A Demand increasingly expensive to produce
The production of a customer base is an extension of the marketing approach, which consisted in segmenting demand and differentiating products in order to, for a time at least, guarantee a monopoly position in a particular sub-market. The marketing approach has allowed improved adaptation of products to needs, but is now reaching its limits: as products have multiplied and the time available to search the market is limited, companies have to channel more and more of their efforts towards attracting the attention of their potential customers and gathering relevant data on the evolution of their requirements.
More specifically, the “production of demand” is characterized by the attention paid to:
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groups influenced by fashion and led by figures who act as behavioral role models and promoter of consumer choice. This is naturally linked to one-to-one marketing8 ;
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the distribution process which is developing more and more into a form of complex intermediation9, acting as a sort of catalyst which combine demand and supply into an actual sale. In the past, it was the task of distribution to bring a product to a customer’s notice, to make him aware of its features, to demonstrate it to him, to back it up and to provide after-sales service. Increasingly, though, the role of distribution is to “get to know the customer”, to gather information on him in order to create new products and, finally, to establish a long-term relationship with him;
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the cost of gathering information: the value of a product now lies principally in the procedures enabling it to be located quickly and its quality to be assessed prior to purchase (in the case of experience goods); for new products, the value depends on the knowledge one can gather on its mere existence. To a certain extent, search engines, guides and information bulletins are of considerable value, sometimes even similar to or greater than that of the products themselves;
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the customization of the products: (i) in the past, production came first - the products or services were successively defined, produced and, finally, marketed; (ii) marketing techniques seek to make the phases of defining and marketing the product simultaneous; (iii) now, the generation of a demand broken down into numerous and homogeneous clusters precedes the actual production of the products so that the consumers can be involved in the design and even, in certain cases, in the very process of production.
It will be noted that economics to a large extent ignores the issues raised here, for two reasons:
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economic theory has long paid scant attention to the costs of seeking out information on a mass market, although these are often greater than the costs of producing the products themselves, at least when the time spent on such research is taken into account;
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within the context of microeconomics, consumer tastes are defined beforehand and regarded as exogenous, which may be justified in the case of a static economy. Current economies, unbalanced by rapid technical progress, would need a model of the production of utility functions and of the process of invention of products10.
The displacement of the value of the production of products and services towards the generation of demand allows one to handle information as a tradable good on a free market. Even if the cost function corresponding to the production of information is governed by economies of scale, the greatest cost element is ultimately represented by the generation of demand, an activity with decreasing returns. Building up a customer base, animating it, enabling it to become involved in product definition, organizing it into a “community”, establishing relationships with its leaders, etc. all involve unit costs which rise with the number of customers, if only because such costs depends on the complexity of the clustering process which is linked to the size of the customer base. Of course, such costs may be higher or lower depending on the techniques used and services on the Internet are currently trying out a variety of methods in order to reduce them and to increase the efficiency of customer-base building techniques. However, for a given technique, it is likely that the cost function conforms to decreasing returns.
In brief, the conventional cost function for information products11 was:
P: (ex ante) potential audience; N: (ex post) actual audience
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C1 is the cost of producing the content, which depends on the anticipated audience P (for example, in the case of a film, such and such an actor is chosen and paid not because of his quality, which is difficult to define, but because of his fame, i.e. the audience he can attract). In certain cases, the cost C1 may not depend on P: for example, the time involved in writing a book is practically independent of the target readership;
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C2 is the distribution cost, i.e. the cost of supplying the content to N consumers.
To say that the cost function C(N,P) is subject to economies of scale12 in N, is to state that the cost C1, independent of N, is much greater than C2. Subsequently, the content can be supplied to another consumer at a low marginal cost [C'2(N)] as opposed to the average cost [C(N,P) / N].
Over time, the cost C2 has been greatly reduced. It represented the greatest part of the cost C for live shows (such as the theater), but is very low in the case of cinema and T.V. With the Internet, it is virtually zero.
The cost function for the procedures currently being set up, particularly on the Internet, is of the following type:
in which C3(N) is the cost of generating the customer base which will form the actual audience. The cost C2 has become practically insignificant, but the cost C3 is greater than C1. Therefore, the function C is no longer subject to marked economies of scale in terms of N. Subsequently, the content is readily accessible to all for a very low C2 cost, but only the N customers “produced” at the C3(N) cost will actually be consumers of the information products in question (the others will not be aware of the existence of such products nor will they find them of any use). As stated, this is an economy in which value resides no longer in content13 itself, but in the path towards content (promotion or search engine) and in the taste one has had to create beforehand in each consumer.
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