In the on-demand economy, disruption can come from above

Clayton Christensen has written the book on disruption. He’s one of Silicon Valley’s most popular business school professors and we often subscribe to his theory on disruption from below. With his theory “Disruptive Innovation,” Christensen states that “a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.” In essence, cheaper products start with less profitable customers, but eventually take over and devour an entire industry.

While the theory is powerful and fits numerous cases, including Christensen’s own example of hard disk drives, we’ve seen counter-examples that suggest his theory is not as universal as we once thought.

On the product side, Apple has proven that innovation can come from above. There’s a great analysis in “What Clayton Christensen got wrong.” It’s well worth reading in entirety, but one of the key points is that Christensen’s examples are based on buying decisions made by businesses, not consumers. Business buyers are extremely rational, with decisions coming down to balancing lists of features vs. prices.

“The business buyer, famously, does not care about the user experience. They are not the user, and so items that change how a product feels or that eliminate small annoyances simply don’t make it into their rational decision making process.”

That’s where Apple comes in. For the past 15 years, they’ve been focused on differentiation based on design and user experience. While these things can’t necessarily be quantified on a price-performance breakdown, they are undeniably felt by consumers and shape the buying decision.

Disruption and on-demand services

The past few years have brought about the rise of the on-demand economy. With nothing more than a few taps on your smartphone, you can summon an Uber or have your weekly groceries delivered to your doorstep. These on-demand services are disrupting entire industries, with the medallion-based taxi industry being the most visible and contentious example right now. Yet none of these new services offer anything cheaper- in most cases it’s quite the opposite.

Huge groups of today’s consumers expect to get what they want, when and where they want it. And they’re showing that they’re more than willing to pay a premium for convenience and instant gratification. For example, GeekWire did a great pricing comparison of grocery delivery services, highlighting the premium that Instacart customers pay.

Both Uber and Instacart are disrupting from above, moving from premium to mainstream. Uber started with its premium Uber Black service (town car) before launching into its mainstream UberX product (taxi). And Instacart is pivoting away from setting a surcharge on each delivered item, instead looking to partner with grocers directly in order to bring down the premium fees.

The bottom line is that disruption can come from both above and below. The key is to define your own strategy for going after the incumbents in your market.

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