TO BOLDLY GO
In my 5 predictions for what will happen in the market data world for 2021, (www.marketdata.guru/2021/01/05/2021-market-data-predictions-5-crystal-balls) my fourth is that exchanges, data sources and vendors will discover their existing business and pricing models have stopped working for them, their clients, and won’t help when entering new markets.
This will lead to an overhaul in business strategies, pricing models, data workflows and partnerships. Improved structures will target two specific areas:
- Tailoring services and pricing around real world market data usage
- Addressing high levels of revenue leakage that is occurring though poor and ineffective reporting.
By adopting smarter business models this will also have the added benefit of blunting the impact of ill-informed regulators will almost certainly have if they seek to gerrymander the data marketplace
There must be recognition that the marketplace has evolved dramatically over the last 20 years and merely tweaking the business and pricing models has ceased to work
2021’s question is what 5 specific areas are likely to be of interest and why?
SEEK OUT NEW LIFE
Current business and pricing models employed by exchanges and vendors are a kludge. They have been developed in a haphazard fashion without the foundational principles that should be forming the basis for their products and services. While many exchanges and vendors recognise that issues exist, there has up until now been a marked reluctance to seek out genuine alternatives.
2021 will force the issues simply because the present models are fast becoming a barrier to good business.
Which 5 areas grab our particular attention?
- Standardised Pricing Framework. The existing copycat pricing strategies have become like something out of ‘The Matrix’ and will be replaced by standardised pricing frameworks allowing flexibility when changing price points. This can then be used as the building blocks when developing, then introducing, new services and entering new markets.
At the moment there is one way to price terminals, a different method for pricing derived data, a third means to price media, ad infinitum. There is not even a common way to bill, some services are charged monthly, others quarterly, or annually. This distorts revenue flows.
2. Reducing Complexity. The pricing structures are too complex, making it hard for clients to administer which inevitably results in revenue leakage. Simplified structures will reduce the administrative burden for consumers and suppliers alike and improve revenue flows.
It is far too easy to subscribe to the wrong service (and then becoming non-compliant) simply because the pricing model is unnecessarily complex. I argue that Bloomberg’s flat and relatively transparent pricing structure is far more effective than the spaghetti like mess of their competition and many exchanges.
3. Pricing By Markets. Current models are inadequate as they do not differentiate by type of user and for what purpose they put the data to use. Business and pricing models will become more aligned to usage, and the fact there are multiple types of user, for instance a vendor’s business is making money out of data, whereas a bank uses data is to make money, and then there is the emergence of new types of consumer which function unlike vendors or banks. In addition, original works creation like indices involving IP transfer is considerably undervalued and poorly licenced. Digital mass markets function in a different world entirely.
4. Term Transparency. This comes through having to price by markets and the necessity to be clear what is being billed for. The classic fallacy of treating derived data and non-display usage as being the same must be made extinct. The lack of a clear understanding of what terms means causes confusion for the data consumers, who often find themselves exposed through misinterpretation, the vendors, ending up with mis-selling, and the exchanges who do not get the income they should. Simplification of administration through transparency will grow the market in usage and fee generation
5. Elimination of Revenue Leakage. Many data sources do not understand their vendors or even their own reporting systems which are in any case inadequate. Existing compliance efforts are insufficient and ineffective as well as being an inefficient application of resources.
Improved reporting combined with analysis of what is being reported will address an issue where well over 20% of revenue is being leaked. It is all about asking the right questions about data usage and on a regular basis, and then analysing the reports.
Better and future looking business and pricing models built around a standardised framework will produce significant benefits, and revenue in a short period. These include:
• Maximising revenue efficiency and growing dollar income
• Improving market intelligence and business relationships
• Creating structures facilitating the development of new products and services
• Friendlier to regulators
• Reducing administration costs for all parties, and reliance upon compliance audits
Knowing the challenges faced does not make the process of change any easier, even positive changes can be resisted if only because any change at all is not welcome. What should be looked out for?
• Identifying what and which foundational business principles should be applied
• Disposing of legacy mindsets, both internally and externally
• Requires educating the clients to understand why the business and price models are changing and how it will benefit them, there will inevitably be resistance
• Accurately finding the real value of key services, especially index creation
• Overhauling licences, agreements, and policies to align with new business models
Changing business and pricing models is bold, innovative, and most critically, necessary. However taking the plunge requires a commitment to engage with the future. This is going to be easier and quicker to do for smaller operators, and it will give them a qualitative and competitive edge going forward because they will be better able to adapt to an ever faster paced marketplace.
Each of these 5 areas to be watched are all about making business, and therefore revenue generation, easier.
The objective is to replace lethargy with strategy, rather than having lethargy as a strategy.
It will be interesting to review what happens in 2021 at the end of the year
Keiren Harris 28/01/2021
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