Is your Product leaving money on the table?

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Is your Product leaving money on the table? The answer depends on “who” is driving your product.

If Engineers are driving your product, it becomes a highly customized product. Services companies are born out of this approach. This gets the lowest profit margins for your products.

If Architects are driving your product, it becomes a highly configurable product. Many enterprise-focussed companies are operating this way. This results in lower profit margin for your products.

If Product Managers are driving your product, then this will maximize the profits for you, as most of the intended functionality will be available out-of-the-box.

As an analogy, think about the CRM application and how it has evolved.

Traditionally, organizations were getting this built for themselves. As a result, many services companies flourished building this for their clients. A little later, Oracle/SAP started building these applications. These applications contained a lot of modules, that had to be integrated during deployment. Needless to say, this was driven by Architects at these companies. As a result, this deployment was complex and needed a lot of manpower,  eating the profit margins for these companies in these products. Later on, Salesforce came into the market with a product-driven approach.  Look at where it has gone with its out-of-the-box product capabilities.

Examples of this sort abound in every company. We just need to look carefully to understand.

How to identify who is driving your Product?

When the requirements of the Product are discussed, observe who leads the requirements related discussion. Is it your Product Manager, the Architect or the lead Engineer who has the final say? Who is the final go-to person in case there are conflicts between these three critical team members on how certain functionality is to be implemented?

I have personally seen cases, where the Product Manager (PdM) was not confident about certain things in the newer architecture (a cloud-native architecture) and deferred the decision to the Architect. Ideally, the PdM should have taken ownership and performed the research to guide the team and the product.

Can a driver change in the course of product development?

It does not take long for change to happen, even when the Product manager might be leading it today. Reasons may include a newer technology (like the example above) or changes in the Product Management team. The new Product Manager may rely on the expertise of the existing team and leverage it more without intending to do so.

What is the remedy?

The Management team is the key here. The Software Development Manager and the Manager of the Product Management team are the ones to have a handshake about who will drive the Product. Any exceptions that happen should be pointed out quickly to these two stakeholders. Any changes in any of these teams (ex. Development lead, Architect, Product Manager or Product Owner) should be carefully planned and a close watch should be kept on how the team is dealing within, to ensure that the right person (the Product Manager) is driving the product.

Who is driving your Product? Are you able to spot the changes happening? And more importantly, how much is it costing your company?

 

 

To OEM or not, that is the question

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Rick was the CEO of a startup. His company had a very promising product. He was selling to enterprises (B2B product) for which he needed every helping hand he could get. In November of 2015, he got an opportunity to be an OEM (Original Equipment Manufacturer) for a much larger company (Company A). He was very excited at the prospect. After all, this prospect would bring him additional 40,000 sales people from the new company, and had all the global customers he would not have been able to reach on his own.

 

But this also meant ensuing troubles that cost him a lot of time/money/resources. Was it worth it, you may ask ? Troubles started right on Day 1:

  1. Building a business case : It took  him several meetings and a few months of scheduling/re-scheduling to accommodate calendars of the people (Product Managers, Directors) at company A. Once they approved of the product, a business case needed to be built for General Manager and other executives of company A. Not only he had to submit the technical/marketing collateral to build such a case but had to support the entire team by answering questions around business, market, customers, legal, technical support, competition whenever he was asked for it. A lot of work as a pre-requisite to the actual OEM !
  2. Margins, Profits, and SKUs: He had to compromise at a 70-30 share. Of any deal Company A would keep 70% and he would get only 30% of the deal. Still, a good deal, he thought. But when he worked out the numbers, he would not make much unless they did around 8 deals (with some combination of small, medium and large-sized deals) per year together. Company A had a 2-month long SKU creation process. That means, he had to wait for 2-months just for his product was available in the ordering catalog of company A. Not a big deal he thought, as he was planning to use this time to get some deals.
  3. Selling, selling and selling: Over the next few months, many prospects came. Whenever they came, Rick’s team was asked to chip in for every meeting explaining the product, traveling to customers’ site for joint presentations, filling in RFPs/RFQs, submit new collateral as needed, develop additional use cases and related collateral. The demands from company A were endless. The prospects stood tall and were progressing step-by-step in the sales funnel, but none of them converted for months.
  4. And a win after all! : Finally after 18 months of the processes and selling spiral, he got a win. The winning deal had his product with another company’s product, product revenues split 50-50 between them and Rick ended with a mere $1.2 million for the deal.

By this time he had 70% of his team working for this company, he had lost focus on other customers, his sales people had churned out, he had almost run out of money, most of his development and support staff was supporting the only customer that came from Company A. It was also harder to pull out of this deal due to the legal complexities.

Would Rick have done better on his own, without going in as OEM ?

What are your thoughts ?

The magic of subscription pricing

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A few months ago, one of our proposals got rejected because of our pricing. It was on the higher side for this client that was based in Asia. We had proposed a lump-sum payment (aka as perpetual pricing in the Product Management lingo!) for our product license.

The client did not have much room in it’s budget in this year and the next. Our proposal definitely offered a good ROI (Return on Investment) for the customer. But because of their limited budget, the client found our pricing very high.

Upon further probing we found out that the client was keen to consider this as OpEx (Operating Expense). As you may know, the operating expense is the monthly/annual expense that consists of items like salaries, internet and other routine expenses. On the other hand, CapEx or capital expenditure carries a big price tag upfront and with one-time payment. The CapEx typically include assets like computers, furniture, real-estate etc.

Now after our proposal was rejected, we started working on revising it to take it back to the customer. The silver lining here was that client had liked our product. We just needed to work within the client’s budget. Besides this, we also knew that the client was open to Opex pricing.

Here is what we did. Have a look at the following chart. The overall price is around $1.2 million dollars. In the first proposal, the entire amount is being charged upfront and the customer gets to use the product for its lifetime. In the second chart, we split the entire amount into multi-year payments so that the customer starts with a much smaller investment. This is the subscription or the pay-as-you-go pricing as the customer is paying as they go on using our product.

Year 2017 2018 2019 2020
Software License Price (Total) $1,240,000 $0 $0 $0

Table 1 : Perpetual or One-time Pricing

Year 2017 2018 2019 2020
Software License Price (Total) $310,000 $310,000 $310,000 $310,000

Table 2 : Subscription or Pay-as-you-go Pricing

 

In Table 2 above,  as it starts with much lower pricing, it is much more affordable. This offers a much lower point of entry aligned with the client’s budget. This subscription pricing will open up opportunities with customers who have tight budgets, in markets where lower price is key for winning.
Subscription pricing has always been a norm with B2C products. Think about your cable TV, your phone, or the Internet or the video service subscription fees. But with B2B, it is getting more popular now.
There are certain things that one needs to think through before offering a subscription pricing :
  • Revenue Recognition: The revenue recognition from subscription pricing happens periodically. So if the deal is for two years, then only 1/24th portion of the overall revenue gets recognized every month. This is the hardest part of offering a subscription pricing on your product. You and your management need to be comfortable with recognizing only a part of the entire revenue throughout the subscription period.
  • SKUs/Part numbers for subscription: Your ordering tools need to reflect the subscription pricing. The older SKUs/Part numbers will not work with the new subscription pricing. Subscription pricing should reflect the product ID and the period of the subscription. For example, if Apple is offering a two year subscription on its iCloud, the SKU should be along the lines of “iCloud – 2YR”. Without this clear demarcation, a lot of confusion can happen when other teams like operations and finance (that are working closely with you) are pulled into the approval/sales process. Also at larger companies, getting these support teams (Finance/Operations) to release the subscription SKUs is a big challenge for a Product Manager, if the organization has been only offering perpetual SKUs till now.
  • Technical Support: One of the smartest ways to limit the usage of your product beyond the subscription, is to offer product support for the duration of the subscription. For this reason, the subscription SKUs come in handy as they help the support team to quickly validate whether the support should still be offered. Once the subscription period is over, then you can cut back on the product support so that customers will not be able to get technical support, upgrades or updates on their product.

So as you can see apart from the lower entry point, subscription pricing also offers other benefits. But as a product manager you need to understand that it brings its own complexities and processes that you need to be aware of.

What distinguishes the top 1% Product Managers from the rest?

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The top 1% PMs use frameworks.

Frameworks are a tool for systematic decision making. Frameworks help you repeat your decision making process across other seemingly similar problems.

The top 1% PMs have frameworks for everything – for valuing companies, for assessing the market, for prioritizing requirements, for translating vision into execution, for pricing the product etc.

The top 1% PMs are people like Steve Jobs (yes, he is the best PM IMO), Peter Thiel, Elon Musk and the likes.

Peter Thiel, for example, has shared a framework he uses to value the companies in his book “zero to one” – it consists of the following components:

  1. Identifying whether the business is a monopoly
  2. Is it scalable ?
  3. Does it have a network effect ?
  4. Is it a brand ?

Frameworks help you to focus on what is important and eliminate the noise. This becomes very essential as the complexity of the problem grows and there are so many factors that come into play, many of which you cannot control directly. For ex. if you are to launch a new phone model, you have to focus on manufacturing capabilities, market size, competition but you can certainly leave out the macro-economic conditions. This becomes your framework.

Frameworks have been in use for a very long time. Management consultants use it all the time, frequently advising the executives with strategic insights.

There are many such frameworks available to a Product Manager. Examples include the technology S-curve, Porter’s five forces model, SWOT analysis. There are a must in the arsenal of an effective Product Manager. You can always develop our own framework or adapt any existing framework to your needs.

What’s not so good about being a product manager?

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There are a few things that are not so good about being a Product Manager:

1. Getting things done from people you do not have authority over: A PM role is a highly cross-functional role. It requires you to work with many people across multiple groups. As a PM, you have to keep the needle moving on your tasks. So you have to get the work done from these team members without having a real authority over them. It is not difficult given people understand their roles and are mostly willing to help. But it is just those one or two people , who might be super-busy or may not an idea of what you are trying to do or are not interested in helping you for whatever reason, that cause a big hurdle. Then you end up spending a lot of time, explaining a lot to get the ball rolling again.

2. Always moving to the next thing: As a PM you hardly get the time you want to focus on the things you want. This can mean that your pricing would have been better or your competitive analysis could have been more in-depth. Even though you want to do that , with the stuff piling on your plate continuously, you may not get time to do things the way you want.

3. Budgets are not available for good projects: You see a good market potential, you see customer demand and you build a business case only to know that for this quarter, your budget has gone to some other project/product.

There are few other things that are not good about a PM role, but those are more subjective (ex. public speaking, travel). I have left those out intentionally. I am sure I am missing on a few more. I will add as I recollect them.