There are basically two kinds of software companies. One provides as complete a solution as possible (a product) and the other is essentially a services company that combines some software that requires services to complete the solution. Sometimes this is referred to as a 70% Solution. The two approaches can be profitable. The big differences between the two approaches are operational business models, the ease of growing, and margin.
With a complete solution, the strategy is to identify a problem or need, and build a complete software solution that requires very little dependency on additional services to make the solution complete for a market of buyers. Ideally no services are needed.
With a 70% solution, the strategy is for the software to be a tool that drives services revenue. The software needs to be complete enough in the buyer’s eyes, but still require services to take it from a 70% solution to a 100% solution.
With a complete solution, needs are identified through market sensing activities. Needs are identified, clarified, validated, and quantified. Then the solution is created. Every capability built into the solution is evaluated on the basis that it satisfies a broader market need.
With a 70% solution, needs are driven by sales opportunities. Each sales opportunity is likely to have unique requirements. Some are handled in the field by the services team. Others require development effort to add features to the software. Every capability built into the software is evaluated on whether it can satisfy one customer’s needs.
With a complete solution, the development team builds software that ensures it can scale to a large customer base and is supportable without the need of a field services team.
With a 70% solution, the development team has license to take shortcuts knowing there is a services team in the field that can take the ball from the 30 yard line and carry it into the end zone (apologies for the American Football reference… please substitute your sports metaphor).
Here’s where complexity and technical debt begin to creep in. With a 70% solution, field customization of the delivered solution is inevitable in order to satisfy the needs of individual customers. Strict standards and guidelines can be instituted to ensure that field-initiated customization is contained. This – hopefully – should make it easier to upgrade customers to future versions of the software. But when under pressure in the field to deliver a solution to a customer where revenue is on the line, sometimes guidelines and standards are ignored.
Over time field customization becomes a significant technical challenge for the development team. In an effort to keep all customers happy, innovation is gradually compromised as every incremental improvement must be scrutinized to have the least amount of negative impact.
Scaling the Business
The challenge with the 70% Solution for software is scaling the business.
The 70% Solution requires adding people (labor) to grow revenue. People are needed to deliver the final 30%. There is a one-to-one relationship with revenue and labor.
With a software product scaling is easier. More people may be needed but the one-to-one relationship between labor and revenue doesn’t exist. There is less constraint to growth while at a much higher margin. It’s one of the key drivers why the software business so appealing.
Making the Transition
If you are in a business that wants to make the transition from a 70% Solution to a complete product, you will face interesting challenges. Some will be easy, and some not so easy. In a future blog post I’ll explore some of the challenges you should expect to experience, resistance you’ll encounter, and what you should do to ease the transition.
The Pragmatic Marketing framework activity of the month is Market Problems. If you know about Pragmatic Marketing you know that the foundation of all that we teach is understanding and then solving market problems.
At first glance, it appears that pricing is directly related to the size of the problem solved. Some life or death medicines sell for thousands of dollars a dose. It’s a no brainer that we would pay that much if it would save the life of a loved one. On the other hand, most of us would never pay thousands of dollars for something with much less impact. Think about a medicine that heals cuts quicker.
This is even easier to understand when thinking about B2B opportunities. If you build a product that will save a customer $10M, companies would pay a lot for it. Compare that to a product that will save them $100K. Obviously the customer would pay a lot more for the product that will save them more.
So far so good. The bigger the problem solved, the more a customer is willing to pay. However, it’s not really that simple.
This situation changes when competition enters the picture. The most a buyer would pay to solve a problem doesn’t really change, but what does change is how much they HAVE to pay.
As an example, assume a buyer would pay $1,000 to a monopolist to solve a problem. Obviously both the buyer and the seller are happy, otherwise they wouldn’t have entered into the agreement. Then, one day a new competitor enters the market and solves the same problem for only $200. Now, the customer would no longer pay $1,000. Assuming the competitor really does the solve the problem, the most the buyer would now pay is $200.
In high technology we see this frequently, where a company creates a new solution, is successful in the market, and then competition enters and drives down industry prices. Another example is in the pharmaceutical industry. Drugs are often protected by patents, making the manufacturer a monopolist, but the moment the patent expires competitors enter the market and prices decrease.
To summarize the point of the blog, the most a buyer would pay is the smallest of these two prices:
The amount they would pay to make the pain of the problem go away.
The price of a competitive product that solves the problem equally well.
So yes, the more severe the problem, the more buyers would pay to solve it. But the price we can get away with charging is often tempered by competitive offerings.
Photo by Tomasz Stasiuk
Successful products have something in common. They satisfy a need. They do a few things exceedingly well. People like them so much they tell others.
We often think that a successful product starts with an idea. An idea so amazing it will change everything. But the idea is just the spark. The spark begins to smolder after we start having a conversation. A conversation with real people, in a real market, with real needs.
As we interact with the market and learn, the smolder becomes a flame. We learn more. We refine. We get more feedback. We discover which fuel makes the flame grow. The flame grows to become a forest fire. Nothing can put it out now.
Without a conversation, the spark is vulnerable. Just a little rain and it’s snuffed out.
Get out of your office. Have a conversation. Don’t let your idea become vulnerable. Build a fire that’s unstoppable.
It is a great feeling when readers tell me they’ve implemented good, better, best because of what they’ve read. (Actually it’s a great feeling that people read the blog, let alone take action.) Then, when they went on to describe what they had done, it became obvious I left out an important detail.
Several times in the past couple months I’ve heard from people who implement good, better, best by creating low, medium, and high priced offerings. The low priced product had the least number of features, the medium had more and the high even more. So far so good.
Then they went on to describe what features made up each package. It almost seemed random as to how the features were assigned to which offering. As an example, the low end product had some features that were not in medium or high. This is not best practice in good, better, best.
The problem with this implementation is we force buyers to make a difficult choice. They must choose between a lower end package that has a feature they want and higher end packages that also have other features they want. They are trading off features between packages, trying to decide which package has the features that are most important.
The power of good, better, best comes in its simplicity. Buyers who have a hard time deciding, buy the one in the middle because it’s better than the good product and less expensive than the best. However, this only works if the product offerings build on each other.
In other words, your better product should be everything that is in good plus more. Your best product should be everything that’s in better, plus more. Don’t make your buyers think too much.
Let’s take a look at iPhones. Apple always offers 3 versions of each model of iPhone based only on the amount of memory. This is a wonderful implementation of good, better, best. When someone buys the one with the most memory, they get everything that’s in the lower offering plus more. It’s simply a price for feature decision.
However, Apple also gives you the choice of the iPhone 5s, the 6 or the 6+. This is NOT good, better, best. Even though they are low, medium and high priced, they do not build on each other. If you want a phone that is not “too big” you will purchase the 5s or the 6, but not the 6+. Even “rich” people may prefer the 6 to the 6 plus.
Good, better, best is a powerful technique to structure your products and prices, but you want to be sure to do it right. One goal is to simplify the decisions your customers need to make. The only trade-off they should be making in their minds is price for features, not choosing between features. We do this by making sure the best product has everything the better has plus more and the better has everything the good has plus more. Good luck.
It’s a new year. The first quarter is a time for launching new products and expectations are high. Launching a product successfully is hard work. And what I mean by ‘successful’ is that it meets or exceed goals that have been defined for a successful launch. The launch goal could be revenue, it could be market share, it could be changing perception in the market about your company.
A successful product launch could be a game changer for the company and for you. Often (as in 95% of product launches fail) we discover the launch problem after it’s introduced to the market. In our eagerness to get to market quickly, shortcuts are taken. In some cases shortcuts that shouldn’t be taken.
Cosmopolitan magazine regularly has a quiz to help their readers sort out important life issues like “Is he cheating on me?”. I thought we could borrow the quiz approach and apply it to launching products to see how prepared you are for your next product launch.
Each of the questions in the quiz is designed to help you think through a product launch across the entire spectrum of new product introduction. Each question has a score from 1 to 5. 1 is the lowest and 5 the highest. Give some thought to each question before answering. Look at each answer and choose the one that best matches your current situation. At the end of the quiz we’ll add up your score to see how you did. Good luck!
How important is the need the product addresses?
- We’re not really sure but at the Powerpoint level it’s very compelling.
- Our Sales Team said if we built it they could sell tons of it.
- I read an article/industry analyst write-up that described how big the problem is/is going to be.
- There is clear evidence of an active and vibrant market buying now.
- There is a huge demand and we’ve validated it with market research.
How large is the population of buyers that want to address the need right now?
- We’ve spoken with one customer and they liked it. We assumed everybody needs it too.
- We have a new person we hired with a lot of experience in this area and he says that the population of potential buyers is huge.
- We are using industry analyst projections on the size of the market.
- Preliminary market research has indicated the market is large. We haven’t validated this research but there is enough evidence to believe it’s large enough to make it worthwhile.
- The population is humongous and demand is growing. Too big to get my head around. We’ve validated the market size through market research.
How well defined is the target market segment for this product launch?
- We expect the marketing team to figure this out for us.
- We have a sales team that sells into a target market now. That’s a good start, right?
- An executive who formerly worked in this industry assures us she can provide all the information we need about where to focus.
- We stumbled across a need in what appears to be a good target market and have observed a pattern after visiting a few customers.
- Over the entire population of potential buyers, we’ve identified a target market segment that has the highest need, and we’ve validated it with market research.
Was this product designed for a single customer or for a market of buyers?
- Our development team built it on their own and now the company expects us to launch it.
- We designed it for a big customer with lots of money to spend.
- We spoke with the sales team and they gave us a list of the most important features.
- We met with a few of our best customers. They love the idea and have given us a set of requirements.
- We designed it for a market of buyers to address a specific set of needs. We’re only adding features which we would be the most useful for the most buyers to fill a broad need.
How well do you know the buyers for this product?
- Why should we worry about this? Isn’t this something our sales team will do?
- We spoke to Bob, he’s our best customer. Every buyer is just like Bob.
- We met with an industry analyst and she told us everything we need to know about the buyers.
- We’ve met with some contacts from a few of our customers and from that experience we think we know who the buyers are for this product.
- We’ve conducted market research to understand who will be involved in making a buying decision for our product. No research is perfect but we believe we have a really good understanding of how this product will be bought.
How well do you know how buyers in the target market segment will make a buying decision?
- The product is so awesome it will sell itself. Duh.
- We’ll let the sales team figure that out. Not our job.
- We hired some new salespeople from a competitor that’s already selling into this market. They’ve shared their experience with us.
- We’ve met with 6 of our customers and from that interaction we think we know how a buying decision is made.
- We’ve conducted market research to understand how people making a buying decision. Not only do we know who is involved, but we when they get involved, what information they need, and what they care most about.
How did you do? Add up the score from each question to get your total. The max you can get is 30.
If you scored a 30, congratulations! You’ve identified a need and validated that it is worthwhile from a business standpoint. You’ve built a product that addresses the essential needs of a target market segment. You know the buyers and how they buy. You are focused. You’ve done the work to minimize business risk. Great job.
If you scored less than 30, don’t panic, but take notice. For every point below 30 there is an increase in business risk. The less market evidence available for making a business decision, the higher the likelihood of failure.
Notice the sequencing of the answers. An answer of 5 is always validated with research. An answer of 1 means you have no data, no facts (you are ‘winging it’). In between is a spectrum of insight, gradually increasing. The more you know, the lower the risk.
Let me know what you think about the quiz! What was your score?