Resisting Siren calls: Odysseus, NDRs and Product Expansion

By Norman Fiore and Shamillah Bankiya

We can imagine Odysseus sitting on the beaches outside Troy thousands of years ago, scratching his head trying to remember how the decision that felled epic heroes, consumed innumerable resources and dominated his ‘head space’ for 10 years was actually made. Fast forward to the startup world today, we encourage entrepreneurs not to find themselves on a beach after the fact, contemplating the decisions they took around equally existential decisions — launching new products.

Let’s start with NDRs

Having lived in boom times for their entire lifespans, most startups could until recently count on growth via healthy net dollar retention (NDR), largely driven by their customers adding seats. Say you’re selling sales enablement software in boom times. When your customers add more sellers, they will automatically ask for more licences, which in boom times will more than adequately offset any churn.

Unfortunately, in the current economic slowdown startups are suffering the double effect of unhappy customers completely churning off products, and happy customers downselling as they reduce their business’s headcount and therefore licensed seats.

In order to protect NDR, the more agile entrepreneurs have been changing their pricing plans to include platform fees, volume based fees, value based fees and/or price increases. But now, having fully exhausted these ‘spreadsheet based’ solutions, startups are looking to the tougher option of adding new products to their offering — either organically or via M&A.

Looking at our own experience we have seen companies like Mimecast master organically adding products to their bundle on their way to Nasdaq, whereas Showpad and Collibra, for example, re-defined their categories through thoughtful M&A. We have also seen a few disasters…

So, which products to build?

Since adding new products is expensive and has uncertain results, we wanted to create and share a simple model to help companies avoid very common, painful mistakes.

When we think about a software company launching a new product, we categorise risks into three buckets:

· Market — does the product have a large, addressable market today?

· Tech/Product — do we have the right tech and product skills to launch a product that is significantly better than anything in the market today?

· Go-To-Market — can the new product be sold to our existing customers, with the same sales motion?

In order to understand the likely success of a new product, we have used the following scoring model as it reveals common fatal errors in launching additional products.

Ideally, a new product would align on all three fronts, although two might be enough. Below are the common fatal errors that occur when startups don’t fully consider the risks.

Fatal Error #1 — the Siren call of envy

This board conversation usually goes along the lines of: “There’s this company XYZ, they’re growing super fast and everyone loves them (ignoring all the overnight copycats) — we can build what they’ve got and get a piece of the action.”

Figure 1: Envy — “we actually wish we were a different business”

The problem with this strategy is clear. Although good tech teams can build virtually anything these days, merely building a copycat product without a vision for leapfrogging others nor having relevant customers to build a product around doesn’t deliver a right to win.

Fatal Error #2 — the Siren call of hope

This board conversation usually goes along the lines of: “Through our existing differentiated tech, we can build this amazing capability that will create real buzz in the tech community. No one’s asking for this right now, because it doesn’t exist, but eventually everyone should buy this.”

Figure 2: Hope — “The Hail Mary”

The problem with this strategy is that the company has confused adding a tactical product to boost NDR with launching a seed startup. The company has forgotten the meandering, years-long path to product market fit and the subsequent odyssey to category creation.

Fatal Error #3 — the Siren call of hubris

This board conversation usually goes along the lines of: “We have a fully featured, heavy enterprise product that our expensive sales reps sell successfully. We just need to slim it down, develop a Product Led Growth motion to keep Customer Acquisition Cost down, and move downmarket”.

Figure 3: Hubris — “We can do everything”

Easier said than done… Enterprises demand fully featured products that invariably make the UX clunky. SMBs on the other hand want above all a ‘consumer like’ UI/UX at the expense of unneeded sophisticated features. There is little common ground. This ambition of launching a new product, to a new customer segment, sold via a new sales motion is fraught with risk.

In summary, if we plot the three product ideas on a 2x2, we ideally want new products to land and create a big bubble in the top right section (large market).

Instead, we see that of the three product options we discussed above, two have large markets but no capabilities to deliver them (bottom left), and one can deliver but is too small to be attractive.

Fatal Error #4 — putting wax in your ears

There is one final risk that entrepreneurs encounter with product launches… Having successfully not succumbed to the calls of the Sirens, the entrepreneur decides that organic product expansion is indeed too risky, and turns to M&A.

This board conversation usually goes along the lines of: “In order to avoid all risks of building a new product, we will buy a company and benefit from the opportunity to learn about a new technology, learn about a new customer segment and/or learn about a new sales motion.”

But the reality is that successful M&A is all about synergies: cost synergies in consolidating engineering and S&M teams with scale, and revenue synergies in selling existing product to new customers or upselling existing customers a new product. Learning is way down the list of M&A success criteria.

Making it safely to shore

We always urge entrepreneurs to objectively assess the risks of product expansion. These seemingly incremental decisions on product are actually big existential bets that change the course of a company’s trajectory, because they consume capital and management headspace, and crowd out other strategic initiatives. But the goal of this analysis is not to have companies stay in their swim lanes with no ambition to add products. Quite the contrary, in our experience the ability to market new products is table stakes to building a lasting company. Founders who get product launches right, who strap themselves to the mast and sail safely past the Siren calls, will guide their teams safely to growth-filled, profitable shores.