Prioritize Roadmaps for Type 2 Impact
If You Aren’t Pursuing ‘Increasing Returns,’ You’re Prioritizing Based on Diminishing Returns
If I asked — “What are diminishing returns?”
Odds are you’ve got the concept ready at hand — something about a lower ROI with each incremental investment.
But if I instead asked, “what are increasing returns?” You might piece things together, but really who knows.
Much like Antifragile, it’s a concept that’s beyond language for most teams and something I learned to embrace to prioritize roadmaps for impact.
This article is about Increasing Returns and how to pursue them.
To learn more, check out Episode 002 ‘Product Teams’ Pursue the Law of Increasing Returns of The Product Coach Podcast.
Name the product
To think about increasing returns, it’s important to see it in action and how it flows against what we naturally have come to think of as proper product prioritization.
The clearest example comes from the most successful signup flow ever designed. Contrary to best practices, the signup flow required:
- First name
- Last name
- Email address
All before seeing any content. It was an unapologetic hard gate — and it successfully onboarded more than a billion users.
Now think about how your organization makes decisions. What are the odds that your organization would have focused a non-trivial portion of the organization’s resources towards “optimizing sign up success rate.”
If that sounds like you, your product leader, or your organization, it reflects a tendency to pursue diminishing returns.
Type 1 v. Type 2 Impact
When most product managers sit down to prioritize their roadmap, they are balancing a few dimensions, stakeholder need, urgency, and partner dependencies; but ultimately, we prioritize roadmaps for impact. Specifically, Type 1 Impact.
Prioritizing for Type 1 Impact will surely beat the many product teams who take a round-robin approach — one feature for you, one feature for you, one feature for me. But it will always lose to the alternative — Type 2 Impact.
The two types of impact:
- Type 1 Diminishing returns
- Type 2 Increasing returns
Diminishing returns is how we typically approach our roadmaps. When someone says we need to optimize our conversion funnel, or we need to increase our onboarding completion rate — what we are saying is we need to pursue diminishing returns. We’re saying, “Of the universe of customers that get to this stage, we want to increase how many complete an action.”
With this approach, the maximum value is 100%. With each improvement, the potential upside diminishes.
Note: For more on this topic, read “Don’t pursue quick-wins. Instead, find wins on the journey.”
With increasing returns, there is no max value. You are investing in factors that “pull” more customers to your product to begin. There is no maximum pull a product can have.
Back to Facebook.
So how did a landing page that required so much commitment and such a high cost of entry become the most successful signup flow ever?
Facebook, at the time, prioritized their roadmap based on Type 2 Impact, Increasing returns. Instead of focusing on optimizing customer sign up, which, as far as I can tell, they did close to zero experiments on this area (and certainly none that involved fewer requirements) — they focused on increasing the pool of customers that got to the signup page.
If you read this and think “it’s marketing’s job to get customers in the door — it’s my job to convert them,” you’re Level 4 thinking at best.
It’s the value proposition’s job and the expression of that value proposition across customer touchpoints from products, to services, to sales and marketing that pulls customers in the door. As a product leader, you have a strong hand in defining that value proposition and its expression.
So instead of optimizing sign up flow, Facebook increased the pull of their product. They made it easier to post content, invite others to view it (add friends), discover that content, and discuss it. With this roadmap focus — Facebook prioritized based on “increasing returns,” and the strength of the product increased by the day.
It’s a lot easier to get someone to complete a signup form when they know there are pictures of their Grandbaby on the other side. And once they completed signup, they now could take advantage of those same benefits and pull other users to the product.
You might be thinking, how is this different than network effects and leveraging Metcalfe’s law? For that, another example.
When I interviewed at Microsoft, one of my interview questions was, “would you put ads on the Google homepage?” I said no. But my interviewer couldn’t wait to share how much revenue Google is missing out on by not having ads on the Google.com homepage.
I still got the job. However, she was thinking in terms of Type 1 impact, increasing ad revenue on the homepage.
By focusing on query relevance, Google focused on Type 2 impact, increasing the number and importance of scenarios customers prefer to use Google. They could have pursued diminishing returns of maximizing Homepage revenue. However, it would have been fighting against the increasing returns of becoming the preferred choice for more and more queries.
Increasing returns are good to examine as a counterpoint to diminishing returns. The idea that small effects in a system get lost as noise. This impacts both you and your competitors. So if your competitor cuts prices by 10%, all you have to do is cut prices by 10% to maintain the equilibrium, or 15% to gain market share.
Neoclassical theory assumes that the economy is entirely dominated by negative feedback: the tendency of small effects to die away. In fact, he can remember listening with some puzzlement as his economics professors back in Berkeley had hammered away on the point. Of course, they didn’t call it negative feedback. The dying-away tendency was implicit in the economic doctrine of “diminishing returns”: the idea that the second candy bar doesn’t taste nearly as good as the first one, that twice the fertilizer doesn’t produce twice the yield, that the more you do of anything, the less useful, less profitable, or less enjoyble the last little bit becomes.
Waldrop, M. Mitchell. Complexity: The Emerging Science at the Edge of Order and Chaos (p. 34). Kindle Edition.
But this isn’t what happens in complex systems. With this small change (10% price decrease across the board) assuming all things are equal, the preferable option doesn’t remain equally preferred. It becomes increasingly preferable relative to competitors.
The rich get richer. You can see this effect with the QWERTY keyboard.
An engineer named Christopher Scholes designed the QWERTY layout in 1873 specifically to slow typists down; the Remington Sewing Machine Company mass-produced a typewriter using the QWERTY keyboard, which meant that lots of typists began to learn the system, which meant that other typewriter companies began to offer the QWERTY keyboard, which meant that still more typists began to learn it, et cetera, et cetera. To them that hath shall be given, thought Arthur — increasing returns. And now that QWERTY is a standard used by millions of people, it’s essentially locked in forever.
Waldrop, M. Mitchell. Complexity: The Emerging Science at the Edge of Order and Chaos (p. 35). Kindle Edition.
Identifying Type 1 and Type 2 Impact
The difference between Type 1 and Type 2 Impact is simple; if you are moving a metric, you’re pursuing Type 1 — if you’re reinforcing the weight of your offer, you’re pursuing Type 2.
If your product strategy is expressed as growing a metric you’re pursuing Type 1 impact and diminishing returns.
If your product strategy is expressed as a strengthening your offer you’re pursuing Type 2 impact and increasing returns.
Network effects are examples of Type 2 impact, so are the “hard to copy delighters” in Gibson Biddle’s DHM model.
The key is that Type 2 impact is highly contextualized to your business, your company, your flywheel if the investment is not increasing the “pull” of your offer or category on the marketplace.
Then it’s Type 1 impact — diminishing returns.
I’ve had a hard time expressing the idea of a system of increasing returns. A system which increases returns — is effectively a perpetual motion machine that accelerates with time.
The classic Amazon flywheel didn’t work for this model. As in the Amazon flywheel, the variables are interdependent. You can’t increase traffic without increasing sellers, and you can’t increase sellers without increasing selection.
While this model works well for Amazon, it doesn’t explain what’s going on from an increasing returns perspective. Internet retail, and Amazon.com revenue, will increase over time regardless of any changes to the flywheel. Why? Because the category of e-commerce is growing, and this shift benefits the leader disproportionately.
Additionally, you take a business like Apple. Apple makes three independent investments: superlative hardware performance, superlative hardware design, and superlative software design. Each of these would be outcomes of “growth” if mapped as a flywheel.
But they aren’t outcomes. They are investments. Apple has made the strategic decision not to reinvest growth in hardware performance — but to invest capital in the pursuit of superlative hardware performance. Dating back to MacBook Air — Apple didn’t pursue thin; they pursued “thinnest.” They didn’t pursue fast mobile processors — they pursued “fastest.” You don’t get to superlative anything by accident. It’s an intentional, strategic decision to “over-invest” — investing beyond the limits of the current product/market fit equation.
Investments like this can’t be expressed as a flywheel because it’s not an outcome that follows from improving other variables in the system. Superior Hardware (fastest mobile CPU) doesn’t naturally lead to differentiated software (Apple Music). Similarly, why is it that historically when AMD temporarily leads the market with a superior CPU — they don’t accrue the same benefits as when Intel does the same?
Small changes compound
With increasing returns, these small product milestones — compound and over time become brand power leading to a self-reinforcing system of increasing returns.
This is our ultimate goal — to turn roadmap features into a pull of the brand, product, and distribution power that continues to pull customers to your product or service. In the example above — if we were pursuing “fanatical help” as a product attribute — “In-App How to Videos” might become a Type 2 impact — as it contributes to the story people would tell about how insanely customer friendly it is.
This is a higher bar than the “will customers pay for this” test, it’s will this line item ultimately pull more customers to our product? Don’t be surprised if there are shockingly few on your roadmap — it wasn’t long ago when you too didn’t have language for why Type 2 impact is more important.