What is a Product — A Strategy Perspective-I
Every company wants to be a product development company, yet no one is licensing any products. We license software as a service, platform as a service, to everything as a service. When we say everything, it is virtually anything — including pieces of furniture, homes, hotel rooms, etc. So, what do we mean when we say we are in the business of software products?
A Brief History
If you have devoted time to management literature, the mention of products exists in marketing as part of the market mix. They are known as McCarthy’s 4Ps (often misattributed to Kotler) — Product, Pricing, Promotion, and Place. In the older literature, products are tangible, while services are intangible. Now, we look at service offering as a special kind of product. All offerings to a customer form part of product offerings. While that simplifies product definitions in some sense, with so many product-based companies in the market, how should we look at products from strategic perspectives? After all, we consider product management a strategic function for the organization.
Profits and Growth
DuPont analysis is one of the most authoritative when identifying profitability to growth. We will describe it as the formula below:
The last term of the leverage ratio and its impact on profitability is a purely financial metric; operations have a limited role there. Hence, we will not discuss it. Our focus as product managers will be to improve Sales Margin and Asset Turnover. Increasing returns is crucial to any product. You can increase returns by selling more while incurring a lesser cost.
Suppose you did advertising to increase sales. Advertising boosts sales; it also increases cost. Hence, a calculated sum needs to be spent on advertising to raise the RoS. The optimal product development and selling cost lead to the best RoS or the margin. The retail industry operates on thin margins but has strong asset turnover ratios. Any increase in sales leads to a rise in the cost. Hence the growth of the top line does not always match the growth in the bottom line. However, the asset turnover ratio acts as a multiplier over the margin. Assuming the investments are almost constant, the more sales you do, the more you multiply your margins. This is the basic premise of product development.
You sell your industrial outputs to more than one customer. Hence:
Where you are is revenue obtained from customer 1 and the like. You will build capacity for every additional customer if you provide customized service to each customer. You need to invest more or increase your assets. This is not scalable. What if you were to give the same service to all the customers? The incremental cost of providing the service shall be minimal. The cost of an additional copy of software is zero. Hence, your sales may look like this:
As we add more customers, we have almost negligible manufacturing costs for the product. Although, there will be operational costs of serving and acquiring the customer. This standardization of service is what we call the product mindset. You are building a software product if you are doing these two things:
- You are providing the exact solution to multiple customers.
- You can show each customer a differentiated value for the same product.
SaaS Operational Cost
Unlike packaged software products, SaaS will not have zero incremental cost. Services run continually. Based on the number of customers you serve, you build additional capacity. The subscription model of SaaS, helps customers easily expense their costs. There is also the inherent impression of a low-maintenance solution. The service provider gets a steady revenue stream year on year without actively selling the product. Although SaaS is a service, it has the same characteristics as a product. Offering the same service to multiple customers, and spreading the investment over a large set of customers leads to improvements in the Asset Turnover ratio.
The basic premise for a software product is to trigger growth and improve profitability. In the subsequent articles, we shall review how organizations present their products in keeping the above goals in mind. Are your products designed keeping these strategic viewpoints?
Note: Sambit Kumar Dash is a founding director of Lenatics Solutions Pvt Ltd, which provides product management services to businesses for Sustained Competitive Advantage. You can reach him at: firstname.lastname@example.org