On Product Strategy 2: the Cash Nexus
A recent survey of failed startups found that ‘business model not viable’ was the single most common reason for failure. To date, a product’s business model has been the preserve of the small group of founders and executives who own the ‘business strategy’. Monetisation isn’t something that Product Managers typically concern themselves with.
As a result, Product Management is very operationally focussed. Lean is a process. Agile is a process. They are formulas for developing software products.
But these processes, blindly adhered to, have inadvertently created a glut of digital products with business models similar to the South Park gnomes’ infamous Profit Plan.
Compare
Steal underpants — -> ? — -> Profit
to:
Build product — -> Pivot? — → Profit
In Part 1 of this series on Product Strategy, I argued that building products (even great ones) is no longer the principal challenge with which Product Managers should be concerned. With over supply the norm in almost every conceivable product category, monetisation is by far the bigger problem. If there ever really was an era in which you could pivot to profit, it’s over.
Instead, I encouraged Product Managers to follow the advice of Michael Porter, the Godfather of Strategy, and concentrate on identifying what makes their product unique and therefore defensible.
In Part 2, I explore why monetisation is such a chasm to cross and the decisions I believe Product Managers should be making upfront before building anything at all. In doing so, I bookend Porter with the current ‘capo di tutti capi’ of product strategy, Ben Thompson. Ben’s epic project, Stratechery, demystifies and deconstructs the digital product landscape; and the hidden forces at work within it. Product Managers interested in why some startups evolve into unicorns while others sink into obscurity are well-advised to familiarise themselves with Stratechery.
As the name indicates, Stratechery focusses on the big strategy of big tech. Like all great theorists, Ben stands on the shoulders of giants. He absorbs strategic thinkers of the past — like Michael Porter and Clay Christensen — and identifies why they are still relevant and where the new reality of digital exposes shortcomings in their thinking.
Despite an explosion of product and technical innovation during the last decade, successful models for monetisation have remained surprisingly static. There are only a handful of ways to monetise digital products, and some are more equal than others. Whilst some categories (like games) have been able to develop micro-payment models (via in-app purchases), for the majority there are only 2 business models that have proved to be repeatable: advertising and subscriptions (SaaS).
Deciding which model is right for your product depends, in turn, on another critical choice: whether your product is a consumer (B2C) or a business (B2B) product. This choice is fundamental to product strategy because your business/monetisation model informs every aspect of how your product needs to be designed and built.
Business buyers have very different needs from consumers and, as the survey showed, most startups die building a product for a user that will never pay.
Part 1: Consumer Products and the (Big) Problem of Free
“People have no problem in paying $5 daily for a coffee. But they have a problem in paying upwards of $0 daily to use an app. Heck, nobody’s going to pay to use your app for $5 a year, let alone a single day.” Mike Post — FitFriend
In his 2014 piece on business models, Ben concluded that “the removal of friction from the software buying process has reduced or removed the willingness of many consumers to pay.”
Why is this the case? Because consumers have an innate sense of marginal cost: ie. how much it costs producers to replicate their product for each new user.
In software, marginal cost is $0. Consumers know this, so are unwilling to pay. An entire generation of digital consumers has grown up listening to icons like Mark Zuckerberg and Sergey Brin proclaiming that software should be free.
It follows, therefore, that the most robust way to monetise is by advertising to a user base paying $0 for your product. Let’s face it, advertising is a big deal in digital, it’s the rocket fuel of unicorns. For category-defining, must-have products like Snapchat, YouTube or Facebook, consumers have consistently demonstrated they are happy to tolerate advertising in exchange for getting these experiences for free.
But advertising is a complex beast. It’s not as simple as build product, scale…then add advertising; that’s (another) Gnome Profit Plan. Consider this: in July 2016, Twitter reported 313 million Monthly Active Users (MAUs). Yet it is in deep, deep trouble. A basket case of missed earnings and failed expectations.
Twitter is not alone. Many products (or companies) with Active Users in the 00s of millions are still struggling to break even. Think Busuu (60 million registered), DuoLingo (150 million registered) or even Linkedin (433 million!); all have audiences most can only dream of…yet they still struggle to make an ad-supported business model work.
The reason why can be explained by another stat from Mary Meeker’s annual Internet Trends update in June. In 2015, Google and Facebook combined captured 76% of internet advertising spend. They achieved this by capturing an equally disproportionate amount of the mobile app market. In fact, in 2015, Google and Facebook claimed the top 8 mobile apps!
These eye-popping stats are terrifying for ‘old’ media publishers and equally foreboding for Product Managers looking to monetise a product via advertising. Confirming Meeker, the overarching message from 2016’s Cannes Lions Festival of Creativity was that we are now in the age of an advertising duopoly…and their grip is tightening.
If you want to monetise through advertising you need to focus on building a specific type of product.
For a start, you product needs to be sticky. That means ‘several times a day’ sticky, at least. Don’t forget, over 80% of people’s time with their phones is spent in just 3 apps. You need to have a realistic chance of claiming one of those spots or you’ll never get the necessary traction.
Nir Eyal’s habit-forming, hooked model is your playbook here. You need to understand the psychology of habit and addiction. Then you’ll need to deploy every notification, web hook, update and FOMO-inducing trigger imaginable to keep users engaged and coming back into your product. The seemingly unstoppable demolition of Twitter by Facebook is still the best case study on getting this right.
Next, you’ll need deep data insight into your users and their demographics. Advertisers pay for access to very specific audiences. You need to capture that data somewhere in your onboarding and be able to demonstrate quantifiably who is using your product. You’ll also need to build out ad-serving capabilities, conversion tracking and reporting sooner rather than later.
Finally, you need to ensure your product is set up for instream, immersive advertising, not ugly interstitials. This is why Snapchat is winning — it’s perfectly constructed for the full-screen, video placements beloved of brand advertisers.
To have a hope of attracting even a small percentage of the ad dollars that the ‘Foogle’ duopoloy leaves on the table, you need to consider how this will work from the outset; not as a bolt-on or as an afterthought.
Part 2: Enterprise and SaaS
Ad-supported products are, by definition, consumer-focussed. This is primarily because,
“no business is going to rely on an advertising-based service for critical line-of-business needs. Beyond the lack of professionalism, data security concerns makes any consumer’s service a non-starter.”
Critically, enterprises are NOT starting from an expectation that software should be free. In fact, most are emerging from an era of expensive on-premise technology (and long upgrade cycles) to cloud-based services (a massive industry shift labelled ‘the consumerisation of IT’) so the SaaS subscription model is financially attractive.
Consumer SaaS is still a tough gig. Slack or Box are more realistic role models than Netflix or Spotify, so B2B is a better bet for Product Managers looking to monetise via subscription payments. One of the biggest problems in consumer Saas is how customers pay. PayPal and credit cards are still rare in many regions and local payment options can be complex. In the enterprise, circumstances are reversed. Not only are they set up to pay, they expect to do so.
Product development for the enterprise has specific characteristics and considerations which, for consumer Product Managers, can be counter-intuitive.
First up is the significantly reduced premium placed on the user-experience. Switching costs are more pronounced in the B2B environment so design doesn’t factor into a purchase decision. A detailed cost/benefit analysis, however, most definitely does. Lest we forget, the buyer is rarely the user in the enterprise so the purchase is a rational calculation, NEVER an emotional one. This is why Apple hasn’t penetrated the enterprise the way Microsoft has.
Business buyers are looking for measurable outcomes that demonstrate a return on their investment, so your product must have progress-tracking and detailed reporting metrics from the outset.
Businesses also have specific customization or feature requests, and are willing to pay for them. So Product Managers must be willing to weigh the business case for custom development against competing demands on their backlogs.
Epilogue
Michael Porter says strategy is about making hard choices. In this post, we have made the case that Product Managers need to make hard choices about their business model before building a product that will sustain it. For most Product Managers, that means a boolean decision between building an ad-supported consumer product or a paid-for enterprise product.
Are there no alternatives? After nearly a decade of neglect, Apple recently woke up to developers’ pain and announced sweeping changes to subscription options within the Appstore. But is it too little too late for a generation raised to expect software for free?
Perhaps the answer lies in the East, in the examples set by the Asian Unicorns which employ radically different business models to the traditional product playbook of Silicon Valley. Line (which recently completed a successful IPO), pulled in $1 billion in revenue in 2015 from in-app purchases of its social games, targeted ads via registered accounts and (shock horror) the sale of actual stickers! Yup, that’s physical merchandise, folks. Having accepted that people won’t pay for digital products, they leverage them as channels for selling physical ones instead.
The one to watch, though, is WeChat. WeChat is a product phenomenon in many ways, most notably in the way it embodies a new law of digital reality that many are claiming is a perpetual break from the past. The law in question states that products are merely ‘pipelines’ whose time has passed. The future for digital businesses lies in building platforms. Whether this is, in fact, the case is the subject of the next installment of On Product Strategy. Watch this space.
