8. Getting the Money
While it’s not true that all designers get uncomfortable when the talk turns to money (budget constraints, the need for revenue, potentially seeing people as paying customers above all else), it’s fair to say that many UX designers are happy to have someone else (a “bean counter,” a “suit”) obsess about grubby stuff like money and find their comfort zone far away from the bazaar, and the cash register. Designing shopping carts, check-out flows, and credit card forms is about as close as most get and that’s plenty close enough, as these tasks rarely inspires flights of creativity.
Before I go too far, let me not overgeneralize! B. Pagels-Minor pushed back on this broad brush, telling me “I generally disagree with this. Many UX designers I work with are just as savvy and thoughtful about how to monetize as many product managers.”
I have no doubt this is true and that I am betraying my own narrow experience and some lingering stereotypes that need updating! So, really you can answer for yourself whether you cringe when money is taken into account as a factor in UX design and product development.
Towards the end of this year Rosenfeld Media will be publishing my book Product Management for UX People: From Designing to Thriving in a Product World (you may sign up there to be notified when it is available for order), the culmination of a multiple-year project that has unfolded with the input and support of the Design in Product community.
During the editorial and production process I am sharing early drafts of chapters, and I welcome any feedback here that will strengthen the material.
Regardless, money is the life blood of our contemporary economy, no matter what sector of the economy you work or play in. Of course there are huge swaths of human endeavor that are not transactional or commercial, but even government and nonprofits and other types of organizations need resources, spend money, and have to stay afloat somehow financially.
note from author: When I first told a friend and mentor of mine who is hugely influential in the product and UX worlds about my plans to write this book she tried to talk me out of it because, as she put it, “designers don’t have any money.”
As a product manager or frankly even a product designer (whether by that you mean a UX designer in a product context or a product-savvy designer in general), it pays to keep an eye on the money. Design teams are often viewed as cost centers. UX has spent more than a decade arguing that it provides sufficient return on investment (ROI) to justify the research, the modeling, the iteration, the prototyping, the testing. There’s always been an undertow of costs vs. benefits pulling UX along with it. From a product perspective, you’re just including this financial dimension in your larger model of what’s going on, what you’re making, and how you’re going to succeed.
Profit and loss
In a business’s C suite, financial tracking, modeling, and projection are constant. Profit and loss (P&L) responsibilities tend to roll up to division heads and general managers. Heads of product may have P&L responsibilities, but most product managers do not. They don’t tend to have decision-making power over hiring budgets or resource allocation, outside of their own product (at best). A PM rarely controls the P&L situation but it sure can control you, and you need to be aware of it.
Depending on the context and the product’s lifecycle, you may be doing business modeling, working out the cost of goods sold, defining revenue targets, and identifying suitable pricing levels. That context might be business, and if so, is it consumer or enterprise? And if not, who is paying for the service, and where do those resources come from and what else might compete for them?
Where the product stands in its lifecycle will drive different financial expectations. Typically, there is a period of R&D and investment launching a product where it generates costs with no revenue or income at all. Later, it will be time to figure out how to get the service paid for without necessarily having to achieve total independence of funding from revenue alone (“break even”).
BCG’s Growth Share Matrix offers a good lens for assessing these matters (see Figure 8.1). All products begin as a “question mark” with low market share and potentially high relative growth rate. Your job as a PM is to try to turn it into a “star” (high market share, high relative growth rate). You may fail but still generate a “cash cow” (low growth, high market share) that can be handled in maintenance mode, or you may fail and end up with a dud or a “pet” (low growth, low market share), which you should be willing to put to rest.
Beyond that a successful product would be expected to more than pay its own way in terms of revenue generated vs cost to produce and deliver. Some product have long periods of plateauing and maintenance where revenue is steady and optimized but no longer particularly growing or likely to peak again. Finally, at the end of a product’s life, when it no longer makes ends meet financially and has no viable future, a PM needs work out the legal obligations to legacy customers, communicate plans to take it off the market, and ultimately wind things down while minimizing the remaining liabilities on the books.
Revenue models
Not all products come with price tags directly attached. If you make enterprise software in a B2B context, the customer may have paid for multiple subscriptions to an entire suite of software and the product you’re working on may come as part of that package whether an individual user ever tries it out or not. This is where SaaS (software as a service) products come into the picture. Now you’re offering entire enterprises your software as a hosted turnkey service, at scale, and charging per seat.
This is somewhat analogous to the streaming entertainment services which charge you a single monthly subscription fee rather than asking you to pay for each show you watch. It still costs money to make those shows and you can be sure that Netflix and Amazon Prime pay very close attention to which shows do get watched (and for how long) and how well that correlates with viewers decided to continue their subscriptions, and so on.
So even if there isn’t a point-of-sale transaction, the individual product still bears a measurable relationship to the business model and its product manager needs to account for that aspect when defining success metrics. (Once these metrics are defined, the growth practices covered in Chapter 7 come into play to try to optimize those metrics.)
For a thorough dive into possible revenue models for products, you may need to go back to business school, but some of the most common ways to bring revenue in for a product include.
- Free during a beta period and then paid for all
- Free during a trial period, and then paid if not canceled.
- Free during a trial period, and then a paid recurring subscription if not cancel.
- Paid subscription (no trial period).
- Free product with in-app purchases available.
- Free product with offer to upgrade to paid Pro version of product
- “Freemium” pay wall to unlock higher level(s) of service.
- Enterprise licenses paid by seat
- Enterprise licenses paid by usage.
What works best for your product will depend on the needs and drives and constraints of your potential customers.
Note: A customer is a person who pays for a service. A user is a person who uses a service. A user may or may not be a customer, and vice versa.
This is another area of potential experimentation, but it can also mean betting your business and your livelihood on your decisions, so this means treading carefully and doing your research up front, as well as studying the data and other signals intently and being prepared to drop a bad model and pivot rather than remaining overly attached to your favorite ideas.
Even when you have found the right model, you’ll want to tune it to find the best price points, the right things to put behind the paywall, the optimal subscription rate, and so on.
Breaking even
Getting a product (or a business) to the break even point is a tremendous accomplishment. Until you manage that, it’s hard to call the effort a success.
From the Trenches
As a counterpoint to this framing, Netflix product manager B. Pagels-Minor suggested I may be oversimplifying things a bit here, saying “I disagree. Amazon was not profitable for years. Neither was Netflix and it was well understood that that was the plan. I think saying break even as the success metric is pretty illogical in modern tech companies. It’s more likely that the goal would be to get market penetration.”
This is a really good point! There are of course more examples of companies that won on market capture long before they found a way to capitalize on this. A few dominant products in terms of marketshare still have not! So, take this as a case study in one particular path and try to see how the same thinking and doing could crack other success goals aside from that of “breaking even.”
Of course, nothing lasts forever. Some tremendously influential and valuable products came and went without ever making a profit, let alone breaking even. Still, if money is the lifeblood of the material world, then getting to the point where you take in more than you lose is, in the long run, just the ante required to play the game at all. What you do next is the real challenge.
For four years I headed up the product team at 7 Cups, a startup that had graduated from the Ycombinator incubator program, which instills a ruthless honesty about growth metrics and facing up to when they are not growing. At core, 7 Cups offers a way for anyone on the planet to get emotional support from a stranger anonymously, privately, and securely over the internet, in the form of a text chat. There is more to it than that, but the basic value proposition is peer-based support for free on demand.
When I came aboard as VP Product I could see that 7 Cups already had product-market fit. The user interface was frankly somewhat ho-hum, having already evolved through a series of feature hacks and design tweaks post initial launch. The value proposition wasn’t fully clear and the first-time experience and navigation were something of a maze.
And yet people were “crawling through glass” to seek support (and increasingly to offer it) in growing numbers. Clearly, 7 Cups had tapped into a deep seated need for authentic caring connection among people (see Figure 8.2).
Making sure it remained free was also a core part of the mission, and meanwhile growth kept increasing but the rate of increase was slowing, which isn’t what venture capitalists love to see. (They also really like their pigeonholes, so if they can’t decide if you are a behavioral health startup, a digital therapeutics play, or a social network, they tend to throw up their hands.)
We kept working on growth hacking, of course, but in the meantime finding a VC “sugar daddy” to provide millions of dollars for us to experiment with to find how to keep a business afloat offering free services powered by volunteers was looking increasingly unlikely.
Our early-stage investors were becoming a bit anxious too and suggested strongly that we start looking into ways to generate revenue. So we began a series of experiments
Experiment №1: Donations
The first idea my boss, the CEO had, was to ask for donations, or as I called it, “the begging bowl strategy.” The reasoning was that we were providing a public good, somewhat like public broadcasting, and that we could ask people to donate to support our mission.
I was of two minds about this.
- We were never going to make enough money to stay afloat just from donations.
- There is nothing wrong with enabling people to give us money.
So we agreed to try it, despite my skepticism about the willingness of ordinary folk to donate to a private business that is not a nonprofit. (This is called “disagree and commit” and is a big part of product leadership.)
We debated whether to enable one-time donations or to require that they be recurring (meaning someone would have to cancel before a month passed if they really wanted to give just once), and we experimented with how to present the option in our user interface, as well as with persuasion or even what you might call social engineering.
We created something called the “compassion jar” and asked folks to help “fill it up” every day. It sat there in the menu bar, right next to a user’s profile image and user menu (see Figure 8.3).
Clicking the jar takes the user to the donation page. After several people asked for the ability to make a single, sizable donation we relented and included a one-time donation alternative to the recurring model (see Figure 8.4).
In the long run, this did generate a small, steady trickle of revenue, what one might call “pin money” or “petty cash,” but as I had anticipated in my gut, it was clear after a few months that alone this donation model would never keep the entire business afloat.
By the way, 7 Cups is far from the only business to ask for donations when providing a useful service. Another example I came across recently is Bot Sentinel, which helps you determine whether accounts you interact with on Twitter are bots (see Figure 8.5).
Experiment №2: Upgrades
One of our investors felt very strongly that we could monetize the self-help features of our product, which is called the Growth Path. This path comprised a series of steps somewhat like that of another wellness product on the market, Headspace (the mindfulness, meditation app): a series of calming exercises and other bite-size self-help experiences.
Headspace used a classic freemium paywall at the time (the first ten mindfulness recordings were free, and then you paid a subscription to unlock unfettered access to the rest of the library).
We took a different approach with a basic free path and even a few special paths for people dealing with specific struggles (such as addiction, or anxiety, or bullying, for example), and the rest “locked” and only accessible to people who paid to upgrade to a premium subscription.
We offered monthly, yearly, and lifetime subscriptions, and we experimented with the pricing and the presentation of these choices over time.
We developed a new onboarding flow that I later called the “Yoga” onboarding, which introduced the self-help steps while the new member was waiting for their first connection with a volunteer. The app offered a simple, calming breathing exercise (see Figure 8.6).
The new member could continue trying simple steps and gradually come to understand that they were taking a sequence of steps. Eventually, we’d present them with the option of upgrading to get access to a premium path more specifically designed for their needs. Over time we experimented with when, where, and how to make these offers, as well.
My biggest concern was that we were monetizing a secondary aspect of the product. Our primary value proposition continued to be live one-on-one chatting with real people. Racking up subscribers to the self-help area wasn’t bad per se but could lead us to divide our focus and fail to excel in any single area, an omnipresent threat for any product person.
This experiment was somewhat successful. It generated real substantial revenue. By itself, it did not appear even after much optimization to be on track to make us profitable and self-sufficient as a company, but it was definitely extending our runway and we were learning a lot about what people were willing to pay for, what they valued, and how they felt about recurring subscriptions.
Doubled down on an onboarding strategy geared towards signing up “Growth Path” subscribers for $29/month, developed Yoga onboarding design to start with simple steps (breathing, reflection) before feeling committed to a path.
Somewhere along the way we started our next revenue experiment.
Experiment №3: White Label
Our founder had some experience marketing to universities, and the vast majority of our user base was in the 18–25 demographic, so we developed a white label version of our product to sell, initially to schools. This was our first step away from B2C business models. This put us squarely in the world of SaaS.
Definitions: A white label product is a generic version of a product designed to be incorporated with an enterprise solution and given the branding of the customer. SaaS stands for Software as a Service and refers to enterprise software hosted by the vendor and paid for via subscription.
In some ways this was a natural fit. Universities and colleges struggle to support their young populations as they struggle with the incipient mental health challenges of adulthood, pressures from home, coming of age and romantic challenges, and more. Aside from caring for their charges, these schools also have legitimate concerns about attrition and even suicide.
Campus services are both limited in their reach and scope, as well as in some cases all too visible for students or other community members who might feel the need for mental health support as a stigma. An anonymous support service provided through the same sort of mobile chat interface every student has their nose in all day can be a lot less anxiety provoking for anyone concerned about being judged or feeling vulnerable for needing help.
We learned that some schools wanted to use our facilities to enable their own students to provide support for each other and others welcomed our ability to offer our own volunteers while training their students in our system.
We found we could charge medium-sized annual fees to provide a version of our services to an entire campus or network of schools, but supporting this type of customer also cost us a great deal in terms of resources and focus.
It also raised for the first time the classic product vs. sales confrontation where we had to have “the talk” with our sales reps about not promising product features to close a deal without discussing with us first! Even with guardrails in place, the reality of larger-ticket customers wanting extra security features, for example, drove my product roadmap in directions different from where I might have otherwise wanted to steer it, and worst of all, left us sometimes zigzagging between multiple destinations over short stretches of time.
This white label model looked like it had potential, even with the drag on our consumer roadmap, but it was also not going to grow fast enough alone for us to align our entire business around that model, so we started exploring another avenue for monetization: therapists and professional therapy.
Experiment №4: Directory
While this ultimately came to little as a revenue source, we created a professional directory for therapists, ostensibly competing with the gold standard online director of therapists, hosted by the magazine Psychology Today. We wanted to offer an alternative marketplace for these therapists and saw it as another potential subscription revenue play.
It was a bust financially,primarily because we had insufficient leverage to offer a credible competitive alternative to the established directory. (Famously, if a therapist got one referral a year from their PT listing it covered their subscription costs. We had no such track record.)
But we did make this directory for an ulterior reason, as a building block toward the next experiment, which was to offer online therapy on our platform. Signing up to offer therapy via 7 Cups would then require that the therapist set up a profile in the directory (see Figure 8.7).
Experiment №5: Paid therapy
It was time to try another freemium model, professional therapy. This made a lot more sense to me than our attempts to monetize the self-help Growth Path. The classic freemium model offers a core free service and then charges for an enhanced, more fully featured, or higher quality version of that same service.
Here the idea that for free you could get support from well meaning volunteers, but also that “you get what you pay for” and if you felt you needed or could benefit from a somewhat more highly trained form of support, and that you could afford it, then a professional tier running on the same communications and community platform would enable integrated referrals relatively easily.
The existing community that sustained the free service needed to be included in the discussion about changes and the need for sustenance, and to be reassured that their roles would remain fundamental, and not relegated to a second-class status.
We updated the onboarding again, this time reverting to a chat-first onboarding flow that offered a therapy upsell the first time the new member asked to chat with a person (see Figure 8.8).
Therapy experiments
Therapy showed some promise immediately but it needed a lot of work. We worked furiously to devise hypotheses and run experiments, holding weekly growth sprints to keep our efforts on a tight cadence:
- We experimented with free trials
- We optimized the heck out of the signup funnels (see Chapter 7)
- We worked hard on the program design for therapists and the expectations of the therapy service itself.
- We developed dashboards for therapists to show how well they were doing, some of which had counterproductive effects and had to be tweaked or scrapped.
- We experimented with our queueing algorithm that assigned new signups to available therapists.
We stacked up a lot of wins, drove up our funnel conversion rates, improved our retention of subscribers and support for therapy providers, without unduly hampering growth rates in our free service and community, and we eventually reached that holy grail of startups, break even (see Figure 8.9).
We were now “Ramen profitable”
This break even point meant that technically, we were profitable if we brought in one penny more in a month than we spent. If nothing changed, our runway was now theoretically infinite. Well, of course nothing stays the same forever, and stasis is death in business, but even a temporary reprieve from the wolves at the door is something to celebrate.
Nonetheless, we were profitable in only the way that a lean, volunteer-powered startup in a mission-driven space can be, by keeping our expenses at a bare minimum, doing everything on the cheap (our motto was “scrappy, not crappy!”), and by paying ourselves well below market rates, which is itself not real sustainability in the long run. In Silicon Valley this is sometimes called being “Ramen profitable.”
One way or another, we needed to keep moving forward, but at least now we had some options. Where could we go from here?
There were basically three approaches we could take (see Table 8.1).
Table 8.1: Three directions for a break-even product
The first direction, “Where we’re going there are no roads” treats the existing break even business as a platform for experimentation. Within the narrow range of subsistence it allows for efforts to find new breakthrough products or even directions to pivot for much greater value.
The second direction, “The band is just fantastic” assumes that the business model that just got the company to break even is the best vehicle for making it truly profitable in a healthy sustainable way, by doubling down on the value in the core service and paid version of it, and using the same fierce honesty toward key metrics that pushed the rock up the hill in the first place.
The third direction, “Go for broke” resembles the first one superficially, in that it takes the current success as a platform for greater things, but it involves swinging for the fences and looking for breakthrough, game-changing, market-making opportunities, more or less suggesting that if you’ve managed to figure out at a way to get from 0 to 1, there is no reason to assume you can’t get from 1 to infinity.
Depending on the line of business, the economy, the competition, and a host of other factors, any of these directions might have been the right one for that product, or for yours.
Managing multiple lines of business
It’s worth noting that the story of a company with one product getting to break-even involved experiments with multiple different business models, entirely separate lines of business (see Figure 8.10). This is not unusual, and while singular focus has its virtues, multiple lines of business can present packaging opportunities.
Revenue Lifecycles
While tales of launching products from scratch and growing a userbase and then finding a way to pay for it all can be inspiring, it’s also risky to focus on the initial stages of a product’s lifecycle to the exclusion of the ongoing dynamics around revenue, cost, budget, resources, and finance.
A product that has established itself with a set of users and with a relatively secure place in the product roadmap and the company strategy is more likely to focus on sustaining and optimizing existing revenue streams, rather than trying to find something where there is currently nothing. This may appeal to product folks with less of a “frontier” mentality. In some ways, these are the banker, supplier, and governance approaches that tend to follow the pioneers.
Sustaining
The underlying mechanisms are the same. There are fixed costs and costs that scale with use. There are recurring revenue streams and intermittent forms of revenue. The moves are more fine-tuned, though, more about keeping a well-oiled machine humming, a reliable revenue stream unclogged, and a stable customer base satisfied.
There is long-term risk of complacency as an incumbent, Clay Christensen’s famous “innovator’s dilemma,” so called because it’s not about being an idiot or a drone with no fire in your belly. It’s a bona fide dilemma because a comfortable established product literally can’t afford to innovate. The risk to the existing revenue stream is too high. This creates the opportunities that upstarts eventually take advantage of, which leads to the third and final stage in the lifecycle of a product.
Sunsetting
All things must come to an end, and digital software products (and the revenue streams and profits they may generate) eventually follow suit. It’s probably no product manager’s favorite assignment, to preside over the sunsetting and decommissioning of a product that has outlived its usefulness.
It’s probably no PM’s favorite assignment, but both kinds of products share similar skill sets. Don’t believe me? Here’s what you need to decommission a product:
- identify the decaying profit vs. loss patterns and make the tough decisions about where and when to cut losses
- wind down commitments, set expectations, preserve security and privacy and other legal commitments
- ultimately take a product entirely off the book of a business
As you can see, this is a mirror image of the skills needed to build up successful products in the first place!”
What’s money without customers or transactions?
It’s easiest to talk about money in terms of transactions, whether paid by a consumer at point of sale or by an enterprise customer via wire transfer, but product management work outside of business still runs on the same lifeblood as for-profit enterprise: money.
Government, nonprofits, other non-sales/business forms of organizations all have bills to pay. Money is the circulatory system of our material world. In a nonprofit, donors and members provide the resources, even if there are no revenues per se. Software development of new features or fixes to old bugs cost money for governments just as they do for companies. The money part of the job never goes away and there is no reason to shy away from it.
As a product manager, once you see the money flowing below the surface of nearly every effort, you’ll recognize that in many ways it is as much a material that you are building with as the lines of code or the pixels on the screens.
A Day in the Life of a Fintech PM
Michael Curry, head of product at 100x Group, an international crypto (financial tech) startup:
How do you start your workday? Check slack and email
How do you spend the early morning? Getting coffee and planning out the day on calendar
How do you spend most of the morning? Squeeze as much heads down individual contributor work in as possible before meetings
How does the morning end? Meetings get rolling
When do you take a lunch break, and what do you have for lunch?12 noon. Protein and greens that were pre-prepared.
What do you do first in the afternoon? Sometimes coffee again. Take an hour to prepare for late afternoon meetings during Asia morning.
How do you handle “firedrills” or other unplanned work? Directly and hands on. I help multiple departments plan through incidents and execute.
How do you spend the bulk of the afternoon? More meetings followed by documentation and recaps.
What do you do at the end of the workday? Dinner with family. Help daughter with homework. Put baby to bed.
Do you work in the evening? Frequently
Key Insights
- Business and revenue are core product responsibilities
- If you have created a valuable product, you can find a business model to sustain it
- Don’t be afraid to try multiple revenue models
- Don’t be afraid to abandon a revenue model that isn’t working
- Don’t be afraid to maintain multiple revenue streams at different level of effort
- Break even is a pivot point for any product where its roadmap is temporarily infinite
- Financial inputs and outflows drive what’s possible for a product at every stage of its lifecycle: establishing, sustaining, and sunsetting
- Even outside of transactional products, money is one of the materials a product manager works with.
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