Category Archives: Segmentation

Product Management Metrics (part 2a)

My  conference call on PM Metrics with Tom Grant went quite well yesterday. It was a round table discussion with good points made by several participants.

While we did talk about a number of topics, the metrics discussion dominated the first 1/2 of the call.

One of the questions  — What metrics should be used to measure the effectiveness of Product Managers? — got me thinking a bit.

My answer on the call was that first the focus should be on metrics for the Product Management organization, and then a breakdown from there on metrics for individuals based on objectives and tasks that support the goals of the organization.

To me that seems like a logical approach, because all other organizations in a company, includes sales, marketing, technical support etc. have metrics defined and measured that way.

So what’s the problem?

So why is it so hard to come up with metrics for the Product Management organization? Well,  it goes to the heart of the major issue with hi-tech Product Management today.

And that is that most companies don’t look at Product Management as a holistic function within the company, but rather as a set of individuals or small teams working on a variety of product related tasks.

Look around and see how the focus of Product Management is different in different companies.

Look at how widely the reporting and organizational structures are for Product Management. It is part of Marketing in some companies, part of Engineering in others, a standalone department in others.

Look at the ongoing debates related to when Product Management roles should be defined and introduced in a company.

If you’ve worked in or have been exposed to Product Management in different companies, compare and contrast the tool sets (or lack of them) used by Product Management organizations versus the tools used by other departments to do their jobs.

And if people don’t look at Product Management and it’s objectives in any holistic and standard way, how can they set about defining and measuring key metrics for the Product Management organization?

Metrics should focus on measuring intended outcomes

For Sales organizations, the key metrics  (product sales/bookings etc.) are directly tied to the intended outcome of the function: generating sales and revenue.  There are numerous secondary metrics that are tracked such as  sales breakdown by product/product family, by deal size, by geography, by new vs. existing customer etc.

And don’t forget all the sales funnel metrics that are used to track progress and success, such as average time to close, win/loss ratio etc. The important metrics are clearly tied to the intended outcomes of the activity of the sales organization.

For marketers it’s a bit more complicated because there are different roles in marketing and different intended outcomes. The two primary outcomes that can be applied to marketing are related to lead generation and market/industry awareness.

And from there numerous metrics can be identified related to number of leads, cost per lead, lead quality, lead to prospect conversion ratio etc.

Metrics for awareness are numerous, but basic metrics focus on “mentions” by press, analysts and other influencers in publications, reports, blogs, and via social media such as Facebook and Twitter.

And what of Product Management?

What is the primary objective of Product Management? In a previous article on this blog entitled Product Management Metrics (part 1), I defined the mandate of Product Management as:

To optimize the business at a product, product line or product portfolio level over the product lifecycle.

Don Vendetti of Product Arts, wrote a series of guest posts, entitled Measuring Product Management. In part 3 of his series, he provided his definition of the Product Management mandate:

To deliver measurable business results through product solutions that meet both market needs and company goals.

I like Don’s definition.  Both definitions share the same spirit about business focus,  but Don’s phrasing is clearer and more explicit than mine. But I do think that mention of the product lifecycle is needed because that has a huge impact on the objectives and the required focus of Product Management.

Don’s use of the words “measurable business results” is crucial to this discussion.

So what are those business results? Well it depends on the business and the company goals. 🙂

Those goals depend on the many things. Some companies care about revenue. Others care about market share. Others care about profitability. Others only care about getting acquired. And those goals can change with time.

Some choose to be technology focused, while others are sales, marketing or market focused. Some companies have a single product, while others have portfolios of products.

Depending on the company’s goals, size and level of maturity, the market conditions, it’s financial status and it’s overall strategy, Product Management’s objectives will change and so the metrics to measure Product Management will also change.

I’ll stop here, but I’ll pick up this discussion in an upcoming, and long overdue post that will be entitled Product Management Metrics (part 3).

Make sure you read Part 1 and Part 2. 🙂

Saeed

Questions for Product Managers

It started with an interview on Red Canary, talking to Product Management leaders in Toronto, including Alan Armstrong, Stephen Pollack, Lee Garrison and Roy Pereira.

Interestingly enough, I know all of these people personally. I have worked with  Lee & Alan, worked for Stephen, and know Roy through very close common contacts.

In the interview, they each answered the following six questions:

  1. Tell us about the best product you’ve ever encountered? Why do you like it?
  2. How do you know a great product manager when you meet one?
  3. What’s your favorite interview question?
  4. When is the best time for a start-up to hire a product manager?
  5. What has been the defining moment in your career?
  6. Mistakes. What was your biggest?

Steve Johnson took up the challenge and posted his answers to those questions on his blog, and most recently Scott Sehlhorst did the same.

I thought it was time to join the discussion myself.  So here are my answers to those same six questions.

Tell us about the best product you’ve ever encountered? Why do you like it?

I’m a big fan of any product that “just works” or surprises/delights me in some way. I don’t have a “best” product, but here are a few that I really like and use regularly.

  • The Blackberry – It does what it promises,efficiently and in a very compact form factor. It’s not perfect, but it’s really good, and it can take a beating like no other device I’ve seen. I’ve dropped my Blackberry many times and it is no worse for wear. To quote an old advertising phrase — “it takes a licking and keeps on ticking”.
  • Dyson vacuum cleaner — I’ve blogged about Dyson previously, but after 3 years, the thing still sucks more than any other vacuum and leaves it’s competition in the dust. Sorry couldn’t resist. 🙂 What really amazes me about it is that their customer service is also really great. A small part broke on the bottom of the machine. I called the toll-free number clearly visible on the cleaner itself. The person on the phone quickly confirmed which part was broken and they shipped me a replacement free of charge a couple of days later. The cleaner was clearly designed for this kind of diagnosis and service. Awesome.
  • The Honda Civic — We’re a Honda family so I don’t have experience with other brands of cars, but then why would I need to? I love the Civic because it just works. I’m terrible when it comes to maintenance and oil changes etc. but even with minimal attention it gets me where I need to go.  It’s both totally reliable and easily affordable. That’s what I want in a car.

How do you know a great product manager when you meet one?

If a product manager adheres to all of these rules, then they must be great! 🙂  Certainly product managers need to be smart, analytic, understand technology and markets, and be great communicators and leaders.

But if there is one thing that I think really defines a great product manager, it’s the ability to “connect the dots” in seemingly unrelated or conflicting contexts.  Perhaps another way to say this is product managers need a strong mixture of creativity, curiosity and intuition.

Steve Johnson answered this question with the line:

A great product manager sees patterns.

Scott wrote:

Great product managers are polymaths, with several areas of deep expertise and skill.

While written differently, these are similar answers and tie in well with the ability to connect dots.

A lot of times product managers need to find solutions to problems that are highly constrained — usually WRT budgets, resources or time. Finding solutions that satisfy business, technical and market requirements, and being able to sell those solutions to executives or other doubting Thomases are hallmarks of a great product manager.

What’s your favorite interview question?

The one I like to ask potential product managers is:

What one word best describes Product Management?

I’ve asked that question on the blog. Here are the results.

It’s always interesting to observe interviewees struggle with the question as it usually catches them off guard. And of course, once they come with an answer, the obvious follow up question is “Why?”

When is the best time for a start-up to hire a product manager?

This is a great question and core to how our industry understands and values Product Management.  I’m clearly biased here, but I have to agree with Stephen Pollack’s response:

Thirty days before you start the company.

This answer also lines up perfectly with what Bill Campbell of Intuit said about Product Management.

Too many people don’t actually realize the full scope of the Product Management role. It’s not just about product requirements, even at the very earliest stages of a company. I’ve seen too many founders of companies create offerings (I won’t call them products), that didn’t completely address market problems, that weren’t differentiated from competitors, or  that didn’t target specific market segments and problem domains.

And what happened then? They brought in “a product manager” to help address the issues. Sorry, way too late. Why spend another year and potentially millions of dollars to fix problems that you could have addressed right at the start?

What has been the defining moment in your career?

I’d say it was leading the Product Management efforts of the flagship product of a public company in Silicon Valley. The release was described by the CTO as “the biggest, most ambitious release in company history.”

That effort consumed my focus  for almost 2 years, and I learned so much during that period. I’ve shared some of it publicly.

I ran a large beta program during that release and used that experience to write this article on betas.

I gained a greater understanding of how to optimize cross-team communication.

I also gained some insights into leadership, particularly when dealing with people across departments, geographies and areas of focus.

Mistakes. What was your biggest?

I’ve certainly made my share.  My biggest was probably not understanding (for far too long) the impact personal motivations and politics played in Product Management. I’ve written that for product managers,  “Every activity is part of a sale.

Virtually everything we do in Product Management relates to influencing others to support our goals. In most companies, Engineering won’t simply do what the PM asks.  Darn. 🙂  And certainly in larger organizations, with significant constraints, misaligned objectives and even compensation conflicts, people will focus on what is of benefit to them. They will optimize locally (i.e. what’s best for them or their team).

A lot of what Product Management is about to get teams to optimize globally (i.e. what’s best for the product or the business), sometimes at the cost of local optimization. This is where selling becomes important. The sale is in getting other teams to agree to do what you need, and to get that, you have to understand their motivations, drivers, goals and objectives. Once I understood that, life became much easier for me as a product manager.

Saeed

P.S. I’d love to see the Cranky PM’s answers to these questions.

Brand extension gone too far?

Brand extension occurs when a company intentionally takes a well known brand and applies it to another product category. Companies extend their brands quite regularly.The objective is to take advantage of the awareness of the brand, reach new audiences, and ultimately make more money.

For example, Arm and Hammer moved from Baking Soda into Dental Hygiene products.  They utilized their association with cleanliness and fighting germs and odor and found a space in a new market (though their competitors are aggressively fighting back).

And the Virgin brand has been successfully extended from records to airlines to mobile phones and even to space travel (Virgin Galactic).

Of course, brand extension doesn’t always work. McDonald’s had a significant failure with their McPizza offering. And does anyone remember LifeSavers soda? Coors Spring Water? Or Colgate Kitchen Entrees? (I kid you not!)

Another form of Brand Extension is when two well known brands, are brought together. One very successful example of this is the Lego Star Wars toys and games.

I believe the reason for this success is that there is overlap in the market segments of people who like Lego and those who like Star Wars.  i.e. mostly male, but with an age range skewed much higher than the typical target audience for Lego.

Those of us who grew up playing with Lego and saw the original Star Wars movies in the theaters can now spend some more money on the combination of those two passions, or introduce our children to them.

But this kind of combination doesn’t always work. Lego recently announced a new game for the Wii, entitled Lego Rock Band.

There is whole family of Rock Band games including:

  • Rock Band (2007)
  • Rock Band 2 (2008)
  • Rock Band Unplugged (2009)
  • The Beatles: Rock Band (2009)
  • Lego Rock Band (2009)

Who is the target audience for Lego Rock Band? And will this game appeal to them?

The songs provided with the game are a curious mix of hits from various decades, with music from:

  • Jimi Hendrix, The Jackson 5
  • The Police, David Bowie
  • Carl Douglas (gotta love “Kung Fu Fighting”)
  • Foo Fighters, Bon Jovi
  • Spinal Tap (set the volume to 11)
  • Queen, Pink
  • Iggy Pop (yeah, this guy ===>)
  • Elton John, Korn
  • Counting Crows
  • and KT Tunstall (Who???)

to name just a few.

Forget about the video game for a second. Who would be the target for  that group of musicians????

Now combine the Rock Band portion, and maybe you’ll get some eclectic rocker/video game enthusiasts.

Now combine in the Lego theme, and who’s left? Young videogame playing, Lego fanboys who like 1970s punk rock?

Perhaps I’m not the target audience for this? I do own a Wii, and I actually do like some of the musicians listed above, and I did like Lego as a kid. But combining them all into a Rock Band game? I don’t think so.

Am I wrong here? Let me know.

Saeed

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Taking the “mess” out of Messaging (part 4)

This is part 4 of the series. Here are links to Part 1, Part 2 and Part 3.

In this part, I’ll take a look at whether the industry can get out of the mess it’s in.

Looking back

Before looking forward, let’s take a look back at some ads from a couple of decades ago.

Click each image to enlarge.

Notice something about these ads? They all look rather similar. Pictures of (similar looking) computers and lots of text! Check out those headlines. “A new way of personal-professional computation”???? What’s that all about? Is it a personal computer or a professional compute? Well it’s both (and neither)! Ouch.

And that’s one fine looking set of muttonchops on Issac Asimov in the Radio Shack ad!

Even Apple was not immune to kind of advertising.  Here’s the original Macintosh print ad. A double-page spread! Click images to enlarge.

Cool. Did you catch the specs on the Mac? 64K ROM, 128K RAM, 32bit MC68000 processor, and even a clock/calendar chip!

Comparing these ads to advertising today, it’s  clear that things have changed for the better in 25 years. Apple certainly leads most other technology companies in their sophistication, but then, they’ve been at it much longer than most other technology companies!

As every industry matures, so does the audience for it’s products. Forty or fifty years ago, a lot of advertising for cars talked about engine horsepower, size (in cubic inches), acceleration, top speed etc. The only metrics that are frequently mentioned today are mileage or fuel consumption (and sometimes number of cup holders!). But that’s because those are important to us.

In personal technology, few consumers, truly care about the processor in their device. Quick, what kind of of CPU does you iPod have? What about a Blackberry? What about an iPhone? The Palm Pre? The Motorola Razr? The MacBook Air?

If you know any or (even worse) all of the CPUs in those device, you’re a serious geek. 🙂

But for the vast, vast majority of people, it doesn’t really matter one bit. Those days are behind us. We have matured and so has the industry. Of course, there are still many companies that talk in “speeds and feeds” or mumbo-jumbo, but in a maturing industry, they pay a price. The segment of the market that listens to the “tech-speak” is shrinking steadily.

Looking forward

If we try and look 25 years into the future, how will things have changed? Technology will have become much more embedded and ubiquitous in our environment.

The days of the big desktop computer will be gone. We will carry, wear and perhaps even embed devices within our bodies.

A second full generation of people will have reached adulthood living in an Web-enabled world. The word “offline” will be an anachronism. Augmented reality will be our reality.

In a world like that, how will people relate to technology? How will companies need to communicate with the market about their products?

The current “craze” known as social-media will be old news, and will just be part of the communication process vendors have with their customers. Consumers, particularly younger ones, will likely give up a lot of what is now considered “personal” information to companies, in exchange for individualized products and services.

In the context of the digital world, “Give me what I want, when I want and how I want” will simply be a common state of affairs.

Remember the phrase “personal computer”? That of course was shortened to PC, which is still used today, but few people think about the “personal” part explicitly anymore. Messaging and advertising will become “personal” in the future as well.

And of course there will be those that do it well, and those that do not.

So getting back to the original question – Can we get out of this mess? – the answer is yes, but it will take time. But for those of us who are at the forefront of this change, let’s see if we can’t make that change happen just a little bit faster and easier and ensure we don’t get emails that promise to help do things like  “Design a Monetization Strategy to Enhance Strategic Goals while Protecting Core Assets” any more.

Saeed

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Bill Campbell says, It all starts with great products!

Here’s a bit more from the Bill Campbell interview. I posted the first excerpt in “Bill Campbell says hire Product Management first!“.

Michael Moe is the interviewer. This exchange takes place about 4:20 into the video.billcampbell

Click the image above to open a window and view the full interview.

Michael Moe

So, what are the key metrics that you track when you’re working with a company. How do those metrics change as the company goes from being a startup, to an emerging company and as it gets larger? How rigourous are you with early stage companies?

Bill responds:

The rigour that goes into the first product is the most important thing. Everybody talks about great companies. Great companies start with great products.  You can’t make chicken salad out of you know what.

This is a truism if there ever was one. How many great startups can you think of that had mediocre products?  People may not know the company well, if at all, but they hear about a product and the product (good or bad) defines the company.

Bill continues:

I’m a big believer that you really track the progress of the product. I go back and talk about Mike Homer and a Product Marketing* like person. What are we doing to make sure we have something that we can ship and release? Get it out into the market place.

Tracking that one single thing — what can we do? who is it for? how do we guide it? Getting great product into the market place would the single most important thing.

That would be the number one metric that I’d judge and boy you’d go a long time in your company before you stopped doing that.

* Bill Campbell equates Product Marketing and Product Management earlier in the interview. See Bill Campbell says hire Product Management first! for details.

While not technically a “metric”, Bill again focuses on making sure the thing that is being built is being built for the right people. Making sure an identified target audience (and set of valued usage scenarios) are front and center during this early phase.

This answer also support’s Bill’s earlier statement that Product Management skills are key at the very earliest stages and should be hired in right at the start IF those skills are not strong amongst the founders.

One final note

What’s most interesting about this answer from Campbell is that he doesn’t say great companies start with great people. That’s what a lot of people would say, but it’s not true. Great people can build great products which lead to great companies, but there are many well known examples of companies started by experience or knowledgeable people (e.g. Cuil and Cassat) that have failed to live up to expectations.  Once a company builds a great product (or service) that people use, that drives company growth, and ideally makes the company a leader in it’s market segment, can a great company emerge.

Saeed

8 lessons we can learn from Infomercials

pitchmenYou know you’re a Products Geek, when you find a show like Pitchmen appealing.

Pitchmen, on the Discovery Channel, is a behind the scenes docudrama about infomerical marketers and how they  identify products to promote, develop the pitch and then take the products to market.

The show stars the late Billy Mays and Anthony Sullivan, two very successful and well known television direct marketers.

While it’s very easy to brush these guys off as selling gimmicky items to uninformed consumers, there are lessons to be learned from watching these guys operate.

And that’s what I like about the show. It presents some of the discipline and process they follow for the products they market and sell. Here’s a list of some of the behind the scenes work they do.

1. They look for problems that a lot of people have.

  • Stain or smell remover: Yes
  • An acoustic shark repellent: No

2. They test out the products and validate they actually live up to their claims.

  • Can the odor remover get rid of foul smells from hockey equipment?
  • Can a vertical grill actually cook as well as a traditional horizontal grill?

3. They listen to others carefully, getting feedback from potential users of the product.

  • For a self-rotating pool side lounge chair, aimed at removing the need to manually rotate a chair to get optimal exposure of the sun, they enlisted some swimsuit models to test them out. After the trial, they not only asked what they thought of the product, but asked how could the chair be improved. One of the testers suggested cup holders.  Not a bad suggestion.

4. The benefits of the product have to be clearly demonstrable with a number of use cases.

  • For a food grater, they grate garlic, chocolate, cheese, citrus zest and other foods. The objective is to present a broad number of real use cases  to show utility and value. This is clearly an area where technology companies need to improve when thinking about how they demo their own products.

5. They always try to find at least one “Wow!” aspect for each product.

  • For a shoe insert product that claims to eliminate impact from running or other sports, they put their hand under a pad made of the same material as the insert, and then hit the pad with a hammer. Then they took their hand out and wiggled all their fingers to show they were undamaged. Can you say “Wow!”?

6. They craft the messaging and the pitch, being very particular to the words they choose.

  • Whether via rhymes or alliterations or carefully crafted wording, the right word at the right time can make a big difference in how a product is perceived.  For example, with a product for grating food, the lines “grate cheese with ease” and “for zest it’s the best” are used. Don’t think these stick in people’s memories? Remember that line from the OJ Simpson trial? “If the glove doesn’t fit, you must…”

7. They ensure price points that will be appealing for their audience.

  • With a vertical grill product (think of a big single slice toaster that grills burgers, steaks etc. vertically) they went to one of their partner companies who tried to source a manufacturing partner that could build product cost-effectively enough that they could sell it for $50.  The partner couldn’t bring the price point low enough and so they said “No” to the product, even though it met all their other criteria.

8. They are data driven business people.

  • While they may come across as shady marketers, they are clearly rather sophisticated (and successful) in what they do. They test out their pitches in local markets, measure the results, adjust their pitch, and test again. When they go national, they are very confident that they have something with mass appeal that people will buy.
  • This is probably the most important lesson that Product Managers should remember. They definitely follow the “Nail it, then scale it” mantra.

Overall, I find Pitchmen to be a bit of a guilty pleasure. I’ve got it scheduled for recording on my PVR. Even so, it is educational and every episode reminds me of basic marketing principles that have broad applicability and value.

Saeed

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5 benefits in thinking about revenue models right from the start

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moneymanThere are a number of Web sites and applications — two of the most well known examples being Twitter and Facebook — that offer very good, free services. And over time, as they grow larger, the quest begins to find a revenue model or models to turn the service into something that actually resembles a sustainable business.

The problem is that after the fact, trying to find and attach a revenue model onto something that people know and expect to be free is difficult. There may or may not be technical difficulties in doing this, but there will almost certainly be business and cultural difficulties in adding revenue models after the fact.

A lot of people like to cite Google as the model for a company that started out without any revenue models and then figured out an incredibly successful one later on. There’s nothing wrong with wanting to be the next Google, but the story of Google’s revenue model success is not one that can be recreated simply by positive thinking and hard work. Ask the folks at Cuil about that one.

The conditions and circumstances, market opportunities and market needs may be totally different. There’s so much we don’t know about the market that leaving revenue generation to an afterthought is hardly good business strategy.

It’s great to tout 1,000,000 or 5,000,000 or even 100,000,000 “users” or “visitors”, but when they cost you money everyday instead of helping generate positive cash flow, more is not better. And this, after the fact thought process of figuring out revenue models, is problematic to say the least.

Instead, why don’t these companies consider revenue models right from the outset or very early into their startup process? Whether the revenue comes from users themselves, advertising, premium services, data collection and licensing or some other means, it’s very important to think this through upfront and act accordingly to understand and implement those models that make the most sense.

There are a number of benefits in thinking and working this way:

  1. It requires you to actually segment your buyers and your users
  2. It helps you understand who you are truly competing against
  3. It reinforces the value proposition to your existing and potential users or buyers
  4. It sets up a revenue-centric culture within your company
  5. It’s the right thing to do

Let’s look at each one of these in more detail.

1. It requires you to segment your buyers and users

Who is the target customer? Now that’s a common question that gets asked all the time for virtually every product or service. Unfortunately, too many times the answer comes back as “everyone”, or “consumers”, or “anyone who needs our product”, or something equally vague and not very helpful.

It’s not always easy to know everyone who will find value in an offering, but it really helps to start with at least one or two target groups. Understanding who they are, what they need, and the value your offering delivers are key to defining a sustainable revenue model.

A lot of times people don’t do this for fear of missing or eliminating key groups of people, but if you can’t identify the kinds of people who might pay for your product or service, how can you decide how much value it is to them and how much to charge?

Keep in mind that users and buyers are not always one in the same. Taking Google’s search engine as an example, the users are the people conducting searches through the site. That service is free to them. The buyers are those organizations that buy pay-per-click (typically Adwords) advertising that is displayed in the search results.

The system of connecting searchers with ad buyers (i.e. targeted ad placement when people are searching for information), creates an incredibly efficient and scalable engine for revenue, and it must be noted, one that few companies have been able to emulate with as much success.

2. It helps you understand who you are truly competing against

There is competition for virtually every product or service. For some it’s very obvious, and direct competitors can be listed without thinking. For others it’s not so obvious, but incredibly important to identify. Why? Because the word “competitor” must be thought of as “other options for your target buyer to achieve the same or similar result”.

If you are going to charge for something, you need to know how your target buyer spends their money today (if they do at all) for similar results. Too often focus is simply put on very similar offerings in the market, and using those offerings as a basis for thinking about revenue models.

But if you truly put yourself in the context of your buyer, understand their options, and what final results or outcomes they want, your perspective can change significantly.

Southwest Airlines sees their competitors not only as other airlines, but also cars and intercity buses. Why? Because these are the most likely alternatives that their target customers (budget minded travelers) would look to in order to travel between cities. Keep in mind that a lot of SouthWest flights are short-haul routes.

Similarly, when Intuit introduced Quicken, they viewed their competition as not only other home accounting software packages (of which there were many), but also the pencil and paper, because that was also a common option for people who wanted to perform home finance calculations.  The outcome — balancing a checkbook or simple budgeting — can be achieved by computer as well as by hand.

In both cases, clearly understanding their target users’ desired outcomes and their likely options helped the companies understand the value they could deliver and in Intuit’s case, a benchmark for the price they could charge.

3. It sets up a revenue-centric culture within your company

What do you call a business that doesn’t care about revenue? Answer: A hobby.

Employees in a business need to think and act for the benefit of the business. People are hired, culture is developed, processes are defined, decisions are made and systems are built that align with the objectives of the business. If the goals of the business (at least initially) do not involve revenue (in some form), the culture, decisions, processes, systems and people within the company will adapt to that.

And when at some point revenue becomes a priority, then changes, possibly significant ones, will have to be made to accommodate for that. Decisions, which were likely technology or user driven will need to start incorporating revenue and business considerations. Does your service or product have a licensing mechanism? Is it flexible enough to accommodate the business? What changes in the Engineering, Marketing or Finance teams are needed? Do you need to create a Sales team?

It sounds trivial, but it isn’t. Consider what happens when something as simple as a pricing change is required in an existing business. There are many existing internal AND external parties and processes that need to adapt to that change.

Now imagine the impact if that pricing change goes from “no pricing at all” to some form of pricing. New people would have to be hired, for example, in finance. New systems would have to be created to collect revenue and process it. New processes are needed to handle refunds, discounts, create financial reports etc. Decision making criteria need to change to focus on what can generate and sustain revenue. These are just some of the changes that would need to occur to create a culture in the company that is revenue centric.

Why not set up the company early on to manage and deal with these kinds of issues and possibly accelerate the process of generating revenue.

4. It reinforces the value proposition to your potential users or buyers

There is absolutely nothing wrong with providing a free service. If  the objective is to only have a free service and it can be funded then go ahead.

But most services are not created to be completely free forever. Even open source software, which originally was viewed as “free” has developed business and revenue models that leverage the value their customers derive from it. Redhat, Suse, MySQL and JBoss are all examples of very successful businesses founded on this so called “free” software model.

For any aspiring profitable business, there is a very clear need to identify upfront what is truly free (e.g downloading and using open source software) and what requires payment (e.g technical support for open source software). Not only does this delineate the difference between free and paid offerings but it also defines the relationship and expectations a customer or buyer will have with the company.

Flickr provides a good example of this in action. You can upload a fixed number of photos for free and share them with anyone, but for a large collection of pictures, there is a small  fee ($25 per year for a Pro account). Flickr commits to never deleting your photos, even if you fail to keep your paid account current. They’ll simply restrict your access to them.

So why is this important for customers/buyers? It positions the company very clearly as one that is in business to generate revenue, that will deliver a set of services or offerings that have some intrinsic value that costs actual money, and one that, if successful, will be around in a few years time to continue delivering the service that is being paid for.

I like free stuff as much as the next guy, but if I’m going to commit my time and effort to using someone’s services, I’d like to know that they’ll be around so I can continue to use them. Now, there are plenty of companies that charge for their services that go belly up, but that is not new to the Internet. That’s a simple fact of life for any business. But I’m sure you’d agree that it’s more likely that a company that DOES charge money for their service or has a very clear and scalable revenue model will be likely be around longer than one that doesn’t.

5. It’s the right thing to do

rightthingWhy are most businesses started? To make money? Well more bluntly, to make money for the founders and investors in the company. If that is the case, then it’s Business Basics 101 that understanding the market, potential customers, their buying needs, budgets, willingness to pay etc. are all critical to any form of business planning. So, why not start right and do some homework upfront?

It used to be the case that the investment to build a product was significant, typically involving manufacturing processes, sourcing from suppliers, warehouse and delivery expenses and logistics etc. But the combination of mature software development tools and the Web as the distribution medium has created an environment where creating and distributing the “product” is simple and rather inexpensive. In fact, identifying buyers, buyer needs, budgets etc. is likely harder than creating the product. So what do many people do? They build something and see “what sticks”.

While there is benefit to this approach, it should not be done without forethought to the business aspects that will underlie the offering. Both product definition and business planning need to be done together and up front. Just as iterations are needed to get the product right, iterations will likely be needed to get the business working well. Both product and business strategy need to evolve together, and as knowledge is gained and changes needed, then those changes can be made in tandem.

And while people will hold up the few successful companies, like Google, as their models for achieving success, it’s telling that they willfully ignore the myriad of companies that tried the same “we’ll figure out the revenue model later” approach and utterly failed.

Saeed