Prioritizing Business Over Customers
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Two stories to share with you today. They may not seem like product management stories initially, but they are absolutely classic product management stories.
Story #1
During the COVID pandemic, our team was working overtime to launch a product that would help physicians and nurses remotely check in on isolated patients.
Development was running smoothly, but we couldn't get our pricing model past the Finance Committee.
We had done our homework. We knew there was demand. We had demo'd the product concept to customers. We knew the features to build. We understood our customers' budgets and what they'd be willing to pay.
We just couldn't get the pricing to work.
According to our model, if we offered it at customers' preferred price, our product margins would get crushed. The product would be unprofitable.
But to get to the margins the Finance Committee wanted, we'd have to offer the product at a price we knew customers would never go for.
We were at serious risk of having to press the STOP button on our development work. We'd lose out to some serious competition. And, most critically, tens of thousands of patients would not get the care they desperately needed.
Lives were at stake.
Working closely with our CTO and pricing analyst, we re-visited our analysis. We looked deep, and questioned every single one of our assumptions.
Finally, we found the problem.
We had accidentally baked too much of our platform costs into our model - AWS, video tech, security, performance monitoring, tools - all of it.
Some of it was just normal human error. (The pandemic was stressful.) Some of that was due to faulty assumptions on my part on the number of units I anticipated in the field in year 1.
We quickly corrected our model. A revised analysis revealed that we only need to contribute 5% of our platform costs to this product. Voila! We were able to strip $10,000 in monthly costs out of the model.
Now, the model worked great! We were able to offer the product at an affordable price with a healthy margin. It sailed through the Finance Committee, we launched the product, and helped our customers save countless patient lives.
Damn, it feels good to be a product manager!
Story #2
Enterprise SaaS platform. Big logo clients. Good growth. Aggressive roadmap for the year to help achieve company goals of (1) expanding the revenue base (25% increase in bookings), and (2) maximizing existing client success (90% client retention rate).
Then, in Q1, the CFO began to beat the drum of "faster revenue recognition". A key area highlighted was the length of time it was taking to implement our solutions with customers.
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Nerdy Accounting Insight
In accrual based accounting, revenue is typically recorded on the income statement once a service has been completed or the customer has received the product.
In cash based accounting, revenue is recorded when cash is actually received by the business.
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For an enterprise SaaS product, this means while the sale (i.e., customer signs the contract) can be considered "booking" that revenue (i.e., the revenue is anticipated), the revenue cannot be actually recognized on the income statement until the product is fully implemented for the customer and the customer can start using it.
I was approached by our Professional Services team. They had a goal: Reduce our client implementation time by 35%.
As typically happens with growth-oriented enterprise products, our product development efforts had been almost exclusively focused on customer-facing features. Our internal "admin console" that allowed our Pro-Serv team to configure our solution for our clients had been given short shrift.
The fact was the admin console needed a complete overhaul. But that would have taken up 4 months of development capacity, which would have put at risk our ability to hit our top-line company goals. A non-starter.
So, in partnership with the Pro-Serv and R&D teams, we worked out a creative approach.
We designed for the big vision, but approached the development incrementally, releasing iterative improvements each quarter, partnering closely with the Pro-Serv team to ensure - as the primary users - they were were involved every step of the way.
The result?
By the end of the year, we were not only able to report on our contributions toward the top-line goals, but also that our improvements to the Admin Console had:
- Helped reduce average client implementation time by 20%...
- Resulting in hundreds of thousands of dollars in additional revenue recognition that year...
- With more planned the following year to get to our end-goal of a 35% reduction.
So why did I share these stories with you?
Because sometimes it's okay to prioritize business interests over customer requests or user-facing features.
Doing so can have the net effect of benefitting customers as well, as both stories demonstrate.
Especially when it comes to product delivery.
Product Delivery is a Product Management Problem Opportunity
In the last two issues, I talked about our #1 KPI for for product management. Brief recap:
- The #1 KPI for product management is return on invested capital (ROI) in a product.
- One part of ROI is net revenue growth.
- The other part is margin velocity.
Read about them here and here.
Last week, I talked about the product development side of margin velocity. Today, I'll discuss the product delivery side.
Product delivery involves the money spent to actually deliver the product to the customer. It can be broken down like so:
Customer Implementation. This is implementing, deploying, or installing our product for the customer to use. For software, this varies depending on if your business is B2C (typically zero implementation costs), "small" B2B (zero to small implementation costs), or "big" / enterprise B2B ($$$ implementation costs).
Infrastructure: These are the costs to run the production environment - AWS, DevOps, security, monitoring, etc. For most SaaS-based offerings, they included in the cost of service. We can get these from our Engineering and/or IT departments.
3rd Party Software Fees: Any 3rd party software we may be using to provide a feature of the product. Examples: Using a systems integrator for data transmission; using a 3rd party data aggregator; plugging the paid version of ChatGPT into our product.
While these costs are borne by other departments, from a product perspective, this understanding gives product management a number of strategic levers:
1. Reducing Client Implementation Time.
Are there features or capabilities that could make it easier for the Client Implementation, Professional Services, or Customer Success teams to implement our solution for a customer?
For example, we had a product where our Implementation team had to setup each user individually, one by one. It could take up to 4 hours to setup a customer with just 20 users... several days if it was over 100 users. We released a bulk setup capability that enabled them upload a single file and allowed them to setup hundreds of users in mere seconds.
At an hourly rate of $40 per hour (per Glassdoor), that's a savings of $164 - $656 just for setting up the users of one customer. Not to mention the fact that those users can start using the system sooner. Now, multiply this across all customers to be implemented for the year.
2. Increasing Client Implementation Efficiency.
For one of our products, setting up SSO for a customer involved an Implementation Specialist, a Systems Analyst to write the technical specs, and an Engineer. Average time for a typical SSO implementation was four weeks. Average cost = $30k.
With improved documentation and a more turnkey approach, we were able to eliminate the need for an Engineer to be involved and reduce the turnaround to 2-5 days. That's an 85% - 95% savings per SSO implementation!
3. Reducing Infrastructure Costs.
This is typically under the control of the CTO, CIO, or IT department, so Product Management has little sway. However, what we can do is understand what these costs are and how much they contribute to our product's margins (and pricing).
For example, at one company, the CIO presented an analysis that showed that as customer unit volume increased, Oracle costs were increasing exponentially. In other words, while revenue was going up with increased customer usage, infrastructure costs were going up faster. Scaling was actually hurting this company.
This resulted in buy-in to prioritize on the roadmap a switch to a different cloud infrastructure.
4. Reducing or Re-negotiating 3rd Party Contracts.
I was launching a new product to market and we had a choice of whether to use a 3rd party service for a key piece of functionality. We knew it was more expensive than building it ourselves, but it would allow us to get to market faster.
The trade-off was to take the 17% margin hit now or launch the product 3 months later, according to our most optimistic estimates. (Which meant 6 months in reality, of course.)
Furthermore, the vendor was offering a 20% discount on their per site fees and to waive the annual licensing fee if we signed a 3-year contract.
Given that...
- Time to market was of essence...
- We were up against some major entrenched competitors...
- We had a customer willing to commit resources now to help us get the product deployed...
- And a qualified sales pipeline of $500k to $1M in total annual contract value...
...with the CFO's blessing, we decided to use the 3rd party service and sign a 1-year contract, forgoing the discount and taking the margin hit for now.
We agreed we would look to prioritize building the replacement capability the following year once we had onboarded a certain number of customers.
The moral of the story is...
Look for initiatives that drive healthier margins or trade-offs with clear economic advantages. Your CFO (and likely COO too) will love you for it!
Your next steps
Your task this week is to understand your product's delivery costs.
- What are the key costs involved to deliver your product to your customers?
- Are there opportunities to drive efficiencies, save cost, or speed delivery cycles that could result in a better customer experience, faster revenue recognition, and improved product margins?
- How would you prioritize those against what you currently have on your product roadmap?
That's all for today.
