4 Steps To Creating Our Product Strategy
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Today, I'm going to talk about how we can craft our product strategy.
It's probably safe to say that we're all aware of the importance of having a coherent product strategy. Simply put, it helps provide direction to the entire organization on what the goals are for our product and how we plan to get there.
Without it, the work we do can feel purposeless, even chaotic.
It can even sink the business.
A medical devices company I worked at wanted to evolve into an enterprise platform for large healthcare organizations in the US.
A bold move to be sure. But the market opportunity was immense. And the customer demand was definitely there.
The problem was the constantly shifting strategy which led to a lack of clear direction.
Which really means there was no strategy.
The results were predictable:
- Weekly changes to priorities.
- Missed deadlines.
- A roadmap no one believed in.
- Discontentment among employees.
- Missed revenue targets.
- Revolving door within senior management. (I left too.)
Ultimately, the founders company got saved by being acquired by a larger player wanting to enter the market. How fortunate.
Strategery...
Now, "strategy" has become a bloated word. There are tons of definitions and opinions about what is and isn’t "strategy".
Heck, entire industries – management consulting, business schools, even product management education – run on talking endlessly about what is "strategy"!
I'm a simple man and, as a result, think in simple terms.
So, for the purposes of this issue, I'm simply going to say that a strategy is a directional plan or set of plans intended to achieve a goal or set of goals.
For a product, it means:
- Setting a goal for our product.
- Having a plan to achieve it.
That's it.
In this issue, I'm going to specifically focus on the goal part – how we can think about setting the goals for our product and the actions we can take to do that.
One more quick thing before we dive in...
Some product managers are far removed from the strategic decision making - e.g., they work at a large company and are several levels removed from those who make the big decisions. Often, they're simply "handed down" the big strategy from above and primarily directed to execute on it.
For example, that was the case when I worked at Capital One, at the time a $34B company. (Now, $55B.)
Even in that situation, as product managers:
- We can still think strategically about the part of the product that we do lead.
- Developing this higher order thinking is invaluable for our career growth.
Ok, with that out of the way, let's jump in.
The 4-step approach to identifying our strategic product goals.
- Understand our company's business objectives.
- Understand the strategic imperatives for our product.
- Analyze the levers we can pull to identify goals for our product that help achieve 1 and 2.
- Socialize our proposed product goals for alignment / approval.
1. Understand our company's business objectives.
This may include:
- Revenue goals.
- Growth strategy – Will growth come primarily from acquiring new customers? From account expansions, upsells and cross-sells? From new channels? New products? New markets? M&A? Etc.
- Improving cash position – such as, accelerating revenue recognition or increasing margins.
- Scaling profitability – improving margins, reducing costs, increasing adjusted EBITDA.
- Any other top-line goals, OKRs, KPIs, key metrics, etc.
If you're in a very large company, likely your business unit, department, or your portion of the product portfolio has trickle-down goals that align with the big corporate ones.
2. Understand our product's strategic imperatives.
There may be key decisions made by our product leadership to help achieve the big company goals above. For example:
- Continued investment in the core product portfolio.
- Driving customer success, reducing churn, increasing retention.
- Increasing conversions.
- Improving customer implementation cycles.
- Delivering on pre-existing client commitments. (Common in enterprise B2B.)
- Launching a new product.
- Post-merger integration.
- Scaling the tech infrastructure.
3. Analyze the levers we can pull to identify goals for our product that help achieve the big goals in 1 and 2.
In earlier issues, I talked about how product management delivers value by helping to drive net revenue growth and margin velocity. Read them here, here, and here if you need a refresher.
In those issues, I identified a number of levers we in product management can use to craft our product strategy and identify the right set of goals for our product.
To make this tangible, I'll use a fictitious SaaS product as an example of how we can use these levers to develop a product strategy.
If you're not in SaaS, this should still provide you some ideas on how you can apply the concepts to your product. You just need to identify the right set of economic and supporting metrics for your product.
Ok, let's get into it...
Example 1
The company's top-level objective is to increase revenue through retention and expansion.
Let's say the average customer lifetime for our product is 24 months with a lifetime value (LTV) of $1,200 on a monthly recurring revenue (MRR) of $50/month.
We do some digging and discover the following:
Wow — half our customers are churning in just a year and a half! Our product's profitability is actually being propped up by just 20% of our customers.
This analysis gives us several strategic options:
Option 1: Double down on the 20% segment – our most profitable one.
- We could propose encouraging sales and marketing to focus their efforts on acquiring more of the same kinds of customers.
- We could prioritize the bulk of our product roadmap on features and capabilities that could help acquire more of them.
Option 2: Reduce churn and increase customer lifetime in the 50% segment.
- We could partner with the account management or customer success team responsible for that 50% to identify any gaps and opportunities. Are they leaving because a competitor is offering better pricing? Are those customers simply "growing out" of the product?
- We could analyze the user experience of those customers – is there something there that's causing them to leave so soon?
- We could identify any gaps in our product that are causing those customers to churn so quickly and propose prioritizing the relevant solutions on our product roadmap.
These aren't either-or options. We could propose doing both, assuming current resourcing can support that plan. Either option would help with the company's objective to increase revenue through retention and expansion.
Example 2
Let's say:
- Our product is available under three pricing plans: $50, $75, and $100 per month – each catering to a different customer segment.
- At every pricing level, the customer has the option to purchase add-on features that cost $25 per month on top of their existing plan.
- We're the product manager responsible for the core reporting capability for the product across all pricing plans. More reporting features are available at each pricing level.
- The company's top-level objective is to increase revenue through existing account expansion.
We find the following:
Although customer lifetime is the best for the $75 plan, those customers aren't adding the add-on. We do some investigating to find that those customers refuse to entertain adding any add-on due to their unhappiness with the existing reporting features they have.
This is incredibly insightful. Since we own the reporting capability, we could consider proposing a product strategy around improving the reporting experience for this cohort of customers. This strategy proposal is aligned with the company's objective to increase revenue through existing account expansion.
Example 3
Our product caters to two customer segments:
To keep things a bit simple here, we'll assume churn and the cost to serve each segment is the same.
Now, on the surface, it looks like enterprise customers are the more valuable ones. They pay more and stay longer. Not surprisingly, the company declares a focus on enterprise customers.
But on deeper analysis we find the cost to acquire an enterprise customer is $6,000, while the cost to acquire a small team is just $240.
This means CAC (customer acquisition cost) for enterprise customers is a third of their LTV, while CAC for small teams is just 1/5th of their LTV.
In other words, it costs 25 times more to acquire an enterprise customer but they're only 15 times more profitable.
It turns out that smaller customers are actually the more profitable segment!
Assuming it's not realistic to reduce CAC (that's a discussion with the Sales VP), and renewal rates remain the same, the LTV for enterprise customers would need to increase to at least $30,000 to be just as profitable as smaller customers.
This gives us several strategic options to consider:
Option 1: Increase LTV for enterprise customers.
This seems the obvious one given the company's declared strategy of focusing on the enterprise segment.
The plan would be to identify the things needed to increase the LTV for enterprise customers, assuming reducing CAC isn't realistic.
Option 2: Double-down on small teams.
On the other hand, we could propose prioritizing features and experiences for smaller teams that could help boost their lifetime value (they stay with us longer) or their MRR (they pay us more).
This is obviously counter to the company's declared strategy of focusing on the enterprise segment. So why would we propose this?
We would consider pursuing this strategy if we felt we've optimized the enterprise segment as much as possible or we feel there's plenty of growth left in the smaller teams segment, and doing so would give the business a better chance of reaching its growth goals.
Our proposal may not get approved, but that's okay. We'll get points for our strategic thinking.
Again, these aren't either-or options. We could propose doing both options, assuming current resourcing can support that plan.
The point of these examples is it's this type of strategic thinking that folks want from product management.
4. Socialize our proposed product goals for alignment.
With our analysis and recommendation in hand, we can now socialize our proposed strategy with key decision makers.
Stakeholder alignment and executive presentations deserve their own discussion, so I'll save them for a future series of articles. For now, here's the template:
- As much as is practical, use shuttle diplomacy to align stakeholders.
- Be succinct in your recommendations: "I recommend X. The alternatives are Y and Z. The potential trade-off is A, but doing X will get us B."
- Communicate in terms of value, impact, and opportunity cost.
- Lay out options with pros and cons to showcase your critical thinking.
- Make a clear recommendation to demonstrates your command of the situation.
- Be prepared to have a conversation.
Whatever the decision, once it's made, our job then is to go make it happen.
Takeaway
While it does work, formulating a product strategy isn't some magical multi-month process requiring deep market analysis and user research.
It does require an understanding of how the business of our company works, our product's business model, and, of course, our customers.
Even if you're at zero now in your understanding of these things, look to incorporate this type of thinking into your work in small doses over time.
Spend just an hour each week learning the business and customers, and in six months' time you'll have built a strong strategic muscle and become a force to be reckoned with!
If you want to get really serious about how to learn about the business of your company and your product, and use that knowledge to craft a roadmap that aligns company goals, stakeholders, and customer asks, consider joining the interest list for my upcoming cohort class, One Week Product Roadmap. You'll join me live to learn how I was able to transform a messy product backlog into a coherent, actionable product roadmap, and how you can use the same methods for your own product.
Right now I'm looking to see if a small group might be interested in a beta cohort so I can perfect the material. Interested? Apply here to get on the waitlist and be the first to hear when enrollment opens.
That's all for today. Hope this helps.
