Building profitable Business models for complex products
The aim of this guide is to empower strategic leaders and startups to develop new, scalable business models for complex, explanation-demanding products. Although the methodologies presented are explained using software products, they are definitely applicable to any type of complex product.
Why Software Products Are Hard to Sell
How long do you think about which apple to pick from the shelf at the store? If you're like me, probably not very long. So far, so good.
But is it the same for software products? Do I just reach into the "virtual assortment" and buy a software product? Probably not, right? We sign up for trial subscriptions from numerous providers, read more or less independent comparisons, and scour online forums to gather reliable information about the software products. For larger IT projects, companies invest four to five-digit amounts just for the evaluation.
What does this tell us? Software products, unlike an apple, require explanation.
Explanation-demanding products come with the following characteristics (and it doesn't have to be software):
Technical Complexity
The product offers numerous setting options or complicated operation. A good example of this is SAP. Depending on the company, it requires a very specific configuration.
Specific Use Cases
The product is designed for a very specific use case. For example, CRM software solves a very specific need: simplifying, structuring, and boosting sales in customer contact.
Customer Uncertainty
Customers are unsure how they can use the product and what exact benefits it offers. While this is obvious with an apple, this question can be much more challenging with software. Everyone knows the Excel spreadsheets in which we desperately try to compare existing solutions to create comparability. We present to the supervisor which solution variants there are, discuss advantages and disadvantages, and ideally make a well-balanced decision that considers both "hard factors" (price, functionality) and "soft factors" (user-friendliness, scalability, security, user acceptance).
High Commitment
An apple is a one-time consumable product; software can accompany companies for decades, so the decision needs to be well-considered. Moreover, software products sometimes perform very important functions in sensitive company areas, which brings significant implications for product decisions. In addition, software products cause high costs due to high development costs to be refinanced and high customer benefit (ideally).
What does this mean for me as a product provider?
For sales, it is crucial to recognize the characteristics of an explanation-demanding product. Only then can I take effective measures to improve my marketing strategy.
All my marketing activities should always have the following three goals in mind:
Minimizing Development Costs for Products Without a Market
Whether I work in a startup or within a department of a larger company, time and costs are the most valuable, albeit limited, resources. The sooner I recognize that a market is not suitable for my product, the lower the expenses for developing a product. Ideally, I decide only after a careful risk assessment whether developing a new product for a niche is worthwhile.
Abstracting Complexity
This goal affects two areas. One area is more technical (applicable to technical products), the other area more communicative (applicable to any type of explanation-demanding products).
Hiding Technical Complexity
Do you know what TCP and UDP are? Unless you have a technical degree or training, you probably won't encounter these terms in everyday life. Yet, these are the two most important transmission protocols on the internet. Without TCP, no website would be accessible; without UDP, your Netflix wouldn't work.
A product like Netflix is incredibly complex from a technical perspective. However, the technical complexity is hidden from the end-user. As a user, I do not need to deal with UDP to use Netflix.
As a software provider, I must enable my customers to use my technical product with existing resources in some form.
Adjusting Communication
As "nerds," we tend to get lost in technical details and explanations. We forget that our counterpart usually does not use the same vocabulary and does not have the same technical background knowledge. So, I have to manage to convey the complexity of the software and the advantages in simple language and simple images.
Work Out and Communicate Benefits for Specific Use Cases
The central question for a customer making a purchase decision is: Can I effectively solve my problem XY with solution Z?
For a customer to answer this question independently, I, as a software provider, must formulate clear and understandable sales messages that highlight the customer benefit. I must be able to clearly state what advantages product XY brings for which problem.
An example of such a sales message would be:
Salesforce enables sales staff to increase the success rate for deals by 20% through automation and clear structures with an intuitive interface.
Build Trust and Break Down Purchase Barriers
Customers generally distrust newer products or providers in the market initially. The sales barriers can vary greatly depending on the industry and target market. The best way to find out these sales barriers is by asking lost deals about their decision reasons. This optimization usually takes place later in the product lifecycle.
An Abstract Model for Developing New Business Models
To illustrate the methodology, I have designed a procedural model that enables every reader to better classify the current stage of their product. Additionally, economic factors for profitability were incorporated into the model.
Depending on which phase one is in, resources of the company should be focused on different tasks.
In principle, the following steps can be defined:
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1. Collect, Discard, and Refine Ideas
The customer should be at the center of my efforts from the beginning.
But how do I start? If I have no idea which customer I want to offer which product to, I can collect ideas in a workshop using methods like magazine shopping. I simply get 20-30 magazines of any kind and flip through the pages. Then I write down every idea in short bullet points. The best ideas can be selected for further elaboration through voting. An idea needs a problem, a market, and a solution.
The selected best ideas can then be further elaborated in the team. A useful tool for this can be the Osborne Checklist.
2. Verify Hypotheses Through Interviews
Up to this point, we haven't really talked to any customers. Hypotheses and ideas set up can now be tested and evaluated with reality using a small group of participants (5-10 interview partners per industry and solution).
3. Create a Clear Value Proposition
A clear Value Proposition is essential to clearly communicate to customers how they benefit from using your product. With the insights from the interviews, you should be able to create a Value Proposition.
If your product does not yet cover all needs, it will become apparent at this point at the latest.
A Value Proposition Canvas Template can be used for creating the Value Proposition. There are a number of free templates out there for download.
4. MVP Development
If the existing product does not yet cover all the needs of the target market, one must either expand the existing range or adjust an existing function. Strategic partnerships can also be useful to complement one's offer so that all needs can be met without tying up internal resources.
Always try to implement the minimal necessary requirements to meet the customer need. This is also called MVP (Minimum Viable Product). This ensures that no resources are used for features that the market does not demand.
5. Involve Customers and Achieve Product-Market Fit
This phase is often the most organizationally and interdisciplinary challenging phase for the team. With a handful of selected customers or partners from the target industry, existing functions must be iteratively tested for meeting the needs. Often, additional ideas and suggestions for improvement come up in this phase, or possibly bugs that need to be fixed.
Here too, careful selection of the functions to be implemented is necessary to keep the invested budget low.
How do I know that I have achieved Product-Market Fit?
6. Optimize Sales Messages and Achieve Message-Market Fit
Okay, you have a handful of customers who are thrilled with your product. Ideally, 10-15 customers. Great! The next step is now to reproduce these enthusiastic customer experiences. For this, you need to set up a sales channel that consistently picks up on the Value Proposition worked out and conveys the same messages.
This concerns advertising, content marketing, internal marketing, sales communication, after-sales, and the Value Proposition on the website.
How do I know I have achieved Message-Market Fit?
Since the entire marketing and sales team needs consistent communication here, it is essential to have a good, evaluated Value Proposition before going into intensive marketing.
7. Make the Funnel Profitable
As a rule, the sales channel for marketing will not be profitable from the start. The reasons for this can be very diverse. This step often stretches over several months, as it is difficult to predict which channels are best suited for sales. Only iterative testing helps.
Prerequisite for Measurability: For optimization of the funnel to even take place, measurability of the entire sales funnel must be given. Check:
Once measurability of the funnel is established, optimization can begin.
Here are some examples of how the funnel could be improved:
How do I know my sales channel is profitable?
For the profitability of the sales channel, two key figures are of crucial importance:
1. Customer Acquisition Cost (CAC): How much money do I pay to acquire a paying new customer?
2. Customer Lifetime Value (CLV): How much profit do I generate with a new customer as long as he is my customer?
If the quotient of CLV and CAC is greater than 1, the sales channel is profitable. A value of 3 is considered a good prerequisite for investor search.
Reading Recommendations
The content and learnings are extracted from various books and blogs I've read over time. Here I've compiled some recommendations for you.
- The Mom Test (Rob Fitzpatrick): Easily applicable basic rules in customer communication. Especially useful for new product evaluations in the early phase.
- Crossing the Chasm (Geoffrey A. Moore): A very comprehensive illumination of the lifecycle of a product, the theory behind the article.
Acknowledgments
I hope I was able to give you some ideas and incentives on how to get off to a flying start with your explanation-demanding product and your team. I would like to thank Thomas Hepp and Andreas Ziltener from INOS (Innovationsnetzwerk Ostschweiz) for prompting my professional development and for the professional advice within the swiDOC project. Thanks to coaching over the last two years, I was able to apply the theory taught and optimize it in practice.
What are your experiences with explanation-demanding products? Which content should I elaborate on in detail? Feel free to write it in the comments.
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