but there's more to the story."
On April 9, 2024 I joined Alex Kistenev from Standuply and I discussed just this. View the recording to learn more about the state of the SaaS industry and how focusing on profit can help you to create a more valuable and viable product.
More Information
Check out Software Profit Streams: A Guide to Designing a Sustainably Profitable Business by Jason Tanner & Luke Hohmann based on the The Profit Stream Canvas.
Transcript
**** Transcript generated with the aid of AI (Otter.ai) please excuse errors ****
Alexey Kistenev 00:00
Am I? Yeah. Hello, hello, everyone, and welcome to stand up Lee auditorium meetings. I'm Alex, I'm co founder of stand up and stand up. Lee is a project management automation tool for slack and Microsoft Teams. And we've always had a vision to not only bring the software tool but also to unite like minded people around project and product management, to help them succeed in their complicated way. Because it's getting more harder to build profitable and competitive products. And today, Jason Tanner will help us on this journey to building profitable and sustainable products. He is the CEO at Applied frameworks, and co author of software profit streams book, he also has almost 20 years of leadership and agile experience. And when we met him with Katrina, two months ago, we were super excited to bring his to our meetings. Hello, Jay. Jason.
Jason Tanner 01:19
Hi, everyone. Thanks for inviting me to participate.
Alexey Kistenev 01:24
Yeah, it's a pleasure. Um, so before we get started, I have a couple of questions to kick this in. And then we can continue listening to you and learn from your experience. And by the way, I wanted to mention that ideally, this meeting, could be conversational. So if you have any questions so far, you can drop it here in the chat. Or you can raise your hand, if it is better to raise your hand and share your question or experience verbally. But that's perfectly fine to leave it in the chat. And while preparing to this meeting, I had a couple of questions to you, Jason, sort of the first one is, why why are you excited about this topic and other adjacent topics? Because we touched a little bit about your experience on Agile and Scrum. And now today we'll talk more about product and making product successful. So how did you? Why are you excited about it?
Jason Tanner 02:36
So why were we crazy enough to write a 400 page book, we we are product managers, by experience. So Luke and I have been working together now. While since 2008. And we met when I was working at a software company, really trying to grow a product within a portfolio. And that was a great experience because it was a really well run company. And a really great team then ended up getting acquired by computer associates. And through that time with that company, we learned a lot of valuable lessons about what really leads to a successful growing product and portfolio of products. No, my product was very small in the portfolio. And there are many challenges in trying to advance that product gain awareness gain customers and because it was only represented about 2% of the revenue for the portfolio that eventually got absorbed into one of the other products. So as a result, I found myself beginning the the new career in consulting and working with Luke and agile Product Management at mtoc. You may have heard about the osis. Or you may have heard of looks book innovation games he had just published it. And what we found was that the early agile adoption really was about delivery. And in some ways, while teams got really strong at their ability to deliver incremental value, product management and product ownership became more difficult. In fact, it became a little bit more nebulous in some ways. Scrum is great for creating the freedom and the ability to clarify what's most important to work on in the product backlog but it's not clear enough about how a product owner contributes to the business objectives of the organization. And this applies no matter what organization you're in Whether you're doing a development for a product that is going to be sold commercially, or in a nonprofit, ultimately, we have to make sure that we have a net positive financial return, that we're at least breaking even. And as a result, we noticed that over the course of about a decade, value became very unclear. We throw around the term business value, without really saying what we mean. And that led us to this path of identifying an opportunity to really do some deep work and research and clarify our own thinking, which happens when you write the book, when you start writing the book, you're actually learning as much as you're writing, and reconfirming a lot of what we'd already known. So our journey was really to think about what is going to lead to sustainably effective teams that deliver business results. And that's what really became the thesis of, of the book is that in order to be sustainable, to have sustainable products, teams, organizations, there needs to be at least some level of profitability to continue to fuel the innovation, fuel, the ongoing maintenance and development of great products that delight customers and ultimately end users. So that's what started us on the path and led to a whole lot of new development of ideas, and conceptual frameworks, and ultimately a canvas to organize all of our thinking. And as a result, we publish the book.
Alexey Kistenev 06:52
Awesome. And another question. And by the way, I wanted to I didn't mention it before. So we want to give out Jason's book to the one of attendees today. And we decided that the one who asks the best question or the question that Jason will like the most, will receive the book excluded myself. So guys, feel free to step in and ask your questions. And so the topic for today's discussion is building sustainable products in 2024. And so you just you mentioned that you're exploring this topic for a decade or so. And why did you put 2024? Like, did you see some meaningful shift or change over the years that affected your ideas? Or is it something Are We Living in some special years? Today that you want to touch on?
Jason Tanner 08:06
Though the book was published a year ago, so we just passed the one year anniversary. So the book was released, April 4 2023. It took us about a year and a half to write the book. So I started the book, very traditional word, editing. And I had a book coach and wrote about 70 pages in word and it was actually kind of painful to do it in Word. And when we re thought the approach, we created a very visual book, we hand wrote the entire book, and we had a designer convert all of the diagrams and sketches and the words into something really nice. And you know, you got this sort of horizontal layout of the book. So what we really got back in the middle of 2021, is when I started writing, the reason that we've made the decision to actually go down that path, really, was that we were seeing that right around that time. Agile was becoming in depending on how you think about the industry life cycle, really started to hit the either the late early majority or the beginning of the late majority. And I think that is that point is when we realized that just about everyone that we were working with had this problem that they were not clearly articulating and thinking about the business results of their products effectively. Part of that I think is amplified by a lot of what we've seen over the years from Silicon Valley, in venture backed startups that emphasize growth at all costs within about profit later, which I think is not a viable strategy in this economic climate, that we actually have to think about, well, what is what is going to lead to profitable success, growth without profit is not going to guarantee success at all. And I think was the trigger to trigger event for us was that agile will only be more successful if we have reasonable and viable and sustainable business plans. And that we will provide a great service to the product leadership, community and software enables solution development organizations in general, by publishing the book organizing the sauce and delivering it to the world.
Alexey Kistenev 10:50
Yeah, makes sense. So let me stop asking more questions. And Lee, lead this conversation to you. So please share what you've prepared for us.
Jason Tanner 11:03
Sure. So I think this is the key starting point, for the whole conceptual framework of the book. And we emphasize this, this notion of a virtuous cycle, that there's a relationship created between a business and the customers they serve. And we emphasize software enabled solutions. So the we don't do work for physical products. When we think about the price of a fuel injector for a car, there are all sorts of companies that do that kind of pricing work, we really, totally focus on software enabled solutions, because software is different than other physical products, we licensed the intellectual property we've created. So I want to emphasize that. But the entire idea is that to be sustainable, we need to profit to drive the ongoing development solutions. So So this diagram really is is the key. No, in the book, we emphasize the idea of the it's like the sun, the sun, it gives us energy is this growth and it really leads to sustainability. To same idea applies to profitability is the energy and the fuel that enables the business because, you know, we've been having the conversations since we launched the book. And when we engage with clients and our partners, profit can have a negative connotation, profit can be thought of as as a way for management and stakeholders to not reinvest or take advantage of profit. And that is not healthy from the type of ecosystem we think about when we think about the cycle. Ultimately, when we have profitability, we have waste contribute back to the community, to invest in employees to invest in product and, and new product innovation as well. And the first question people ask is like, well, the title of the book is software profit stream. So what is a profit stream. And really, we start with value streams. And a profit stream is just a type of value stream. So when we think about value streams, the sequence of activities to ultimately deliver a product to a customer is a value stream and value streams really are everywhere. And there's value stream from buying milk, there's buyings, value streams for updating software in a car or your phone. All of those events and activities are value streams. And we think about the Scaled Agile Framework. And that's one area in which we also work did a service in defining two different types of value streams. So we think about value streams, there can be an operational value stream, which is really how we establish a relationship with a customer and the operation to get the product to the customer. When I'm purchasing the product or ordering service for my product, if I'm calling my refrigerator manufacturer to get service, well, that'd be an operation of ice cream, how they fulfill that service commitment is operational. And we use those to model value as opposed to development value stream again, when we think about delivery to building the product, really are the inputs into cost models. A profit stream is what is used to model profit. So when you compare the two and I like this example with Porsche because it really becomes clear that the operational value stream is when I'm fulfilling the order for To car, I go to the website, I configure the car, I place the order, and it sends it to dealership. Similarly, if I need service, go online to the dealership and choose the option for whatever service I need, I need no oil change and a tire rotation I scheduled that maintenance is again, another operational value stream also may be dependent on software, I may have software developers in an operational value stream delivering value, as opposed to the development value stream, the actual design and build of the powertrain or the car itself. Likewise, the construction of the Financial Services solution or development value streams. So we think about software profit streams, where there really are an evolution of value streams or or if you prefer a new type of value stream that is designed to create a sustainable business. I emphasize design because this is a design process. And like other design processes, it's iterative and incremental. But the value stream that we consider for profit starts with quantifying the economic value of solutions that are created. And we really emphasize this idea of quantification can, particularly when we think about customer value, how do we quantify the tangible and intangible benefits that are created by our solution based on what we know about customer so customer benefit analysis is something I'll come back to again. Secondly, a profit stream is sold through pricing and licensing choices that ensure that the revenue generated exceeds the cost required to serve customers to total cost to serve customers. And when we think about the customer, we also think about their total cost of ownership. And this is not done once. This really is a profit stream that emerges over time. So products have a lifecycle. And as we think about the lifecycle of the solution, there is an evolution and where we can continue to add more and more value and evolve the solution and include things like what we call a profit engine. So one key aspect of profit stream design is to remember that the software business models the system, and a system includes the customer, the solution, how the business exchanges value with the customer pricing and licensing, and both the return on investment for the customer and the business. So designing a software enabled solution that's sustainable requires system thinking, we're going to go through a cycle of making and then remaking a system of interdependent choices. So there this ties nicely to agile, can we think about agile, we think about the iterative incremental nature of Agile? Well, the same thing applies here, when we think about profit streams. So I have a question I want to take a look at. Do you feel that the Internet startup market is currently experiencing a period endure? Andy Grove once referred to as a ton of teknicks changes? So I'd say yes, that we are seeing that impact of the new technology as a trigger. And what we call that is an external trigger, which is driving a lot of innovation and adaptation to business models. I don't think it will go as fast as we think, as we figure out how to apply AI and the what I've been observing is that most of the AI advances I've been seeing I've been more in adding more knowledge to the experience, enhancing the experience, but I have not seen as at least not in most of the products that we know and use a lot where it's completely transformed the experience. Right. So having an AI assistant to help transcribe meetings in zoom isn't a huge change to the overall core value proposition to zoom in enhances the experience. I think the next step would be when it really becomes a whole lot more powerful, which I think is going to take a little bit more time. The main winner and loser of this in the coming decade. Wow. That's it's hard to predict right now than being winner looks to be Microsoft. In terms of their investments, that depends on how we define winners winners in terms of revenue. Microsoft appears to be in the lead loser based on what's happening so far might be Google but I don't know alphabet is definitely lagging but you know are now with them, they can come back and crush it. Yeah, I think the next question I want to answer as we go through the rest of the presentation, the question about can you share examples of business models that give a competitive advantage? Let me let me frame that answer. As we go through this, Sony, let me keep going with this idea of systems thinking, and give an example of how it's applied. So let's start with a series of choices. And look at these as a set of nodes and relationships. Okay, so first, we start with the customer. And we have an idea for a solution. And we developed some software, and we decided we want to license this software on an annual basis. And this is called a time based access, value exchange model choice. So we make that decision, then we need to make sure that we capture that in the license agreement. So we do go all the way down to the level of really understanding the terms and conditions that are expressed in the license agreement, then we need to engage the technical team to ensure that the technical architecture enforces the terms that are described in the license agreement. And you'll be surprised how many companies do not have license agreements that are actually aligned to their technical architecture or the reverse you're talking about architecture is not currently aligned to their license agreement, we often have to help correct that. Once we've done that, then we need to ensure that we enable the and consider the appropriate compliance concerns, such as data retention policies. So what happens when the license is terminated, we need to think through that and ensure that the system is actually within the compliance as described in the license agreement. So this entire set of just one simple example, has multiple implications from the system that we're creating between the customer. The choice we make for value exchange, the license agreement, to technical architecture and how we consider compliance. So by organizing these elements of the system as a canvas, we can create a representation of the system that leads to expressing how we are constructing the business model, and enables more collaboration for traveling through or traversing through the set of choices that we're making. So the canvas is organized in three layers. And this really is the construction as well as the book. This helps to identify the choices that you're making, and remaking as you navigate through the design process to build out your profit stream. So the top layer emphasizes solution sustainability, how we're going to deliver value to customers over time. So what are the benefits are seeking? What's the solution that will deliver those benefits? How will we exchange value? What is the pricing model? And what are potential profit engines? The middle layer is economic sustainability. So on the left side is the customers when we look at the columns here. And this took a long time to figure out sorry, when we look at the columns. So they get the annotation and work right? This column really is customer, this is the business, everything in the middle is also relationship. So if we look at this as a customer, and this is the solution. In the middle is the value exchange model, how will we exchange value between the customer and the business? And then the rows allow us to see the different sets of relationships, solution sustainability at the top and make clear those annotations quickly. In the middle is the economic sustainability, how will we ensure that we have a profitable solution? And this includes the customer's assessment of value? When we say the customer system of value greater and total cost of ownership? How can we describe and illustrate the potential customer return on investment? On the right side? What is the solution? Return on Investment, what's the solution is business model. And again, the middle of the pricing and the profit engine at the bottom is relationship sustainability. We actually want to deeply consider how we're designing the relationship with the customer is going to benefit both the customer and us. We want fair, equitable, clear, understandable license agreements with appropriate levels of compliance to ensure that we protect a relationship To and that everyone is happy, and that we are creating, again, a long term relationship. So the details of the canvas are really described here again, on the left the customer, what is it benefits are seeking? How can we quantify those benefits? On the right is the solution, how will we identify the set of features to deliver those benefits, and actually build the solution. value exchange, really is the choices we're making about how we will exchange value that's appropriate to the benefits of customer seeking. And I'll go through some examples of that in a moment. And then, as I described, the economic sustainability and middle customer ROI modeling, which is one big lever, if you don't have a customer ROI model that you can share with customers is one thing you may want to consider creating and modeling, particularly to attract customers to increase their confidence center making a good purchase decision. And then at the bottom, you can see customer licenses. And over here to solution licenses as product leaders, we really need to think about all of the in licenses that we have. So as an example of that, there are two big in licenses. I always remember from my first product management experience, one was an object oriented database, we paid to license that database to then resell it to our customer to second was a reporting engine, we leveraged Crystal Reports at the time. And we paid Crystal Reports, again, we licensed Crystal Reports to then resell it as part of our product. Well, that was part of our economic model. And we needed to ensure that it was clear in our license agreement that the customer was effectively sublicensing those in licenses as part of solution. And a lot of times that we need to ensure that the the in licenses we're choosing are aligned to our customer licenses. So that's a consideration that we go deep into is a really you think about this is it? What does it have to do with agility and everything else? Well, it's really important it it may sound that it's very deep and legal. On the flip side, it actually is ensuring that you have a very sustainable product that enables the relationship you want to create with your customer to take advantage of your solution. So from there, really go deeper into quantifying value, because I think this is really the starting point really keeping the customer in mind. So when we think about value, we want to be precise. And this is why again, I talked about earlier, we can't be vague when we talk about business value. So for us, we wanted to be super clear about value as benefits a customer receives less the price that we are extracting, or the price that they pay. So value must be greater than price. Right, we definitely want to ensure that that we're creating sufficient value that customer is willing to pay an appropriate price that is fair for the value that we're receiving. So when we look at customer benefit analysis, that top left box, really trying to answer two questions, what is the dimension is solution that provides benefits to our customer. So I'm working with a healthcare company right now. And one benefit is to get healthcare faster, right, they want to get healthy sooner, if they're sick, they want to get healthy sooner. They benefit from clearly understanding their insurance coverage for common medical procedures. They can easily schedule appointments, each one of those benefits is something related to healthcare, so you may have dozens of benefits of your customers are seeking. When we do this analysis we typically generate between 25 and 100 benefit cards. And then the right side. Second question here on this slide is what is the magnitude of those benefits? So there's different types of bandit benefits when we think about value and benefit analysis. One is the tangible benefits, which is the number one type of benefit we want to explore particularly for business, a business solutions or business to professional BDP solutions. So we think this is a professional, maybe something I would buy as a professional. My company is not paying for Adobe b2b. I am choosing to buy LinkedIn premium. I buy it because it's going to advance me professionally in my career. I'm going to pay the extra cost for my professional development or I'm going to choose to self fund. My learning would be a b2b solution if I'm going to invest in one of the online learning programs out of my own pocket. Very different from b2c purchases. So for b2b, we typically see more tangible benefit examples by the business, and the company in the business of providing plumbing services, and they decide that they want to purchase electric vehicles for their service people. So one tangible benefit is that they're going to reduce or decrease their fuel consumption costs. And they're gonna get a positive increase in their receivables from tax credits and rebates. So we think about benefits, we're always increasing or reducing something, if it's tangible, we're increasing revenue or decreasing costs, with intangible benefits. On the other hand, which is more common for B to C, we're typically like increasing satisfaction increasing happiness, we're decreasing stress for decreasing frustration, we're reducing anxiety. All of those examples of intangible benefits are difficult to measure, however, very prominent in how customers perceive the value of the solution. So even though you may be working on a b2c product, the intangible benefits can be quite powerful. In fact, a lot of the people we've been working with discount the value of the intangible benefits too much. And she needed to rethink how valuable are the intangible benefits that we deliver. So it's also important to remember that the value is also a system. So there's positive and negative relationships between these different value examples. So as you can see, here, we're starting with increasing driver's safety. Now, there's positive relationships and negative relationships here, and we model these with this plus and negative sign here. Because if we think about it, it is a positive, economic, tangible benefit to reduce maintenance costs, however, that could have a negative relationship with increasing driver safety. Right. So for reducing the amount of maintenance, we could be decreasing driver safety. So we need to be careful about how we approach the value design, as we're building out the solution and think through carefully these different relationships. Similarly, for reduce maintenance costs, we could potentially decrease driver satisfaction, do I want to drive a truck that is not properly maintained? Now I need to ensure that it's appropriately maintained at the lowest cost. So these types of flags are important as we think about the construction of the value model, as we're considering the solution. So I want to go to this slide, because the common question is, okay, where do we actually get to the features. So, as I said before, there's a relationship of these benefit cards to the features. And this is a simple example, because I've only got four cards, if you remember, I said I could have 2550 100 benefit cards. And notice there's a many to many relationship here between the benefit cards and the features. Now on the left, these little icons represent two different market segments. And so the key point I want to make as you're thinking about, everything I'm saying is that we do want to consider all of our potential market segments, and to think about different pricing models for those different segments. Because it will dramatically affect your ultimate profitability and sustainability if you can sell your solution to different segments at different price levels. Because they doubted because they perceive value in their benefits differently. So in this case, this market segment, we've identified three key benefits for that segment. Just for purposes of a simple diagram. At the bottom, this segment has identified these two benefits. But notice that we can enable the delivery of this benefit from this feature, which also enables this benefit for that segment. So this mapping of benefits to features is is vital to really start thinking about what is the solution we're going to offer and how can we bundle or package the different features to offer different solutions or differentiators solutions to different segments. Okay, so I'll pause there and see questions there may be about anything I've said, if you want to come off mic and ask a question, that'd be fine. Let's see anything come to mind for you.
Alexey Kistenev 35:19
But let's see what are the questions in the chat? And, you know, my question would be, what changes or shifts have you noticed, when companies shift from just delivered features to using this framework in terms of increasing their and ACV or increasing their revenue overall.
Jason Tanner 35:51
So I think the most vivid example I have from a recent experience is we worked with a venture backed startup that was considering a new round of funding. And the problem they were trying to solve was to increase the number of new customers that chose their annual plan. Because they knew that if they could show and demonstrate that they had more customers choosing that package, that their projections of recurring revenue will be dramatically better than more monthly subscribers who could cancel at any time. So after re designing their pricing and packaging, their number of first time, subscribers, choosing annual plans went from 25% to 65%. It has dramatically improved over the course of about four months, that led to an earlier funding round. So pretty dramatic impact, just by rethinking their pricing and packaging, which really is related to this picture, because that's what they did, they made it very clear about what was the difference between the different packages that customers could choose. So we almost by default, we think about good, better, best, right, I'm just gonna have three different packages, three different tiers. And it can work. However, unless they're deliberately designed to appeal to specific customers, they won't be as effective as they could be. And that was a change that they made, they rethought who is the different package for. So by thinking about the customer first, this package is for this segment, this package is for the next segment this package for the other segments so that people could literally self identify who they were, and select the appropriate package for their needs. So I think is the ties into question and arguments, which framework would you recommend for ensuring a potential customer connects directly with the value your company offers? I think that gets into messaging and positioning I think for the context of this presentation, I think it starts first with clarity of the packaging. I think it also involves either sharing your customer ROI model publicly, or having it available private privately as part of your sales process. So customers can actually do their own reasonable analysis of what their results will be. Because the context is going to be different for every customer. When you really you really stand out because none of companies do this. I'm not sure what's happened that the ROI modeling is a lost art. Now granted, some of the ROI models are hard to believe use the HubSpot ROI model, if anyone knows hubspot.com. They have terrific ROI modeling tools. They're amazing. But they're also shocking. We put we used it before we became a customer. And they were promising almost you know half a million dollar payoff. If we invested in HubSpot. Do we exactly get that return? Probably not. We've we've had positive impact of HubSpot. How much did it influence our decision? I think it did influence our decision a bit because when we talked to them and really tried to dig into the numbers became pretty clear what the path to that return would be. And I think that's the motivator for particularly for b2b. To stand out that you actually have a model that is logical is reasonable and compelling. I think the second approach or framework that helps to differentiate is the clarity of the solution. Again, going back to the pricing and packaging, when your customers can self identify with what the right solution is for them, particularly when you have a low impact sales process. Just maybe you don't even have direct sales. If someone can go to your website or look you up and say, That's me, I need that package, I can clearly understand what it is I'm buying in the prices fair, I can believe that I'm gonna get the return on investment I expect. That I think is a big differentiator.
Alexey Kistenev 40:22
I have a clear clarifying question about the latest example. So you mentioned that these folks had significant results in sales selling their annual plans. And what I see most companies just discount their annual plans. So did they have some special features in their annual plans that were absent in monthly plans?
Jason Tanner 40:55
I don't think so. I think that there was there was a small discount, it was not a dramatic discount in the annual plan. I think that the, the changes they made to the package were such that the pricing more aligned to the perception of value. And so what I mean by that is, previous to working with us, the premium edition is a premium package. As an example, the premium package was expensive. For the annual plan, let's say it was $10,000, it was either, I think it was either 1000 was less, these are rough numbers, either pay $1,000 a month, for a monthly plan or pay $10,000 for an annual plan as the original pricing. But the benefits of choosing the premium plan, were not very clear. But people saw that the features that they had, and that premium package were what they wanted. But because it was such a big number to say, I'm going to commit to $10,000 for a year, they would most more commonly more likely choose the 10,000 I'm sorry, the 1000 a month and they choose a monthly plan and say a $10,000 annual plan. Okay, but they reposition the premium to appeal to a specific customer. And when they did that and made their packaging more clear about why that would benefit that segment, people were more likely to choose the annual plan in depth as you raise the price went from, you know, 10,000 to 12,000. Roughly, I think it was like a 20% increase. And people were more likely to choose it because like, oh, that's what I want. And I want to get that now at the discounted annual plan price, I'm willing to make that commitment. So as a perception of value that we've made people more willing to choose DNS scription, to take advantage of the of the economics at that point.
Alexey Kistenev 43:08
Okay. Makes sense.
Jason Tanner 43:15
Adam asks how to measure which plus are more important, another plus considering customer's perception of value. So let me go back to this slide. Is that almost always based on tests? Or is there another way? I think that the quantification of the strength of these relationships, in some cases is testable or measurable. In other cases, I think it may be more qualitative. So I could I could measure the specific decrease in the driver satisfaction resulting from change to maintenance schedules that I can I could actually go measure that and detect this train. I think if these are these are more clear, I can measure the impact of the reduced fuel costs. And I would, I would definitely measure the impact of increased on time delivery. It turns out that I mean, this is a trucking example. It turns out in some trucking companies, the main motivation is getting another stop. They want route efficiency. More stops is what they care about. More than they do even fuel costs, they're willing to incur the additional fuel costs if it means one more stop for the driver on any given day. So the the question that I think you asked is, we would always emphasize measurement we want to measure as much as possible And we do that a variety of different using a variety of different techniques. What's the best strategy for going to value of non dominant features? So when you think about dominant features, so yeah, did that's a really great product strategy question. So what point focus on the expensive working on dominant feature bring the forefront use cases that may seem now seem insignificant? This? That's a great question. Because the the observation I've been making is that there are a lot of products that we probably all know and love that continue to get better. There's even a feature in zoom that I just discovered yesterday, this really cool new option that I had not seen before where I can present differently than I am right now. Or my head, could I think I can probably even enable it now. I saw it yesterday, I couldn't believe it. Let me see if it's enabled here. Yeah, this feature I didn't even know existed until yesterday is my head now bobbing around in the bottom left. I've never seen that before. Zoom just added it out of nowhere. In there enhancing this core feature. Well, what's the core feature I want, I want great video conferencing, I want green screen sharing, and recording and so on. But now I've got this extra feature at no additional cost. So I've been noticing that there's this both a roadmap of adding new capabilities new adding more value, probably on a retention basis, I want to retain customers by continuing to add value to the product. But I also think that at some point, we've got to decide, are these new enhancements, these new features actually profit engines? Are they new modules? Are they new add ons to existing pricing packages that people can select to add incremental value? So there's a question about the core feature or not? I think it comes down to what's the strategy around the profit Engine versus enhancement? Could you like this? I have no idea what it looks like. Because I could only see a short preview. I don't know if I want to use that format anymore. I didn't choose it. Today did wasn't a sharing with my head bobbing around.
Alexey Kistenev 47:25
Yeah. Now we can see you in front of your presentation.
Jason Tanner 47:29
I'm not going to do that anymore. I
47:30
don't like it looks actually really great. So, so alive.
Jason Tanner 47:37
Yeah, I gotta practice and get more comfortable with that, for I keep doing that. Okay, so let me walk through the values change models, because this is, I think one of the key things that we figured out. And the process of writing the book, really, like I said, led to some deep research. And we're really organized a lot of thinking and we we obviously advocate for the modeling that we do. Because there is a lot of confusing terminology out there for product leaders. If you do a Google search on pricing strategy, you will get a flood of different terms that seemed the same was some people call it pricing strategy other people call a business model. What we call value is changed models are also perceived as pricing strategy. And we really tried to just separate and decompose all the elements of the pricing model as it relates to the values change model separately. So the values change model again, is a top layer of the canvas, we got the customer we've got the solution, and the values changes in the middle. So these are actually value exchange models. They have nothing to do yet with pricing. So these are the choice you make about how you will exchange value with the customer. b2b b2c b2b, it doesn't matter. Right? So if I'm, I'm a Netflix subscriber has been for years there were a customer to find the coffee mugs here. But that's a time based access relationship, right? That monthly subscription so we think SAS most of the time we think SAS we think time based access. So customers have access to the license to use the software based on a time based relationship, monthly subscription annual subscription. Some companies even have the perpetual license to the IP transaction will be like Stripe, right I don't pay stripe anything until the transaction occurs and the exchange of value is based on the transaction. Now the details of that transaction exchange are contained in the pricing model, meters uses space. So metered best example today open AI, right? I can prepay for the credits on factor effectively metering the usage. And they're paying for I'm paying for the usage, hardware, cars, microwaves. When the software is embedded in the solution, then the hardware value exchange model applies. And that is a huge area of opportunity. By the way, I think that there are so many companies out there that are looking for ways to enhance the value of their physical products, through a combination of software with those hardware products, service values, change models, anytime that there's a human involved. And I think this is one that may be dramatically affected by AI. So there's one customer we're working with that has some great software, and they have a concierge level, where effectively one of their professional services team members will actually help the customer achieve value that would be a service face value exchange model where a person is involved in the delivery to solution, Intuit TurboTax right now has an option where you can select live assistance from an agent, they've been advertising like crazy in the US. During the sports season, in tax season, where you get a live agent, well, that's a service based value exchange model, but it's very specific is one option for the same product. So again, we think about TurboTax is a great example. They have multiple levels, my kids, young adults, where they can use the free version, and they have deliberately chosen offer a freemium version. As they get older, they may choose the next level, the basic package, no life support all the way up to the life support, which will be service data is literally we're paying for access to the data. Carfax in the US is a great example I can pay for one Carfax report, banks can order a credit report, well, that'd be a data relationship. And finally, performance, which is a great value exchange model. Effectively we're sharing in the revenue gained or the cost saved based on performance. So the software promises to reduce costs, well, let's say reduce cost by million dollars, I might pay the vendor 10% of the cost reduction, or pay them a percentage or portion of the revenue increase. So that exchange model is a very specific choice that we make. And these are important choices make because they profoundly affect the technical architecture. So if I start with a transaction based guys change model and change my mind, it will take a significant amount of redesign and re architecture to enable that change. We got to have to keep that in mind as as product leaders. So what is the pricing model? I'm not gonna go into this now to keep going with the idea of how to keep all these ideas separate. So again, we want to use systems thinking to manage all aspects of a value based approach to pricing that maximizes profits. So we start with the strategy, how are you going to compete and position your product? I think this may lead to some answers or questions because it is very competitive choice. So we actually have a premium product, and we can deliver that premium experience, then we're gonna go higher than the competition. So that's my favorite, right is premium if we actually can generate that premium value. Competitive is another strategy. I know what the range of prices are, for my competitor, I'm going to be somewhere in that range. Very common to choose a penetration strategy. Now to be clear about penetration strategy of penetration strategy is I'm going to go lower than my competitors initially, but I have a designed plan to raise prices over some period of time. So penetration evolves to competitive value is the second most favorable choice. So value based strategy to some of the questions I'm seeing in in chat is where we align the pricing to the value that the customer is receiving for each segment. So while competitive also as delivering value, of course, we always want to deliver value when we can very clearly align and articulate and describe how our pricing aligns to the value to customers receiving we've really zeroed in To the customer's desire and willingness to pay strategy, there's 10 different strategies to choose from, I can show you what those look like, if you want, the strategy is a choice. So I got my value exchange model, then I think about my strategy, then I think about my structure. So who are the different segments I'm selling to? What are the attributes of segments, and how am I going to keep them separate. So one example of a segment for appropriate structure would be geographic. I sell to the US, I sell to Europe and I sell to Asia in Africa, I'm going to, I'm going to consider the sickness differently and create a structure that ensures that the US customers can't buy at the prices available in Africa. So that's my structure, we think about fences, and separation of segments to keep people from jumping fences is structure, then we get into specifics. This is where the actual price levels live, sorted out all the details related to the different price levels and options, and add ons and so on. Policies are the final part of the model. And I think this is important as well, to protect our profitability, we want to have the sufficient description of the processes and procedures for discounting. So this is super clear of what the sales people can do and what they can't do. So an example of a policy could be that any salesperson is authorized, upon request by a customer to offer up to a 7% discount. That's it with no approval, if they're in a negotiation, and a customer asked for a 5% discount, they are allowed to offer anything above 7%, we need to escalate. And so that type of design policy helps to make really clear what the rules are for the sales team. So that's just a brief introduction, Introduction to pricing model. So a few tips on what to do and what not to do. I think there was a question about antipatterns. The first pricing mistake I see is cost plus pricing. So basic economic models I see sometimes are identify my costs, I'm gonna hire a scrum team. I'm gonna think about them sprinting for a year, I know what that costs, I know what my cloud AWS costs are, at some other software costs and benefits and so on, I established my cost model, I'm just going to add a margin to plus, so costs plus margin equals price. The problem with that is that when you don't have more sophisticated thinking, you will have customers that would have paid more, a lot more. So when we just price based on costs, and margin, we're not looking at exploring all the potential for differentiated pricing for the customers who will actually pay a premium. Likewise, you may price so high that you lose a segment that can afford your cost plus pricing. Next is share pricing. I mentioned this before, let's gain loss of customers really quick, we'll figure out profit later. Don't recommend that at all. Instead, I'd be choosing a more deliberate penetration strategy if if growth is important, use penetration pricing in raise prices, shortly after you launch. And the last is customer driven pricing. Simply asking people what they're willing to pay is not good enough. So that fundamental, basic research is insufficient. So we actually need to use more sophisticated models. One is like advanced Western door pricing meter, where we ask a different set of questions. For example, what price is too low or you perceive low quality, right prices is too high, where you would consider the product too expensive. So by asking different sets of questions, you actually get a whole lot better results. And AI is actually pretty good at this. We did some AI modeling of a van Westendorp pricing experiment and it turned out surprisingly well. Also, if you if you're in the position to measure your discounts over time, it is crazy what's happening right now this is some fairly recent data from last fall. But I was shocked at this. You know, discounts are kind of out of control and it's not surprising the higher the discount, the longer the buying cycle, which means if customers are perceiving you're willing to negotiate, they are extending the negotiations and extending the sales cycle So your policies will protect you from these excessive discounts that are going to lengthen the buying cycle and decrease or depress profitability. It's also reflected in the performance of the sales team. So you've got the top 10%, with a 26%, close rate with only a 4%. Discount, the bottom percent or close rate is almost half as good to 42% Lower close rate. And yet, they're offering six up to 16% discount. So if you want high performing sales teams that sell faster, you really need to establish good pricing policies. So fences prohibit customers from one segment, from purchasing at a lower price and available to another segment, policies that are rules and conditions you need for ensuring that you've got the appropriate control and procedures to protect your profitability. Okay, I'll pause there and see what questions there are. There's really, really any pattern. So how would you approach building a product differentiation strategy for software periodic competing in a red ocean market, when the competitors mostly achieved the same feature set over time? So Dimitri, I think that the, it is hard to answer that in general. But I will say this is that red ocean means I've got to I've gotten I've gotten another solution. So there must be a reason why you think you can compete. So one strategy in a competitive space is to choose the budget pricing. I'm not going to offer everything my competitors do. But I'm going to be really good at one or two very specific things and laser focus on that price below the competitors appeal to the budget segment. And go after that. And you can be fairly successful, I think that is a is an example of one strategy, product strategy, you could choose to compete in a red ocean type market. Another strategy, maybe go premium. If everyone else is kind of looks alike, how can you elevate and really differentiate and command a premium price? Because you're so much better? Not only do you do with all the competitors do you do more, which could be better service could be additional features and benefits. There's a wide variety of of options there. To thoughts came to mind, do you think there's room in your list for expertise? In a decade, when content generated by especial value should be given to knowledge from live experts. Insecurity. So which art in which models were you? were you referring to? Do you want to come off mute?
Alexey Kistenev 1:03:12
We can't hear you.
Jason Tanner 1:03:27
The seven value side seven values change models. Think expertise. Expertise, I think would be service. So let's walk this through. So we'll use him as an example. Right? Jim has a right now I could turn on the AI companion. So I don't think the AI companion. Well, or anything related to AI is going to change the value exchange because this is what I'm thinking about the relationship with a customer to the solution. So could there be a value exchange model called AI? I don't think so. Really, I don't see how that would be different than anything else here. Service and expertise. I think expertise is directly related to service. There's a human involved in a service exchange model. Security thinks security is an attribute of any one of these. Thanks for pressing me on this because we're always testing these models. When we tested these rigorously like we went through about 100 different products. And that's one exercise we do in our training is given this product what is the value exchange model? Right what's the value exchange model for zoom? Well Zoom is time based access What's the value exchange model for? I've talked about stripe linking, we can play that game anytime I think those are all the questions that were asked so much so far. Let me get back okay talking about any growth Okay, so now I think we're ready for interesting business models that can currently get started as competitive advantage. I believe having a working business model is crucial in the concept of the value stream, generally said to business model can be a primary growth driver. But what we see now is that business models become almost identical for many, especially in SAS via Freemium or trommels. Are there any more intriguing options available? Yes. So how I think how you stand out from SAS is, I don't think time based access is necessarily the default. I think that there's more options available just by simply saying subscription. Now, they may not make sense. So if I was designing the profit stream for a particular solution, I really evaluate how well customers received, the benefits are seeking. So that really, I think, drive some deeper thinking about what the relationship is between the customer and the solution and the solution provider. Now, what's an example episodic usage I'll go a little off script and say that the one thing that we like to do on a very time based or say, a very episodic pattern, and we've have an episodic pattern is roadmapping. And there are lots of roadmapping tools out there. I mean, I assume you're here and you're in product and product development, or your leader product team. There's some good solutions. And but there's not really any great solutions, none that I absolutely love. So maybe instead of paying time based access for one existing solution, some other competitor come along and say, Look, you only need to pay us when you use it. And that could be a transaction, use it for $100 per use. Dead that would really stand out to me. In fact, in some ways, even more compelling, I don't want to be in prodpad every day, I'm just using prod pen. I'm neutral about tools, by the way. So I could say I'm gonna get my monthly or annual subscription prodpad Or there's a competitor says no, instead of doing that, differentiate on the value exchange model, you have to pay us monthly pay us one time fee every time you use it, and you're gonna love it the first time use it a quarter from now I'm going to use it again, pay another $100 And then another quarter of the pay another $100. So that's one way to stand out on the business model. And a lot of ways I think it comes down to the pricing model as well. I think the getting the packaging, right, can really drive signal significant business outcomes. Okay, I think I may have answered all the questions, I'll leave you with one last tip here are actually two things. One is the three roles. So as as product leaders, particularly now there's a lot of pressure. So better before cheaper is rule number one. And these rules are from Michael Reiner and tasm. And he wrote a book called the three rules. So don't compete on price compete on value. Right, that's number one. The second which is vital today. Revenue before costs, don't drive profits by cutting costs, instead find ways to earn higher prices or higher volume. There's a Harvard business review a case study that came out. And it was a struggling software company. And all of the advice in the responses were cut costs. And that is crazy. No one said, think about how to reposition and repackage to raise prices. So I know that I'm even in the class I'm teaching right now. We had this exact discussion. You can only cut costs so much, you're actually going to get better business results by thinking about how you can raise prices, even if you lose some of your customers. The net positive gain is almost always positive when you think about price increases. And finally, there's no other rules but view all your choices through the lens of the first two rules. My last comment is No freemium ever. Right, no freemium, free trials are fine. But never freemium forever. That is a recipe for disaster. Okay. That's everything I have to share. So let me stop sharing and see what other questions have popped up? Well, I can answer for anybody or do for anyone.
1:10:31
Meanwhile, if I may follow up on the question that you already answered about the strategy for competing on a red ocean market at first, Thanks for the answer, I think it's a lot makes a lot of sense to me. And would you say also that the first approach, like niche out and be a solution for the niche or go premium? And do all the competition does plus more at charge, a higher price would basically depend on how much velocity and how much budget you have like for example, for a startup, it seems feasible to go first route. And like for if you want to go for basically to win the market about have kind of big velocity, big team and big pockets, then you can go for the second?
Jason Tanner 1:11:20
Yeah. Well, we are very appreciative of Fern Harnish, in his work, and he wrote a book called Scaling up, which the first edition was called the Rockefeller habits. And I put his name in the chat, because he has a terrific newsletter that I recommend, I recommend scaling up as well. Are
Alexey Kistenev 1:11:50
you a member, by the way?
Jason Tanner 1:11:52
Sorry?
Alexey Kistenev 1:11:53
Are you the old member, by the way?
Jason Tanner 1:11:56
No, I'm not. Not right now. But we've we've actually had a scaling up coach, the book, the book is scaling up. I bring up Vern, because he he says this a lot. There's riches in the niches. So I would actually go count I would go the former not the latter. And what you what you asked, I would actually focus on the niche First, I would not try to be broad. In fact, I'd really want to to validate early with one niche in the class I'm doing right now there, I'm looking at what they're doing, because there's another instructor covering for me. As they think about their segmentation, I actually encourage them to focus on the segment that identifies most important early and really get good at that segment before expanding to other segments, which I think supports the same notion of do I go broader, don't go narrow to start, I'm gonna go narrow, even my cutter even in my competitors abroad, I've got to actually get really good at one niche before I ever consider expanding. Beyond that, I think that that's my startup thinking, my opinion, right? Yeah, because
1:13:13
this way, you get at least profit with the second strategy, you may basically never get profitability, you kind of go for huge risk, but you don't have this kind of stairs, you can put your foot on the floor lion to get there. Makes sense? Yeah.
Alexey Kistenev 1:13:39
Any other question, folks? You know, Jason, I wondering, what could be the strategy for a very early stage startup? Let's say you don't know which value stream could it be, you can make a hypothesis that it could be one or another. But what could be the fastest and the best strategy to give it a try to then understand what strategy to apply? pricing strategy tip line?
Jason Tanner 1:14:19
Well, pricing strategy and value exchange model I think are two different things. I the values change model is unavoidable. You've got to choose something for your value exchange model, but I think that the values change model becomes apparent quickly with your market research. Because the choices are very different. So the let me get my zoom control back.
Alexey Kistenev 1:14:53
I'll give you an example. By the way while you're switching on, instant update, we charge For time based access, but we consider it an option to tie it to the number of surveys, we call it reports. So it could be another strategy. And it took us a lot of time to compare these two things to end up with time base, Texas. But we could start with another one and continue with that. And when you're in the earliest, in your early days, you may have not so much data to rely on the very exchange model that you will leave on yours. All.
Jason Tanner 1:15:39
Right. So I think that's a great example. Because the so the choice between time based access or per survey, this is where he, I think there's a thought experiment, and there's market validation. So if I thought through it, it is cost per survey. I don't know how many surveys I might have need to produce in a year. Or over anytime scale, I don't know if I'm going to need 10 surveys or 100 surveys, I might be able to calculate and estimate the number of surveys, right, but there's a burden, right? I've got to count it, you've got to count it. You've got to track it. I've got to be able to audit the tracking at a number of surveys, does it actually make sense for it to be based on number of surveys, which effectively is transaction? So they think there's a bit of a cycle of thinking through how would this work for the customer? How would this work for us? What are the impacts of the choice? But yes, you could test it in early stage, say, if I priced it this way, how would you react? In terms of the value exchange model? In a lot of ways, I think it becomes apparent quickly, like with Slack, like Slack could do metering like they could charge me per number of messages sent on Slack. And you imagine how crazy would be to try to think about from an enterprise perspective and slacks, core businesses, huge companies, not tiny little consulting companies like ours, I'm gonna got 20 people on Slack. But they sent me a message reports all the time, but I didn't I didn't pay attention to him. Do I care that there were 1000 messages sent this week on Slack? Versus 800 last week? No, I don't. Because the cost is the same. I would care if they were accounting messages, they stopped using slack so much. You think about it, what behavior you want to drive. Slack wants people to send lesson messages, they want it to be sticky, they will get the reverse effect. If they charge per message, I think that type of logical thinking actually I think sometimes leads you to the outcome you want. So again, if I price per survey, each survey runs expensive. If I add if I get my first survey wrong, and I want to run it again for a different cohort, while I'm going to currently can't incremental cost, so I cannot really afford to do a second survey or would I like to run as many surveys as I want in a month? Dad I think is a line of thinking we want to go down.
Alexey Kistenev 1:18:11
Okay, thanks a lot of sense, actually speaking us like maybe it could be a great way to people enjoy slack or if they wouldn't be less messaging there. Any other question, guys? We have some more time to pick up on Jason experience. Or you can you can share your Yeah. Yeah. Dmitry. Go ahead. Okay.
1:18:43
So, Jason, if you compare the framework that you are introducing to other product management frameworks, like value proposition, Canvas or jobs to be done. So why you felt where you felt like, there is the most, the gap and how it fits together?
Jason Tanner 1:19:07
I made a really, yeah, I made a really ugly Amuro diagram of how this fits into I say ugly because I'm not a very good designer. I'm a good sketcher I can make a really good first ugly draft. I'm not good at making a really pretty second draft. I believe that the experts and I really wanted to, there were like 50 frameworks on it. That's how ugly it was. So we know and love strategize er. Luke is a friend of Alex Osterwalder. Alex included innovation games and in both Business Model Generation and value proposition design. Value Proposition Design connects directly to customer benefit analysis. As does I think jobs to be done Uh, the picture I drew at one point was, I test this with students a lot, when you look at the business model canvas is great at establishing the value proposition channels, the resources and so on. But it has only that tiny box at the bottom, which people kind of don't go deep enough to kind of wave their hands around revenue and costs. We explode that out. So if I was going to plug two canvases together, do your business model canvas. But when you really want to figure out the details of the pricing and licensing model, you need to profit streams canvas, because they go together. Right. So there's things that that business model Canvas does really, really well that we don't do. And there's things that the profit stream Canvas does really, really well, Business Model Canvas doesn't even touch on. And that's I think the big, the big difference is we want to be really holistic as the providers of software enabled solutions to be super clear about the different sets of relationships, customer, the economic relationship and the ultimately the solution relationship.
1:21:14
Cool. And I think also this even more relevant for b2b startup. Like, because there you need to really get from the benefits to features.
Jason Tanner 1:21:28
Yeah, we're seeing some some leverage in b2c to particularly gaming. Right, the in app purchases within games, I think it applies a lot less so on the more social, you know, ad driven models, not not so much yet. I mean, I think there's still applications, but yeah, it's very strong and b2b. Yeah.
Alexey Kistenev 1:21:52
And, by the way, we haven't touched 2024. In today's conversation, what do you think? And what's your take on raising prices? Should everything gets more and more expensive in our lives? Should we raise prices this year?
Jason Tanner 1:22:09
If you have delivered or are delivering sufficient value, I think price raises are fair. So we we talked about triggers for pricing. So the first trigger is time, when is the last time you raise prices. So if you haven't raised prices in a couple of years, I think it's a valid position to say we haven't to tell your customers, I got this email from HubSpot. So we have not raised prices in 18 months, we're raising prices, here's the impact for you, here's what's going to happen. Here are your options. Because it is a price change, you have the option regardless of your agreement, you can lower your subscription level, if you want to this price change. They were very clear, it was very fair. But that was the first thing is time if you haven't raised prices in the past year or longer. It's a fair consideration right now, the second is external triggers. Has something happened in the market has your economic modelling change due to an external trigger? It can be regulatory, that can be technological, something's happened externally to you that's cause a trigger to change pricing and there may be internal triggers as well. Right, the internal triggers may be do you want to expand to a new segment, you may be facing a change where you have do have have to raise prices because internal trigger. So the question of whether or not we should raise prices here really depends on the last time you've made a change, and what's fair, so I don't think customers don't necessarily resist a price change. If they believe they're still getting sufficient value. Like Nero hasn't raised prices and I'm shocked because they keep adding more value. I would pay more if they said to me we're gonna raise prices 5% I'd still pay it I'm not gonna leave probably won't even be very upset.
Alexey Kistenev 1:24:06
We don't have much time left. And we still have one important task for us to choose the best question to present your book with the thing Jason? What was the question that you liked the most
Jason Tanner 1:24:22
pressure on me? Not even fair. Ask question now. I gotta go read all the questions again. The one that challenged me the most is I'm going to look at it think I'm gonna have to go with art and art and artists questions challenge my thinking
1:25:04
Oops, we lost the connection.
Alexey Kistenev 1:25:07
I can hear you. I can see. Now we got Jason back. Yeah, back.
1:25:14
The connection was down. Oh,
Jason Tanner 1:25:16
my kitchen. I can actually see you didn't hear me. We
Alexey Kistenev 1:25:19
we heard that you are you are speaking about item items. Questions. Yeah.
Jason Tanner 1:25:25
The challenge group they challenged me the most.
Alexey Kistenev 1:25:30
Okay. Okay. Yeah. Now after our meeting, we can calculate how to share the book with our team. But yeah, I
Jason Tanner 1:25:37
just need I just need a physical address to ship it.
Alexey Kistenev 1:25:40
Okay. Okay. Good. So thank you, everyone, for coming to this meeting. And first of all, thank you, Jason, for sharing your insights and spending time with us. It's great to have you. Instant level editorial meetings. Hopefully, we'll see you again on our meetings next time. And see you guys on our meetings as well. And we'll keep you posted. Thanks a lot.
Jason Tanner 1:26:16
Thank you for having me. Appreciate it.
