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Profit is the net income resulting from revenue minus expenses. Profit is essential because, without profit, a business is unsustainable. The problem is that while there is lots of guidance on how to price regular goods and services, there is little guidance on how to design profitable software-enabled solutions – until now. Please join us at 1 pm ET on December 8, 2022, for a deep dive webinar where you will learn how to identify profit streams in your business. This one-hour session led by Luke Hohmann, Chief Innovation Officer at Applied Frameworks, will show you how to help your organization increase profit and drive improvements in customer satisfaction using profit streams.
Luke has been involved with Applied Frameworks since its founding in 2003. He later went on to start Conteneo, a collaboration software company which was acquired by Scaled Agile in 2019. While at Scaled Agile, Luke served as a SAFe® Framework Contributor and Principal Consultant, with significant contributions to the SAFe Agile Product Delivery (APD) and Lean Portfolio Management (LPM) competencies and the SAFe POPM, APM, and LPM courses.
He is an author and cited as an inventor on more than a dozen patents. His books include Innovation Games: Creating Breakthrough Products through Collaborative Play (2006), Beyond Software Architecture (2003), Journey of the Software Professional (1996), and the upcoming Software Profit StreamsTM (2023) co-written with Applied Frameworks CEO Jason Tanner.
As SVP – Product, Carlton is responsible for the Applied Frameworks Online Academy, the first Scrum Alliance®-approved online training program for advanced certification.
Carlton got his start in Agile software development with Extreme Programming (XP) over eighteen years ago. Prior to joining Applied Frameworks, Carlton was the President of Look Forward Consulting, an Agile consulting and training firm. Long before that, Carlton worked at SAIC, Exxon, and Cardinal Health.
He is a Certified ScrumMaster® (2005) and a Certified Scrum Trainer® (2011). He is also the author of the book Fourteen Observations of Good Scrum Practice.
*Created using ai, please excuse any spelling and grammar mistakes
Laura Caldie 00:03
Hey there, Carlton; good to see you.
Carlton Nettleton 00:05
Good to see you again.
Laura Caldie 00:07
Yeah, well, this will be one of those webinars I’ve been looking forward to. And I think this is very interesting topic; we definitely have had lots of questions about what is a Profit StreamTM. So we’ll just give people a moment to log in; it looks like we’re people are ticking in at the moment. So before we get started, I’ll do some quick housekeeping things. So everybody can tell we’re recording the webinar will share the link out within a day after this conclusion. There probably be questions over the course of the webinar. So for the folks who are on the call, it is sorry, it is easiest for us if you use the Q&A button. So post your questions in Q&A. And if we can’t answer them in the over the course of the webinar, it’s still important to pose the question because we’ll incorporate an answer in our follow-up email. So we love questions; we’ll get to as many as we can, and we’ll try to weave them into the conversation. And if we can’t answer them all, we will answer them after the webinar is over.
Carlton Nettleton 01:08
Yep. Yeah, exactly. All right. I’ve been looking forward to this one, too, or I did. I’ve been doing some research on the topic. And it’s kind of interesting—discussion to me.
Laura Caldie 01:21
I think so too. So let’s see, we’re at two minutes after. Why don’t we get started? So we make sure that we’re, you know, starting and ending on time. And for those who are on the call, again, thank you so much for being here. We’ll make some quick introductions and get going. So, Carlton, I’ll turn it over to you.
Carlton Nettleton 01:37
All right, Laura. Thank you much. All right. Well, welcome, everyone. This is our session on what is a software Profit StreamTM. Let’s just talk high level for our agenda. It’s pretty straightforward. Do some introductions, and talk about value streams for people that are unfamiliar with that topic? Then we’ll kind of segue to what is a Profit StreamTM and talk about how it’s connected to our Profit StreamTM canvas that we’re developing here at Applied frameworks, and then open the floor for Q&A. So let’s have those introductions. Laura.
Laura Caldie 02:07
Great. All right. Well, my name is Laura Caldie. I run Sales and Marketing here at Applied frameworks. And I am the official webinar host for a lot of these Profit StreamTM webinars that we’re having. I’m also on SPC. And so the topic of value streams is just inherently interesting to me. And so I’ll be moderating. I’ll be looking at the Q&A that’s coming in. And I’ll post some of those questions to Carlton and eventually to Luke, who will be joining us shortly. He’s just in transit at the moment. So you’ll notice Luke slide in at some point in time, he’s a safe framework contributor. He’s a good friend of ours. We’ve worked with him for a long time, and he is helping lead the innovation practice here at Applied frameworks. So you’ll see Luke pop in and a couple of minutes.
Carlton Nettleton 02:53
Yeah. And I’m Carlton Nettleton, I’m the SVP of product here at Applied frameworks. CO creator of the platform online academy, along with our CEO, Certified Scrum Trainer, I’ve been involved with Agile software development for over 15 years, almost 20. And my responsibilities are really to help manage our portfolio of products and services that we offer, at apply firm are so we offer consulting services, we offer training services, and we do have online, you know, live instructor led or in person training, which is more and more what we’re doing and our online academy. So. Okay, so that’s introductions, it’s who we are. Let’s move on to a little bit about our topic. And so I like to get started with our discussion about the students with a little history. Right? And I think that history begins with Henry Ford and the Model T. And early in the 20th century, right, Henry Ford put the entire sequence of bottle to production, casting, machining, painting, painting, welding, etc, into a single building at Highland Park. This was one of the early places where they manufactured the Model T. And this innovation right putting all of these functions together in the same building was the beginning of flow based manufacturing. And what Ford did is he documented the sequence of the steps as the items moved through the assembly line in what we would call today a value stream. Right. So way back in the early 1910s, early part of the 20th century, the initial idea of a value stream was created. Now in the 50s Taiichi Ohno, the originator of the Toyota Production System, extended Ford’s innovation right his innovation was to take all these functions put them in a single building. He extended that innovation to work in environments where in an environment where oh no right need to produce a high variety of products at low volume so he kind of perfected Ono did this floating So manufacturing with owner and his teams are engineers used value streams, right? To map out all the steps from start to finish, right. And they mapped out these steps to develop a simple single component or all the steps to build an entire product. And then in the 90s, the 90s, the first people to offer a definition for value stream to Western audiences, because Japanese manufacturers who ever knew about these concepts were James Womack, and Daniel Jones in their 1996 length book Lean thinking. And in this book, they introduced the main elements of the Toyota Production System and define the value stream, right. And their definition of the value stream based on their research of the Toyota Production System was the set of all the specific activities required to design order and provide a specific product from concept to launch order to delivery into the hands of the customers. Right, so that was the initial definition. But in the 20 years since the publication of Womack and Jones book, right, the concept of value streams has been applied to multiple domains outside of manufacturing, healthcare marketing, software development, right, lots of people are interested in value streams. And so now we have a more general purpose definition that I’m going to share with you here. Right, and this definition, right, provides a good baseline for dividing, defining a value stream today. Alright. And one of the things I think is really important is, once you have a good definition, you can see how we are surrounded by value streams, because like, everywhere we look, we can see value streams, right, we can start to think about, well, how did this water bottle gets my house? Or how did this pen gets my house? Or more importantly, how did this phone gets my house with all loaded up with software? Right. And if you think about a value stream, really very, very simple, very simplistic, right? Let’s take the example of like consumer household appliance, this diagram here kind of demonstrates, very basically, what a value stream is, we have some raw materials, right? Then there’s another step where you kind of stamp out, I’m trying to think, well, I have a microphone right here, it kind of do the stamping process, then there’s a machining process, then followed by an assembly process, then they have that finished product that gets the customer, right. real basic, real straightforward, right. And now that I’ve kind of given you it in your an idea in your mind’s eye for what a value stream is, let’s add a little complexity to a picture, right. And in the world of SAFe, there are two categories of value streams, operational value streams, and development value streams.
Laura Caldie 08:03
So I’m gonna just jump in here and say, it’s a perfect moment to say, Hey, Luke, welcome to the webinar. Good to see you.
Carlton Nettleton 08:13
That’s a good, that’s a good point. Hey, Luke, thanks for joining us. And not everyone’s had a chance to kind of say hello to Luke. But and also take a look at the slide for me and operational value stream is all the sequence of activities a business needs to take in order to deliver a solution to the customer, right, and a development value stream is the sequence of activities that product development teams, use to design build and support a solution that’s used by operational value streams. So we have two categories of value streams, operational value streams, development value streams. So let’s look at some examples to make this a little bit more concrete. And let’s imagine we want to buy a new car and that car we wanted to buy was a Porsche. Okay. And imagine, right? If we were buying a Porsche, one of the operational value streams we might interact with, could be the value stream responsible for filling an order made on the website, which results in a brand new Porsche waiting for us at the dealership and two to three weeks or maybe sooner, it’s already inventory. Right? That could be example, one operationalizing. Or, perhaps we need to bring in our Porsche for routine maintenance. Right after the first 5000 miles or 25,000 miles. Not sure what that is in kilometers. I apologize for our folks outside the United States. So if we brought our car in for routine maintenance, those interactions will be organized around a different operational value stream. So let’s shift our focus to development value streams. And if you Recall our definition of development value stream is the sequence of activities that product development teams use to design build and support solution that’s used by operational teams. Right? So if we think about all the sequence of activities used to design and build the Porsches powertrain, that would be a development value stream. Or perhaps maybe we need financing from Porsche financial services in order to buy our car, all the sequence of activities used to design, build and support the software that the user that the dealer uses to determine our eligibility for financing. Right, the building of that software, that would be a development value stream. So what are the benefits associated with ours? Why do we even care? They’re everywhere? Why do we use this? Okay? So, for me, I think one of the benefits of value stream is that allows us to map out the sequence of the steps, right. And in my opinion, what makes value streams transformative is that you can visualize the steps. And it is that visualization, which allows people to spot the bottlenecks in efficiencies. And once they’ve been spotted, they can be subjected to elimination, or improvements. So another benefit, right? So second benefit we have here, but what’s this mean? It means that when a decision needs to be made, that we deeply consider the effects it could have on our customers and end users. And this kind of encourages us to adopt a new mindset that goes beyond a transactional relationship with the customer. And consider the total lifetime value that can be brought to the customer. And design thinking, which is a problem solving approach, right? Is how the solution the excuse me how the solution designers put the customer at the center. And then the third benefit, I would say, is this idea right here, right. And this sentence here, I like to say it’s just another way of saying that value streams encourage, but do not guarantee the delivery of valuable outcomes over the delivery of a result, right. And I find value streams have the greatest impact. When they’re organized around the delivery of one or more valuable outcomes desired by the customer. We help the customer complete an important job, we help them eliminate an extreme pain, and or realize its central goal or game. Okay, so here are three benefits to why value streams are useful, why we want to kind of understand these value streams. So while they’re great, there are a few drawbacks. Right. And the first is here, right? And, in my experience, value streams encourage businesses to consider the total value they deliver to customers. That’s great, right? They’ve heard just, what happens though, oftentimes is we don’t really quantify the value that’s delivered to the value stream. And because for me, this is a problem, right? Because one, not all value delivered to the customer, all value delivered to the customer is equal from the perspective of the customer. So some value students provide the customers more value than other value streams. But the same can be true from the perspective of the business. Right? So we don’t really quantify the value. Okay? Next, what’s another weakness? All right. And since value is quantified, customers are not charged for the value they receive. Technically, at the end of the value stream values just kind of dumped into the lap of the customer. without really any considerations, what is the right price, the customer should pay for the outcomes delivered. And that kind of leads us into the last kind of weakness or drawback of a value stream. Right. And in for me, finally, since value isn’t quantified, and the customers aren’t charged an appropriate price, having a well documented values documented value stream is no guarantee that the sequence of steps that are identified are profitable and sustainable for the business. Right. And in my opinion, sometimes with value streams, there’s too much consideration is given to the customer, and there’s not enough consideration given to the business. Okay. So this is a good place to pause and ask for questions or comments. Okay, so this kind of just background summary, help people kind of level set. What we want to talk about with value streams, I’m gonna hand it off to Luke to start talking about software Profit StreamTMs. So Luke, welcome.
Luke Hohmann 15:00
Thank you for having me at this webinar, I’m really glad to be here with my colleagues and with all the attendees. Carlton left us at a cliffhanger. How do we make these things more valuable not just to our customers but to ourselves, and by closure other stakeholders in the ecosystem and the stakeholders in which we serve. So next slide. Well, our perspective is kind of an organic perspective. It is just as Mother Nature. Can we back up one. Just as Mother Nature relies on the energy from the sun to sustain life on Earth, every business relies on profit for sustainability. And the metaphor is profound. We we believe in sustainable businesses. But when you think about sustainable businesses, sometimes you hear environmentalists say, hey, look, Mother Nature is just fine on their own. Humans get in the way, and humans cause problems. And there may be some truth to that. But what’s also true is that Mother Nature needs the energy from the sun to grow and sustain itself. And we believe that profit performs the same function in a business; you have to be generating more revenue than your costs. It’s that simple. Now we can get into a more subtle and complex structure of when profit is needed. For example, in a fast-growing tech startup, you might be deferring profit for a while while you’re growing, so you’re investing more than what you’re bringing in. But ultimately, over time, every sustainable business has to create a profit. Next slide. If we can drive sustainability, we get two qualities one arrow. We create a virtuous cycle between a business and the customer it serves by a customer providing us with money, we can create the next release provide more value, and that cycle can repeat, we see this in some of the online services for those of us who use LinkedIn, we pay a monthly fee to LinkedIn. And we expect that over time, LinkedIn is going to provide more value to us, we also expect that LinkedIn will maintain our data with proper security and integrity. So there’s this kind of normal relationship between money and value being provided both now and over the course of the product, arrow. And we can also look at the benefits of profit for the business itself and its own sustainability. All products have a natural product solution lifecycle, they don’t last forever, they evolve. Sometimes the actual need for the product is designed out of our systems, and we change them. By having a profit, we can move from a single offering into a portfolio of offerings, and therefore create a more sustainable enterprise. Next, the trick is treating a business model as a system. And included in that business model is the price and the licensing terms that are associated with your offering. And one of the things that we find is that when people look at value as a discrete thing delivered as opposed to a part of a complex system, or when they look at price as a number, or earlier to what Carlton said when they fail to recognize the full set of value attributes of your offering, they miss opportunities to create a better system. Next, we are huge believers in systems thinking so that software-enabled solutions can make and remake these interdependent choices. Let’s go through an example and see what this might look like. Next. Let’s start with our customer. We know we want to serve our customer and we’ve got to take a path through our system. Next. We’ve got our solution next. And we may want to offer our solution our software on an annual basis this term of time and annual term is fairly common in business to business software. And it’s also common in business to professional environments where you know, I’m gonna license something for a year. Okay, so now I know that that’s what’s underpinning my business model. Next. I need to be able to make sure that that’s captured in the next the license agreement. So as the term is captured in the license agreement, I I have established this business relationship with my customer. Now if I’m a hosted service. Next, I need to make sure that the technical architecture itself enforces those terms. Next, and once I’ve got the enforcement of the terms, finally, next, I need to make sure that any compliance concerns are handled, because compliance is also part of our system of providing value. And what I specifically mean here is for our European customers, and for the people who are joining us from Europe, we have the GDPR. And the GDPR specifically gives guidance on how long a business may retain data from a software system after the license agreement has been terminated. And we are expected if we’re serving customers in Europe to honor the requirements and obligations of the GDPR. Next, which leads us back to the entire system needs to work as a system for us to be successful. Now, this means that Profit StreamTMs are the natural and necessary evolution of the value stream. A Profit StreamTM is a value stream that is designed to create a sustainable business, it needs to quantify the value and needs to be sold through pricing and licensing choices that ensure that generate the revenue generated exceeds the costs not just once, but over the product market lifecycle. Next. This means that there’s three aspects of sustainability that Profit StreamTM design involves, one is the sustainability of the solution, you’ve got a customer, you’ve got a solution, their needs are going to evolve the way I use LinkedIn. Now, after more than a decade of using it is very different. When I started using LinkedIn, part of that is my needs have changed. And part of that is LinkedIn has created new functionality that enables me to do things that I hadn’t imagined when I started using LinkedIn. So the notion of solution sustainability captures this idea that the solution needs to evolve and CO evolve with its customers. Next, we have economic sustainability. I find it interesting that a lot of people in the Agile community talk about making continued investments into the value streams. But it’s not entirely clear where the money is coming from. In save that money is coming through the decisions of the lean portfolio management function. But we still have to have economic sustainability. Somewhere along the line, there has to be one or more operational value streams that are generating profit for the business. That’s where we get our economic sustainability. Finally, we have relationships, sustainability, there’s multiple kinds of relationships for the creator of the offering, they have suppliers, and every software offering has some kind of a license coming into the product. And even if all you’re doing is writing a program in C or C++ using some older languages, you still have the runtime libraries of the core language itself. Relationships Sustainability also refers to the relationship that the provider of the solution has with their customers. And finally, there’s also compliance sustainability. If I want to operate a solution for children, I have to be compliant in America with the Children’s Online Privacy Protection Act, it’s a necessary part of the relationship sustainability and offer to serve that market. If I am offering my solution in Europe, we’ve previously talked about GDPR in Europe, if I’m offering my solution in America, and it’s a healthcare-related solution, I have to honor the HIPAA Compliance Act. There are hundreds and hundreds of laws, regulations, standards and agreements that product managers and business leaders need to understand and manage so that they can create the right kind of sustainability in the relationships that they’re creating. Next. To help organizations and business leaders make these decisions. We have developed and will soon be releasing the Profit StreamTM Canvas next. The goal of the canvas is to promote holistic innovation, collective wisdom and collaboration within enterprises that are compete that are creating software-enabled solutions. So you can think about the nodes of what we’ve been talking about as separate items meaning my license agreement are my technical architecture or my pricing model or the needs of my customers are all nodes in a system. Next, by looking at how those nodes are organized, we can start to see See those relationships next. And then using and being inspired by the fantastic business model canvas and value proposition canvas from Alexander Osterwalder, we can organize these into a compact representational form that lets us express, share and innovate on our choices. There are different specific areas of the canvas. Part of it is devoted to solution sustainability. Part of it is devoted to economic sustainability. And part of it is devoted to relationship sustainability. They work together so that you can make these choices in a way that benefits you and your ecosystem. Next, this is an example of what it looks like in detail, you can find a version of it on our website, and it will also be thoroughly explained in our forthcoming book on software Profit StreamTMs.
Carlton Nettleton 26:05
You know, I think that is the that’s the last slide. That’s just the next book. So but I think there was a question Luke on, let’s take a look at that. Laura. Was there a question in the Q&A?
Laura Caldie 26:21
Yeah. So you know, I think you started to talk about this in a number of your slides. But Carlos was asking about some of the weaknesses or gaps in the value stream implementation. So nothing is preventing somebody from prevents, let me just read it directly. Nothing prevents us from including profit as a metric observed in the value stream model, in addition to common flow metrics. So nothing prevents us from doing it. I guess the point you were making, Luke, is that it? It’s not explicit. Right.
Luke Hohmann 26:50
Yeah, I would agree with that, Laura. And I would agree with Carlos, right. There’s nothing that prevents us from including profit as a metric. But I would also submit Carlos that the challenge of just including profit as a metric belies the challenge or doesn’t necessarily include the other elements that we’ve talked about. And what I mean by that is, we know that there’s a license agreement between the provider of the solution and the customer of the solution that has to exist. The challenge is that the value stream thinking tends to leave those aspects of the solution aside, and they don’t necessarily include it directly. So what we want to be able to do is we want to be able to include that directly elevate it so that we can design this value stream itself. So that is generating profit.
Carlton Nettleton 27:54
Right? It’s kind of thinking about it holistically. Right? And because are there elements that are unique to software-enabled solutions that a band of for instance, a manufacturing value stream might not consider?
Laura Caldie 28:09
Well, I think the addition of software is what makes this interesting when people are looking at the software-enabled solutions. And you know, I’m teeing up the next question from Jim, which is, the complexity of the software-enabled solution or the business itself is also an interesting one to consider. So in the case of like, multi, well, he like Airbnb, a multi-party system where you’ve got regulations, you have property owners and hosts and you have customers and it’s uh, we’ve talked about Airbnb as an example, many times. So how do you model that as a Profit StreamTM? Is Jim’s question? Like, for example, specifically Airbnb? Well,
Luke Hohmann 28:54
I’ll take part of this. And I know Carlton has also used Airbnb and some of his courseware on this. One thing that we would do, Jim and for all of the attendees is when we’re looking at modeling something as a Profit StreamTM, we want to first understand the foundation of each of these elements. Who is the customer? What are they paying for? What’s the value exchange? If there’s more than one customer? What are the set of customers involved? How are they paying? How do they interact? Airbnb is a kind of a rich example to really go after because it’s it’s a two-sided market. I’ve got an inventory of rooms to sell from a set of people who have houses and rooms to rent. And I have got a market of people who want to rent and buy those rooms. So in terms of the value stream itself, we know that we’re providing value to those entities, but to convert that into a Profit StreamTM, we have to know well how much are we pricing are there limits on how much we can price. Like you mentioned regulators. Jim, in your question, is there a legal limit on how much a hotel room could be charged? I don’t know, in some jurisdictions, there might be, what are the licenses and so modeling that as a Profit StreamTM includes in the our solution ROI looking at choices we would make and how they would affect our market, I might raise the price, or I might increase the percentage of the take that Airbnb makes, that might lower my number of rooms rented through Airbnb, but it would increase the profitability of each room that was rented. So when we look at modeling something as a Profit StreamTM, that’s where we’re really going to put a lot of emphasis on the economic sustainability, notably the customer ROI and the solution ROI. And I’ll turn it over to Carlton and if he wants to add anything on that.
Carlton Nettleton 30:58
Yeah, I would just think of, if we model like Airbnb as as a Profit StreamTM, which I think I think it is, it’s a software-enabled solution. One of the things you also could think about are what profit engines what additional money making events can we generate from this business. And if you look at Airbnb, they talk a lot about Airbnb experiences now. So in addition to getting you know, a place to stay in a cool location, and maybe the cool house, they now start to offer like, hey, go kayaking, go whale watching, go on a hike, simple things like go on a dog walking, if you like dogs, and you’re on vacation for a long time. You can go dog walking with local people, and they bring a dog from shelters. So I think there’s a lot of interesting things that they are doing that is about trying to create a Profit StreamTM, Airbnb, what do you think?
Luke Hohmann 31:51
Why would agree and that’s this is central to Profit StreamTM design is understanding the evolving needs of your customer. I mentioned, my needs for LinkedIn evolved over time. And I also gained the benefit of LinkedIn zone innovation. This would include roadmapping, it would include monitoring the use of your offering, it would include market research, both qualitative and quantitative, to help understand where your customers are deriving value and how much value they are deriving.
Laura Caldie 32:28
So here’s another question. So today, we’re able to calculate total cost of ownership and PL I’m assuming means profit loss today. So how does pricing Pricing and transaction types? How do they improve, increase or sustain profits? So I think, yeah, pricing value exchange, like maybe Luke and Carlton talk a little bit about what additional benefits do we gain by thinking about Profit StreamTMs, and specifically thinking about, you know, pricing and transaction types when we’re thinking about sustainable profitability?
Carlton Nettleton 33:09
Well, I could start a little bit with thinking about value exchange, right? So value exchange is the, it’s describing how you exchange money for use of your solution, right. And there are many different types of value exchange that you can select in your business model designed for a Profit StreamTM. Luke mentioned time-based access, right? That choice that you make influences the use the customer’s use of your solution. So thinking about that, that choice, could either cause the customer to use the solution less, right, because you might penalize them for making the using the solution, they might perceive it as being penalized. Or it could encourage them to use it more, which could impact the P&L. The other thing you would think about the value exchange, it’s very tightly linked to how the customer perceives the benefits that you’re providing them. So the customer benefit analysis is really quite important, because it will help you get a sense of okay, what does the customer fear feel is a fair way in which to exchange money for use of the system. So I think that the value exchange it’s it’s important element of the design, and it is influenced by the customer benefit analysis. But then once you make that choice, your solution needs to be able to support that value exchange model that you that you select. The other thing that I would add here in just make this a little wrinkle because this is a complex system and it’s interconnected nodes, right. So we put it here as kind of these boxes and they’re arranged in rows and columns, but They really are very interconnected with multiple connections. Sometimes your in license components that you use may drive you towards a certain value exchange model. Right. So for instance, maybe you might want to do time based access, right, for example we’ve talked about is like Disney plus time based access, you get paid monthly for one year access to the videos or the movies that you can see, right constrain them. But if you want to license, right content that’s outside the Disney library, that provider may charge you a transaction fee for per viewing a movie that’s not part of the Disney library. And so you have to be able to your solution will need to be able to one track your customer’s use of time of the product under time based access, but also record what sort of transactions they consume related to videos and movies that are outside the library. So it’s very interconnected. What do you want to say a little bit look, though about pricing?
Luke Hohmann 36:10
Yeah, I think the central challenge of pricing, and I’ve been a product manager having to price things. And it’s arguably the hardest thing ever, because you always wonder, did I set the price too high? Do I set the price too low. Silicon Valley startups have a persistent problem where young or immature companies almost always set the price too low, because they’re so hungry to get sales. And they leave revenue and profit on the table to refer to really change that equation, the book that we’re writing goes through a very structured process of setting the price. It’s a little hard to read in the Canvas when it’s shrunk down like this. But for our perspective, pricing is four components, it’s the strategy that you have as a company for your pricing, then it’s the structure of the pricing, then it’s the actual specifics, meaning the number that you’re actually going to charge, and then policies that promote ways in which your market is going to behave, that will promote profit and promote sustainability. So let’s just knock off strategy. And I would invite everyone on this webinar to go to our website. Jason Tanner did a specific webinar on pricing strategy a few weeks ago, and that recording is available. But in terms of pricing strategy, you might have as a company a premium strategy, because you have a well recognized brand, or you’re trying to create a premium brand. Alternatively, you might have a penetration strategy, which is a strategy of pricing where you are explicitly trying to underprice your competitors to take their market share or gain market share. So those elements are what influences how you go through pricing. And the reason we want to create a Profit StreamTM is we want to back up whatever number we charge with the necessary data and the necessary analysis to justify the price that we’re asking for.
Laura Caldie 38:31
Well, thanks, are there other questions that folks have? So if you’re thinking about one, not sure if it’s a good one or not, doesn’t matter, throw it into Q&A, because sometimes it’s a good catalyst for Luke and Carlton to remember a few other of their debates we’ve been having internally about how to express this and the kinds of questions that we might want to anticipate. So if anyone else has anything else to add, please put that into the Q&A.
Luke Hohmann 38:55
And Laura, there’s one from Anders in the chat. So I’ll just take you just take it. Yeah. So Anders asks, Does the Profit StreamTM take into account embedded costs for using other companies parts of the solution? That is using some vendor solutions as part of your solution? Anders? Absolutely. I mentioned that in terms of are in licensing and Carlton also mentioned it. That is in the lower right quadrant of the Profit StreamTM canvas, which is your solution licenses. Your solution licenses refers to all of the licenses that you need to include into your solution. Some of those licenses are going to be open source and their boy free. Other licenses are going to be paid for. If for example, if you’re a hosted SaaS provider, you might use SendGrid. To send out emails to your customers. Well, that’s part of the solution in licensing and it’s also part of your cost model. We pick up the costs of development value stream and solution in licenses in the suit We shouldn’t ROI modeling.
Laura Caldie 40:03
Okay, a couple more have come in, um, jobs to be done, how does the jobs to be done framework fit into the Profit StreamTM thinking?
Luke Hohmann 40:11
Yeah, I’m gonna go a little bit rogue on this one or a little bit controversial when I look at jobs to be done. And we’ve done some extensive work on jobs to be done, there’s two things that I think are lacking. One is jobs to be done in the traditional format is structured as a verb and a noun, which I think is pretty strong. But it doesn’t often include the actual economic value or utility of the job itself. And the second, so in our customer benefit analysis, we’re actually taking those concepts and improving them by saying, hey, look, it’s more than just the job to be done. It’s what is the economic value of the job to be done. The second part is when jobs to be done, were released, they were heavily weighted towards functional jobs. Similarly, value streams are heavily weighted in most writing to functional value. But there are many kinds of value beyond functional value, there’s emotional value, there’s intangible assets, there’s brand value, there’s the psychology and behavioral psychology of pricing, you see that in some of the more recent work in jobs to be done. But it sometimes feels a little bolted in as an add on into jobs to be done, as opposed to something that’s really integrated into the system itself. The last part of our approach that I think is a little different than jobs to be done in its pure sense is that we don’t focus on the benefits in isolation. If you look at a customer benefit analysis, we think of that itself as a complex system. And when we’re looking at that complex system, we’re looking at the relationships between the different ways in which those jobs are done. This is more prominent in B2B, although it does manifest itself in high-end B2C markets. I’ll provide a concrete example. And this is from our book. So you’ll get a precursor to what’s in the book. Let’s see, I’m a B2B company, and I’m providing a routing solution for trucking companies that can help them improve their driver performance in their vehicle utilization. Well, if I improve vehicle utilization, that is really great, because I’m getting more value of or more use of the assets that I’ve made capital investments in. But if my drivers hate my solution, then I lowering my driver satisfaction. And in some markets, it’s really hard to find truck drivers. So when I look at a system of benefits, the elements of that system themselves are related. And many times, a customer is not going to accept a trade-off in one area unless the other elements of the system are managed. But yeah, jobs to be done are great. We just have a slightly different extension and use of them. So if you’re, if you’re accurate, and you’re an expert in jobs to be done, you’re going to love Profit StreamTMs, because they’ll naturally integrate and build on what you’ve got.
Carlton Nettleton 43:28
And that kind of seems related to that other question that’s in the Q&A, Laura, which is, it always seems hard to get to the true customer value, what are the steps or methods to truly understanding and getting into customer value? And one of the things that I would like to talk about here, Luke, is our dimension and magnitude cards. Right? So one of the things you’re going to see in our book, on the Profit StreamTMs that Luke and Jason are writing, is we give a framework, right, but frameworks like frameworks, we’ve created a framework to allow you to identify what dimensions of your solution to the customers really value and then give you the opportunity to think about how to quantify that value in economic terms. Right. And I think you’ve got to start quantifying the value that you deliver in economic terms, so that you can start to think about you know, profit, and we this framework can be used for what we call tangible value, which is like concrete, you know, savings that you might realize or benefits that you might gains you might realize from like installing solar panels like on top your home, and also what we call this intangible value as well to give you the opportunity to measure the intangible value associated with brand or more, the softer sides of value. You want to add more to that Luke are no?
Luke Hohmann 45:02
No. Eggert pointed out in the chat that they have created something called customer progresses. I think that there’s still rich opportunities for using design methods that try to help identify and quantify value. I think that most of them don’t include the kind of the nitty gritty challenges associated with actual pricing and license agreements we applied for Amex recently helped the client, a software company that had some actually poorly written software license agreements for their offering. And they were making commitments about upgrades and future releases that we didn’t really think would be in the right interests of the company or their customers over time. So I think when you look at the system, the goal is to really kind of distinguish between the value streams that I might be using internally, those development value streams, and the value streams that are going external and the richer and more complex environment in which those external solutions live.
Laura Caldie 46:11
So, Jane is asking an interesting question about the freemium pricing strategy. Do you feel there’s value in that for emerging products, perhaps to create disruption in the market as a strategy and how would this factor into the overall long-term pricing structure specifics? You know, all the policies, discussions like how does that if you had a freemium? How does that factor into like your longer-term plan?
Luke Hohmann 46:37
I’ll start with this and I’m sure Carlton will add. We believe that freemium is one manifestation of a loss leader pricing strategy. And as such, we actually are not fans of freemium. So we know that freemium pricing is used in a lot of markets. Freemium is used in a lot of different industries. But the challenge that we find with freemium is that except for a few very celebrated use cases, most of the time, the freemium offerings don’t actually produce the economic, they don’t generate the economic results that the company was seeking, meaning they start with freemium, and they have economic models of how many people are going to convert or how many customers are going to convert to a paying option. In fact, Bloomberg Businessweek, one of the main articles in the current issue, this week’s issue is Duolingo. And their challenge of moving from a freemium model for the users into a paid model. Now, in truth free Duolingo isn’t really free, because Duolingo is ad supported. And in an ad model, there is customers, right? They’re selling advertisers, the users of Duolingo, and the attention of those users. So there is there are times where a freemium or a loss leader strategy is appropriate, but they’re much more rare than people think. And our general advocacy is to not pursue a freemium pricing strategy, but instead to develop a solution that is appropriate for market segments who are not willing to pay the same price. I’ll close that by saying we’ve seen this with Procter and Gamble in places like India or Unilever in certain markets. For example, in American markets, you tend to buy soap and big packages because we have big houses in America, and we buy things in bulk, and we kind of store them in our house. In many other markets, the idea of buying seven bars or eight bars of soap that are huge is kind of impossible. But what we have found is that there’s single-use shampoo, single-use toothpaste, or single-use soap that actually improves hygiene, but at a price point and in packaging and through a distribution model that is appropriate for the target segment. We believe the same is true in software-enabled solutions if you work a little harder on the business side and on the product side and understand your customers, you are more likely to create offerings that people will pay for and therefore avoid freemium.
Carlton Nettleton 49:36
is one the what Luke said? I guess I guess my only comment on this, Luke is as a product manager myself, I mean, we spent a lot of time building the products and services really passionate about it. I feel you should get if the customers are using the product or service, they should pay you for it. Right, and like Luke said, You got to figure out what is the configuration of the product for the different markets. segments that are willing to pay.
Laura Caldie 50:03
Alright, so what’s the distinction between SaaS and software-enabled solutions or SWES, SWES and SaaS?
Luke Hohmann 50:15
Calton’s drinking, so I’m going to I’m going to handle it. It is it is, you know, in the evening in Lisbon where Carlton live, so it’s okay that he’s drinking,
Carlton Nettleton 50:24
I’m drinking water. Haha
Luke Hohmann 50:27
Okay, so, there’s not a significant distinction, I would say it’s actually quite simple. A software-enabled solution is more inclusive than SaaS. So if we had an object model, the higher-level superclass would be a software-enabled solution. One, subclass of a software-enabled solution is a SaaS offering. Our work in software Profit StreamTM, though, covers data solutions, it covers hardware, it covers traditional software, both on-premise deployed and deployed in the cloud or through a SaaS; it even covers an emerging version of solutions that we know to be a service in which a human is intimately tied and required to deliver the offering. An example of these services is companies like StitchFix, in which the software is used to provide design ideas to a designer who makes the final choices on behalf of the customer. And we think that this is one of those areas. That’s an exciting emergence of opportunity within the traditional industry, this notion of not having AI replace our jobs but having the right augmentation between software AI and humans to create new and entirely more effective offerings.
Laura Caldie 51:55
All right. Well, that was you started out in the most engineering way of answering that question with your class and subclass answer. But you ended up going back to where I, you know, I can tell you, so thank you. I don’t have any other open questions. We’re getting closer to the end of our hour. So if anyone does, please, pop them in, we could probably take one or two more. And yeah, I mean, again, if we can’t get to it, or if your question is only partially answered, we’ll be putting our heads together and providing more written answers in our follow up email. So Carlton, and Luke, what do you think is maybe the most surprising benefit of thinking about a Profit StreamTM in the way that you’re describing both in the book and in here? Like what what’s maybe an unexpected benefit for people who might start to look at it and use it internally in their own software powered or software-enabled solution?
Carlton Nettleton 52:54
I can, we saw that question. The answer came to my mind right away. I think from a product management setup point of view, you get really tight on your market segments, like, what are the benefits, we’re providing them? What configuration of the solution can we provide, that will meet their needs, rather than giving them more than what they need, and then they’re paying for things they don’t want. And really just identify, and really starting to get crisp on pricing. Because if you understand the customer benefits that you offer, then you can really start to think really clearly around? What is the pricing how to preserve your pricing. And then that to me, I think is really powerful.
Laura Caldie 53:37
Well, before I hear Luke’s answer, I’m going to give you my answer. Being a non-technical person, I’m not an architect, and I’m not a software developer. I actually think it’s, it’s enlightening for the business side to see the relationship between architecture and business choices in a way like this, right? So having the collaboration happened between, you know, highly technical people and highly business-minded oriented people and to see how, you know, hard coding or not the choices that you’re making, both in architecture and in licensing, ended up being very tightly coupled in a software-enabled solution. And not everybody in the system thinks about it in that way right away because depends on what your role is and what you’re passionate about what you’re focused on. So I found that to be really helpful and enlightening to see the relationship between those two things.
Luke Hohmann 54:33
I guess I have to answer something different. But I’m gonna pick an answer that is motivated by a Profit StreamTM workshop that I taught last week to three growth-stage startup companies. So the, these three companies were members of the companion ventures portfolio, they’re a VC firm in Boston, and they invest in growth stage companies, and each of these companies Were interested in seeing if they could improve their pricing and licensing practices, one of the companies hadn’t adjusted their pricing in three years. And it was time for them to make a price change or price adjustment. They wanted to do it more effectively. But the unexpected benefit that they got from Profit StreamTM thinking was in the core of customer benefit analysis. And as startups, they were just convinced that their intangible benefits were non-existent. And I said, Well, let’s think about that. Really, why might someone prefer working with a smaller company, as opposed to say, Oracle, or SAP or Salesforce? When the founder instantly said, Oh, well, when you compare me to my big competitors, we’re more responsive. Our customers have more influence on the roadmap. And they know that we’re going to listen to them when they have a problem. And we’re going to fix it faster than our competitors, because they’re so big. I said, Yeah, that’s one of those intangible benefits, where you’re providing a solution that your customers need, but they’re also buying it from you, because they want that ability to have a more collaborative relationship with their vendor. So I think that one of those unexpected benefits are actually looking at the full set of benefits that you provide both functional or hard benefits. But also those intangible benefits, those emotional benefits. Those reasons for working with a company are much more prominent than people want to recognize many times.
Laura Caldie 56:46
Yeah, that’s, that’s a great example. So thank you for that. All right, so we’re at the end of our hour, the book is coming. And I think, you know, I’ve been reading it, it’s great, you’re all gonna love it. So I can’t wait until it’s out there. But if you have questions, in the meantime, I guess the places to go would be. And I put a link in the chat to one of our webinars, but there’s a bunch of them that have been recorded and a bunch that are coming. And they continue to explain parts of the Profit StreamTM canvas and just generally Profit StreamTM thinking, please send us an email or get in touch with us. If you have other either questions or ideas for either further drill down and other webinar ideas. We’d love to hear from people about that. So thank you all for being here. And Carlton, and Luke, thank you so much for doing this. Any last thoughts before we let the let the folks go today?
Carlton Nettleton 57:38
Laura Caldie 57:52
Yeah. And weirdly enough, this is actually super interesting.
Luke Hohmann 58:10
Russ just said we know how to party, Russ. We party like geeks, and I’ll leave everyone with the best joke that they can have. You know that you’re a geek at a party when they look at the other person’s shoes when they’re talking to them.
Laura Caldie 58:29
Well, on that note, I’m glad that’s recorded. Thank you for being here and we’ll see you next time.
Carlton Nettleton 58:36
See everyone next time!
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Luke has been involved with Applied Frameworks since its founding in 2003. He later went on to start Conteneo, a collaboration software company which was acquired by Scaled Agile in 2019. While at Scaled Agile, Luke served as a SAFe® Framework Contributor and Principal Consultant, with significant contributions to the SAFe Agile Product Delivery (APD) and Lean Portfolio Management (LPM) competencies and the SAFe POPM, APM, and LPM courses. He is an author and cited as an inventor on more than a dozen patents. His books include Innovation Games: Creating Breakthrough Products through Collaborative Play (2006), Beyond Software Architecture (2003), Journey of the Software Professional (1996), and the upcoming Software Profit StreamsTM (2023) co-written with Applied Frameworks CEO Jason Tanner.
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