Revving the Profit Engine | View Recording
We all know that profitability is the key to unlocking sustainability for your software-enabled solution. And to be profitable you need to fuel profit engines. But what is a profit engine, and how exactly do you rev one?
A value exchange model describes how you make money once, which is an OK objective if the goal is to motivate the customer to make a one-time purchase. However, if the intent is to capture a stream of reliable profits, business leaders must design a business model for their software-enabled solution that makes money over time. The mechanism which enables this result is called a profit engine.
In this webinar, we share with you the five most common profit engines for a software-enabled solution and give you tips on how to maximize your profit engines.
- What is a profit engine & why do I care?
- How does profit engine fit into the Profit Steam canvas?
- What are the five profit engines for a software-enabled solution?
- Pop quiz – pick the profit engine
Transcript generated with the use of Otter.ai. Please excuse any misspellings and grammar errors.
Bob Ternes 04:06
Excellent. Okay. Do you want to kick me over to the well first off, everybody. Thanks again for joining. We have a really great crowd here this afternoon. Or I would say this morning this afternoon and this evening from depending on wherever you’re calling in from our topic today is the profit engine. This is part of the profit streams framework. Take me to the next slide. Contemplate this problem. So my name is Bob Ternes. I’ll be hosting the webinar today. And for those of you who are new to Applied Frameworks, we are a management consulting firm and we’re helping helping enterprises of all sizes, develop more profitable software-enabled solutions. And we also support partners who are leveraging our thought leadership. In fact, we have one of those partners on the call today. Jim Tremlett. So welcome, Jim. And thanks for being part of our partner program. We provide consulting services, training, mentoring, and execution with key personnel and my direct responsibilities. As director. I often work directly with clients but then I also support our partner program as well. And Carlton has been a scrum trainer for well for a certain amount of time. I don’t want to steal it later. And I’ve been in the in the technology space for about 20 years half of that helping to improve and transform organizations. And along that time, I’ve realized that I love to improve organizations. I just love the systems theory of it. I love to support the employees in those organizations kind of uplift their experiences. And then finally, the customers that they serve, kind of eliminating waste and creating better experiences for those customers. Those are really energizing for me as a professional and it’s a joy to be able to do that with applied frameworks. You know, I’ve mentioned partners and I know that many of our partners are energized by the same things. I wanted to mention that we do have a partner program related to profit streams and we’re right now in the process of scheduling our first enablement sessions in both the US and Europe, and those were in April and May respectively. Those dates are actually approaching pretty quickly. I just realized that like, next week is March. So if you would like more information about how to get enabled on profit streams and our partner program overall please put your email into the q&a, which is a segue into our housekeeping items for today’s webinar. So we’ve been using the chat, which is part of one of the functions in zoom for good communication, but as we move into the webinar portion I’d ask that you please put your questions and thoughts into the q&a. We’re watching that as our moderator, and we will surface those questions as we can. We’re also recording this session and therefore within a few days, both the recording and the deck are going to be made available.
Bob Ternes 07:18
Great Okay, so, our topic today is profit engines. And that’s one of the factors of the profit streams canvas. Now, I think many of you have seen the profit streams framework. This is a framework that contains several interrelated choices about how to improve sustainable profitability. Now I’m really excited about this topic, because it puts a an interesting spin on profitability and the realization of value. If you look at the canvas for profit streams, the left hand side have choices that are related to the customer. The right you have choices that are related to the solution and the factors. They’re up in the middle. That’s kind of where they joined. The top of the framework, just as there is the value exchange model, and that describes and defines how you make money, maybe only once, and the profit engine at the bottom defines and describes how you make money over time and in time thinking and timescales that often aren’t part of the discussion about how to make money. So I’m really actually glad that Carlson is here to help unpack this topic for us, and talk about how profit engines are critical as you nail the overall goal of profit streams, which is that sustainable profitability. I think I have one more slide and I’ll turn it over to you Carlton. Now, I mentioned that the webinar today is being recorded. So if you need to leave, you will receive a link to the recording afterwards. And moreover, all of our webinars are found here on this on this URL, which I’ll drop into, I’ll drop it into the chat. And And again, I’ll start watching the q&a. And with this Carlson, I will pass it over to you.
Carlton Nettleton 09:13
Hi, thank you very much, Bob and thank you for the introduction. My name is Carlton Nettleton. I am the SVP of product here and Certified Scrum trainer and as I was mentioned Bob and a little bit earlier. Today is the 12th year that I’ve been a scrum trainer is the anniversary of when I was first awarded my certification I have over 20 years of experience with Scrum and Agile practice. And I’ve lived in Portugal since 2017. Bob’s kind of talked about we are we’re a management consulting firm. Our passion is around helping our clients develop more profitable software enabled solutions clients and partners, right? Because we want to definitely think about how do we help our partners be successful? One of my responsibilities or core responsibilities is managing our portfolio of products, which include consulting training, our online academy, in addition to developing new products and services. I also have a Boston Terrier puppy named Bruno. There he is. You won’t see him today in the background because I asked you have stay out of the office today. It’s during our session. So that’s me. So let’s talk about our agenda for today. And this is what I’ve got planned for us today. So first off, why is this topic important? What is a profit engine and then what are the most common profit engines out there? So in order to explain why this topic is important, I want to start with a story that explains how I first learned about this topic, and how a profit engine supports the growth of a sustainable business. And this story begins in 2013. So let’s go back in time, right. And think about what were we all doing back in 2013? Well, NCIS was the most popular TV show in 2013. And it was in its 10th season. I actually have never seen this television show. But if you take what else was going on, Barack Obama was beginning his second term as President United States. The Baltimore Ravens beat the San Francisco 40, Niners and Super Bowl 47 And I was living in San Diego, California, as the President of look for consulting and look for consulting was a small consulting business dedicated to helping teams and businesses adopt Scrum and Agile practices but after four years of of running this business, I started in 22,009. I was starting to detect a trend in how my business operated. And in the consulting world, right, especially for a small business like like my own there are only two settings you either are busy or idle. That’s it. Right, which is good because when you’re busy, you’re making money, right? That’s kind of how consulting works. But there were some trends that I observed in my business that weren’t so great, right? And between my consulting engagements right times when I was busy, there were long periods, three, four, or even five months when I was idle, no business at all. And that’s not good because in consulting, if you’re idle, you’re not making money. And when you have long periods of time when you’re idle on a regular cadence, and this was happening multiple years in a row, that really means the business isn’t that sustainable. Right. So how does one create a more sustainable consulting business, a business that replaces those long periods of being idle with profitable work? And how does one resolve the consultants dilemma of either being too busy or being idle? Many ways to solve this problem, right? Let’s let’s state that upfront. The choice I made was diversification. And my thought was that in order to create a steady stream of profits from our business I wanted to make the choice to offer additional services, additional products beyond the adoption of Scrum and Agile practice, right? If I could identify what were those new solutions that customers wanted? Ideally, my business would become sustainable, ideally, right. So I had in my mind what potential solutions the customers wanted or at least what I thought was important in 2013. So I thought my biggest challenge was more around how to find the customers. Where are all these new people going to come from? How do I reach them and tell them about all the good goodness that business could offer? But then I remembered this advice from one of my mentors. It is my belief that a profitable and sustainable business is not defined by the amount of new customers that come through the door. So that certainly helps, right. In my my belief is that a profitable and sustainable business is defined by the number and the profitability of the additional value exchanges you can generate from your existing customers. Right and so why do I keep coming back to existing customers, right you can avoid all those customer acquisition costs. If you just go back to the people that already have shown that they like you that they believe that you can offer value. The people that are predisposed, predisposed to engage and do more business with you because they’ve already purchased services. And created another create more value in that relationship and create more value exchanges. What I did not know at the time, that the mechanism that I was looking for to help me build a sustainable business was called the profit engine. Right. And the simplest definition I can offer for you right now is that a profit engine explains how you make money over time, which is kind of what Bob described early on, right? And as we saw my story of look forward consulting, right, my small consulting business in San Diego, California. The lack of clarity around what were my profit engines has prevented me from quickly identifying how to build this profitable and sustainable consulting business because I had times when I was busy fall by long periods of being idle. So I had to figure out what are my profit engines, right. And if we think about how profit engines fit within the applied frameworks, profit stream canvas, excuse me, let’s go back there. There. We kind of see two things one, profit engines reside reside at the heart of the canvas right next to pricing. Right so profit engines are really important for you to build a sustainable and profitable business model, right? And profit engines are the result of specific business model choices, profits per dream designers make when they’re trying to optimize that business model for a software enabled solution. So profit engines are at the heart of the canvas, and profit engines don’t exist by accident. They are designed. All right, so if I’m designing a sustainable and profitable business model, for a software enabled solution, what are my choices I can make with respect to profit edge? Well, you got two things, you can either increase the quantity of value exchanges within the same solution or you increase the profitability of a single value exchange. So how does one go and do that? Too, turns out profit engines are software enabled solutions follow common patterns. So let’s review some of those patterns. And this list here shows us for profit engine patterns that we’re going to review today. And for the remainder of this webinar, we’re going to look at each of these along with specific examples to help you better understand the profit engines you might have in your software enabled solutions, or the solutions that your customers are asking you to help optimize. Sorry. So the first is called leverage the installed base, right? And in order to make the most of this profit engine, one of the first things I did I’m like okay, what do they mean by installed base? So I researched that and in the in the context of product management, the installed base is simply the current number of units in production. And when we leverage this profit engine, this is about returning to your existing customers for additional value exchanges exists additional transactions right. This profit edge and leveraging the installed base is the most common profit engine for any software enabled solution. One might even say that this profit engine comes pre installed with any business model, which relies on a software enabled solution. And what you might not know is that there are actually four ways to execute on this profit engine and we’re going to talk about them all. This is the most familiar of all the profit engines where we migrate the customers and users from one version to the next. And here are two examples. of analog products which you can upgrade the strings on a tennis racket or you can make a mod on a car truck. Right so for analog products actually like this water bottle here. There really isn’t a way to upgrade this solution. But there are some analog products like tennis racket where you replace the tennis strings to make them more bouncy or bores you can use up mod the car with bigger trucks or different types of headlights, whatnot, right a more recognizable example of this. Profit engine for the world of software would be the last for up MacOS so we have got Catalina followed by Big Sur. There’s too much clicking here, Monterey and then Ventura. And in most cases, each upgrade right each upgrade that you make to the solution adds enough value to the customers that profit stream designers can justify an increase in price levels, making future value exchanges more profitable. So upgrading the solution, very, very common. Profit engine. So let’s move on to the next variation of this profit engine. Right leveraging the install base called Add Module. I think Bob this one here you might be familiar with the example and I get to it. So with this profit engine, right solution, designers are extending the base with additional value added modules. And what makes this profit engine interesting from the customer’s point of view is that each module enables the customer to tailor the space solution to their specific needs so that they only buy what they need. From the providers provide a view or the suppliers point of view. This profit engine works because the base solution plus modules provides enough differentiated value to motivate the purchase of both the base solution and the modules, thus increasing the total revenue on a simple value exchange. Right. And the key to making this profit engine work is to ensure that the base solution does not over deliver functionality. That can be best delivered via module. Okay, so what we’re doing here is that we are extending the base solution to give the customers new capabilities. Let’s take a look at some examples. We’ll start first with the analog world. Alright, an analog example this profit engine would be what people would call today a camera for 35 millimeter film. And a telephoto lens filters and even a tripod are all examples of modules that you can add to the base solution in this case, a camera which extends its functionality in unique and specific ways. Alright, so the camera doesn’t come with all these modules. If you have a need for telephoto lenses, filters or tripod, you would then purchase these modules purely from Minolta right? But let’s take a look about software. And that’s why I said Bob I think you would appreciate this example here. HubSpot is an example of how to exit HubSpot. It shows how you can execute this example of this profit engine add modules in the software software world HubSpot is a CRM platform for small to medium businesses. And they offer all these different modules for what they call hubs marketing hub, they have sales hub as CMS hub, service hub, and a operations hub. And all these hubs are modules extend the capabilities of hub spots based solution in specific ways related to marketing, sales operations, etc, etc.
Bob Ternes 22:41
Just I just added a hub yesterday, so it’s a perfect example.
Carlton Nettleton 22:44
Yeah, and I imagine we paid for it right. It wasn’t free.
Bob Ternes 22:50
corporate activity. Yes. Yeah.
Carlton Nettleton 22:52
There’s costs associated. That’s fine, right. Because here’s the thing when I think about value exchange, because we want access to these capabilities, we’re like yes, we will pay for them. We and we like HubSpot. We bought services from them before. So that these profit engines are who are evil that’s gonna get more money from our customers. We’re actually giving customers we’re getting more value from HubSpot. Therefore, we have a monetary exchange. Right? That is the essence of a profit engine. Right? Hey, we provide as a provider we offer you more value therefore, we can expect to collect more money from you and customers. Happy customers of HubSpot. We are happy to do this. Okay, so let’s go on continue on with leveraging the install base and let’s talk about the next variation on this which is called replace solution. So at some point, it is time to retire a solution and replace it with something new improve something that’s new something that’s better. And when you think about this, on the surface, you might think wow, this is similar to add module. Right? But for me, they’re different and their difference lies in the scope of the change being presented to the customer. Right with add module the customer is being asked to customize a base solution with capabilities specific to their needs. Like Bob’s example pay, we just need to add another module right. But we replace solution. The provider is making significant improvements to the solution or expanding it in such a way that the new solution provides extra ordinary value and benefits to the customer. That was not possible in the old solution. That’s the difference here. Right module is you’re just extending it replaced solution is you’re giving them something completely new and in order to do that you have to replace the solution. So let’s take a look at examples. Alright, so in the analog world, a good example of replaced solution would be the transition from the horse to the automobile. Both offer a transportation solution, but the automated automobile provides benefits and costs that were not possible with horses. Alright, so that’s analog versus automobiles, right? In the world of software enabled solutions, an example of replaced solution would be the change from Adobe Creative Suite to the Adobe Creative Cloud and 2012. Alright, so you might be like, what, what is this? Why is this so important? In prior to 2012 the complete set of Adobe products were sold to commerce customers via physical media, like really old school like CDs, right? And they were sold to customers with time based access and with the perpetual license, right. Adobe Creative Cloud said, okay, you know what, we’re not doing that anymore. What we’re going to do is we’re going to replace those individual products with a cloud platform, right, and this cloud platform, maintain time based access, right, but change the duration of that relationship from perpetual, which is hey, if I bought the CDs, I can use the software whenever I want to a monthly subscription. Right? That’s it from the bet from the providers point of view. But from the customer’s point of view, what did they get access to? Well, they got access to everything that’s in the cloud, not just what they bought at the time of the CDs. They got up, they got access to all the updates. They also got access to community and other resources that were not available from the physical media. Right. And so this is kind of one way is like, hey, we can offer you significantly more value with the solution. Now, not everyone made the transition. Right. Some people are like, you know, I I’m actually one of those types of people. I like having the software I don’t want to pay a monthly service, right. But for most of Adobe’s customers, they were like, Yes, this is great because there was enough value being offered in the new solution that many of the people made that change. Okay, so let’s look at the last of our profit engines related to leverage and install base which is called add related solution or solutions, right. So instead of adding more features to an existing solution, solution designers can create related independent solutions can be targeted to the installed base as additional value exchange transactions. So instead of you know, enhancing the product itself, you can actually create a new our new solution, a new offering, that maybe the install base very interested in. And one of the added benefits of this profit engine is it allows is that these new solutions may attract additional customers to the business. So customers may not have been interested in the initial solution, the related solutions that you create, draw them in. So let’s take a look at examples. And first, let’s look at some analog examples. Alright, so as our analog example, let’s continue consider excuse me, consider the entire family of Scrum certifications offered by the scrum Alliance. We know a lot about Scrum certifications here at Applied frameworks. And as you can see the scrum Alliance began with certified scrum master and then later launched Certified Scrum Product Owner followed by four advanced certifications. Right after that. There were a series of certifications about certified at for certified agile leaders. So to date, over 1.2 million certifications have been issued by the scrum alliance in the last 15 to 20 years. Each one of these certifications is both in money again, opportunity for the scrum Alliance and their partners because the partners are the ones that deliver certification courses for the scrum Alliance. They started with CSM and then started adding related solutions. So let’s take a look at a software enabled version at this profit engine and see what that would look like. And I wanted to I had to think about this one ask around and what people recommended to me thinking about the Witcher franchise right and that started with the video. Game in 2007. And two sequels followed in 2011 and 2015. And there’s now even a TV show on Netflix. Right each one of these is a related solution around the idea of The Witcher right video game two sequels TV show, all three video games combined have sold over 60 million units. And over 50 million people have watched Season Season One of The Witcher on Netflix that is a lot of value exchanges. If you understand this profit engine this can be quite profitable for you. Okay, so let’s go ahead
Bob Ternes 30:50
before we move to the next profit engine, those are huge numbers. And I think about you know, I contrast the opportunity to add solutions versus adding modules. It feels Karlton like adding modules. Each of those modules they are not standalone they require the core solution to either or function. Contrast the adding related solutions. Each one of these solutions is standalone independent and doesn’t need any of the other solutions to operate. Is that a fair kind
Carlton Nettleton 31:23
of? Yeah, absolutely. I mean this in classic product management terms when we talk about AD related solutions this is like about building a product line. And adding modules is more about bundles. If you’re thinking about classic product management terms, it’s helpful.
Carlton Nettleton 31:47
let’s talk about so we’ve talked about the four patterns within leveraging the install base or leverage the install base. What comes next. Alright, let’s talk about the product pyramid and to create a product pyramid we first begin by identifying increased functionality and benefits. One can offer by partitioning your solution into multiple tiers. Right. And the common way people talk about this good, better, best. And with product pyramids, there’s a few ideas to consider number one volume of the customers decreases as you travel up the tiers. Okay. Customers at the lowest tier are offered less functionality and benefits but those capabilities increase as customers progressive tiers. interesting side effect of this profit engine is that as the functionality increases, so does the prestige that’s associated with that tier. And because the solution now offers more capabilities, and additional social status, right ie solution offers more value. And if you offer more value in your solutions, you can charge more money and that’s what you see with a product pyramid the price increases with each tier. Alright, so let’s take a look at some examples right here. And so while good, better best is the common vernacular to refer to these tears do not feel that you have to be restricted to only three tears. Right? You could have two tears like we do at Applied frameworks with our ACSM Express and premium products. Right? Or you could be like TurboTax and you have five tiers, right and each tier offers increasing levels of service to the customer. Right so when we talk about good, better, best, yes, that’s how it works, right? But don’t feel like you’re gonna have to just have to have three chairs. You can do it with two, or you can do it with more. So that’s all I really want to say right now at this time about product pyramids. Maybe if there’s more questions people could ask them in the q&a. Let’s move on to the next up profit engine, which is called Platform ecosystem, which I’m sure many people are quite familiar with because this is both a popular and profitable profit engine. So so this profit engine is when product designers use the core solution as the focal point to create an environment that’s where they use the term ecosystem, where a community where a community through its interactions with one another and the core solutions. The core solution generates values for as participants, right. So we have a core solution. We have a bunch of people that have gathered around this core solution, and they interact with one another and they interact with the core solution. And those interactions generate value. Right and the community can be made up at least in the software enabled world. Developers, resellers customers, and can involve software services and all sorts of different types of value exchanges here. Right and so this is the in healthy, robust ecosystems or communities are very durable. Right? And but this is not necessarily a discussion on like, hey, how do you set up a platform ecosystem? We just want to identify it here as a profit engine. So what do you need to know about form ecosystems? providential? Well, there’s two things I would say. One is we want to think holistically about the solution. And we think about that when we leverage what we call whole solution thinking and we leverage this to kind of consider, how is this ecosystem going to evolve? Right? I like this idea of ecosystem I like this idea of environment because you have to think about its evolution growth. Right and in its growth is somewhat complex, so you can’t plan it all out. upfront, but you do need to be responsive. So the first thing I want to think about is in the initial stages. You want to take care to define what is the core solution and what we call the expected capabilities that will provide the ecosystem with the necessary resources to thrive. Alright, so if you’re familiar with frameworks, when we talk about whole system’s thinking or thinking about whole product thinking, from don’t believe the creator of this framework was Ted Levitt. And so we’re talking about core solution. And expected capabilities. But as the ecosystem grows, and when you’re even in the early design stages, right, you need to think about, well, how’s this going to expand? Right, and how do we support the expansion of this ecosystem? Well, when we think about expanding the ecosystem, right, we have to deliver on those capabilities which augment the ecosystem right so people have their expectations of what they expect the ecosystem provide. But what can we put in the ecosystem which will augment it and make it more valuable for the participants make it more sticky to increase the number of transactions they make are their interactions with the community, but also what are those capabilities which will attract potential participants as well? Right. So definitely need to design the growth of the ecosystem upfront or at least consider one of those capabilities that will help it grow and thrive because the key right with this Model A metaphor is that this has to have the necessary resources to thrive on its own. So second thing you want to think about so think holistically about solution is define the boundaries. These questions are just a few of the questions that you need to consider solution designers need to consider when defining a platform ecosystem. But the choices you make here, right are kind of those initial system, those initial starting conditions, which will say, Hey, is the ecosystem going to grow and thrive really quickly? Or is it going to kind of mutate and kind of stall out right? There’s no right way or wrong way to answer these questions. Right. But you just need to think about what kind of ecosystem are we trying to create? And your answers to that question will certainly influence those growth and choices that you’ll find in the community that you’ll see in the environment. So let’s Yeah, Bob, before we move on to slide, I’m curious,
Bob Ternes 39:13
you actually use some interesting where do you you said, you want to take care to define your core solution. And then you also laid out some activities to help define those boundaries. Are there any other typical anti patterns or sticking points or better practices or do difference that folks should think about as they do either of those activities?
Carlton Nettleton 39:36
Well, I would say one of the things when you when you are thinking about designing your software enabled solutions, business model is do a really good job spending with the customer benefit analysis, what are those elements of your solution that are that are valuable to the customer and trying to quantify the magnitude of that value? Right, I think that becomes really, really important. I also think helping understand clearly, what is the customer’s ROI to consume your solution implemented, especially with respect to the ecosystem? Right? I think that yeah, okay. Okay, so two things we want to talk about or understand carefully when we explore a platform and ecosystems one leverage wholesome solution thinking the other is take time to understand define the boundaries. Let’s like take a look examples because I always think examples are helpful for us to kind of consider Okay, so, this can be a as I mentioned earlier, both a profitable and popular profit engine, if you can pull it off, right. Oh, and contemporary examples, like Salesforce, AWS and apple. demonstrate the importance these firms plays on developing communities as a strategy to their long term sustainability and profitability. Right. In addition, this profit engine pairs well with other profit engines that we’ve seen before. Like, you know, leveraging the install base, those two patterns that we saw there, add modules, as well as replacing the solution. Right, sometimes people kind of leveraged the replace the solution and the solution you’re replacing to, goes to a platform ecosystem. Right? But the thing I want you to consider is that all five examples, right, product designers at their respective firms have developed to maintain the core platform or solution, which enables a community of users, users, customers and third party solution providers. To exchange value in a variety of monetizable ways that is both beneficial to the community members, right? Otherwise, they wouldn’t be there. And the platform creators otherwise wouldn’t necessarily host the ecosystem. Okay. So here are some very, some examples. That you might be familiar with already. And let’s move to our last example of a value of non value exchange Prophet X profit engine, CSV. And I want to talk about this one here, experience curve. Okay. Just to raise one thing, and even before
Bob Ternes 42:29
we talk about this, we got a question and q&a. Really, probably about the last section, actually, from Jim Tremlett. How would you describe amazon marketplace with a whole solution thinking? I don’t know if that’s, if this is a good time to answer that before we move to the next section or if we want to let me think about that one.
Carlton Nettleton 42:47
How would I describe amazon marketplace with a whole solution thinking? I want to keep that around in my head a little bit. But for me, I mean, it’s It definitely sounds like a platform ecosystem. Right. And that at the core they are Amazon is creating an environment in which customers can you know two sides, two sided platform. Customers are coming in wanting to buy different goods, physical goods, but they’re leveraging Amazon’s platform in which to facilitate those changes. What else would I want to say about that? That’s where I want to get started with it. Right? So it feels like a platform ecosystem. For me, I guess I would want to understand, where does the ecosystem grow? Right. So we got a sense of okay, what it does today, right? That’s the core platform, the expected right. But for me, you know, what is in that potential Greg that would draw people to it, or what would be augmented that would make people excited about it. So I think about going back to Keno, the Kindle model, you’ve got your you know, your exciters dividers and your detractors. So the potential almost lines up like hey, what would make people really excited about and give them buzz? That’s what the potential would go into potential. And then the dividers are the items that would go on the augmented brain, which is hey, this is stuff that makes me happy. Give me more of it, because it’s linear. Hopefully that helps. But if, but, ya know, it’s it’s a good time.
Bob Ternes 44:34
Well, thanks for letting me interrupt you with a midstream No, no. Yeah. Very good. Okay,
Carlton Nettleton 44:41
so let’s talk about experience curve. So all our previous profit engines talk mostly about how to generate new value exchanges, right, which is one way of Rafi profit engine, right? Hey, let’s have our customers come in and do repeated value exchanges with us because we’re offering them more value, right? This profit engine experience curve is is about maximizing the profitability of single exchanges, like how can we reduce our costs over time? And one of the things that I did here is, you know, little research on this topic was just figure out what where does this come from? Alright, well 1000s of studies from the world of manufacturing production costs, right. So for instance, they were producing iPhones right, usually declined by 10 to 30%. With each doubling of cumulative cumulative output, right? So if you go three to six, we can reduce production costs by 10 to 30. If we go six to 12, another 10 to 30, and we go 1220 for another 10 to 3%. And as one might expect, this profit edge is most common in hardware environments where there is a relentless focus on manufacturing process improvements, and those process improvements create substantial financial benefits for the business. Right. For software enabled solutions, though, this profit engine is the result from the accumulated experience the business acquires over time by launching, selling, supporting, maintaining, extending and developing the solution as it’s used by new and existing customers, right. That’s what the experience curve is about. Right? But it’s it is that deliberate focus, much like they do in the manufacturing world, to improve the efficiency of the processes used to develop the solution. It’s is optimized, it’s about optimizing flow. And so the question might be is like, Well, how would we do this, Carlton right, well, each one of these practices combined with an agile method, Scrum Kanban. Extreme Programming safe right, will give the business the opportunity to learn how to decrease costs, while optimizing the flow of value to the customer. Right. So how do you execute on the experience curve? These practices plus others are the way that you start to do that, right. But you have to really be very strong, very disciplined. In your inspect and adapt process. Alright, how do we optimize flow? It’s called lots of different things. So I my background scrubs, I always talk about inspect and adapt, but safe and Kanban often talks about the idea of optimizing flow, right? Yeah. How do we do that? Extreme Programming talks about this in this respect to quality, how do we increase the quality so that really is the end of the presentation. So what more do you want to know that’s all I have for today on? Profit engines.
Bob Ternes 48:10
We’ve answered many of the questions. Oh, Andrew Leung is also on the call Andrew, are partners. It’s good to see you in the chat. I think we had some. I liked the questions that arose. Does anybody have any additional thoughts or questions around either profit engines or around how they relate to the other interrelated choices within profit streams? Yeah, what?
Carlton Nettleton 48:43
I guess to kind of tie a bow while we wait for questions kind of tie a bow on my story. For me, way back when in look forward consulting back in 2013. What was the profit engine that I used right? Was add related solutions. Right. I looked for other you know, beyond just consulting of agile practice. We look towards training training as a related solution that attracts people to my business. And as it turned out, it attracted other people that were interested in learning more about Scrum and Agile practices. But not necessarily Okay, I want to commit to a consulting engagement where we can transform our business or improve our business. Right. So that was the profit engine that I leveraged to help stabilize the profitability and the sustainability of the former consulting All right, maybe this will have questions. We do have one. We do have
Bob Ternes 49:43
a couple of related questions or topics from talent. He asks. Let’s see. We’re going to do both of them. With respect to platform ecosystems, how do you avoid Big Design Up Front thinking how do you avoid that big activation energy and putting too much or over rotating on especially like the planning, we all know it PDU F is how do we avoid it? Well, I think
Carlton Nettleton 50:11
one thing I would recommend is recognize that this is a complex system. So you can’t define upfront what the ecosystems gonna look like, right? And do like the metaphor of an ecosystem as you go outside right out in front of my house today. There’s big field, right? You can’t design how it’s going to work, but you can shape the initial conditions. Right? And you can kind of, you know, urge where you want things to grow where you don’t want things to grow. So that’s one thing. Recognize that it’s a complex system. So whatever you plan up front, which does require some planning, right? Whatever you plan up front, it’s going to change. So be you know, embrace change from the bottom from extreme programming. The second thing I would say is, when you do your whole product thinking, right, the whole product thinking is not hey, we’re going to design every single capability. Right? But it’s it is around what is the market need not what is the feature set? Right. And I think one of my philosophies around product management is don’t compete on features because you’ll lose, but focus on what the need is. So if you understand what the need is that you can find your ways that your ecosystem will meet that need better than the competition.
Bob Ternes 51:44
additional thoughts in the chat. Yeah, there’s there’s no problem per se with big vision upfront. I like that engine to model how you might get there, and an MVP or incremental approach to validate legitimacy of vision and approach and or modify the vision based on learning. Approach. Yeah, I mean, I think
Carlton Nettleton 52:08
that’s, we have to be flexible. We have to inspect and adapt. Right? That’s how nature works. I mean, nature tries I mean, the field in front of my house, you can’t see it, but But last year, it was all just dirt. And now over the over the last eight to 10 months. The grass has slowly encroached on getting closer and closer to my house because it’s construction zone. It’s I couldn’t tell you I tried to put grass in there and make it grow but it didn’t work. So it just wild grass out there. And that’s kind of how ecosystems, they just do what they want to do. Yeah, there’s self organizing. Excellent. Well, well thank you
Bob Ternes 52:49
for, for talking about in bringing intentionality to profit engines. Garrett thank you for thank you for your kudos into q&a. Thanks, everybody for your attendance. This is one of again a series of discussions around profit streams. Check out the webinars if you’d like to learn more about the other factors and interrelated choices that govern sustainable and how to find and optimize sustainable profitability for yourself or the client that you’re serving. And then anybody who has additional questions, I’m going to type my email address in the chat. It’s easy to remember it’s Bob at a flood frameworks.com Feel free to reach out to us if we did ever be of assistance regarding sustainable profitability, lean agile or any other way to help transform and optimize your organization. And with that, we’ll give you five minutes of your day back. Thanks so much, everybody. Thank you. Bye now.
About the Maximize Your Software Profit series:
The Maximize Your Software Profit series is hosted by SVP of Product, Carlton Nettleton and is designed to introduce the idea of Profit StreamsTM
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. This series will introduce you to Software Profit Streams™, the natural – and necessary – evolution of value streams.
What is a Profit Stream? with Luke Hohmann, CINO
Understanding Value Exchange Models
View the recording for Revving the Profit Engine
Are you interested in learning more? Please contact us to learn more about how our consultants can help your organization align around profit.