Product Strategies to Boost Your Web Business
It is crucial to consider developing products, if you run a Web development or design business. Let me tell you why!
First, service business models suffer from a fundamental flaw: in a service business, you have to trade your time for dollars. People pay you for a service, and this service requires some involvement by yourself, employees, or contractors, all of which costs money and cuts into your profit. Even if you know how to price based on value instead of time, you still face the problem of having to use resources re-create a service experience with every project and new client. Meanwhile, you can sell a product over and over again. Once developed, products can generate an ongoing, passive revenue stream for you. Your costs shift to product development and marketing, but the economics can be quite impressive once your product achieves acceptance.
Second, products are proprietary, and add to your company's enterprise value. In today's market, it is very difficult to sell a service-based firm. Research shows that, even when it's done well, the acquisition of a service firm usually results in the turnover of 75% of the original employees after a year. While there may be value in a service firm's brand, customer list, and methodology, the true value of a service firm lies with its talent. Most service-based firms only sell for 1-2 times revenues, if they sell at all. In the meantime, companies with products, especially proprietary products, are much more attractive to acquiring companies and investors. Among publicly traded technology companies, those with proprietary software products sell for 5 to 10 times revenues, often more. They earn this premium because margins are higher with proprietary products, and because they have developed something tangible that they own.
Convinced that it makes sense to develop and market products?
Four Basic Product Strategies
This article provides you with four choices of product strategies. All of which have advantages and disadvantages. Now, you have to think about the best way to position your product in the market.
- Develop a product with a significant advantage over the competition (also know as "faster, better, cheaper")
If you want to truly differentiate your product from the competition, you need to have a significant edge that matters to your market. Examples include: lower total cost of ownership, faster deployment, greater usability, and operating speed.
It makes intuitive sense that if you want to launch a new product that succeeds in the market, it has to be better than competitive offerings in a measurable, important way. If you want to develop a new product, start by brainstorming ways to be better, faster, and cheaper than what others are offering right now.
- Find a niche
If you can't develop an edge over the competition, then you should consider launching a product that fills an un-served or under-served niche. If you take this route, you have two options.
First, you can offer an existing product to an under-served market. For instance, there are many industries out there that still lack a basic portal or front-to-back business management software system. Entrepreneurs are currently marketing software to address the needs of numerous under-served markets: health spas, furniture manufacturers, local telephone exchange carriers, behavioral health centers, and religious organizations. There are hundreds more industries like these to target.
Second, you can find a product that makes existing solutions more complete or fills a gap in a large company's product offering. If some of these niches seem too esoteric for your programming capabilities, don't fret. These are not the only categories out there, but they are the ones with huge market potential. You can still make plenty of money finding a niche application that falls under the radar of these larger opportunities.
- Change the world
If you are really ambitious, why not develop a product that changes the world? Few people successfully apply this strategy, and it can cost huge development and marketing dollars to make it. But the rewards are huge for those who do prevail.
Generally, software developers have a hard time with "change the world applications." That's because their applications are made for inventions and products that have already changed the world (e.g. the PC, the Internet, vast networks, mobile devices).
Still, there are many current examples. Tivo–a product that lets people watch what they want when they want it, has the potential to change the way the world watches television. Instant music download programs are changing the way people buy and enjoy entertainment. Peer to peer applications have enormous potential to change how people work, collaborate, and share information. Ebay has created a new economy that allows anybody anywhere to become a small merchant. And Meetup.com has allowed people from around the world to get together easily based on common interests.
- Develop a me-too product
Common wisdom and business school theory say that "me-too" products can't succeed. Experience proves them wrong. In large, developed, and especially in growing markets, there is plenty of room for me-too products. If you can't develop a direct edge, find a niche, or change the world with your product, you can still make a good living being good enough. In some cases, the me-too strategy can prove to be enormously profitable.
The second- and third-place, less glamorous companies are often quite profitable, sometimes even more profitable than their better-known and larger rivals. For those of you who run much smaller organizations, keep in mind that the market for most products and services is huge. You can be very successful by riding the wake of demand created by larger companies. Why not let others blaze the trail, while you take advantage of their hard-earned wisdom?
The secrets to success with this strategy include:
Make sure your product is good enough to meet market expectations.
Keep your overhead low and your prices competitive.
Set a revenue target that is reasonable, yet makes you an excellent living.
Build credibility with testimonials and an ironclad quality guarantee.
Consider bundling added features to give extra value to customers than what they get from the market leaders.
Invest in effective marketing and sales tactics to hit your numbers.
In conclusion, this fourth strategy is under-rated, and is sometimes the best option available to many developers and designers.
Four Strategies to Launch Products
The following four models have worked for many entrepreneurs. They are not mutually exclusive, so you can pull what you like from each model to develop a process that fits your style and goals.
Model 1: Slow and Steady Organic Growth
In this model, you grow your product with internally generated revenues, whether from your Web design/development revenues or accumulated savings. People who take this path rarely look for outside investors (although you can), which means that they own 100% of the equity of their company, and don't have to deal with investor relations. They also enjoy the benefits of launching products at their own pace, with limited downside.
The disadvantage of this model is that, if your market is huge, you may sacrifice revenues by shutting out investors who can help you accelerate revenues. As many venture capitalists say, "One hundred percent of something tiny is not nearly as lucrative as 20% of something huge."
Model 2: Cross the Chasm
Geoffrey Moore's classic book Crossing the Chasm describes a compelling model for growing any technology product. While his model is based on a rapidly growing industry (one causing discontinuities, as the Internet did in the 1990s), it applies to almost any growing business.
Moore borrows heavily from studies of adoption of new agricultural products during the Green Revolution in the 1950s. In his model, new products progress through a life cycle. In the first stage, a few brave early adopters and visionaries are willing to experiment with a new product. Early adopters accept the new product because they love technology for technology's sake, and are passionate about tinkering. Visionaries see the potential of a new technology/product and know that they will have an edge by being the first to adopt them.
In the second stage, the general public begins to get involved. Unlike visionaries and early adopters, this "Main Street" audience needs a complete product, one that solves their entire problem. For instance, whereas early adopters would assemble their own PC, Main Street wants to pull a PC out of the box, be able to use it with minimal hassle, and have a source of tech support if something goes wrong.
The third group of buyers comprises conservatives and skeptics: people who are skeptical about what a product can do. They need complete plug-and-play functionality, and typically only come on board when they have to.
Finally, there are laggards, who never buy a new technology. These are the people who still don't have televisions, computers, or telephones, even if they can afford them.
Moore's insight is that most technology companies get hung up shifting from early adopters to Main Street. That's because the much larger mainstream audience has very different requirements than early adopters, and don't view early adopters as credible references.
To overcome this problem (the "chasm"), Moore suggests a very compelling and clear strategy:
1.Choose a specific target market.
2.Develop a total, complete, comprehensive solution to that target market's needs. If you try to be a horizontal solution, or develop a solution that meets everybody's needs, you will water down your functionality and develop a mediocre product that doesn't please anyone.
3.Develop clear marketing messages, in the target market's language, that compel them to buy.
4.Dominate that target market.
5.Adapt the product to a new, but related target market.
6.Repeat, until your product becomes the industry standard.
This model works time and time again for my clients, especially those who suffer the consequences of a lack of focus. Once they choose a specific niche and serve it, their revenues leap, even though they have a smaller number of prospects than they did before. The act of focusing increases conversion rates, so that a much higher percentage of people take interest in the product. At the same time, marketing costs decrease with focus compared to a shotgun approach. This model also ties nicely to the niche positioning strategy detailed earlier, although Moore suggests that a niche company can eventually become a "500 pound gorilla" by knocking each niche over, like a set of bowling pins.
Model 3: Be a Cheetah
Another model that many entrepreneurs follow is based on the hunting strategy of the cheetah. When a cheetah spies its prey, it puts everything it has into chasing it, for a short time. After a hundred yards or so, the cheetah knows if it will catch the prey or not. If it has a solid chance of landing a meal, it pursues. If it doesn't, it stops and rests for the next chase.
For entrepreneurs launching products, the "cheetah" model includes the following tactics:
1.Stay lean and mean. Keep your overhead low. Avoid fancy offices, salaries, and perks. Outsource development. Use freeware wherever possible.
2.Hone in on a niche that you can fill, especially a gap in the market or in a larger company's product line (which also sets you up to be acquired at a nice price).
3.Fund with savings, friends, and family. Avoid angels and VCs as they complicate the process and take away too much equity. Work hard to launch your product (or company) for under $50,000.
4.Get visible the low-cost way. Create buzz about your product via articles, publicity, trade shows, referrals, speaking, and whatever else it takes to get word out about what you are doing. If you are targeting a product gap in another company's offering, find a way for them to learn about you (so that they consider buying you).
5.If you don't get a solid customer base or interest within 12-18 months, do what the cheetah does and move on to different prey.
Model 4: Drill for Oil
This model is similar to the cheetah model except it relies on lots of testing of different products in parallel, then the development of those that seem to have legs.
This option is based on the world's most profitable direct marketing companies (e.g. The Franklin Mint, The Danbury Mint, Time-Life Books, Ronco). These companies have found very low-cost ways to develop and test products. For instance, they often market a product before they have developed it, to gauge interest. They do this by testing ads in a variety of media. If a variety of test ads work, they expand the product in a big way. If a test ad fails, they fulfill a few orders, and move on to other tests.
This model is elegant because you can test a large number of products in a short time, and your downside is limited.
The Internet makes this model even more powerful, thanks to Google AdWords, banner ads, and other online marketing media. You can test all sorts of products quickly and efficiently, and roll out the ones that work.
As in the oil drilling business, the best of the best find that out of 10 products ("wells"), 2 are super-hits, 3 are bombs, and 5 are mediocre but profitable.
Keep your Eye on the Prize
Let's conclude by getting back to basics. The primary purpose of being in business is to make as much money as you can, while hopefully doing something you enjoy. Developing products can be far more profitable than providing services, because of the repeatable nature of a product vs. a service. Therefore, it makes sense to add products to the mix of solutions you offer.
If you master the art and science of developing, testing, and rolling out sound products, you have three excellent opportunities before you:
First, another company could acquire you. With a proprietary product, your enterprise value increases, especially compared to have a services-only firm.
Second, you could generate a lucrative income.
Third, even if the first two opportunities don't materialize, products can still get your name out there, so that people hire you for design and development services.
Unfortunately, no article can tell you what product to launch. But that's your next step, and I sincerely hope that the strategies laid out here help you frame your approach.
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