Saturday, February 26, 2022

Continued Improvement in Software Products

What’s more valuable to the software vendor: improving what you’ve already delivered, or building something new?

At first it might seem like building a new thing will have the highest return on investment. After all, new customer growth being equal, the finished product is only going to get support, renewal, and expansion dollars from existing customers. A new product could be sold for full price to existing customers, so more potential. This view neglects the sad fact that software ages like milk, and requires constant attention to maintain its value. An enterprise software product exists in an ecosystem of supply chains, changing standards, and data flows with adjacent products. The ecosystem changes continually, and a product that doesn’t keep up weakens and eventually dies. There are exceptions, but by and large when products stop working, customers stop paying for them.

This is why growing and sustaining software can actually have higher business value for an enterprise vendor than new projects, because it is churn prevention. The easy benchmark in sales is every dollar churned is two you have to make in new business. But in enterprise businesses that's more like 1:5 or 1:10. Why? There’s a strong chance that product failures don't just churn a product, they churn the entire relationship. Failing to maintain or add features to software that your customers are still using leads to customer churn. 

You could argue that's not true or not important if you're on a one-and-done perm license model… you’re only risking your support contract renewals, reputation, and any expansion opportunity, but you’ve sold the software and that’s all done. "Just risking reputation" or "won't get expansions" ought to give any company serious pause, but this straw man position is that it's okay to ignore software maintenance if you primarily sell perpetual licenses. However, perpetual licenses make a lumpy revenue stream. If your business is primarily living on them, then your CFO is probably pushing for a recurring subscription model such as SaaS right now, to smooth out the lumpiness. And if you’re a SaaS, you are not very likely to keep subscriptions if the software starts breaking and you’re not fulfilling your end of the contract.

New projects have potential to disrupt industry and make 10x or 100x annual ROI. Every baby also has potential to be an Olympic athlete or famous musician. The odds are against a particular new project instantly becoming a world-changing 10X, and pretty good for a much more modest rate of return that gradually improves with the application of more effort. New products that don't immediately fail are often legit businesses that could steadily grow into serious revenue generators, if they’re sustained at the appropriate tempo. Leaving them unsustained or not adding features hurts the vendor. Or they can be shut down, leaving disappointed customers and opportunities for competitors.

Squad development models can exacerbate this form of “almost made it” product failure, by encouraging shift of resources away from product that is “finished” or not driving 10x right now. Another way to produce a stagnant product is to build with assumptions that someone else will take care of content, but then never build the partnership conditions for that to happen.

Sustaining and feature growth teams are churn prevention teams, and they're very probably making more money for the company than higher profile projects. The product manager’s challenge is to make that visible and exciting. A new product with its own license has an easy path to show exponential growth; after all, it’s not hard to double and triple your yearly sales when the starting point was zero. It takes at least a year in enterprise software to recognize if that early growth will hit a plateau. Sales of big ticket software take time to complete, license bundle definitions might have changed, and feedback or demand might be muddled by context loss. Arguments for how much money an existing product makes can get bogged down in soft accounting of pull-through dollars.

Anecdata can be a powerful tool in this situation. A financial argument is always your foundation, but you can support it with positive customer quotes about what the product means to their businesses. It can be tempting to go negative and pull quotes indicating intention to churn if features aren’t built: my advice is to avoid engaging your own leadership’s fight-or-flight response. Tell a positive story of account building, value retention, and license expansions instead.

Since you’re making an argument about the future, using a probabilistic model can help reveal the opportunity (or opportunity cost). Douglas Hubbard’s How To Measure Anything has a good set of examples to follow. The inputs are current and projected business per product, probability of partial churn, probability of complete churn, and planned cost of sustaining engineering over the same time frame.

Update: more thoughts here