You built a new feature. What should it cost?

No pressure, but the success or failure of launching new software capabilities can determine the financial health of your company. After months of investment in development, testing, and marketing, the potential payoff from landing new logos and expanding current client subscriptions is what you need to demonstrate growth to your current (and future) investors. Like everything else in life, packaging and pricing decisions are about making tradeoffs: in this case between the priorities of Product, Sales, Client, and Finance personas.

What do these personas care about? With apologies to Tolstoy, each unhappy team is unhappy in its own way, but it’s safe to believe the following motivations are true:

  • Sales wants to get paid
  • Clients want it for free
  • Product wants adoption
  • Finance wants accretive growth

Of course we could add complexity to these incentives, and you will likely face some of these complexities (and others) in your business. Does top line growth or profitability matter more to your investors in the pursuit of Rule of 40 growth? Does new logo acquisition or current client expansion matter more to your industry analysts? Does your Sales comp plan pay the same commission rate on expansion sales as new sales (i.e., is the cost of sales equivalent)? Is your product team incented on feature adoption, or build quality? Is the new feature a strong positive differentiator vs competitors, or ‘table stakes?’ And more. For now, let’s keep a simplified view and compare a few practical options to launch your new feature.

Bundle it in

In this scenario, include the new feature at no additional charge with an existing product or edition without changing the list price. Current clients already using the edition that contains the new feature will ‘just get it’ when they receive the new release. Sales will get paid when new clients purchase this edition, or when existing clients upgrade from a lower-tier edition. Finance will likely yawn unless the new feature generates significant market share growth.

This option is best suited for situations when the feature is ‘table stakes’ and restores parity to competitors’ equivalent offerings, or when adding the feature to a top-tier edition increases the perceived value and drives upsell among the existing client base. If your competitive intelligence has shown low win rates and poor perceived value of an existing edition, and your test clients showed relatively low willingness to pay for the new feature on a standalone basis, this option might be your best choice.

Raise the price

When the new feature is highly differentiating and sample buyers demonstrate a high willingness to pay, set a higher price for bundles/editions that include it. Current clients will likely be ‘grandfathered in’ to start using the new feature before a higher price kicks in at renewal. Client Success and Product Marketing teams will use this preview period to gather feedback and testimonials to validate the expected value of the new feature. These proof points will help to diffuse any resistance to the increased price from new buyers. Both Sales and Finance teams will be thrilled by the higher transaction value, assuming that win rate and deal cycle length (key variables in the Sales Velocity Equation) don’t drop concurrently.

Give them the option

A middle-ground option makes the new feature a paid add-on to existing products or bundles. This configuration can get Sales teams excited to sell something new to existing customers who are mid-term in their contract (and retire some quota in the process). Be careful that the new feature, with a value prop of its own, doesn’t get “thrown in” at a discount to close deals — undermining the Product Marketing team’s ability to validate the market’s willingness to pay, trashing the Finance team’s margin forecasts, or artificially depressing the Product team’s adoption trends (if the feature is ignored by buyers who were indifferent to it in the first place). A paid add-on will require a new “SKU” in your catalog and add complexity to provisioning/shipment and run-books for your Ops teams. If your organization has immature Product Launch processes, make sure to give these teams 4-8 weeks notice so they can review, modify, and test their procedures to support the new feature as a paid add-on.

But wait, there’s more

Launch planning can feel like a tug-of-war between numerous groups with competing priorities and often misaligned incentives. While it’s impossible to predict how your clients, prospects, and competitors will react to your launch, the concepts above might help you make a more informed decision on how to package and price the new feature.

For more information about packaging, pricing, and product launch, try these resources:

I spend most of my days thinking about packaging, pricing, monetization, and the lead-to-cash cycle for a B2B SaaS business. I’m open to questions, feedback, challenges, and new ideas from people in the same situation – please leave a comment or contact me directly.

This post first appeared at leadertainment.com. Image credit: schoolspecialty.com

Are you a normal thinker in a power-law world?

Along with celebrating the holidays, eating cookies, catching up on sleep, eating cookies, and doing fun projects with the kids (did I mention the cookies?), one reason I enjoy the year-end is the chance to chip away at the stack of unread books piling up in my house. A particularly thought-provoking book in this year’s batch is Peter Thiel’s Zero to One, which has earned a spot on my recently revised Essential Reading List.

This post is not a book review, but rather a highlight of an idea Thiel introduces early in the book and has appeared in my daily thoughts since reading it. He reminds us that conventional Western thought trains us to think of outcomes as following a normal (random) distribution, but in fact both the natural and business world follow a power law distribution. Accepting this re-framing of the world around us is easy in theory, and changing our choices in life as a result can be very difficult.

Some are mean, some have no mean
Some are mean, some have no mean

The idea itself is not original – from the application of mathematical theories to the emerging computer science field in the 1950s, to Malcolm Gladwell’s 2006 New Yorker article, to Taleb’s Black Swan – but Thiel’s framing of the concept, and its implications, is novel.

Many of us are taught to value breadth over depth, and to avoid “placing all of our eggs in the same basket.” We are coached to believe that well-roundedness is a virtue but hyper-specialization is “weird.” The entire premise of the liberal arts education system, from classical to modern times, is to provide foundational knowledge in a broad range of topics. [Personal note: not all institutions follow this mantra. The feedback I heard after being rejected from MIT’s undergraduate engineering program was that I was “too well rounded.”] As students and professionals, we are graded on a curve (the normal distribution). We are advised that portfolio diversification is the safest and most profitable theory of investment.

But strategy is about trade-offs. A business must choose to specialize in a certain market, geography, or product domain in order to reduce competition and increase profit. We cannot diversify our professional lives by being partially invested in many careers. At some point, we must choose to specialize in a function, industry, or growth stage in order to excel.

Sure, it’s interesting to think about whether phenomena like marathon finishing times, portfolio company performance, emissions, or health care spending follow a normal or power law distribution (at least for a few moments). But how can we apply this new way of framing the world? Here are a few ways to put this theory to action in life:

  • Think, plan, and go deep – from an early age. Find out what you (and your kids) are passionate and talented in, and build expertise. The most knowledgeable and talented people in any discipline are always in demand, regardless of market cycles.
  • Take risks with definite outcomes. Be certain, which means being certainly right or wrong, not indefinitely indeterminate. Too many of us hide behind a fear of failure and instead drift along in the middle of the pack without achieving much.
  • Concentrate your investments in a much smaller number of areas: in your professional pursuits, and your personal interests. As the new year begins, instead of asking yourself “what else can I start doing?” think about what you can stop, in order to focus your mental and physical energy on the few things you do best and enjoy most.

Does this resonate with you? Sound completely crazy? Leave a comment and let me know! Regardless, have a happy, healthy, and prosperous 2015.

Capability models, performance management, and knowledge management: how they all fit together

Often the day-to-day demands of work prevent us from stepping back and seeing how the big pieces fit together. While you might not have the same ecstatic reaction of this guy discovering a rainbow in his backyard, hopefully this post will help you have an even better answer to “what does this mean” (if you can make it to 1:17 in the clip).

Capability (competency) model, performance management, knowledge management: many of these terms get interchanged, however, in my experience I have seen distinct and specific applications for the processes as businesses work to maximize their return on investment in human capital. Below the diagram is a quick definition of the terms with links for more information.

The whole is greater than the sum of the parts.
The whole is greater than the sum of the parts.

  1. Business Strategy: While Michael Porter has a longer answer, Jack Welch defines strategy (in his book Winning) as “making clear cut choices on how to compete.” In a previous post, I compiled the 9 Critical Questions on Strategy.
  2. Organizational Design: just as form follows function in art and nature (but not chickens), an organization’s structure should follow its strategy. Jaques takes a scientific yet pragmatic approach in Requisite Organization.
  3. Capability Model: while purists will prefer to use the term “competency” to emphasize demonstrated abilities (rather than future potential), in either case a model, such as SHRM’s, provides a framework for a hierarchy of skills that can be developed and applied at various levels of the organization.
  4. Role Definitions: each role (remember, each position can have multiple roles, just like a father can be a cook, landscaper and coach) needs a definition of its responsibilities and scope
  5. Role-based Capability Model: Combine 3 with 4, and you get an inventory of the capabilities (competencies) required to be successful in each role. This is an essential input to the processes below. Do not pass go, do not collect $89 (after taxes).
  6. Four related processes to improve an organization’s return on human capital
    1. Talent Intake: defining the requirements for each role will empower your recruiting organization to provide a better slate of candidates for vacancies, and help new hires get up to speed and contributing within the first phase of the talent cycle.
    2. Knowledge Management: a central repository for standards, policies, procedures, and other specific “tribal knowledge” accumulated with experience in any organization. A top-notch knowledge management system combines the “push” of compliance with the “pull” of recognition for contributors and highly accessible content (like wikipedia and TED).
    3. Performance Management: while a recent duel of data fit models has caught a lot of buzz, an effective performance management process gives employees meaningful, actionable feedback on their performance vs expectations in role, and allows the organization’s leadership to identify high-performing, high-capability players and put plans in place to address staff who are under-performing. Performance review surveys are typically more complicated than they need to be, and the best ones I’ve seen capture 360-feedback quarterly.
    4. Capability Development: programs combine training and succession planning to close development gaps identified in any of the above processes. Training can be delivered through self-study, online learning, classroom based training, and on the job coaching.

While none of these definitions go deep enough to be applicable on their own, hopefully differentiating between the terms with a few resources for further research will be a good start to helping your team go “all the way across the sky.”

What did I leave out? What other approaches have you seen work also? Leave a comment and let us know.

Three steps to grow faster in the Information Economy

Behind barriers are new markets for growth
Behind barriers are new markets for growth

One of the key components in my career search has been joining an organization with a high growth rate. This has prompted me to think about what steps businesses can take to scale a “killer” idea into new markets. Below is a loose framework with a couple examples. Does it resonate with you? What examples come to mind to strengthen or disprove the theory? I look forward to your comments, and I hope that my lesson for success doesn’t sound too much like the Underpants Gnomes.

1. Generalize your competitive advantage. Start by making an abstraction of what makes your businesses viable. Like any tough problem, the answer will be obvious in retrospect. It might be helpful to answer key questions on your strategy first and then generalize it. Also Jim Collins has written some great books comparing companies and what contributes to their success or failure.

2. Translate across barriers to new markets for growth. What are the barriers that stand between your strategic advantage and new growth? These barriers could be functional (e.g., moving from finance to HR), geographic, or up/down the supply chain. Peapod by Stop & Shop, salesforce.com, Lean/Six Sigma as management fads, and Starbucks VIA/Verismo are all examples that spring to mind.

3. Deploy with operational excellence. Regardless of the market you choose (or create), your team will need to expand with speed and efficiency. Michael Porter argues that operational excellence is a prerequisite, not a strategic advantage. Jack Welch reminds us to “pick a general direction and implement like hell.”

9 Critical Questions to Clarify Strategy: from Start-Up to Maturity

Whether your business is just an idea to talk about with friends or a mature, publicly traded icon of industry, having a clear strategy is essential to survive in a competitive market. To adapt one of my favorite quotes from Ping Fu, it is more important to be clear than to be right.

Collis & Rukstad's Strategic Sweet Spot
Collis & Rukstad’s Strategic Sweet Spot

I’ve compiled the core ideas from my favorite HBR articles on strategy, listed at the bottom of this post (plus an idea that I think is from Jack Welch but I can’t attribute) into the 9 critical questions:

  1. WHY does the business make money? i.e., what gap in the market does it fill?
  2. HOW does the business make money? i.e., what are the transactions that generate cash flow and margin for the business?
  3. What is our specific objective?
  4. What is our scope?
  5. What is our competitive advantage? i.e., how are we better, cheaper, or different than the alternatives?
  6. What is our strategic sweet spot? (see diagram)
  7. What are the relevant products in the market and their geographic coverage?
  8. Who are the buyers, suppliers, competitors, substitutes, and potential entrants?
  9. What forces control profitability? (see diagram)

    Michael Porter's Five Forces
    Michael Porter’s Five Forces

If the answers to these questions aren’t clear for your current business–no matter how big or small–think about it and spark some conversation. The answers will help you focus and might surprise you.

If you have questions, feedback, or know where #1 & #2 come from, leave a comment!

References

Collis, D. and Rukstad, M. “Can you say what your strategy is?” Harvard Business Review, April 2008, Reprint R0804E.

 

Kaplan, R. and Norton, D. “Having trouble with your strategy? Then map it.” Harvard Business Review, September 2000, Reprint 000509.

Porter, M. “The Five Competitive Forces that Shape Strategy.” Harvard Business Review, January 2008, Reprint 0801E.