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#codecon and reflecting on generational changes

RecodeAttending the <code/conference> (#codecon) this past week turned out to be a remarkable experience, even more remarkable than I expected. The generational shift in our computing experience from desktop to mobile, from software to services, and from hundreds of millions to trillions was on display through the interviews with a dozen industry CEOs.

This post will explore this generational change through the speakers at the conference. Before diving into the details of each session, we will explore this change and the implicit context.

Generational Change

Reflecting on the interviews and demonstrations as well as the “lobby chatter” is a key part of learning by attending. I’ve always viewed this conference and predecessor D Conference as the most relevant conferences for learning about the strategic drivers of our industry. You can read my report from last year here. Writing these reports is part of the learning for me and reading the old reports lets me checkpoint on my own learning and journey.

If you move beyond the insights from any single speaker or the announcements at the event (all were widely reported by re/code and others and new this year by re/code partner CNBC), one theme just keeps coming back to me—the vast difference in tone and content between the incumbents and the challengers, between legacy and disruptors, between the old guard and the new, or whatever labels you want to use. We talk all the time about the transition of our industry from one era to another (and don’t forget the term “post-PC” was first used in this very forum) and the conference provides a microcosm expressed through leaders of these transitions taking place.

There is a vast difference in tone and content between the incumbents and the challengers, between legacy and disruptors, between the old guard and the new.

The transition is in full force. This does not mean by definition that all existing companies will lose and only new companies will win. Quite the contrary, the fact that these changes are now visible to all makes the creation, purchase, and use of new products and technologies evidence of the transition, as well as opportunity to create new plans and adjust. The mobile internet is causing the transition but also making the communication of that very transition much more transparent, which is unlike the progressive unveiling that characterized the mainframe to mini to PC transition.

Are the new companies doing enough to transition customers as well as their own business to new paradigms? How much should new companies bridge from existing solutions or should they expect a wholesale change from customers? Is there an understanding of the existing complexities of the real world?

Are the incumbents changing enough to build new products and business that reflect the new generation? Are they trying too much to “thread the needle” and incrementally step to a new context by maintaining status quo or “repotting the plants”? Is there an understanding of the complexities of existing solutions?

The puts this "generational" change out there for us to experience through the always challenging, yet always consistently even-handed questioning (interrogation) from Walt and Kara (and a great addition this year were interviews featuring seasoned members of the re/code team).

Context (is everything in business)

The attendees (in the audience) are people who have worked in the industry often times since the earliest days. The interviewers are professionals who cover deeply the industry and the subjects. It is hard to imagine creating a more informed or tougher environment. That’s the challenge.

Yet, industry leaders both line up and are obliged to appear (for the most part). Because the environment is so challenging and widely covered, leaders gain a great deal of credibility by standing up to the challenge.

Leaders gain a great deal of credibility by standing up to the challenge of appearing.

The conference takes place the same time every year, whether a company has something to announce or not. For example, last year attendees were frustrated because Apple’s Tim Cook did not announce anything. This is an unfair way to look at the “performance” of a participant. This conference has an amazing audience, but it is also an “uncontrolled” environment so announcing a new product is not without risk and not without huge upside (Disclaimer: I’ve been part of several product announcements/interviews at this forum). Apple, along with many companies, has a tried and true approach to announcing new things as we will see next week.

What is most interesting about the forum, however, is that the format and depth of the dialog allows for a strong “how did we get here” or “how are you wrestling with challenges” discussion. This is not a one-way speech or a forum where talking points go unchallenged. That is in a sense what separates the men from the boys so to speak.

When speakers prepare for the interview, especially at larger companies, folks in communications prepare talking points, responses to tough questions, anecdotes, and even jokes. This is a forum where this can take on “Presidential debate” levels of preparation. The challenge is that everyone in the audience and certainly the interviewers are all well-versed in these techniques. For the presenters, all of that over-preparation cycles through your mind during the tough questions and unpredictable questions from the audience. This is a tough environment.

When speakers choose not to say anything of depth or the answer is clearly a prepared message, you can almost feel the energy in the room drain. There is a collective sense of a missed opportunity to learn more among attendees.

When speakers choose not to say anything of depth or the answer is clearly a prepared message, you can almost feel the energy in the room drain.

Too many people focus on CEOs evading questions about the next big deal or the features/availability of the next product. I don’t think that is a way to evaluate speakers and in almost all cases the interviewers ask a question like this one time often make a joke and move on.

Reporters have an obligation to ask or they look like they are not doing their job. Speakers have an obligation to acknowledge such a forward-looking, material statement and move on. There’s a big caveat to this and where I wanted to share my own learning, my own journey. I believe when it comes to challenges and strategy, CEOs specifically and companies in general can and should do more to inform the dialog. The way I would say this is that if there is something out there that everyone knows to be a fact and the speaker knows to be a fact and everyone knows everyone knows, then talk about it. By not talking about it, the conventional wisdom becomes the reality and the conventional wisdom is often wrong and always incomplete.

I have personally experienced this in the transition from Windows Vista to Windows 7. “Everyone” knew something was up with Vista and certainly Microsoft knew, but no one was saying anything. The result was a strong desire to know the next features of Windows, which was the only thing that folks knew to ask. It served no one to talk about the features of the next product but it also served no one to pretend everything was going well. I missed a big opportunity and looked foolish in a very early interview I did with a (now) re/code reporter. I followed the tried and true approach of the incumbent which is to say nothing, redirect, and so on. See several thousand words without saying anything appear here, from 6 years ago this week.

It turns out that in a world of global instant communication, transparency, open source, platform shifts, and so on that the story about the products, the strategy, and more can come to define efforts more than folks think. This isn’t always the case because business is a social science, but by and large what distinguishes the way the PC era evolved from the way the mobile era is evolving is a vast difference in the flow of information and pace of change. Corporate communications and the leadership approach need to adapt to this era. Recognizing this one thing we did on the above transition in Windows was start blogging about the “why” of the product long before the release, which to this day was a unique level of transparency (and also a huge challenge).

The generational change taking place now is challenging large companies more than ever before. Technology companies are seeing their investments and assets have faster lifecycles and shorter lifespans. They should address head on the challenges of these timescales and commitments. Business approaches are also being challenged and everyone knows this on all sides, but not talking about the challenges means everyone just assumes how things will evolve, and collectively everyone can’t be right.

These changes are also pushing and pulling customers more than ever before. As individual consumers we invest a little bit in a new phone or tablet and maybe a gadget and services here and there. Some of these pan out and some don’t. But large companies looking to define themselves in a new era of mobility, bring your own devices, cross-organizational boundaries, and cloud need much more information and a clearer understanding of what and why things have transpired like they have. Discussing the rationale behind choices provides much more context for customers making bets and allows a much more open dialog to compare and contrast choices. This goes way beyond features and gets to the strategy, learning from the past, direction for the future–it is a fine line.

It is too easy to fall back to wanting to know the next products and features. Companies still have secrets. That’s what defines a company relative to competition. As Jeff Bezos commented recently, “sure, I’d like to know Apple’s product roadmap”. To interpret the need for openness as a public roadmap or feature list misses the point—what was missing from the incumbent perspective was a view of what has transpired over the past 5 years and with that understanding a view of what could provide more understanding of how investments are moving forward.

The real question is if incumbents are going to change enough, fast enough, and in a sense disrupt themselves and do so with a clear understanding of what has transpired in the past few years. Or will they take on all the characteristics of “Innovator’s Dilemma” and operate hoping incremental change dampens any effect of big transitions will allow them to weather the storm and return to normal.

To see how significant this transition is, I think it is best to start with Mary Meeker’s always informative “Internet Trends 2014″. The complete report is available and so is the video. There were many interesting data points—the rise of China, the conversion of smartphones from feature phones, the move of OS platforms to Silicon Valley companies, messaging, and more. One slide that sums up the transition along with the challenge showed the growth of tablets relative to PCs with the title “Tablet Units = Growing Faster Than PCs Ever Did…+52%, 2013”.

 

Tablet growth relative to PCs

Because business is a social science and because there are many ways to look at data, no doubt some will challenge this data or conclusions. In fact, IDC just revised their tablet numbers down. Some feel that Tablets are reverting to their role as “media consumption” or lightweight computing devices. That I’m writing this on a tablet (yes one with a keyboard, but one with LTE, 10 hour battery life, weighs nothing, B5 size, etc.) provides my own anecdote about where things are heading.

This growth will change. It might sputter and then increase. There’s no doubt tablets are overtaking notebooks in terms of unit volumes. They are definitely not taking over all notebook workloads. But that would be like saying the growth of email was irrelevant to word-processing because it ignores the growth of the pie and shift in total volume to the new technology. As Steve Jobs said on stage at this conference, the software will catch up. This is happening. Despite what people might think, large numbers of attendees had their tablets at the conference and they were being “productive”.

Just as mainframe companies attempted to point out the shortcomings of PCs as servers, pointing out the shortcomings of tablets is not helpful, especially as tablets continue to gain more and more features of laptops while maintaining their unique characteristics (lightweight, fanless, quality over time, connectivity, reliability, security, apps, etc.)

One more slide from Mary sets the context that dominated the divergence of incumbents and disruptors and that was the view of the market size of each generation of computing, “Each New Computing Cycle = >10x > Installed Base Than Previous Cycle.”

Each New Computing Cycle = >10x > Installed Base Than Previous Cycle

“More than just phones” might lump too many devices into the last data point for some wishing to make the point that things are not changing so much. Let’s be clear—many mainframes still run the most critical systems of the world (I was in a briefing with an insurance company last week that wanted to hire me because I happened to know PL/1!). Today’s laptops have massive utility that isn’t being replaced overnight and probably won’t ever be “replaced”. That’s the Innovator’s Dilemma argument that does not equip either product developers or customers to innovate and prosper during these cycle changes.

Once you get beyond the specifics of what is coming next, which no one should be obliged to answer at #codecon, the dialog that gets to the heart of what is going on is worth having. What was missed? What was learned? What was tried? What did you think of what was tried? What is being done differently? How are big technology changes being thought of in isolation? Relative to existing investments? What point of view does a company have? What led the new company to be formed? What is different about investments being made? How do customers cope with change?

These questions and how they were answered made for quite a contrast between incumbents and disruptors. If you’re interested in per-speaker reports or the full interviews for any of them, please see the re/code site. My intent is not to summarize the sessions but to reflect on the sessions through this lens of forward leaning versus backward looking.

Incumbents

The incumbents of Microsoft, Intel, Comcast and Wal-Mart had a common theme which is that they each face significant challenges in the technology platforms and business models that brought them wildly successful. At the same time, each in my view missed an opportunity to say how they intend to change. In a sense, each asked us to leap to a future with them in leadership but without the detail to support that assertion.

It is key to understand that it is incredibly important for an industry to have large and healthy players operating at scale. In many ways, the startups we love serve as disruptive R&D for larger players and a healthy M&A pipeline is critical for all as evidenced by some of the recent mega-deals and dozens of smaller ones all aimed at the long term evolution of core products.

It is incredibly important for an industry to have large and healthy players operating at scale

Yet, many investments, particularly in hardware and manufacturing, require billions of dollars that can only be made by large companies. Incremental improvements we come to take for granted such as doubling of capacity, improved batteries, thinner devices, more pixels, massive data centers, and so on can only come from huge scale and well-functioning large companies.

At the same time, one look at Meeker’s slide above and one can’t help but notice that these large companies come to define the cycles she represents. Is that a convenient way we recall changes or were strategic changes part of a causal relationship? Don’t be so quick to judge. There’s a significant amount of subtlety and nuance.

Let’s look at some of the specific speakers.

Microsoft’s Satya Nadella and Intel’s Brian Krzanich both sit in the hot seat (the red chairs that define the #codecon set) with the same question so it is worth considering them together—what happened with respect to mobile and tablets. Satya talked about wishing to have taken the bet to build hardware all the way, sooner. Intel talked about the challenges in manufacturing at 14nm, not having the right product relative to power and the need to do better at 10nm. Mossberg kicked off Brian’s interview with the observation that he’s using a laptop half as frequently and using ARM based products a great deal. In a moment of candor, Brian talked about how many at Intel wished that the march towards mobility would have stopped at Ultrabooks and that Intel lacked the right parts to do tablets, which many at Intel did not think tablets would break out beyond consumption. I felt Brian’s comments showed a good acknowledgement about why things didn’t happen. At the same time, collectively the view of a strategy in the near to medium term didn’t come through. In eerily similar approaches, both Intel and Microsoft looked to a future beyond phones and tablets to an internet of things or more personal computing as where they will see greater success. I left both of these sessions feeling there was more to be told about where things are right now and what will happen over the next year or two (again not the features but the strategy—Microsoft and tablets small and large, Intel and mobile or even Chrome and Android). It isn’t that nothing was said, it was that everyone knows where things are today and the speakers know everyone knows, and the upside to keeping things close to the vest seems minimal and equates to “go with the disruptors” at some level.

One must admit that the challenge faced by Wal-Mart’s Doug McMillon is even greater in this audience which has few Walmart regulars (note, I shop at Walmart). In particular, many in this crowd are on the leading edge of home delivery and uber-for-everything and so visiting stores is already a thing of the past. That said, so much of what was said about online commerce felt too much like an expected incumbent response. For example, the idea that the lines are blurring between ecommerce and retail or that it is really hard to measure ecommerce if a person looked up an item on their mobile device before coming to the store (I wondered if there really was a metric that tried to give credit internally to the ecommerce division if someone did that). Ultimately, Doug said “physical still matters and digital makes it more valuable”. Maybe, except the last morning of the show I ordered a wall mount for the Sonos speaker we received at the show (yes elite gifts are part of the elite show) and it beat me home. Yes that is a luxury good and more, but to put forward the notion that ecommerce is still an add-on to physical stores seemed tricky for me.

Comcast’s Brian Roberts not only faces the challenge of cord cutters represented in the audience or the prospects of dealing with questions on net neutrality, but also just the fact that a lot of people have a lot of less than positive feelings about the products and services Comcast offers. When you look at Comcast as an incumbent and consider things like Netflix, Hulu, cord cutting, and more as the disruptive force it is very tough to see the dialog Brian led as satisfying. My feeling was that there is a strong response to keep everything as it is, while putting forward a notion that things are improving.  There was a long demonstration of the X1 cable box. Yet in the same session when questioned about net neutrality, Brian said that it is too bad that Netflix should pay a cost of doing business as he has to pay for cableboxes. I think that they love the cablebox (evidence, it seems to be an incredible headache to get cablecards and very costly to switch to TiVo and the rent for cable boxes is pretty high). The fact that they spent 10 minutes doing a demo on the new platform seemed to indicate that—yet the platform has none of the elements of a modern platform relative to apps or openness as was asked by an attendee. The responses to questions about net neutrality seemed to show a strong desire to avoid change while at the same time not acknowledging a changing world and changing needs of what is going on relative to connectivity. The overall dialog around Netflix seemed harsh to me and it failed to consider just how much more pleasant (and modern) Netflix is as a consumer than the X1 experience shown. Disclaimer: I have had really significant problems with Comcast in our new place and having never used them before; this is my first time as a customer. As I have no choice for video or broadband, one could say it is challenging for me to be totally objective.

Each also stuck to revealing little, defending the status quo, and offering a view of the future that is the same but better.

Each of these CEOs and companies have enormously challenging jobs and situations. Having shareholders demanding consistent quarter by quarter results, customers who do not really want change from these service providers but seek change elsewhere, and massive organizations to change all make for the potential of no-win interviews. Yet, each also stuck to revealing little, defending the status quo, and offering a view of the future that is the same but better. My own experience and learning would offer than when facing massive disruptive challenges, engaging in the dialog serves all parties better even though the normal school of thought for the incumbent is to double-down, stick to talking points, and only reveal challenges through the lens of opportunity.

Disruptors

Several CEOs represented the leading edge of disruption. It is super easy to be a fan of disruption and to look at all that is going well with these leaders just as it is easy to look at all the challenges the incumbents face. At the same time, these disruptions are also representative of a new level of frankness and openness about what they face or have faced.

More than the great work these leaders represent, I think it is important to look at how each is communicating and participating in a dialog. One might suggest that when these leaders are under pressure or face challenges of being disrupted they will start to take on the characteristics demonstrated above. I don’t think that is the case, simply because several of these leaders have already faced (or are facing) these challenges in their business. While clearly disruptors have less to lose, it is important not to lose sight of the fact that some of these represent large public companies (not mega cap, but large) and all represent very large customer bases from consumer to enterprise.

It was exciting to see these leaders head to the future, demonstrate a unique point of view, and engage in a two-way dialog about where things are going

For me, it was exciting to watch these interviews and how these leaders took on their own challenges. It was also exciting to see these leaders head to the future, demonstrate a unique point of view, and engage in a two-way dialog about where things are going.

Let’s look at some of these speakers.

Uber’s Travis Kalanick is arguably the most used and mission critical service for the attendees. The love for the service runs deep. Equally deep is the love for how Uber is taking on the government in the regulation of taxis and ride sharing (along with Lyft, an a16z portfolio company). At the same time, Travis faces a lot of questions about his aggressive style and reputation. He didn’t hold back, characterizing the task ahead at Uber as “a political campaign, and the candidate is Uber and the opponent is an asshole named Taxi.” OK, probably a bit colorful. What I loved was how he embraced even the disruption to his own business. After seeing a truly autonomous car from Google the night before we heard the CEO of Uber telling us that self-driving cars are the future, not drivers. Considering that Uber is a marketplace for drivers, this embrace of your own disruption is great to see.

Most people expected a characteristically polite interview by Softbank’s Masayoshi Son-san, but were treated to candor and aggressiveness, though in a very polite way. This would be consistent with the amazing success Softbank and Yahoo BB had in Japan ten plus years ago bringing amazing broadband and low prices to a market easily dominate by the goliaths like NTT (the most visible building from the Shinjuku train station is the DoCoMo tower). Son-san told the story of starting Yahoo BB and “how they had: No experience, No technology, No capital. Just anger.” This was a true disruptor story, much like Uber’s story of realigning city government only at a national scale. While it was not so challenging to be candid about WiMax, Son-san was super clear about the failed technological approach. He was clear about the intention to go after broadband in the US with the same zeal he went after it in Japan.

Salesforce and Workday (Marc Benioff / Aneel Bhusri) together offered an incredibly clear view of disruption at the enterprise software level. If there’s one interview to watch, I would suggest this one because it has so much relevance to how software is made and brought to market from two CEOs who made and brought to market software in a previous generation. These are CEOs learning from their experience who have also engaged the marketplace differently as disruptors. There were many statements that are starting to seem less and less “bold” but nevertheless remain monumentally disruptive: “in a few years no one will run business software on premises”, “I run the company from a smartphone”, “if you’re going to build a cloud app you need to start from a clean sheet of paper—there’s no way around it”, “incumbents are holding on to the past and basically trying to monetize it”, “90% of the company can do all of HR on a smartphone” and so on. There were many profound elements of the dialog that revealed the depth of the strategic and technological shift these leaders are both creating and have experienced. For example, there was a description of competing with an incumbent like SAP who would go to a customer, negotiate a $40M deal to “upgrade” and then wait two years to get the latest features or start to use a SaaS model and the new features just show up. Yes there’s a ton of complexity in there and yes it is horribly disruptive to how businesses operate, but so was the introduction of the PC, client/server (upon which that $40M upgrade was based) and more. Finally, the discussion about being in a “post-server” world resonated with me as I just don’t see it as viable for companies to be building out their own data centers and this session provided a lot of evidence as to what these vendors are doing to make that a realistic assertion. From a format perspective I love the adjacency of these two and wish a couple of the incumbents were paired together.

Dropbox’s Drew Houston brought innovation, competition, and regulatory oversight into focus with his interview. This is another service that many people in the room not only use but rely on and that brings with it a degree of comfort and also a challenge in that the audience knows a lot about the services represented. Not content to simply reiterate what was previously known and said about the company, Drew talked about the genuine frustration he represents as a cloud provider learning about the revelation that the NSA tapped into cloud based services. It would have been easy to lay low but instead made the quip that the “NSA doesn’t send a muffin basket and say welcome”.

Netflix’s Reed Hastings represents learning and the learning from disruption incredibly well and can also be chronicled in his own appearances in the hot seat. Sometimes we forget that Netflix has been a public company for 12 years, to the day of this interview! For many of us it seems like ancient history that we used to get plastic discs in the mail and then return them Monday morning. Netflix is famously known for having disrupted itself and not with grace while on a path to streaming and today’s Orange is the New Black. I found the discussion looking backwards to missed opportunities and disruption absolutely fascinating. Reed talked about how the team would discuss “managing to the point of feeling like your skin crawled” and making decisions that were unbelievably difficult. While given the success right now, perhaps it is less difficult to look backwards at the challenges faced and mistakes made. It was amazing to hear this level of candor. Reed was even candid about something he said just a short time ago about the high price of Netflix stock which he said at the time was too high and represented a euphoria. In contrast to Comcast, Reed was much clearer about the net neutrality issues are playing out—he used a great example of Comcast trying to charge at both ends (both for the consumer and the internet service) by talking about the flow of money through the system. He offered an operational view of “strong net neutrality”. Putting aside the specifics of the issue, the tone of looking forward, candor about the past, expression of a clear point of view, and a view of delivering new products and services along with the inherent risks and challenges comes across as modern and consistent with a new style of leadership.

What comes next?

It might be too easy to read this and conclude big companies are legacy and being disrupted and new companies disrupt, but that would ignore two things.

First, this is a moment in time. While some would say disruption is akin to physics and must happen, there are dominant companies that reinvent themselves. Few even recall that IBM was close to bankruptcy when it reinvented itself from one dominant company to another, albeit in a very different way. And that reinvention progressed through nearly 20 years and returned 7X the broad stock market overall during that time.

Second, companies that disrupt are themselves prone to disruption down the road. We haven’t seen this dynamic play out yet for the companies here (though Netflix might be one). There is also a great deal of learning about how to reinvent and avoid the risk of being locked into a strategy and execution. Google doing the unthinkable of shutting down services or Facebook acquiring very large scale indirect competitors or technology complements are examples of a new generation of leaders acting differently relative to the potential disruption of core businesses.

Nothing is quite inevitable in business, but the potential to fall into familiar patterns is high.

Nothing is quite inevitable in business, but the potential to fall into familiar patterns is high. This past week at #codecon demonstrated the challenges and approaches to the core risk of the technology industry. In technology, the only thing you really do is monetize the work of the past and deliver innovation to the future. How leaders approach this reality is an evolving skill and #codecon allows us all to witness this evolution firsthand.

–Steven (@stevesi)

Written by Steven Sinofsky

June 1, 2014 at 11:30 am

Posted in posts, recode

Tagged with , ,

The Price Is Right: For Early-Stage SaaS Companies, It Needs To Be

TPIRWordmarkNothing is more critical to a software-as-a-service (SaaS) business than pricing strategy. Pricing is the moment of truth for a new product … and doubly so when it is a company’s first product. But far more often than not, I’ve observed new startups leaving “money on the table” when it comes to pricing enterprise products. I’ve seen founders say their product saves hundreds of thousands of dollars — yet their product is priced as if it’s only saving thousands of dollars.

One reason for this is assuming the need to price and program similarly to competitive products. With a potentially disruptive product, however, falling into the trap of pricing like a legacy competitor not only leaves money on the table — but it could fail to surface your differentiation. Said another way, your product is your price and how you price your product reflects value from the buyer perspective as well as what your company believes is valuable. SaaS products also have the advantage that they are priced not just for the service they offer, but for the potential of saving massive capex/opex spent directly by the customer.

From your business perspective, SaaS products have a level of stickiness that would be the envy of the packaged-and on-premise software generation.

Since the uncertainty and social science aspects of pricing can be uncomfortable, especially for technical founders, here is a framework — from the perspective of a product manager — to consider when pricing new SaaS products. The product manager role is critical in SaaS because the ability to fine-tune the monetization of the product is closely tied to its features and implementation. The product needs to be designed with such flexibility in mind when it comes to making features available, prioritizing features, or even just choosing where to spend engineering time.

Just remember that “business isn’t physics”, as Bill Gurley notes in his excellent post on some of the metrics here. Andreessen Horowitz also has a detailed primer on understanding SaaS valuations as great background for pricing discussions. Because pricing is math, there’s a tendency to create the spreadsheet model and assume it will all work. But there’s also a ton of psychology that comes into play: beyond math, pricing involves judgment, vision, and flexibility.

How do you solve an unsolvable problem? Bound it.

In a new business, it’s easy to spend money, but the combination of a new product and the unknown cost of acquiring customers leads to an “unsolvable” problem. One approach is to take lean/iterative methods and apply them to finding the right pricing fit. This post is about a framework to arrive at such early prices, which will change. (This is very different from what happens in an existing company with existing customers, where you really only get one shot at pricing something right).

The business side of SaaS involves a complex array of variables such as customer lifetime value (LTV), customer/subscriber acquisition cost (CAC), average revenue per user (ARPU), cost of goods sold (COGS), and churn; as well as pricing models such as freemium, tiered, and time based. Then, depending on whether you’re targeting consumers or enterprises, there are very different sales models that influence your pricing approach (for example, business products invite complexity, especially when dealing with purchasing managers). Similarly, the product side of SaaS is a complex set of equations related to usage patterns, scenarios, and variable costs of a large number of resources.

The most critical costs are related to customer acquisition and sales/marketing expense — which can appear to erase any potential for profit by traditional accounting measures — so the key to early-stage SaaS businesses is to focus on understanding customer acquisition costs relative to the estimated long term value of a customer. Since we don’t know how much it will cost to acquire a customer yet, we will just have to move forward assuming some budget (along with some allocation for margin in the ultimate price relative to this long term value). This post focuses on the pricing models relative to product and features and assumes a higher level view of customer acquisition costs and long term value.

One way to approach this is to establish upper and lower bounds on pricing:

A lower bound for your pricing

The lower bound represents your costs to serve a customer your product. One common example is the basic costs of spinning up the IaaS/PaaS elements of what you do — creating accounts, allocating minimal resources, other infrastructure, and then subsequent usage.

It might be convenient to think of this lower bound as what you could offer for “free” to some customers. You might make some assumptions about the use of variable resources such as compute, egress, storage, etc. in order to arrive at this lower bound. (Note, since this is a product-centric view these bounds are absent the allocation for fixed and variable costs outside the product/technology, so do not not include opex, S&M, etc.)

It is important to understand this bound across the full breadth of your product. While you might initially view some features as “premium”, you also want to assume that over time capabilities will migrate from advanced to essential and you will fill in new features at the top. I think it is a good exercise to consider the full product as a base case initially.

An upper bound for your pricing

The upper bound represents your costs to serve a “depth” user: in this case, the customer using the parts of your product that drive ongoing costs to scale (for example, this customer is using increasingly more bandwidth, storage, or compute). Now this is where you can look at what you offer relative to your competition, and want to understand if you have scale attributes that are better/worse/same. By knowing this you can begin to separate out variables for your model.

Presumably in developing your product, you created a unique architectural approach relative to existing competitors. Do you scale better for more tenants, use storage more effectively, or maybe your mobile app is more efficient at bandwidth? The importance of knowing your own strengths and weaknesses will inform what variables to use in your pricing.

You can also think of your upper bound as a competitive foil — the stronger you are on some attribute, the more you should use this attribute to differentiate your offering. This might allow you to charge more for capabilities that are just too expensive for your competition.

These are the core attributes for pricing

When you’re pricing a new offering, it is worth understanding where your product is today relative to a core set of potential pricing attributes.

Whether it is Bronze/Silver/Gold, Free/Select/Premium, Trial/Select/Premium, or Individual/Business/Enterprise, the norm for SaaS is to offer a “3xN” matrix of 3 pricing plans and N attributes — as inthese examples. The more mature a SaaS product, the more rows and columns its matrix has. (One SaaS product I researched had five top-level features organized into an array of 27 price points based on combinations of the three to five of the features and number of users.)

A broad range of SaaS products can be considered across the following core service attributes:

Features

If your product lends itself to dividing the features themselves — such as import/export, visualization, view/edit, or connectivity to other products — into good-better-best then differentiating price points here might work. In a freemium model, dividing must-have features among free v. paid users can be a customer-hostile way to differentiate or optimize pricing, so beware.

The reason to hesitate on this dimension is because customers understand that you’re basically just inhibiting access to code that is already there and hence being draconian. Another reason to be cautious with this model is that as usage of the product deepens over time, paid features will tend to get pulled into lower-priced tiers — which means you need to fill in new features/prices with every release or update. As easy as it is to communicate general-use features in pricing tiers, there’s a level of distaste with this approach for many customers.

Administration/IT

One of the most common approaches to differentiating a SaaS product designed for business is to separate out the IT-focused features as a pricing attribute. These could be features for security, audit, identity integration, domain names, sharing, control, management, etc. Businesses understand what it is like to both value and pay for these features.

Commonly this approach is used to rectify a product that has become viral within an enterprise, so be careful about how you approach an enterprise with pricing here. Otherwise you might come across as an arsonist-firefighter who is offering to contain the very situation you knowingly created.

Scale in consumption

Another broadly used SaaS pricing attribute is storage consumption (even for products for which storage is not a primary attribute): It’s easy to measure, easy to articulate, and is relatively expensive. The benefit of using storage is that people “get it” to some degree. It also gets cheaper faster than people can consume it (and in most scenarios customers need to be doing something fairly extreme to consume vast amounts of storage). At the same time, the platform companies have been steadily increasing free storage or ultra-low priced storage as a base, no-frills service so simply using storage as a one-dimensional offering might not work. With a new SaaS product, be sure to consider ways to avoid basing costs on storage given challenges.

One novel approach seen recently is using third-party storage and letting the customer establish a paying relationship such that storage is not part of the pricing of your product, since that way you do not serve as a pure pass-through for a visibly priced third-party element of your product. There are many novel attributes in modern software that can be used as consumption variables; one relatively new one is to use depth consumption of APIs/calls as a price tiering structure. (Box, where I’m an advisor, recently announced pricing for Box APIs as an example.) Developer-oriented products work especially well for consumption pricing because developers understand the product architecture and what can drive costs, even if those costs are variable with usage.

Scale in consumers

SaaS products used by small teams, cross-organizations, or that just scale with more members collaborating/sharing/using are almost always priced by number of unique users (and subsequent integration with organization-based directories). Pricing this variable is straightforward and over time you will see distribution of engagement and resource usage that will further let you refine the discrete price points.

Because most products priced this way also want to encourage more users/usage, carefully consider where you put the first step or two. But large-scale customers like this approach because it allows for predictable pricing on a metric they understand: number of employees/users. In general, you can think of this as per-seat pricing but can also apply to device end-points, servers/CPUs, VMs, etc.

Segmenting your customers

Every product is used by different customer segments — whether measured by size of organization, industry segment, geography, or type of individual within an organization. Common pricing tier labels here include “government”, “non-profit”, “academic”, “healthcare”, “small business”, and so on.

As a product matures, you will almost certainly either label or expand your pricing tiers to account for this. Before you jump into this level of differentiation, however, you want to gain more data on usage — are you seeing customers across some set of segments, and are they using the product differently? More importantly, do you see a path to develop differentiation that allows you to target and sustain these segments (or are you just optimizing revenue along these lines)? Some products are designed only for specific segments like education, which allows you to further refine within them: e.g., public, private, post-secondary, etc.

But one customer segment that is almost always special is the engaged technical user. These folks can push a product through an organization when required, or develop custom solutions on your platform that either deliver or enhance the value of your work.

Developers are key in this regard. For any platform-oriented product, it is worth considering how you offer developers the ability to experiment with and use the full product in a development environment at a very low price. One way to accomplish this is to separate out usage-as-development versus usage-as-production, and price accordingly.

* * *

As a new offering with any established competitors, pricing will be the easiest point of attack. And if you are a disruptive product, you want to have the deepest possible understanding of the value you are bringing to the table so you can maximize the initial pricing model. So the most important suggestion for pricing I have here is to wait until the last possible moment to price and announce.

Even for enterprise products, things like round-numbers, 9′s, and discounts all matter. Do keep in mind that discounting will be substantial in enterprise products with direct sales and 50% or more off “list” price is not uncommon (and often required). That’s not an excuse to bloat the price, but it is important for purchasing managers and for empowering your salesforce that you enable a level of customization — and know what variables you are using to do so.

Some say that you can never change or raise your prices once you’re out of the gate. Always keep in mind that once you have customers, price changes or product composition relative to price are never viewed as positive changes, even if you think for some customers you are lowering the price. And when you do change your prices, always offer existing customers time to adapt and grandfather them in (at least). Finally, remember to engineer a product framework that can support pricing flexibility.

Create the model, use the model, but don’t let the model do your thinking. Price carefully!

–Steven Sinofsky (@stevesi)

This post originally appeared on TechCrunch.

Written by Steven Sinofsky

May 16, 2014 at 11:00 am

Everyone starts with simplicity, no-one ends there and that’s OK

simplicityDesigning a user experience for many millions of people is a unique job that a relatively small number of people practice. The responsibility of such an undertaking is immense, stressful, and one that can be all-consuming. Cold sweats, sick to your stomach, and a constant feeling of messing up are the norm for those that take on these challenges.

But someone has to do it!

This week brought quite a few big design changes that have folks talking including twitter adding mute, gmail testing out a major revamp, and iOS 8 bringing “Surface split-screen to iPad”.

Everyone starts with simplicity, then what?

At introduction almost every successful product champions simplicity as a design and execution goal. Products are declared simple, minimal, and tailored to specific uses. Almost no one argues against these attributes and when marketing goes to position a tech product, invariably these attributes bubble up to the top of the favorable list. That’s because of the inherent and expected complexity of tech products as a starting point.

At introduction almost every successful product champions simplicity as a design and execution goal.

But where to go next? Tech products that are simple can start off well, but three things exist immediately after launch.

  1. A customer need to address feedback and “fix” things that might be simple but are not quite there yet.
  2. A product need to remain competitive with the products that follow your introduction touting the same simplicity but also do a few more things (reading the reviews of your product will always demonstrate examples of wish lists)
  3. A business need to develop new products that can enhance revenue, margins, or maintain price points in the face of commoditization.

Tech products, particularly software products, are unique in that there is an almost natural tendency to organically add or to absorb features from competitive or adjacent products. Unlike physical hardware products that have COGS and BOM challenges, the incremental cost of software is simply limited to R&D (and operational costs for SaaS). That means when faced with the above existential properties, tech products will get new features pretty rapidly.

These new features will do constant battle with the simplicity of the initial release. Some argue that this is just bloat and invariably ruins products. Certainly from a design perspective this is a massive challenge. It takes enormous discipline. On the other hand, there are very few examples of software-based products that remain static. To remain static in features is to open yourself up to commoditization or disruption—a static target is an easy target.

Example: Palm Pilot

The introduction of the Palm Pilot (http://en.wikipedia.org/wiki/PalmPilot) is a fascinating historic example of simplicity leading to isolation and expiration of a product. The designers of the product did an amazing job building an amazing product. All day battery life, simplicity, specific and purpose-built as the first truly modern and truly mobile productivity tool used by the masses.

I remember in 1998 the Palm Pilot was standard issue for all new MBA students when I taught. Shortly after that time, I recall a panel discussion with one of the original designers of the product. At the time the pitch was overarching simplicity and ease of use. Everyone agreed. Then there was an audience question that changed the dynamic.

Most leading edge folks at this time were carrying Motorola flip phones along with the calendar/notes/contacts in their Palm Pilot. The problem was every time they wanted to make a call, it was a multi-step process that involved looking up a number on the Palm Pilot and juggling the two devices while typing into the phone. While this was vastly easier than going back to your desktop or attempting to pull an 8lb laptop out of your bag, it was a usability disaster.

The question was simply—when could I have all the Palm Pilot functionality on my phone? Lots of words about how you could sync (with a cable, not the cloud that didn’t yet exist), but a hardcore answer about how adding a fifth function to the Palm, a phone, would overload the functionality and make the product too complex and unusable. So the phone would never converge with things like your contacts and calendar.

Honest, that was the answer.

The problem was I was sitting there with my pre-production blackberry merrily connecting in real-time to my calendar, contacts, and email on my Exchange server. It was incredibly clear that the need of a non-converged device with a static copy of some of the important mobile tasks was no longer useful.

A pattern for how things evolve in practice

This challenge in software product design happens time and time again. It is the very nature of disruption. The new product does some things brilliantly well and simply, but is “missing” features people value from an existing product or an adjacent product.

Designers face the choice of adding new capabilities and potentially challenging the beauty of the initial release or facing competition and disruption from new competitors without that same strongly held belief. Marketing, channel, business and pricing can defend against these for a while but ultimately the ease and costs of just adding features in software will win.

The tension between user interface design and the realities and capabilities of software leads to a fairly predictable pattern for how tech/software products evolve. We can think of this pattern as evolution in five stages:

  • Introduce
  • Optimize
  • Deliberate
  • Succumb
  • Mature or Renew

Introduce. First you introduce a new product. In your view it is a thing of beauty. Whether you spent 3 years or 3 months, you are convinced it has exactly the right features done exactly the right way, though you know there are ton of things on your “to do” list. Even if you are practicing lean methodologies you are pretty sure you got it right in your heart even though there is a lot of learning to follow. Your design embodies simplicity in design and messaging. Once your product starts to get used and you have the luxury of people relying on your work you begin to see the holes and maybe even misfires in your experience design. Optimize. You have a lot of work to do to reconcile your “to do” list with what actual people using your product. It turns out that what you thought the product was missing is pretty different than what everyone else thought the product was missing. You shrug this off and take the feedback seriously because you have real-world people using your product. Quite often the innovations introduced at this stage are formalizations for how people were using your product. Add-ins, customizations, or just conventions that enhanced usage become the sorts of things you formalize in the product. You very quickly iterate and get to a much more robust, reliable, stable, and usable version of what you had originally envisioned. This becomes the foundation of your product.

Deliberate. Evolving your product at this stage is very fun. While you believe you have a product that embodies your vision, with usage you begin to see broader usage and scenarios as part of your product. There might be third parties that do similar things as you but with a slightly different or much improved take on a specific mechanism you have in your product. Because you have become a leader with your product in “the way” things are done, when you decide to introduce an innovation it comes as a deliberate and thoughtful extension of your experience. Rarely do you see pushback from a broad base of customers when something new is introduced at this stage in your product’s evolution. In fact you often are seen as taking the product to a new level and providing a broader context in which your whole category or class of products should evolve. You are basking in the glow of innovating in the user experience of your space—you have come to define the category and now you’re defining the category to include new elements of user-experience.

Succumb. The feedback your product is receiving is growing, both positive and negative. As your product is used more and more, the usage scenarios and skill-levels of your customers change dramatically. Your product is used in ways you could never imagine and customers are asking for your product to do things you would never have imagined they would ask. If your product becomes essential for some scenario, then people will ask for your product to take on attributes and features of other familiar products (if you share photos, then you’re likely to be asked for photo editing for example; if you communicate, then before long you will be asked for rules and filters; if you type then you will be asked for more and more formatting, spelling, and entry features). If during the previous stage you really believed you had achieved a level of almost Bauhaus minimalism about your product, this is the stage when you feel a relentless pressure to add more. You’re hearing from customers, pundits, press and more about the must-haves and must-dos. This is by far the most stressful time in product development—you can’t just step back and not change things, but you constantly feel like changes are all part of a slippery slope. You constantly find yourself struggling between the minimalist view of the product you have been perfecting and the need from different types of customers for seemingly contradictory types of features. It is why at this stage as a designer you feel like you are succumbing to feedback and introducing features that you know some people will value and others will see the other way or maybe just not even notice—you feel like you’re bloating your simple product. These are the hardest decisions to make and are the price of success. If you try to hang on to simplicity, you will see competitors pass you by or you’ll see engagement stagnate.

Mature or Renew. The natural evolution of most every product involves a fairly long period of incorporating features in the previous stage—you add some new things, incrementally change some existing things, and in general are working to find a path through the maze of contradictory feedback and complex market needs. Over time your product will develop a different personality and unique set of assets, but is going to be far from that original version. While you might have hundreds of millions of customers, at some point the experience of your product is such that the market collectively demands an overhaul. The challenge of course is that the collective market is very different than any one individual or an organization (for enterprise products). The latter two, unlike the aggregate view of the market, do not necessarily embrace change. This point in the evolution of your product is where you face disruption—the telltale signs of reduced engagement, alternative tools and experiences, or just a lack of energy in your ecosystem are signs that your product is overdue for improvements, new features and more. Software affords you the chance to reimagine your product and presents you with the opportunity at this time. Of course with hundreds of millions of customers, a very large number in absolute will not want any change at all. That’s why this stage of evolution is a choice—you can incrementally mature your product design or you can choose to renew your product design. These two are really that very rare of “either-or” choices. As a product designer, you will be faced with a big set of decisions when you have to design what comes next for a mature product. Be careful what you wish for you as your design might be so successful that one day you face the prospect of redesigning it in the context of a significant customer base.

Products reaching a mature stage face a fork in the road.

Products reaching a mature stage face a fork in the road—one where you can renew or watch your product slowly shrink in relevance. This might seem dramatic, but the velocity of change in the technology world combined with the ease of switching shows that one day what might seem like “the way things are done” will risk becoming “the way things used to be” much sooner than expected.

Disruption and technology transitions are part of the context of designing products and experiences.

From search home pages, to photo editors, word processors, operating systems, music players, and more these stages are all part of the evolution of a user experience. The beauty of software interface is that unlike the physical world you are given the chance to move things around, change, and improve the product for little to no manufacturing cost, but at each stage you have to work through the cost of change to customers.

No other product in history has had the ability to be used by so many yet be so flexible in how it is used.

Simplicity in design is what we all strive for and often how we begin a product lifecycle. With success, maintaining simplicity over time while also remaining competitive is where design and product management are really challenged.

The “soft” of software makes this challenge even more acute and the pressures to add or change a product even more difficult to resist.

–Steven Sinofsky (@stevesi)

Written by Steven Sinofsky

May 13, 2014 at 11:00 am

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Tablets v. the World

Every time the topic of tablets versus laptops (and or smartphones) comes up, we end up in another endless debate about scenarios, consumption, productivity, keyboards, mice, screen size, multitasking, and more. In every case the debate centers around the core uses of “PCs” today—and PC is in quotes because the PC itself is a remarkably flexible device that has morphed over the years into many form factors. People study run-rates and trends and try to predict the demise of one over another and so on.

It isn’t so simple.  But it also isn’t so binary.

For more on this dialog, you can also catch a couple of podcasts from Benedict Evans and I (see a16z Podcast: Engineering a Revolution at Work and a16z Podcast: When Your PC Expires).

Disruption

Every disruptive innovation shares (at least) two characteristics.  First, the newly introduced technology is more often than not inferior in some key dimensions, while superior in some dimensions that in the current context seem to matter more.  Second, despite much consternation, the technology being disrupted is almost certainly going to remain a vital part of the landscape in some form or another for quite some time—either simply because of the long tail of legacy or because it serves a function that is not replicated at all.

What changes, however, is where the emphasis takes place around an ecosystem and with a, usually, broader set of customers. The ecosystem is not a static world and it too plays a vital role in the transition. Where the ecosystem is investing is always a leading indicator of where the transition is heading.

We can look at transitions such as entertainment (theater, radio, film, TV, video, streaming) or transportation (horses, boats, trains, cars, planes) or even storage (removable, hard drives, USB, flash) as examples of where these traits are demonstrated. Computer user-interface moving from characters to GUI to touch shows these traits as well.

The introduction of the iPad, and the modern mobile OS (and smartphones) in general, shows many of these characteristics.  The modern OS in combination with new hardware has many characteristics that separate it from the PC era including sealed case (non-extensible hardware), ultra-low power consumption, rich embedded graphics, touch user interface, app store, exclusively wireless connectivity, and more.  This is the new platform which is where so much innovation in apps is taking place.

Here is where the debate starts—some of those features are either not valued or true limitations when compared to the vastly more capable PC model. There’s no doubt about that. It is just a fact. Not only does the PC have a wider range and more “powerful” hardware options, but it also benefits from 20 years of software that drives a vast array of processes, devices, workflows, and more.  Tablet hardware is still immature relative to “PC standards” and apps do not seem to cover so many of the existing PC scenarios (even if they cover scenarios not even dreamed of or possible on PCs).

Hardware and Software

Two things are still rapidly changing that will account for a much broader transition from the dichotomy of tablet OR laptop today to a world where tablets with modern operating systems begin (or have begun) to replace many scenarios occupied by laptops.

We will soon start to see more innovation in tablets.

First, the hardware in tablets will benefit enormously from Moore’s law. While the pace of changes in smartphones (screen size, cpu, gpu, specs) has been faster than we have seen in tablets, my guess is we will soon start to see more innovation in tablets. In terms of both form factor and specs, tablets have been reasonably static since introduction. There are give or take two screen sizes and fairly modest spec bumps. My guess is that since the same vendors make both smartphones and tablets, the vast amount of energy has been focused on smartphones for now (just as when the PC industry shifted innovation from desktops to laptops and then swung back again to focus on all-in-ones).  I suspect we will start to see more screen sizes for tablets and more innovation in peripherals and capabilities, along with specs that benefit from the rapid progress in Moore’s law.

Second, all the hardware innovation in the world isn’t enough to drive new scenarios or even more dramatic replacement scenarios. The amazing innovation in software on smartphones shows what can take place when developers of the world see potential and tap into the power of a new platform.

Two Examples

I wanted to offer two examples of where the transition to tablets has been surprisingly “behind the scenes” and really out of sight, but very interesting from a technical perspective.

Many of us find ourselves in the AT&T store all too often because we’re adding a line, replacing a phone, getting a new SIM or whatever.  Over the past year or so, AT&T has aggressively rolled out iPads to replace the in-store PCs that were used for customer service. This is a massive software challenge. The in-store PCs had point of sale capability, bar code readers (for SIMs), and a large array of apps that drove the entire customer engagement (some of these apps ran Windows OpenStep believe it or not).

He kept telling me how frustrating it was to deal with the lack of capabilities of the new tools.

If you happened to visit the store during the early stages of the transition, you would have been able to sense the frustration with the account managers.  There were many unfamiliar elements to the new apps on the iPads and worse there seemed to be many things that the desktop tools could do that the iPad apps could not.  For example, I got caught trying to merge two accounts and the rep was forced to call the regional call center to do the work and while on hold he kept telling me how frustrating it was to deal with the lack of capabilities of the new tools.  At the same time, the iPad had cool integration with portable bar code readers, the reps could easily show you what is on the screen to verify information (like picking a new phone number) and so on.

The transition is well underway now and I don’t think folks notice any more.

Today I spent a few hours with my friendly Comcast technician while he diagnosed something faulty with our cable signal.  While he has a fancy signal meter, most of the work he does is actually adjusting things via a remote app on an iPad.  Comcast technicians (as I learned, the ones in vans but not “bucket trucks”) were recently issued iPads. Sure enough during the visit he was on the phone to a central office and was saying “I have an iPad now and so without my PC I’m not able to get that measurement”.

The tech said, “I have an iPad now and so without my PC I’m not able to get that measurement”.

I was having flashbacks to the frustrated AT&T reps. Turns out this technician used to have a PC and ran the same software as the tech at the other end of the phone (and in the bucket trucks). They are moving techs to iPads because they do not have to carry chargers; they are more resilient when dropped; and the integrated Verizon connectivity all make for a far more convenient service tool.  Plus things like entering the MAC address become much easier with bar code readers and the ability to use a much more agile form factor, as one example.

The conversation I had with a tech (always the anthropologist) was fun.  He said they have a whole tracking and feedback process that helps them to prioritize what features the software folks need to add to the apps being used in the field. Turns out, I’m guessing, they built some pretty elaborate desktop software that did just about everything since it was used on the ground and in the data center, but they likely had little understanding of just what was used and how often. The creation of new apps will drive a new level of customer service and technician capabilities, even if there are some hiccups along the way.

Broader Implications

These two examples are hard core line of business tools. We’re seeing the same thing in the line of business tools used by folks at all sorts of companies big and small. The new generation of mobile-first SaaS tools make it far easier to create “documents” for sharing and collaboration, access business information, or participate in business services from CRM to accounting to benefits.  The tools these are supplanting were developed over a decade and have tons of features and optimizations but lack the mobility and internet access that is so highly valued in a modern workplace. The transition will have some hiccups but is happening.

Along with these tools, so many of the tools for creation and production that are PC based on being reimagined and recast for modern work. We can see this revolution in Adobe’s work on photography for professionals with tablets, Paper and Penci from fiftythree, and of course the long list of productivity tools we talk about often on this blog. These tools do less, but they also do more. When combined with tablets and smartphones on modern platforms they enable a new view on the work and scenarios.

The characterization of tablets as “neither here nor there” or “in between tablet and a laptop” misses the reality that the modern nature of tablet platforms—both hardware and software—will drive innovation and subsequent transition for many many scenarios from traditional laptop platforms to tablet platforms.  We’re in the middle period where this is happening—just as when people said cars were too expensive for the masses and would not be mainstream or when the GUI interface lacked the hardware horsepower and “keystroke productivity” to replace character based tools.

New hardware and new software will surface new capabilities and scenarios not previously possible (or imagined).

The traditional laptop will power hundreds of millions of endpoints for a very long time. But as the two examples here show, even in the most hardcore worlds where device integration meets custom software, there is a transformation and transition taking place.  New hardware and new software will surface new capabilities and scenarios not previously possible (or imagined). It won’t be smooth and it won’t please everyone immediately, but it is happening–just as both of those same scenarios transitioned from character to GUI.

It really is about the software. That change is happening all around us.

–Steven (@stevesi)

Written by Steven Sinofsky

May 6, 2014 at 3:30 pm

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Designing for BYO, a product manager view

imageMany companies I work with are creating tools to enhance workplace or personal productivity depends on the “bring your own” or BYO movement to get their product bootstrapped or to just get in the door. Once in the door, the product design challenges of BYO begin.

After those first customers they count on broader, viral, usage within a company to drive revenue growth. While they likely built your product with the notion that “customer equals purchaser” once this changes to “business equals purchaser”, you are going to get a whole different level of feedback.

My guess is most every app and service is both excited and terrified to get to the moment when there is a choice between cozying up to IT and risking alienating your newly minted enthusiasts. It is, by all accounts, a choice. Most I talk to feel like they will navigate this by focusing on customers first and hope to overwhelm the negatives often associated with IT.

Walk that fine line to enable your product to be at some state of détente with IT.

Get over it. Not entirely of course, but there’s some subtly at play. At some point you are going to face a fork in the road; navigate enterprise management or face existential challenges. You can choose to be managed without your cooperation or worse blocked and literally unable to access important assets that your product requires. Alternatively, you might also choose to walk that fine line to enable your product to be at some state of détente with IT.

I know that sounds awful and while I am sure there are some exceptions (in both organizations and products), this is by far the most normal path. It doesn’t have to be a sell-out, but when done well you can bet that you’re going to be in great position to advance the state of the art and contribute positively to enterprise infrastructure.

In fact, as I was typing this post there was this thoughtful article on putting customers first in business apps.

The essence of BYO is that one can easily acquire and begin to use a device, product or service without IT involvement of any kind. You might need to know the server name for email or maybe how to export data from a line of business system, but otherwise the device or app can tap into the necessary resources without first going through IT and/or purchasing. Even better, these tools likely make it very easy to share information with coworkers or collaborators at other organizations. All folks need is a free email account as a gateway to sharing.

Of course all this ease of use has at least two main IT downsides.

First and foremost is security of the network overall. Devices on a network, running code of unknown origin, tapping into servers is a big risk. What can be transmitted by those devices and apps concerns IT. Inbound PDF attachments or simple USB sticks seemed harmless enough at first until they became a massive vectors.

Second, the data and servers being accessed contain information that you need to use but do not own. These are corporate assets and managing and tracking those is a fiduciary responsibility for IT and in some cases such as HIPPA or SEC regulations the penalties for messing up are severe. That simple case of putting something like logmein or internet messaging can potentially become a significant liability.

My own personal experience “helps” me to see this pattern. Working on Microsoft Office in the early days, we were very clearly a “bottom up adoption” product. People were going to stores and buying the product with their own money and creating amazing looking documents they would bring into work (often on PCs bought with personal funds at those same stores). Pretty soon groups of people were using corporate expense accounts to acquire “5 packs” of Office. Then over time, Microsoft grew an enterprise sales force that could offer large deals.

That’s the sales side, but on the product side the management and deployment of the product (deployment being decidedly old school now) became unwieldy. As a result, the late 1990’s saw a movement to reduce so called “TCO” or total cost of ownership. TCO mandated a vast number of controls across the entire platform and from that grew a whole generation of features from the registry, to logon scripts, to the, now, dreaded “corporate desktop”. TCO reached an epic volume as it described owning a $1500 PC as a $20,000 per year expense to companies.

While I was dragged kicking and screaming to deliver features that I felt could be used to make the product worse, the reality was at the time this is also what grew the business.  The tradeoffs, debates, and design choices were all very real.

In a startup, these choices are much more existential than they were for us back then. Given the hurdles to overcome to become a widely used tool, there’s a good chance you might want to be more proactive about how your product fits with BYO.

As a product manager facing this decision point, you have this intense belief that IT wants to make your product worse, harder to use, and to basically ruin your good work. The fact that so few built-for-IT products have the design sense, usability, or approachability of apps and services focused on consumers only reinforces this.

While there are dozens of potential traps and pitfalls that can result in a product falling out of favor, it is a good idea to consider a few important design choices you can make now that will enable your consumer and BYO product to be viewed through a positive light. It is important that these design choices be considered product assets rather than object handlers.

Ultimately, if you design a product to be used in business where you can charge more it should be better, not worse, than a product used in the consumer space. It used to be that the business versions of products charged more so they could do less and be harder to use and acquire. The SaaS and App models invert this. Phil Libin, founder of Evernote, says it best when he says “business class means superior and we challenge ourselves to make our product better when you upgrade to the business version”.

Business class means superior and we challenge ourselves to make our product better when you upgrade to the business version. — Phil Libin, Evernote

The following are five product areas to consider when it comes to making a product business ready:

  • Identity and authentication. The first thing a business needs from a product is that employees should sign into the product using the business-owned credentials (such as Active Directory). This allows IT to send a clear message to the individual that they are operating in a business context. This needs to include authentication mechanisms used at the organization and enforce associated password policy and security. At the same time, you owe it to your own ease of use that stand-alone credentials can be used, especially for collaboration. How you manage the bridge and the commingling of credentials depends on the flow of assets through your product.
  • Network usage. IT organizations guard their network across several dimensions. Platform providers make it possible to use VPN (secured with enterprise credentials) or other access methods for WiFi. Your product should use well-known/documented ports and be clear with IT about what travels over the wire and in what volumes. Techniques like polling, using obscure ports, and more will only hinder your product usage.
  • Changes related to re-orgs. In an organization of any size employees quit, vendors are fired, or staffing on a project just changes. If your product is used across a group of people then IT will want to be there to assist in supporting these changes within your product. How can content remaining on devices be recalled or how can a person lose permissions to content are important design choices you can make in building a product that it BYO friendly.
  • Content “ownership”. If your product creates or consumes content then your product owes it to IT to participate in the content management responsibility of the organization. At one extreme, the clipboard exists on IT apps and in every other app so you can dodge this question by saying it isn’t your exclusive responsibility. On the other hand, by having mechanisms for IT to have some telemetry and actions on content then you invite your product to be desired by IT, not just challenged. More than any other area this is where many potential solutions exist and many possible ways to make the product worse or upgrade to business class.
  • Features. Products are more than editors and tools for sharing, so there are going to be unique features in your product. Some of those unique features will intersect in ways that might run counter to a business policy. Sometimes this could be simple such as an ability to generate email notifications which might be frowned upon. Other times it might be complex as a feature runs directly afoul of regulatory compliance. At some level there are going to be features you give IT permission to enable/disable. No area is more challenging of course and thinking hard about the design tradeoffs when a feature might not be there is important. A feature like password protection might be great for consumers but becomes a huge problem for IT when personnel change. Alternatively, you might have a feature that becomes a “must use” and if that’s the case you want to consider how something you might have thought of as optional becomes permanent. For example, you might optionally support a confirmation email when adding new people to a project and IT might require that email be sent to produce a record of access changes.

There are many other avenues to consider. I think it is possible to make a product better when enabled for business even if you start from the very solid business and design foundation of customer first.

The modern mechanisms for administering IT control are vastly superior to the PC era mechanisms. The idea of running arbitrary code, tweaking every aspect of the UI, or installing add-ins that alter base functionality of a product are long gone. These approaches showed how great products can be made unfamiliar, hard to use, and less robust even with the best intentions Worse, the mechanisms developed to enable these approaches proved to be vectors for security problems, performance challenges, and in general sources of unpredictability and unreliability.

Today’s devices support state-based management, app stores, and security contexts that greatly improve the ability to deliver upgraded business features. To many, these tools are not yet enough. The platform vendors are carefully balancing the approaches they introduce with the known downsides by the old approaches.

There’s a disruption in the way devices, apps, and information are managed, but that does not necessarily mean an elimination.

–Steven Sinofsky

Written by Steven Sinofsky

May 1, 2014 at 3:00 pm

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Shipping is a Feature: Some Guiding Principles for People That Build Things

I love questions about advice because they really force one to think carefully about what to say. My former colleague (and fellow Cornellian), Jackie Bavaro now at Asana, who recently co-authored a thoughtful book on the ins and outs of securing a role in product management, asked the following question on Quora:

Untitled

In the back of my head I always have that product manager view of accountability and so rather than “advise” I much prefer to have a dialog in context and make sure accountability stays with the person asking. It is difficult enough to be a manager and avoid the constant pull of “telling people what to do” and certainly on big topics one really has to be careful. At the same time, spouting cliche’s like “what do you think” or “it depends” can frustrate folks. This in itself is a valuable PM lesson.

I’ve been really lucky (literally) to work with many amazing folks and so many routine interactions yield empowering and powerful insights that one can bring forward. I’ve used blogging over many years to share those and many are also republished in our book on strategy and collaboration.

In thinking about the question and some of the recent design-oriented discussions, here are five takeaways that have always guided me. They didn’t originate with me, except in the sense that I discovered their value while making some mistake.

For these five bits of advice, I chose to focus on what I think is the most challenging aspect of being a PM, which is achieving clarity and maintaining a point of view for a product when all forces work against this very thing. What customers value most in a product is that “it just work” or “does what it is supposed to do,” and yet at every step in a product, the dynamics of design work to make this the most difficult to achieve. For those that have not built products, understanding the context and dynamics of decision making while building something is a bit abstract.

Shipping is a feature. Every PM knows this but it is also the hardest thing to get right. As a PM you throw around things like “the enemy of the good is the perfect” or, well, “shipping is a feature” all the time, yet we all have a hard time getting a product out the door. There’s always more to do to get it right. The way this was taught to me was so old it involved software being shipped in a box on floppies, but the visual has stuck with me. When you ship a product in a box on the back of the box are screen shots and marquee features. What does not come on the box are lists of all the features you thought of doing or different executions you considered. It is that simple. Once you release the product you begin a new adventure building then next iteration. It is almost always the case that what you were thinking before you had customers will change in some ways in the version that comes next. So ship. Learn. Gather data. Iterate. Whether you spend three years or three months developing a product this motion is the same.

You get paid to decide. Some people love making decisions on their own. Other people need socialization and iteration to make a choice. Either way can work (or not) as a product manager, but to be great you really do have to decide. Deciding anything important or meaningful at all means some people will disagree. Some might really disagree a huge amount. The bottom line is a decision has to be made. A decision means to not do something, and to achieve clarity in your design. The classic way this used to come up (and still does) is the inevitable “make it an option”. You can’t decide should a new mouse wheel scroll or zoom? Should there be conversation view or inbox view? Should you AutoCorrect or not? Go ahead and add it to Preferences or Options. But really the only correct path is to decide to have the feature or not. Putting in an option to enable it means it doesn’t exist. Putting in an option to disable means you are forever supporting two (then four, then eight) ways of doing something. Over time (or right away) your product has a muddled point of view, and then worse, people come to expect that everything new can also be turned off, changed, or otherwise ignored. While you can always make mistakes and/or change something later, you have to live with combinatorics or a combinatoric mindset forever. This is the really hard stuff about being a PM but the most critical thing, you bring a point of view to a product—if a product were a person you would want that person to have a clear, focused world-view.

Can’t agree to disagree. Anything that requires more than one person to do (and by definition as a PM you are working with Engineering/Dev so that means what you do) will reach a point where you have to do something and not everyone will agree. On a well-run team there are very rarely that many decisions that span many people all of whom have a voice (if you do, then fix that problem first). When you do reach a point where you just don’t agree, first, contemplate the first lesson and realize you have to ship. Second, see the previous lesson and realize you do have to decide. That leaves you deciding something that some people (or one person) won’t like. What you don’t want to do is end that meeting over coffee with the infamous “we have to ship and I think we should do X, so let’s just move on and agree to disagree”. Endings like that are never good. The “told you so moment” is just out there waiting to appear. The potential for passive-aggressive org dynamics is all too real. Ultimately, this is just a yucky place to be. So if you’re on the “winning” side of such a dialog then you have to bring people along every day for a while. You can’t remind people who was right, or that it is your decision and so on. If you’re on the “losing” side you need to support the team. You can’t remind people when little things go wrong (which they will) that you were right. Once a choice is made, the next step is all about the greater good. Nothing is harder for technologists than this because as technologists we believe there is a “right” answer and folks that don’t agree are simply “wrong”. Context is everything and remember you have to ship–as a team.

Splitting the baby is, well, splitting the baby. Even with all those lessons, time and time again I’ve faced situations where there is a stalemate on the team and the suggestion is made for a middle-of-the-road choice. A feature will appear sometimes. Performance won’t be terrible, but it won’t be great. Customers can do 90% of something, but not everything. Yet it would be possible to decide to have the feature, have great performance, or deliver 100%—it is just that the team dynamic is placing a value on finding a middle road. The biblical narrative of splitting the baby often comes into play here, because in practice if you do arrive at such a comprise what you’ve in effect done is reached a state where in fact you have made no one happy in the room and no one happy down the road. Of course, compromise is a critical part of product design for many reasons. The bigger the team, the more varied customers, the increased divergence of customer needs all lead to a stronger need to find middle paths for complex choices. There is magic when you can do this without just muddling the product. But there is risk that if your design language turns into splitting the baby that the output is exactly what you don’t want to achieve.

10% better can be 100% different. The hardest choices a PM can make are not the new choices for a product—a clean slate is challenging, but that is the truly fun part of design for many. It is not easy, but it is fun. The real challenge comes when deciding what to do next time around (in three weeks, three months or more). The first thing you do is remember all those things you could not get done or had to decide sub-optimally. So you think you’ll go back and “polish” off the work. But remember, now you have customers and they are using the product. They might not see what wasn’t done. They might actually like what you ended up doing. Your temptation to tweak things to “finish” them might come across as better in an incremental sense, but will it be that much better for existing customers? Will it be so much better for new customers that it is worth the risk of touching that code again? The big question for you is whether you can really measure how much better something is—is it more efficient, faster, deeper, etc.? There are many cases, particularly in user-experience flow and design, where incremental improvement simply amounts to speed bumps in using a new release and the downside masks the upside. Sometimes when you improve something 10% what you really do is make it 100% different.

Context is everything in decision making as a PM . The skills and experience of the team matter. The realities of where the business is at a given time or the ability to execute on a proposal are all factors that weigh heavily. Hindsight is 20/20 or better in the world of PM, and we all know there are many standing by to offer perspective, advice, or even criticism of the choices a product makes.

If you don’t make those choices in a timely manner then there won’t be much to talk about. Sometimes the most difficult thing to do is keep moving forward. That’s why some of the most valuable advice I’ve received relate to the very challenges of making tough product calls.

 

–Steven Sinofsky @stevesi

This post originally appeared on a16z.com.

Written by Steven Sinofsky

April 17, 2014 at 8:30 am

You’re doing it wrong

The-main-characterSmartphones and tablets, along with apps connected to new cloud-computing platforms, are revolutionizing the workplace. We’re still early in this workplace transformation, and the tools so familiar to us will be around for quite sometime. The leaders, managers, and organizations that are using new tools sooner will quickly see how tools can drive cultural changes — developing products faster, with less bureaucracy and more focus on what’s important to the business.

If you’re trying to change how work is done, changing the tools and processes can be an eye-opening first step.

Check out a podcast on this topic hosted by Andreessen Horowitz’s Benedict Evans. Available on Soundcloud or on a16z.com.

Many of the companies I work with are creating new productivity tools, and every company starting now is using them as a first principle. Companies run their business on new software-as-a-service tools. The basics of email and calendaring infrastructure are built on the tools of the consumerization of IT. Communication and work products between members of the team and partners are using new tools that were developed from the ground up for sharing, collaboration and mobility.

Some of the exciting new tools for productivity that you can use today include: Quip,EvernoteBox and Box NotesDropboxSlackHackpadAsanaPixxa PerspectiveHaiku Deck, and more below. This list is by no means exhaustive, and new tools are showing up all the time. Some tools take familiar paradigms and pivot them for touch and mobile. Others are hybrids of existing tools that take a new view on how things can be more efficient, streamlined, or attuned to modern scenarios. All are easily used via trials for small groups and teams, even within large companies.

Tools drive cultural change

Tools have a critical yet subtle impact on how work gets done. Tools can come to define the work, as much as just making work more efficient. Early in the use of new tools there’s a combination of a huge spike in benefit, along with a temporary dip in productivity. Even with all the improvements, all tools over time can become a drag on productivity as the tools become the end, rather than the means to an end. This is just a natural evolution of systems and processes in organizations, and productivity tools are no exception. It is something to watch for as a team.

The spike comes from the new ways information is acquired, shared, created, analyzed and more. Back when the PC first entered the workplace, it was astounding to see the rapid improvements in basic things like preparing memos, making “slides,” or the ability to share information via email.

There’s a temporary dip in productivity as new individual and organizational muscles are formed and old tools and processes are replaced across the whole team. Everyone individually — and the team has a whole — feels a bit disrupted during this time. Things rapidly return to a “new normal,” and with well-chosen tools and thoughtfully-designed processes, this is an improvement.

As processes mature or age, it is not uncommon for those very gains to become burdensome. When a new lane opens on a highway, traffic moves faster for awhile, until more people discover the faster route, and then it feels like things are back where they started. Today’s most common tools and processes have reached a point where the productivity increases they once brought feel less like improvements and more like extra work that isn’t needed. All too often, the goals have long been lost, and the use of tools is on autopilot, with the reason behind the work simply “because we always did it that way.”

New tools are appearing that offer new ways to work. These new ways are not just different — this is not about fancier reports, doing the old stuff marginally faster, or bigger spreadsheets. Rather, these new tools are designed to solve problems faced by today’s mobile and continuous organization. These tools take advantage of paradigms native to phones and tablets. Data is stored on a cloud. Collaboration takes place in real time. Coordination of work is baked into the tools. Work can be accessed from a broad range of computing devices of all types. These tools all build on the modern SaaS model, so they are easy to get, work outside your firewall and come with the safety and security of cloud-native companies.

The cultural changes enabled by these tools are significant. While it is possible to think about using these tools “the same old way,” you’re likely to be disappointed. If you think a new tool that is about collaboration on short-lived documents will have feature parity with a tool for crafting printed books, then you’re likely to feel like things are missing. If you’re looking to improve your organizational effectiveness at communication, collaboration and information sharing, then you’re also going to want to change some of the assumptions about how your organization works. The fact that the new tools do some things worse and other things differently points to the disruptive innovation that these products have the potential to bring — the “Innovator’s Dilemma” is well known to describe the idea that disruptive products often feel inferior when compared to entrenched products using existing criteria.

Overcoming traps and pitfalls

Based on seeing these tools in action and noticing how organizations can re-form around new ways of working, the following list compiles some of the most common pitfalls addressed by new tools. In other words, if you find yourself doing these things, it’s time to reconsider the tools and processes on your team, and try something new.

Some of these will seem outlandish when viewed through today’s concept. As a person who worked on productivity tools for much of my career, I think back to the time when it was crazy to use a word processor for a college paper; or when I first got a job, and typing was something done by the “secretarial pool.” Even the use of email in the enterprise was first ridiculed, and many managers had assistants who would print out email and then type dictated replies (no, really!). Things change slowly, then all of a sudden there are new norms.

In our Harvard Business School class, “Digital Innovation,” we crafted a notion of “doing it wrong,” and spent a session looking at disruption in the tools of the workplace. In that spirit, “you’re doing it wrong,” if you:

  1. Spend more time summarizing or formatting a document than worrying about the actual content. Time and time again, people over-invest in the production qualities of a work product, only to realize that all that work was wasted, as most people consume it on a phone or look for the summary. This might not be new, but it is fair to say that the feature sets of existing tools and implementation (both right for when they were created, I believe) would definitely emphasize this type of activity.
  2. Aim to “complete” a document, and think your work is done when a document is done. The modern world of business and product development knows that you’re never done with a product, and that is certainly the case for documents that are steps along the way. Modern tools assume that documents continue to exist but fade in activity — the value is in getting the work out there to the cloud, and knowing that the document itself is rarely the end goal.
  3. Figure out something important with a long email thread, where the context can’t be shared and the backstory is lost. If you’re collaborating via email, you’re almost certainly losing important context, and not all the right folks are involved. A modern collaboration tool like Slack keeps everything relevant in the tool, accessible by everyone on the team from everywhere at any time, but with a full history and search.
  4. Delay doing things until someone can get on your calendar, or you’re stuck waiting on someone else’s calendar. The existence of shared calendaring created a world of matching free/busy time, which is great until two people agree to solve an important problem — two weeks from now. Modern communication tools allow for notifications, fast-paced exchange of ideas and an ability to keep things moving. Culturally, if you let a calendar become a bottleneck, you’re creating an opening for a competitor, or an opportunity for a customer or partner to remain unhappy. Don’t let calendaring become a work-prevention tool.
  5. Believe that important choices can be distilled down into a one-hour meeting. If there’s something important to keep moving on, then scheduling a meeting to “bring everyone together” is almost certainly going to result in more delays (in addition to the time to get the meeting going in the first place). The one-hour meeting for a challenging issue almost never results in a resolution, but always pushes out the solution. If you’re sharing information all along, and the right people know all that needs to be known, then the modern resolution is right there in front of you. Speaking as a person who almost always shunned meetings to avoid being a bottleneck, I think it’s worth considering that the age-old technique of having short and daily sync meetings doesn’t really address this challenge. Meetings themselves, one might argue, are increasingly questionable in a world of continuously connected teams.
  6. Bring dead trees and static numbers to the table, rather than live, onscreen data. Live data analysis was invented 20 years ago, but too many still bring snapshots of old data to meetings which then too often digress into analyzing the validity of numbers or debating the slice/view of the data, further delaying action until there’s an update. Modern tools like Tidemark and Apptio provide real-time and mobile access to information. Meetings should use live data, and more importantly, the team should share access to live data so everyone is making choices with all the available information.
  7. Use the first 30 minutes of a meeting recreating and debating the prior context that got you to a meeting in the first place. All too often, when a meeting is scheduled far in advance, things change so much that by the time everyone is in the room, the first half of the hour (after connecting projectors, going through an enterprise log-on, etc.) is spent with everyone reminding each other and attempting to agree on the context and purpose of the gathering. Why not write out a list of issues in a collaborative document like Quip, and have folks share thoughts and data in real time to first understand the issue?
  8. Track what work needs to happen for a project using analog tools. Far too many projects are still tracked via paper and pen which aren’t shared, or on whiteboards with too little information, or in a spreadsheet mailed around over and over again. Asana is a simple example of an easy-to-use and modern tool that decreases (to zero) email flow, allows for everyone to contribute and align on what needs to be done, and to have a global view of what is left to do.
  9. Need to think which computer or device your work is “on.” Cloud storage from Box,DropboxOneDrive and others makes it easy (and essential) to keep your documents in the cloud. You can edit, share, comment and track your documents from any device at any time. There’s no excuse for having a document stuck on a single computer, and certainly no excuse risking the use of USB storage for important work.
  10. Use different tools to collaborate with partners than you use with fellow employees. Today’s teams are made up of vendors, contractors, partners and customers all working together. Cloud-based tools solve the problem of access and security in modern ways that treat everyone as equals in the collaboration process. There’s a huge opportunity to increase the effectiveness of work across the team by using one set of tools across organizational boundaries.

Many of these might seem far-fetched, and even heretical to some. From laptops to color printing to projectors in conference rooms to wireless networking to the Internet itself, each of those tools were introduced to skeptics who said the tools currently in use were “good enough,” and the new tools were slower, less efficient, more expensive, or just superfluous.

The teams that adopt new tools and adapt their way of working will be the most competitive and productive teams in an organization. Not every tool will work, and some will even fail. The best news is that today’s approach to consumerization makes trial easier and cheaper than at any other time.

If you’re caught in a rut, doing things the old way, the tools are out there to work in new ways and start to change the culture of your team.

–Steven Sinofsky @stevesi

This article originally appeared on <re/code>.

Written by Steven Sinofsky

April 10, 2014 at 6:00 pm

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