Growth is a make or break measurement for products and companies. Investment is often determined by expected value, which is based (in part) on expectations of growth. When you create a product, there are aspects of growth – how many people can use your product, and how many people do use your product. When dealing with a freemium business model, there are two elements of use – paid use and free use.
Three Goals of Growth
You can think about growth in terms of three goals – increasing your servable market, increasing your market share, and increasing your paid market share.
- Servable Market – The number of customers that could potentially use your product.
- Market Share – The percentage of the market (or of the servable market) that does use your product.
- Paid Market Share – The percentage of the market (or the servable market, or your users) that use and pay for your product.
As a product manager, when you consider capabilities to add to your product, you need to understand which goal your capability is designed to address. These are all inter-dependent metrics, so it can be challenging to stay focused on each. For example, if you have a 1% conversion rate from free customers to paying customers with your freemium business model, you may assume that by increasing the number of free users, you will automatically increase the number of paying customers. That might be true, it might not. Ultimately, you want to increase the number of paying customers – so that is part of all of these decisions. When making each decision about prioritizing the next capability to add to your product, make sure you understand the primary growth goal you are affecting.
To keep the language from being too contorted, in the rest of the article, I’ll talk about users and customers as people, and not try and differentiate companies and people. Users are people (or companies) that use your product or service. Customers are people (or companies) that pay to use your product or service. Your product could be a physical product, a software product (or license), software provided as a service, or a service. I’ll refer to it as a product.
Growing Your Servable Market
The pedantic definition of your servable market is all users who could use your product. A better way to think about your servable market is all people who experience the problems you’re trying to solve, who have reasonable access to your product. People who don’t have those problems are not part of your market. People who have those problems, but can’t reasonably use your product are part of your un-servable market.
Imagine you build a product that only runs on Windows Vista. Windows XP users are not part of your servable market – they could upgrade to Vista and use your product, but they haven’t yet. There’s a barrier to entry that they have to overcome. Perhaps you have a pizza shop that delivers within a 10 mile radius and allows customers to place an order for pick-up and drive to your store and pick up the pizza. If your shop is in Mountain View, technically people could drive from downtown San Francisco to pick up a pizza – but there’s a barrier to entry (the time and expense of driving to Mountain View) that makes those downtown San Francisco people part of your un-servable market.
The size of your servable market reflects the potential number of users you could serve. Your focus on growing your business can include changes designed to increase the size of your servable market. You can write (non-functional) requirements that express this goal. One type of non-functional requirement is platform support – supporting different operating systmes; supporting netbooks (with less-powerful processors) as well as laptop computers; supporting devices with slower network connections; and supporting visually impaired users through your user interface. Sometimes, the requirement to support a particular platform is represented as a constraint (e.g. you must provide support for linux users).
Many products are developed today as software as a service (SaaS) applications – and they are usually implemented as websites, where people can use the product through a web browser user interface. The approach of ubiquity of web browsers and “always connected” devices leads to platform selection for web-based products being a less-constraining factor in definition of your servable market. You may still be constraining yourself based on the specific browsers (Internet Explorer, Safari, Opera, Chrome, Firefox, etc) that you support. You can gain a lot of insight through an analysis of your traffic, or you can rely on general trends.
Your business model may only support customers in the United States of America (like the soon to be launched Google Voice). Your user interface may be text only (and not support screen readers or other devices). You may be building a Facebook application. You may be selling headphones with controls for the new Apple iPod Shuffle (that has no integrated controls).
What’s important is that you identify the things you need to do (added capabilities, platform support, country availability) to increase the size of your servable market – and associate them with the theme (or context) of increasing the size of your servable market.
Growing Your Market Share
Your market share is the percentage of those people you could be serving who are your users. You can also think of this as the size of your user base, but thinking of it as a proportion of possible users provides more insight (because it provides visibility into how many people aren’t in your user base too). As part of developing a business model (or financial justification for investment in a new product), you will have developed a model with some assumptions about market share. Venture Capitalists used to joke about pitches that projected capturing “1% of a trillion dollar market, and therefore a $10 billion business” without providing justification.
You have to develop a plan for how and why you will achieve a particular market share. One approach is to develop a viral marketing message, for products that “sell themseleves.” Another approach is to develop a product that is inherently viral. You can, of course, apply multiple tactics.
The point here is to identify those product capabilities or features that will encourage users who can use your product to use your product. Adding support for a platform does not encourage users to use your product – it just makes it possible. Adding a solution to a valuable problem encourages people to start using your product. Your product may be one that is designed to inspire love, or one that is designed to reduce annoyances. An effective (and right-minded, in my opinion) approach is to identify personas within your servable market, and focus on their problems. As a product manager, you choose which of those problems to address – and your team invents a solution approach. You then validate that this approach is an effective one for the particular problems of the target persona.
You may also want to define market segments to subdivide your servable market, so that you can develop unique strategies for presenting your solutions to potential users. For example, you may find yourself with a surplus of cheap black pearls. You can create two market segments – people who buy cheap jewelry and people who buy very expensive jewelry. For the first group, you may position your product as cost-effective elegance. For the big-spenders, you may position your product as something rare, unique, and not like those “everyday” pearls their friends all wear. [I am pretty sure this is a reference to an anecdote from Predictably Irrational, but I’m not sure.]
What’s important is that you identify the things you choose to do (develop solutions to specific problems) in order to increase your market share – getting viable potential users to become active, actual users – and associate them with the theme (or context) of increasing your market share.
Growing Your Paid Market Share
People normally talk about this as conversion – conversion of free users into paying customers. We’ll do the same. I wanted consistent section headings. so I came up with “Paid Market Share” as a title.
Conversion is a key element to a freemium business model – one that offers two or more versions of a product. One version is free to use and the other is a premium version that users pay to use (thus becoming customers). Your conversion rate is the percentage of your users who are paying customers. As we mentioned in the previous section on growing market share, you will have developed a business model for how much market share you would get and when and why. If your business model is (or involves) a freemium product offering, your plan will also include projections around the number of paying customers you will have over time.
This is where focus becomes valuable. As you identify problems to be solved (as part of developing a market-share growth strategy), you need to also decide which problems should only be solved (or should be solved better) for premium customers. For example, the free version of MediaMonky (audio software) solves the problem of being able to listen to your audio files on your computer. The catch is that when you add new music, you have to click a button that updates your “library” (so that MediaMonkey will play the new music). The premium ($20US) version will automatically detect those new files.
You may also decide that a product is free for some users (companies with fewer than 10 users), and charge a fee to larger companies (10 or more users). I don’t consider this to be a freemium model In a freemium model, any user can choose either version of the product. A related model is one where one set of users pay while another set doesn’t. The distinction is probably best made by thinking about market segments. If all (potential) users in one market segment only consider the premium version, and all (potential) users in another market segment would get no additional benefit from the premium version, then you would approach your growth strategy differently. You wouldn’t be focused on converting customers, you would be focused on attracting paying customers – which is the same approach you use for growing market share. In this case, you’re trying to grow the “pay for our product” market segment.
When you do have a freemium model – one where any given user can choose to pay or not – your focus is on identifying problems to solve for premium customers. Not only do you have the normal “is there value in solving this problem?” question, you also have a positioning question. Will you alienate the users of your free product (or inhibit market share growth) by offering a capability only to paying customers? Another interesting strategy is to introduce new capabilities to premium customers first, and then have them “trickle down” to the free version as new capabilities are introduced for premium customers.
This strategy seems to be a powerful way to leverage market insights to continuously make your product more valuable than your competition’s products. This could be a great way to “set the pace” for your market – forcing your competition to be reactive. Slower competitors will lose not only to your premium product, but to your free version, which will out-value their paid products. You get to define the rate at which your market changes.
What’s important is that you identify the things you choose to do (develop solutions to specific problems, and position them appropriately) in order to increase your rate of conversion – getting current free-product users to become premium-product (paying) customers.
One Way to Bring it all Together
I’ve done work with a client who has a distributed leadership team, so whenever I wanted to write on a whiteboard or stick stuff to the walls, I had to do it electronically. We created a “strategy” Google-spreadsheet. We have three columns one each for – grow the servable market, grow our market share, and grow our paid market share. We added items into the appropriate columns, and developed relative priorities within each column. The client strategy at any point in time, clearly drove the balance of emphasis for a given release across those columns. Some releases, for example, were entirely around growing the servable market.
Conclusion
It isn’t enough to just consider the value of a particular capability, you have to put it in the context of an overall growth strategy. Even if you’re solving problems from all three columns (servable market, market share, and paid market share growth), your top down strategy should drive how much effort you dedicate into each column, for any given release.
Eliminating barriers to market addressibility will enlarge your market. Customers won’t ask for this.
If you built your product on top of MS Access, you can address that market easily enough, but that installation requirement becomes a barrier. Eventually, you will need to sublimate MS Access. Your Access customers won’t ask for this. They may still appreciate it, because your refactored application should make MS Access or any other database easier to deal with for its users.
Global markets also present addressibility opportunities. Globalization, internationalization, and localization need to be addressed by your value chain. Localization in particular can be left to the distributor in the local market.
Good points, David. That’s why it is important to understand the needs not just of your customers, but of your prospects – to understand the potential value of sublimating MS Access in your example – how much impact does that have on your addressable and target markets?
When you say “addressed by your value chain” – what do you mean?
On your value chain, at the very beginning of your defining your differentiation and your capability focus, you don’t do everything. You rely on whole product partners. You use an operating system and the development environment, APIs, and frameworks provided by your operating system vendor.
As your product evolves, you foster complementors in terms of technology extensions, product extensions, content provision. By foster, you might sponsor a marketing component and pay for. This to encourage third-parties. Similarly technical evangelism. Beyond that you reach an ever increasing range of technology providers, such as say MS SQL, Oracle, …. You don’t do everything. All of these people constitute your value chain.
Once you become a SaaS operation, you can use n-tiering to work with other SaaS vendors to provide ALL the functionality your customers might need. Online banks typically use Check-Free to provide a customer-driven check ordering capability. You don’t write that stuff yourself. You leverage others.
In a value chain, you want to occupy the top slot and make the most money off of the transactions, but you definately split the experience across the vendors in your value chain. If they don’t succeed, neither do you.
A more realistic approach is to occupy the position that is focused on the capabilities of your company. This even if you don’t take the most money. The point here is that it costs you less in terms of investment in your business.
Addressability as mentioned in my prior point is to code using a vendor that provides a co-marketing program, so it costs you less to reach an established market. So if you use MS Access, you would use Microsoft’s 3rd party developer marketing program to reach the MS Access install base.
You might, later, support Oracle and use a similar program provided by Oracle. Market leading vendors usually have co-marketing programs.
@David – thanks for the clarifications! One point you make – focus on your company’s distinctive competence – is definitely key to being successful (better offering, more profitability, etc). On co-marketing programs, I think it depends on your industry. That definitely makes sense when your product is a “best of breed” component in a ‘value chain’, but isn’t a requirement when you are solving a specific problem without defining a value chain. A taxi company, for example, provides a pretty discrete product to solve a distinct problem. There aren’t obvious benefits of developing a co-branding program there (at least, not obvious to me at first glance).
A taxi company is pretty red ocean, commodity, so what would I do? I’d build a website where riders could schedule their ride, and track their cab until it arrives. That would reduce my inbound call handling and provide better service. It would also result in an API that I could let everyone use free for non-commercial use, so layers upon layers of logistical, GPS-based iPhone-based apps would happen.
As for co-branding, cabs are advertising platforms, recommendation engines when the drivers take “DriveOla” from clubs for deliving patrons, and they participate in a vast value chain relative to various experiential products. Can a cab interface better with airlines? Can a cab enhance a travel experience with its hotel, lodging, and entertainment partners? Sure. All of it co-branding.
There is always a value-chain. There are always co-branding opportunities.
And, if you are not fostering an ecology, a value-cahin, user generated content, viral product, viral messaging, …. Oh, well.
“It’s a rainy night in the city that sleeps, and here I am groggy from my nap in the cab from the airport and that painful red eye. Fred, you gotta card? Is your website on it?….Good. “MyCabbie.com,” I’ll leave you a recommendation. Keep the change.”
@David: You should tell the NYC taxi and limousine commission about your ideas http://www.nyc.gov/html/tlc/html/home/home.shtml they just put out an RFI for suggestions: http://www.nyc.gov/html/tlc/downloads/pdf/public_notice_rfi_tpep_2.pdf
Great article that puts a great visual to different types of innovation: http://metacool.typepad.com/metacool/2009/04/7-develop-a-taste-for-the-many-flavors-of-innovation.html