What comes first: Product or revenue?
It is the startup equivalent of the chicken/egg question
This whole thought is coming from the question — What do you focus on first? Product? Or, Sales? If you are starting from a product, what if you built a product that just doesn’t sell? And if you start with sales, what the hell are you going to sell if you don’t have a product?
A close friend of mine was working on an amazing (and quite robust) recommendation engine for entertainment. I loved what the idea behind the product was. What I hated were the countless months they were taking to ‘get ready with the product’. And yes, I do mean months. I can’t remember exactly how long did it take before they were ready with their first public release, but I remember it took more than 24 months. That was insane, in my opinion.
If you are taking that long to practically just start, you just took 24 months to start taking in user feedback and reaction to whether or not this is a product your users will love or not. Add to it the months it will take for your product to start gaining traction and more often than not, it is a recipe for disaster.
THIS IS NOT REALLY A NEW STORY
This is something we all see with entrepreneurs all around us. They start with the thought of investing months and thousands of dollars into building a product, and then a couple of months turn into a couple of quarters, and by the time they are ready with the product, they have already started running out of steam. I recently met a couple of startup founders who had just started operations after having built a product, had started seeing traction as well, but now they were running on fumes. They had started the process of raising some external capital, and when I asked them about the runway they had, I was surprised on hearing “one month”. One frigging month!! They had spent so much time in getting the product ready that once it was, and they went operational, they had no fuel left in the tank. One month is way too low a timeframe to close on a fundraising round, and that is when you have some decent traction. When you have just started witnessing traction, one month is next to impossible.
WHY DOES THIS HAPPEN?
The same old story. You don’t want to roll out a product that isn’t ‘ready’ yet.
Btw, just to remove any confusion, let me clarify that I am talking about a tech product here.
As entrepreneurs, we are often living in the fear of rubbing our potential consumers the wrong way. The general consensus is, once your customer feels irked by your website/app/product, he/she is gone for good. Well, yes and no.
No, because it is not entirely accurate to think that you lose your customer for good once he has had a bad experience with your product interface. (Please note that I am using the term ‘product interface’ and not just product. Your business, your product is much more than what the website or the app is.) Even if your consumer was underwhelmed by how your website looks like, you always have the opportunity to bring them back to you.
And yes because of obvious reasons. If you can avoid leaving a bad impression in front of your consumers, why would you not do that?
There are a few things you need to remember here that will help you and let us start with the difference between a product and a product interface.
First, your website/app is just a tool. It is a tool you use that enables you to cater to a much larger base of customers in the same amount of time. It is something that enables your growth, it helps you scale up. Your product is ‘the value you are bringing to your consumer’. Your tech, it’s just a part of the delivery medium. So, as long as you don’t screw up their experience on the value they are being promised, having a less than ideal delivery medium won’t be a deal-breaker for your consumers.
Second, you don’t need to do everything from the get-go. If there are five different aspects of the value you are driving to your consumers, it is perfectly okay to start with just one of them. This way, your product is able to hit the ground faster.
Third, when you are just starting up, you are not looking at catering hundreds of thousands of customers. You are focused on the first ten or hundred paying customers. It is okay to deploy non-scalable ways for this part of the journey. In this manner, you can start operating your business and not sit idly waiting for the product to be ‘ready’.
WHY? WHY SHOULD WE OPERATE IN THIS FASHION?
Product-market fit. That’s why.
Now, since I have seen people have differing views on how they can achieve product-market fit, let me throw in one more term in the mix — revenue. Product-market fit with no or little consideration given to revenue or sales is a disaster waiting to happen.
Ask any entrepreneur who has gone through the grind and he will tell you of the tightly knit relationship that exists between a good product and its go-to-market strategy. And your go-to-market strategy is where the whole consideration for revenue or sales comes from.
The second you introduce revenue into your product-market fit equation, that is where the whole notion of chicken and egg gets into the picture.
Your go-to-market strategy should always be dictated by what your product is, and your product roadmap would always be defined by what your go-to-market results are looking like. It is a two-way feedback. One constant feedback loop.
Your product and services need to be designed in a way that helps you sell it better. This includes the price-points at which you would be selling the product, what the product management cycle will look like, and how the product will be packaged. It includes all of it.
Take your early product design for example. You would need to think of the features, design, pricing in a way that enables you to make the first ten sales. It is quite easy to get obsessed with the technology at this stage, especially if you are an engineer, but you need to always remember the one and only true law. Without user adoption, none of it would matter. No user adoption means no market, ergo no business. So, your product-market fit needs to be driven and dictated by user adoption. And you can’t achieve that balance if you are cooped up in front of a screen building the product that you think your users need. You need to have an interface that is continuously engaging and interacting with your users. Now, whether that interface is a website, an app, a chat window or an actual human making a sale, it really doesn’t matter much.
WHAT ABOUT THE INDUSTRY SEGMENT? SHOULD THAT NOT DICTATE THE PRODUCT MARKET FIT?
Well. Yes and No.
Of course, you want to build a product for the industry your users are in from. But if you start addressing the problem with that particular approach, it could very well mean restricting your addressable market size immensely.
So. What do you do?
You start broad and then start narrowing it down from there. You start narrowing it down based on the feedback you are getting from your target audience. You start narrowing it down based on the revenue/sales generation potential indicators you are getting from the aforementioned feedback loop. And that is how you design your first product.
You always need to have the go-to-market in your product thinking. After all, it is all now closely knit together. Sales, marketing, product — all of it.
WE ARE A PRODUCT COMPANY, NOT A SERVICES COMPANY
I used to think that way too. I was wrong. So would you be, if you think that way.
“Product over services” is an obvious choice to make. If you look at the unit economics, you would see for yourself that services company suffer from the fatal flaw of ridiculously low margins. A product company, on the other hand, enjoys margins by the bucketloads. But, and here is the catch — never start with that mindset. Let your go-to-market dictate what your business needs it to be.
Consider this. If being a standalone B2B product company (zero services) gives you $20,000 in revenue from each enterprise, but a hybrid model (primarily product, backed by some services) gives you $200,000 in revenue — what would you choose to be? It narrows down to the question of blended margin from the overall ticket sales. Everything boils down to user adoption. You don’t want to become a company where even if you have managed to sell a product to a business, it is not being used by the customer. Why? Because without them using it, the probability of you getting repeat business from them goes down the toilet. But if you are providing a service that helps them see the value of the product and drives adoption and usage, then you not only end up closing a sale, you ensured that the probability of them renewing business with you would be much higher. And even if cost of providing this service eats up into the margins you would make on your first cheque, it will all get compensated in the higher margins you would witness in subsequent transactions.
Blended margins for the win!
So, as you see. It is all blended together. You can’t decide on a product and then go all-in on building that product only to start the sales process at a later date. Don’t prioritize product features over sales.
Your product features and overall product architecture will be quite influenced by your sales, and rightly so. Do them in tandem. Much like salsa.
Oh, and a bonus point? It will also help you price your product/services better. How? We will talk about it some other time. :-)