Software companies often struggle with product strategy and product engineering, because of the temptations of “build it and they will come” syndrome. Software developers tend to get excited about technology and they just start building a product, without thinking too much about what market is the right fit for that product, or how that product will make money.
Sometimes companies get lucky and stumble upon a successful business model that delivers revenue. But luck is not a plan, and hope is not a strategy! Software companies need to get more rigorous and realistic in understanding the market. Success means figuring out not just the technology of their software products, but the business case and revenue goals for their products.
Let’s look at how software companies can get more focused on software product strategy – so they can not only write great code but also create successful businesses that launch profitable software products that deliver ROI.
Big Tech: Too Many Bad Role Models
Perhaps it shouldn’t be a surprise to see so many software companies flying blind, without a product strategy or a plan to achieve profitability. After all, that’s what so many of the biggest names in tech have been doing for years. When you look back at the last 10-15 years of the tech industry, so many of the most famous brands in tech built their businesses without a plan or product strategy.
If you look at the early years of Facebook, Twitter (now “X”), YouTube, or Google – so many of these companies didn’t start with a clear business model. They just started inventing things and building things and writing software, and they (luckily) were able to find enough users to achieve scale and make money. Amazon was not profitable for years, but its investors were patient enough to let them build their logistics infrastructure, achieve scale, and establish market leadership.
More recently, with the rise of AI and ChatGPT, we’re seeing another example of “build it and they will come” thinking. ChatGPT really does not have a product strategy. How is OpenAI going to make money off of ChatGPT, other than paid subscriptions? They’ve created a cool new technology that’s fun for people to play with, but what’s the business case for it, and where are the profitable products to be created? They’re still trying to figure that out.
Here’s the takeaway for smaller software companies: Big Tech is not a role model. What worked for Facebook or Google or Amazon is not likely to work for you. Your investors need to see ROI within a shorter timeframe. Your software products need to solve problems for customers in a way that generates revenue. If you don’t have a product strategy, you don’t know your market, and you don’t know where your revenue is coming from. If that’s the case, when you go to market you’re going to be misaligned on what customers are willing to pay.
Software companies need to get back to basics. Your software product needs a strategy, and that begins with product-market fit.
Before You Write Code, Know Your Market
I would estimate 60% of software companies have not really studied their market. They just start writing code and building a product, assuming that they can figure out pricing and an approach to GTM later. A lot of software gets built this way – but it’s risky and wasteful. Instead, your team needs to strategically study and identify the market niche for your software product before you build it.
Instead of “if you build it, they will come,” ask yourself, “who is buying this if we build it? Can we identify 5, 10, or 100 companies that would pay for this?”
Sometimes the success of a software product has very little to do with the quality of the technology. Software developers often struggle to accept this. They get excited about writing code, they love adding bells and whistles to products. But what if you have the most elegant, well-written software in a product that isn’t meeting a market need? You’re not going to sell much of that software.
For example: let’s say your team has built software to help fitness centers manage their business operations. You love going to the gym, you’re passionate about fitness, and you created something amazing to help gym owners. Let’s say you’ve priced this Gym Manager Platform at $10,000 per month.
Think about the financials of a typical gym. Let’s say the gym has 500 members who pay $100 a month. That’s $50,000 of gross revenue per month before they pay all their costs, like rent, utilities, equipment, employee salaries, maintenance, and more. Is any gym going to pay 20% of its revenue to buy your software? Even if it’s the most mind-blowing gym software they’ve ever seen, they’re not going to buy it. It’s too expensive. It’s not aligned with what the market needs.
Another example: let’s say you have developed software to help people visualize their interior spaces for DIY projects and interior design. This software has great features to show how different furniture will look, different rugs, and different colors on the walls. This is the best possible design software, with better technology than anything else on the market, and it only costs $20 a month for a 1-year subscription.
But here’s the problem: what if your typical customer is not a professional house-flipper or architect or designer, but just an amateur DIY person who needs to do an occasional home improvement project? What if they only need help with one design project every 2 years? What if Home Depot or Lowe’s come out with a similar but inferior software product on their website or at a kiosk in their stores, where people can get much of the same value that your software offers, but without a subscription?
Once again: even if your software is best in class and solves a real problem, your value proposition may not be aligned to the market. Most customers won’t want to make a 1-year commitment for a one-off project. Your software might be gorgeously coded, but still fail to make money.
Successful Enterprise Software Product Strategy: Delivering Continuous Value
What does it take to develop a successful enterprise software product? One great example is QuickBooks accounting software. QuickBooks (and other types of accounting software) are so successful because they provide fair value for the money, and they can meet the needs of multiple tiers of customers.
A small business owner might buy QuickBooks software because they need to record transactions but they can’t afford to hire a bookkeeper. If QuickBooks was only good at recording transactions, they would probably lose customers; some business owners would start to question whether they were getting enough value. “This software only records my data; maybe I’d rather hire a bookkeeper.”
But that’s not all QuickBooks does. It also offers insights into the business, shows revenue, costs, how your business is performing, and how to better manage your business finances. Customers feel good about paying for a QuickBooks subscription because they get continuous value.
How can your software product be like QuickBooks and keep delivering value to your customers, year after year, quarter after quarter? That’s how you can keep your customers engaged and keep strengthening your customer relationships. Your product strategy should keep developing value-adding new features and new versions, for larger Customer Lifetime Value and long-term revenue growth.
Software Product Strategy: Becoming an Ecosystem
One product strategy that Big Tech companies have gotten good at – and that smaller software companies can emulate – is the concept of becoming a larger ecosystem for customers:
- Amazon wants to sell you everything imaginable and deliver it to your door in hours, and they want you to watch live football on Amazon Prime Video.
- Apple wants its customers to own a MacBook, an iPhone, and an Apple Watch and subscribe to Apple TV+.
- Disney wants to be your one-stop shop for premium family entertainment – and get you to subscribe to Hulu, Disney+, and ESPN, all in a bundle. And don’t forget to visit a theme park!
- Microsoft Office is no longer available as a one-off product that you buy in a box on a shelf at Best Buy. It’s only available as a subscription. And Microsoft wants to sell you an entire bundle of software – Office 365, Microsoft Teams, Microsoft OneDrive, everything you need for productivity and cloud storage, all in one ecosystem.
Even if your business never gets as big as these tech giants, you can emulate this product strategy of turning your customer relationships into larger bundles and ecosystems. Ask your company’s sales and marketing team:
- What is our strategy to increase revenue from new customer acquisition vs. upselling to existing customers?
- How can we get a relationship established with the customer, and then expand over time by selling new features, new versions, or modernized products?
- How can we increase revenue by winning a bigger share of that customer’s software spend?
Bundling software products and creating an ecosystem is another aspect of software product strategy that you need to be proactive and focused on. You can’t just assume it will “happen.” Understand your market, get your pricing aligned with what the market will pay, and set specific, achievable “SMART” goals. That’s how you can build a clear, consistent software product roadmap, to sell more software products that deliver continuous value and deepen your customer relationships.
Three Types of Software Product Strategy Goals
Before your developers start writing code, before your software R&D team gets enamored with learning a new language or adding new features to a legacy product, it’s important to sit down with your team and talk about software product strategy goals. Here is a simple framework for how to create your software product strategy around three types of goals:
- Business-driven goals: These are high-level goals related to business growth, revenue, valuation, or process improvements. An example could be, “We want to sell the company for $40 million in 5 years.”
- Market-driven goals: These goals are related to market awareness, building strategic partnerships, expanding to new markets, earning market share, or outperforming competitors. An example could be, “We want to achieve $8 million in revenue by the end of next year,” or “We want our mobile app to have at least 4.5-star reviews.”
- Customer-driven goals: These goals can be related to customer satisfaction, customer experience, product usage, and overall value delivered. An example could be “We want to have 300,000 devices installed and earning revenue” or “We want to have 100,000 paying subscribers for our platform’s premium plan.”
A good software product strategy needs to combine all three of these goals. You need to solve problems and create value at the business level, the market level, and the customer level. If you fail to include any of these three types of goals, you’re likely going to misunderstand how your value proposition fits with the market, and your pricing will be misaligned.
Understand your market. Get laser-focused on what your customers need, what they are willing to pay for, and how your software company can create well-engineered software products that continuously deliver value for them. That’s how you can create a winning software product strategy that keeps you relevant in the market – and drives revenue and growth for years to come.
Ready to get more focused on your software product strategy?