Jim Price is the CEO of Empower, a creative media agency: “I learned”, said Jim, “that every business needs both fortifiers, who focus on growing the existing business and explorers, who focus on creating new revenue streams.”
Empower’s evolution from a media buying agency to an organization with a portfolio of services and highly scalable products is inspiring; it is also emblematic of the key steps services organizations need to take in order to create scalable products.
To be successful, our primary focus needs to be: “Do we know how to choose the right innovation investments, test them in real time and scale them for maximum impact?”
What does it mean for a services organization to productize? Let’s start by clearly defining a product. Product refers to a scalable, often tech-enabled, tool or program that can be packaged and sold. Just like a tube of toothpaste that we might buy at a store, a product has a name, a predefined set of features and benefits and a set price.
Here is a simple Innovation Ladder framework that I developed to map out the various product options: As we move from Customized Services in the lower left to Products as a Service in the upper right, the use of technology tends to increase (the X-axis) as do the benefits (the Y-axis). Benefits include: improved gross margins, better revenue visibility and increased company valuation.
- Many organizations provide Customized Services in the form of human-resource intensive, knowledge-led services. This business model is often lucrative, but it’s not scalable because it requires additional people to serve additional clients. It’s also very “hands-on” and key-person dependent.
- The next rung, Productized Services, still requires additional people, but it should require fewer resources than Customized Services to both sell and to deliver. Productized services are standardized so that all customers receive the same experience at the same price. The service is broken down into its core components or process steps, which are sold as a defined package.
- The next move up the innovation ladder is to Products. Here, features are standardized and packaged for an ‘off-the-shelf’ buying experience.
- At the top of the innovation ladder is Products as a Service. The customer relationship is ongoing, though the services are still well-defined and standardized.
Intellectual property forms the basis for the product, technology helps it scale and services help the customer unlock the value. The ratio of each ingredient within the mix is determined by the end goal: are you creating a productized service, a product or a product as a service?
The global market for professional services firms is approximately $ 5.7 trillion; traditional consulting services alone accounts for $ 200 billion of this market.
- Scale: Scalable products help to grow revenue at the same rate without having to add costs at the same rate.
- Better profit margins: A “product” company such as Adobe, Gartner or Bloomberg typically has gross profit margins ranging from 60 to 90 percent, versus an industry standard of 40 percent for customized professional services.
- Improved revenue visibility: Buyers love subscriptions because of the budget visibility and the continuous upgrades (versus quickly becoming obsolete); sellers love subscription-based products because they provide fantastic revenue visibility.
- Higher and easier valuations: Product and “as a service” companies have much higher valuations (e.g. , eight times revenue) than traditional professional services firms (e.g. , one times revenue) because they have better profit margins and improved revenue visibility.
- Accelerating digitization and use of technology:
- Increased competition and disruption: Consulting, for example, is still primarily based on hourly billing rather than value-based pricing. Soren Kaplan, author of The Invisible Advantage and a prominent thinker on business strategy and innovation is talking about changes in B2B Buying Behavior: B2C consumers are used to transacting and buying products immediately online and B2B buyers have become accustomed to this as well.
- Retention of staff: The traditional professional services model makes it hard to retain the best talent (the sell/deliver/sell/deliver model can be exhausting) and presents challenges in terms of planning for growth.
- Reduction of key person dependency: Productization is a critical part of the growth strategy for business services.
Seven key mistakes of Productization
Moving from services to products requires a unique set of skills, business processes and investments than most service firms typically possess.
There are seven key mistakes that organizations often make. I call them the Seven Deadly Productization Mistakes:
- Mistake No. 1 Focusing on Processes Before People. A productization strategy almost always requires new skills, significant behavior change and new organizational structures. Rather than creating tailored solutions for each client (customized services), we move to the phase of creating products that meet 80 percent of the needs of a sizable market segment (scalable products).
- Mistake No. 2 Starting Too Big or Too Perfectly. Many organizations lose money on new product development and/or get lapped by competitors because they take too long to build and launch a product. An MVP is defined as “the smallest experiment that either proves or disproves [our] assumptions about a business idea.” Ries calls it a “build, measure, learn loop.” “Build” a product we think customers want, “Measure” if and how they use it, “Learn” from what customers do and say about the product and “Loop” back to the beginning to build again. I love requoting Reid Hoffman, the founder of LinkedIn: “If you are not embarrassed by the first version of your product, you’ve launched too late.”
- Mistake No. 3 Favoring Existing Business Over New Products. Alignment is an incredibly important component of a successful product innovation strategy. New product development done “off the side of the desk” of existing staff is rarely successful because client demands (and immediate revenue) are always a higher priority. Organizations fail when they do not devote initial resources to new product development. And this brings us back to alignment. Allocating sufficient resources to fund both product development and product launch typically requires changing shareholder expectations. Using a $ 20 million firm as an example, the research, ideation and concept testing stages typically cost at least 1 to 2 percent of revenue; full concept development and launch can cost 5 to 20 percent of revenue. These investments need not be made all at once, but at some point, they will need to be made. The simple truth is this: a focus on the current year’s output and revenue will never spur on innovation.
- Mistake No. 4 Not Solving an Urgent and Expensive Problem. A major mistake I see companies make is developing a new product that does not solve an urgent and expensive problem that customers are experiencing. Sometimes a product team thinks they’ve identified an urgent and expensive customer problem, but it’s really only a frequently cited problem.
- Mistake No. 5 Designing and Developing in a Vacuum. The most successful companies take a co-creation approach to both design and development.
- Mistake No. 6 Starving Products Due to Fear of Cannibalization of Higher-Priced Services. Many organizations run away from products that they fear might cannibalize revenue from existing, often higher-priced services.
- Mistake No. 7 Stopping at the MVP. The MVP is only valuable when we make changes based on what we learn.
Think Big, Start Small – starting to big and too perfectly – the Productize PathwayTM
Many of the challenges, especially those around skills and behaviors, alignment and cannibalization fears, are unique to a services firm. This means that services firms must take a unique approach when designing, developing and monetizing products.
I have developed a product innovation method uniquely designed to help business services organizations avoid the Seven Deadly Productization Mistakes we just explored. I call this method the Productize PathwayTM.
- To start, rather than creating a “set in stone” strategy, a set of hypotheses is created that is continually tested through market experiments.
- Creating a Product-Friendly Culture. This is where we win employees’ hearts and minds.
- Align at the top of the circle. Here, we set aside sufficient resources to fund product development.
- Define the Problem. The goal in this stage is to understand the urgent and expensive problems found in the most attractive market segments.
- Co – Design and Develop. This is where we generate, test and develop ideas.
- Manage & Iterate. This is where we learn from the market and begin to iterate and repeat an abbreviated version of this cycle again to improve and grow our product.
Focusing on process before people – create product-friendly culture
Creating a product-friendly culture is central to building successful products.
Linkage is a leadership development consultancy that specializes in assessing, training and coaching leaders. The organization has been in business for more than thirty years. While the company had evolved over time, it still relied on a people intensive, highly-customized services model. So, Jennifer began to develop a productization strategy that has transformed the way Linkage works and generates revenue.
What do we mean by “product” skills? These competencies include being able to:
- Identify breakthrough product opportunities based on data and pattern spotting (strategy/vision)
- Translate those breakthroughs into a great user experience (design) and financial plans (business)
- Guide product functionality (development)
- Define how the product shows up in the market and gains successful sales (marketing and commercial acumen)
- Analyze product usage data (analytics)
- Ensure that customers, prospects, and staff are aware of, trained on and engaged with the changing product (management)
A Product Leader needs user experience, business model strategies and analytics skills.
Experience has shown this much to be true: diversity of all kinds leads to better products.
Despite bringing in the right skills and allowing these skills to flourish, functional silos can kill innovation and product strategy.
Everyone in the organization — from the CEO to the intern — needs to be digitally fluent. Digital fluency is a combination of both understanding and appropriately using technology.
Organizations need to develop a test-and-learn mindset that is applied at every stage of the product development process.
A key point to remember is that an MVP shouldn’t be released without a vision that details the future plans of the product.
A well-defined process for capturing data and for revisiting hypotheses will ensure a “learn and adapt as we go” approach. It’s important that testing focuses on how customer needs can be better served and not just on how to improve the features of a product.
Altering company culture is another area where help from outside experts can be beneficial. As Simon Frewer said about Challenger’s shift to a more product-led culture: “As we moved from pure service to more product-led tech-enabled services, using outside help and getting feedback on our team’s capabilities was really important . . . Don’t underestimate how big of a change management effort it is for internal staff across the entire organization to move from pure services to tech – enabled services or products.”
Prioritizing core business – align to support innovation
Leaving behind many superficially attractive opportunities was the key to victory on specific battlegrounds. A senior group of leaders with a divergent mix of experiences and backgrounds (experience design, management consulting, scaled information and technology businesses) had to converge on the company’s product niche (where they would focus) and periphery (where they would no longer focus).
As Simpact CEO Dejan Duzevik put it, a line in the sand may need to be drawn. “You may have to fire some customers that are with you for your services. You can’t sit in two chairs and pretend you are a service company with them, but be building products .”
Organizations migrating to a product strategy thrive when there is sufficient trust among the executive team to allow for productive conflict about fundamental business questions.
Many services businesses first fund products that they can sell to a single client as part of an engagement. While that is a tempting strategy, those products tend to fail because the primary focus is the needs of one client as opposed to the needs of the larger market.
The most successful organizations put aside a small amount of investment to discover market needs, define the right customer problem to solve, test potential products that will solve those problems and test hypotheses about market potential and the additional investment required to build a product.
For organizations adopting a productization strategy for growth, the size of the budget typically depends on the amount of digital disruption a company is facing.
I recommend creating a one-page strategy overview for each idea that includes answers to the following questions:
Vision: What is the purpose behind the solution?
Target Group: Who are the target buyers and users?
Customer Needs: What urgent and expensive customer problem does the solution solve?
Solution: What are the primary features of the solution?
Business Goals: What are the business goals?
Metrics such as the revenue potential (near-term and longer-term), the payback period and the ability to attract new customers might be some factors considered. Many organizations look at Revenue, Confidence and Effort which is a variation of the RICE method (Reach, Impact, Confidence and Effort). Ideas with low business value and high complexity are deprioritized.
Creating a product innovation governance group to discuss funding and provide stakeholders with regular updates about new product development can be very useful.
Three innovation pipelines: Endemic, Independent and Leveraged.
- Endemic products can be folded into work with existing clients.
- Independent products are adjacent to existing services and are run as separate brands.
- Leveraged products are completely outside the core business, but still leverage the skills of existing employees.
What percentage of new product development funds will be spent on “easy win” ideas versus more strategic or transformational ideas.
The most successful innovators allocate 37 percent of their portfolio to more strategic, transformational innovation.
Existing products or productized services and requests for customization can be a significant resource drain for product development teams.
Customization is often promised by well-meaning sales or account management teams that don’t fully understand the value of a more scalable product strategy.
In consulting businesses, the urgent priorities of the client and the chance to realize cash more quickly tend to crowd out the time needed to develop a productized business, no matter how strategic the change might be.
That brings me to another important aspect of alignment: incentives. Teams will need to be incentivized to sell lower-ticket, standardized products as opposed to the high-ticket consulting engagements.
Follow Urgent, Expensive Problems – define the right problem
What’s the biggest new product development mistake you see companies make? Developing a product that does not solve an urgent and expensive customer problem.
The goal of the Define the Problem phase is to avoid this mistake. This includes:
- Understanding our customers’ urgent and expensive problems.
- Knowing how these problems present by different segments or personas.
- Understanding the competitive landscape.
Building a product around unique, protectable IP is appealing because leveraging existing IP lowers the effort required to create a product. However, the product still needs to solve an urgent and expensive customer problem.
Clayton Christensen’s advice: He suggests looking for “. . . poorly performed ‘jobs’ in customers’ lives and then design[ing] products, experiences and processes around those jobs.”
Solving a minor annoyance will “improve people’s moods but not their lives.”
- Hypotheses about customers’ urgent and expensive problems.
- Types of customer segments experiencing these problems.
- How customers are currently solving those problems.
It’s important to hypothesize which segments or customer personas have the problem. A persona is a fictional character created to represent a potential buyer of the product and a potential user of the product.
Tara-Nicholle Nelson, former VP of Marketing for MyFitnessPal, who said “The question is not who our competition is but what it is. And the answer is this: Our competition is any and every obstacle our customers encounter along their journeys to solving the human, high level problems our company exists to solve.”
Sign up for competitors’ newsletters and review their job postings and LinkedIn profiles to see where they are making talent investments.
Designing and developing in vacuum – co-design and develop
Although interviews can be time- consuming, they yield the deepest insights.
Where are you now and where would you like to be in the future? What’s challenging about meeting your goals? What would you sacrifice in order to solve a problem? How does X problem affect you? How often do you experience problem X? Can you tell me about the last time you experienced the problem? When did you last look for a solution to this problem?
A Customer Advisory Board can also provide valuable insights about a problem to be solved, as well as initial ideas for solving it.
When we have very little time for research, a survey can do the job of customer interviews. When deploying a survey, it’s critical to get an adequate sample size. When designing survey questions, remember that surveys are not like interviews where follow-up questions can be asked for clarification.
There was an internal debate about whether the next new product should focus on Agile or Scrum training, or if it should focus on helping individuals earn their Project Management Professional (PMP) certification. When we looked at the twelve-month rolling average of search terms entered into Google, it was clear that interest in a PMP certification dwarfed interest in Agile or Scrum. We can learn a lot from data related to scalable solutions or products in the market.
What percentage of engagements have a component where the approach is heavily standardized, such as an assessment, a training session, research and analysis, etc.? How much standardization typically occurs?
If Define the Problem is the most important phase, then the Co – Design and Develop phase is the most fun.
The best way to Co-Design and Develop is to use a co-creation model that involves ideating with employees outside of the core team, heavily engaging with potential customers and closely partnering with developers.
This phase includes:
- Step 1: Cataloging existing assets
- Step 2: Developing new product ideas
- Step 3: Quickly testing product concepts with customers and prospects
- Step 4: Developing preliminary business models
- Step 5: Translating market requirements into product requirements that designers and developers can use to develop an MVP
- Step 6: Working with designers to create and test prototypes
- Step 7: Working with developers to build a functioning front – end and back – end
- Step 8: Continuously soliciting user feedback
For a new product to win out against consulting revenue, it has to be compelling enough that clients prefer sustained access to a product in preference to a one-time consulting solution.
You can also look for ways to enhance or complement your services by developing adjacent products.
Since it typically involves leveraging current assets and customers, developing service adjacent products is often a low-risk way to innovate.
SCAMPER was developed by Bob Eberle, education administrator and author, to solve problems or ignite creativity. It’s an acronym for seven different types of questions to ask when generating new product ideas:
- S – Substitute (What can I substitute to make this product better?)
- C – Combine (What ideas, features, processes, people, products or components can I combine?)
- A – Adapt (Which ideas could I adapt, copy, or borrow from other people’s products?)
- M – Modify (What can I tone down or delete?)
- P – Put to another use (What else can it be used for?)
- E – Eliminate (What would happen if I removed a component or part of it?)
- R – Reverse (What would I do if part of the problem, product or process worked in reverse?)
One of my preferred exercises involves allocating “100 pennies” across a set of features to see which ones are the most and least important to different types of buyers and users.
No matter how well the product solves our customer’s problem, it won’t be successful if they can’t figure out how to use it, or don’t find it appealing enough to give it a shot. That’s why utilizing a good designer is critical in this phase.
There is a range of fast and thorough techniques for market testing, but I prefer “pre-development” Minimum Viable Products.
In particular, three types of pre-development MVPs are recommended: Sell-then-build, Wizard of Oz and Concierge Testing.
- “Sell-then-build” is aptly named. Sell the product concept first; then, if there is enough interest, the actual product is built. Sell-then-build is the idea behind Kickstarter.
- Toto was the real hero of the Wizard of Oz when he pulled back the curtain to reveal that the giant talking wizard head was just a sweet old man appearing all-powerful. Wizard of Oz prototyping is similar in that it gives the impression that a product idea is fully-functioning and automated when in actuality, it’s under development. You needn’t worry that Wizard of Oz prototyping is a nefarious deception; rather, it’s a manual simulation of what a real product could look like and do. Zappos shoe company was initiated using Wizard of Oz prototyping.
- The Concierge Test is similar to Wizard of Oz prototyping in that the work is still done manually, but in this case, customers know it’s happening. Concierge testing lets us try out our product idea by first providing it to a small group in beta form.
A preliminary business model of the revenue and profit potential of your product idea is developed. This helps in making a “Go” or “No-Go” decision before proceeding with the more expensive product development step.
For each new product idea, a hypothesis should be created regarding:
It’s also important to start discussing whether to Build, Buy or Partner to develop the idea.
Once you have a concept for a product that solves customers’ urgent and expensive problems and you’ve moved into development, you’ll need designers and developers to build a functioning product that delights users.
Co-design and development aren’t just about seeing customers as partners, these steps are also about seeing developers as partners.
Share the product strategy document that was created to make the Go/No-Go decision with developers and designers. Since this document outlines the vision for the product (i.e., the value proposition), target customers (i.e., personas), the customer problem the product solves and the objectives/key results, it’s a key piece of the puzzle.
Both user and usability testing help to collect deep information about customers’ experiences in using your product. But the goals are different. The primary goal of user testing is to learn more about customer behavior, preferences and opinions so that their requirements are continually met.
The primary goal of usability testing is to identify problems or bugs in the design. User and usability testing may be done at the same time and can take on a number of different forms:
- Individual in-depth interviews
- Focus groups
- A/B testing
- Heat maps
Be Fearless – about cannibalization and how to launch boldly
In the Launch Boldly phase, planning occurs as to how new products will be marketed to existing customers and how they will attract new customers.
There are five parts to Launching Boldly:
- Address our biggest fear: cannibalization
- Develop pricing strategies and packages
- Create messaging to articulate the value proposition to target different segments
- Create a multi-channel marketing plan
- Develop a sales strategy and win the hearts and minds of the sales team
I’ve developed a simple framework to use when examining and addressing cannibalization fears. I call it the 3 C’s of Cannibalization: Customers, Complementary, Christensen.
- Customers: Successful products all start with clear customer needs and target customer segments.
- Complementary: Find a product that is a good partner for our existing services.
- Christensen: As in Clay Christensen and the pattern of disruption described in his classic book The Innovator’s Dilemma.
The dilemma is that established companies tend to protect what they have and run away from products that might cannibalize. Now, with more disruptive threats on the horizon than in the past, businesses willing to cannibalize existing revenue streams are more likely to survive.
Self-cannibalism can renew a firm’s competitive advantage and introduce a previously unthought of value proposition.
New products should either meet the needs of new customer segments, work in partnership with our current products or services, or play into the idea that we are stealing business from ourselves before our competitors do.
To ready a product for the market, its features, price points and packages should be designed to meet customer needs across a variety of customer segments.
To create tiered pricing bundles, we need to choose the attributes to add, drop or vary to create different perceptions of value.
Another pricing strategy is to have both free and paid versions of the products — commonly referred to as “Freemium.”
The other decision to make when determining the pricing of a product is whether to price based on the number of users, tiers of the number of users or enterprise pricing.
Once you’ve uncovered the essence of a product, messaging needs to be developed to market it. That messaging should include:
- A lead message for the product that embodies its essence.
- Secondary messages for each persona that speak to their unique needs.
- Urgency drivers for purchasing the product.
- Differentiators for the product. What makes our product more effective than existing solutions?
Geoffrey Moore offers a good template for messaging. He suggests outlining an elevator pitch for a product idea:
- For (target customers)
- Who are dissatisfied with (the current market alternative)
- Our product is a (new product category)
- That provides (key problem-solving capability and benefits — this is where we mention the product’s product’s product)
- Unlike . . . (insert product alternative), our product . . . (insert key product features).
Successful multi-channel strategies are designed around the same customer persona (s) and create consistent experiences across all platforms.
The skills for selling consulting services do not automatically transfer into skills for selling standardized products.
Introducing the sales team to the new product and sales process is critical to building trust among the sales team and for giving them the knowledge needed to effectively sell it.
Keeping the conversations flowing to and from the sales team will lead to a better understanding of customer needs; moreover, that back and forth sharing of ideas will also help you to win the hearts of your sales team.
Stopping at MVP – managing and iterate
Once your product is in the market, you move into the Manage and Iterate phase.
In this phase, I’ll focus on four areas to help manage products:
- Developing a customer onboarding, customer success and measurement strategy
- Monitoring and understanding the root causes of product performance
- Regular product performance reviews and roadmap updates
- Regular discussion on how the overall portfolio of products is performing
Since product use is a leading indicator that a customer will continue to buy and/or promote the product, defining the ideal level of usage serves as an early indicator of customer success. While you may track several key usage metrics, many companies find it useful to home in on “One Metric that Matters” (OMTM). The OMTM concept comes from Ben Yoskovitz’s book, Lean Analytics, and it’s the idea that even when tracking multiple metrics, there’s one metric that we care about above all else.
Scoring methods discussed previously can be used here to score potential product enhancements against different variables, such as technical feasibility and desirability (customer need). Using objective criteria to score future enhancement ideas helps to avoid cognitive biases such as recency bias.
Ideally, we collect input from a variety of sources to score each feature — the sales team, the leadership team, customer success and our developers.
Now — Next — Later (NNL). A NNL roadmap divides the plan into three sections: what you’re working on now, what you have planned next and what you plan to work on later.
It is easier to track progress if each product in the portfolio has a clearly articulated vision and performance measures.
A one – page strategy summary for each product idea:
- Vision: What is our purpose for creating the solution?
- Target Group: Which market or market segment does the solution address?
- Customer Needs: What meaningful, validated, urgent and expensive problem does the solution solve? What benefits does it provide?
- Solution: What is the solution? What makes it stand out?
- Business Goals: What are the business goals?
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