How to build financially successful products for an unknown future
April 2, 2020
In these very difficult times, there are far, far more important things than business posts. But with COVID-19 hitting people, organisations and economies hard all over the world, even more of us will be asking the question: how much money will this product make? Is it worth making at all?
It is perhaps even more essential that we are committed to creating valuable products – valuable both to society and commercially. Here’s how to help make that happen.
How to prove that your product will be a financial success
Consultants across the world have managed to convince themselves that it’s possible to predict the future. All you need is bright people, benchmark data and a spreadsheet. The result? Promises get made, bad bets are placed and good ideas get missed.
I’m talking about an exercise often referred to as ‘commercial modelling’. If you’ve worked in a product or growth team, you’ve probably created a commercial model (I have created many over the years).
For me, how we think about and use commercial modelling is fundamentally broken. In order to get value from such an exercise, we must shift how we think about its purpose and its effectiveness.
Why commercial modelling is broken
The intent behind a commercial model makes perfect sense: increase confidence that an idea is going to give a financial return. But the way we use commercial models has morphed so much, it’s unable to provide that desired confidence. This is down to two main reasons:
1. People ask the wrong questions
The most common cause of failed commercial models is that people ask the wrong questions. Some of the most common ones I hear are:
- What is the price going to be? As if we will pick a single price for a product and keep it forever.
- How much money will I make in year 1? As if by default, all business model types can be reviewed at the end of my existing financial year.
- How much revenue does 1% of market size give us? As if it makes sense to plan customer acquisition by market share.
Instead, try a more flexible approach. Think in short-term experiments and focus on the economics rather than the totals. More on that later.
2. People wait too long to use them
One of the most common things I hear product teams say is “we don’t need to look at the commercials yet, we’re way off that”. Yet according to CB Insights, 18% of startups that fail do so because they have pricing or cost issues, and 17% fail for having a product without a business model.
18% of startups that fail do so because they have pricing or cost issues. 17% fail for having a product without a business model.CB Insights
For me, these two stats are related. Many teams focus too much effort on the product and wait too long to design (and prototype) a business model capable of monetising that product. They also wait too long to test the risky commercial assumptions behind it.
5 tips to avoid the traps of commercial modelling
It is possible to use commercial modelling effectively. In fact, it’s necessary in order to build financially successful products. Here’s how:
1. Do it as early as possible (use it to pass the smell test)
Use a commercial model to help you to make decisions and prioritise between ideas from the get-go. Ask yourself:
- Is this opportunity even worth going after?
- What would need to be true commercially, for this to work?
2. Focus on the economics, not the totals
Understanding the economics will tell you the commercial levers that you have at your disposal to make this product a financial success. Ask yourself:
- How does my cost of acquisition compare to my customer lifetime value?
- Where does most of my cost come from?
- What level of retention would I need to reach to stay afloat?
3. Use it to run experiments
Experiments don’t just have to be customer ones. A good commercial model can be used to run quick experiments during product ideation. Ask yourself:
- What’s the best way of making my product?
- What combination of features drives the most profit?
4. Always do bottom-up analysis
Whilst top-down calculations can be useful for producing quick answers (e.g. market size), only bottom-up analysis can de-risk your commercial assumptions. Building your model from the ground up means thinking at a customer level rather than a market one. Doing this early will let you segment your commercial model and your assumptions more easily, allowing you to experiment at a more granular level later on.
5. Assumptions are fine - just make sure you document them
More often than not, a product team knows their product better than anyone else. Don’t be afraid to use this knowledge and experience to make assumptions around your commercials. Just make sure that when you do, you document them and can replace them with evidence later down the line.
1 crucial thing to take away
I’m not telling you to avoid creating commercial models - far from it. My main hope is that you’re now reinvigorated to build your confidence in the commerciality of your ideas. Now more than ever, confidence is key.
While your teams are probably under a lot of pressure right now, this is an exercise really worth making time for. Just remember, approach this as a real test of how good your idea is. Not a tick box exercise for the next round of funding.
By Andy Wilton, Business Design Director at Idean UK. Andy likes designing impactful propositions, solving big problems, and hates it when people forget the importance of the business model. For years he’s been talking about starting his own podcast…
Are you stuck on your financial model? Unsure if your proposition has legs in this current climate? Send me a note and I’ll help you build confidence in the commericality of your ideas.Send Andy a note
This is #3 in a series of articles from Idean UK’s Business Design team. We’re demystifying ‘business design’ and sharing how we go about solving gnarly business problems – so you can create things that thrive in the real world.
Read on for how to avoid the one-stop shop and create a proposition that will actually make you money.
Read on for how to use the word proposition properly and save time, effort and money.