Are you a product manager and wondering “How can I increase profit?” Well first. It’s important to ask, “What is profit?” It’s the net income that results from revenue minus expenses such as salaries, product costs, and sales and marketing. It fuels sustainable business. So, why do product managers fail to maximize or increase profit?
One of the root causes is that product managers often fail to recognize and leverage the unique characteristics of software.
To help you increase profit, I’m going to share 10 ways software differs from other kinds of offerings, notably physical goods. Understanding these differences is fundamental to creating pricing and licensing strategies that maximize profit.
- Software is not a physical thing. It is intellectual property. This means software is licensed, not sold. Unlike a physical good where the consumer can transfer ownership rights, a software license restricts how and what ownership rights may be transferred, if at all!
- Software requires a physical environment – hardware – to run. Sometimes the customer will provide the hardware, such as when you download an app onto your phone. Other times, the business offering the solution will provide the hardware, such as when you access the cloud.
- Unless the software is specifically designed to be extended, the average customer cannot modify it. This stands in stark contrast to most hardware. In fact, in the United States Uniform Commercial Code (UCC), the Implied Warranty of Merchantability burdens manufacturers with the responsibility of providing customers with spare parts, which means the customers can generally repair, modify, and even extend what they’ve purchased. If you’re old enough, you can remember hot rodding your car to improve its performance. Most software license agreements explicitly reject the types of warranties found in the UCC, which means you’ll only be hot rodding your car if you’re willing to violate the terms of the license agreement. And if you think this is about having fun driving down a highway, you’re missing the point: the ‘right to repair’ equipment has emerged as one of the most contentious issues in software pricing and licensing.
- While there is effectively zero cost to replicate and distribute software, the costs to maintain, extend and decommission software can be expansive – and expensive. Solution costs can be organized into five main categories: creating the release or unit, creating subsequent releases or units, operating the solution, maintaining the solution, and decommissioning the solution. While there are many similarities in the design and initial production costs for the first release or first unit of software and physical solutions, the ongoing creation of the next unit of a physical good is based primarily on raw materials and distribution. While it costs virtually nothing to replicate or distribute software, there are other costs associated with software that affect both customers and producers, notably operations, maintenance, and decommissioning. For enterprise or business software, these costs can be pretty extensive, with the total lifetime cost of the software maintenance far exceeding the initial purchase cost. We explore costing models extensively in our treatment of Economic Sustainability.
- Software can be pretty easy to steal. Every business has to deal with theft. Physical goods that are cheap, like pens, aren’t typically worth stealing. Expensive physical goods, like cars, are protected in such a way as to make them harder to steal. The level of protection and/or security increases based on the value of the goods and can reach quite significant levels for extraordinary or priceless items such as art or fine jewelry. Similarly, software-enabled solutions exhibit quite a range of vulnerabilities to theft. Some software, like games or personal computer software, is relatively easy to steal. Software that is contained with the hardware is stolen when the hardware is stolen. And while we may not be stealing SaaS software, sharing accounts on a movie streaming service is a different form of theft. Accordingly, business leaders of software-enabled solutions must understand how their offering is susceptible to theft and implement appropriate mechanisms to deter it.
- Software is not consumed, doesn’t break, and doesn’t wear out. Physical goods are consumed (bananas or diesel), wear out (running shoes or brake pads), or break (windows or coffee mugs). While software might have defects (bugs), it does not share any of these properties we find with physical goods.
- Software-enabled solutions are composed of multiple software components in complex value chains. While these components provide value to the company creating the solution, business leaders must review the license agreements and business models of the in-licensed components to ensure they support the sustainability goals of the company. This is in stark contrast to the physical world: there are no in-licensed components to a wooden table or set of wrenches.
- Software is extended, updated, and improved. This promotes an organic mindset to growth that is considerably different from the relatively inorganic mindset associated with physical goods. For example, we do not consider “upgrading” our couch, car, or lawnmower. We use them until they are worn out, unfashionable, dull, or outdated. Then we buy the next model – which in most cases is better. However, our mindset changes once any of these physical goods become software enabled. When that happens, we tend to think of upgrading our car or improving the diagnostics in our lawnmower. This organic mindset motivates an organic economic model.
- The upgrading of one software component can destabilize the solution. One undesirable side-effect of component-based solutions is that the improvement of any one component can destabilize the entire solution. While some of these destabilizations are highly desirable, such as removing security vulnerabilities or upgrading a component to enable additional features, these changes increase costs for solution developers and quite often cause problems for customers, such as the dreaded ‘forced upgrade’ of our software just when we’re starting an important business presentation or the ‘forced purchase’ or new hardware required to run the latest software.
- With a small amount of architectural support, additional value can be easily added to a software product after its initial purchase or release. At the same time, this is not usually the case for a physical good. This specialness of software opens up new opportunities to capture revenue for the business.
Those are my top 10 ways software-enabled solutions differ from physical goods and how those differences affect how product managers maximize profit. Interesting in learning more about how to increase profit for your software solutions? Check out the Maximize Your Software Profits course.
For more product management insights, check out our Product Management Accelerator, Scrum foundational and advanced Product Owner education, and SAFe Product Owner, Product Management, and Lean Portfolio Management education courses. Also, check out the recent blog series and webinar by Applied Frameworks CEO Jason Tanner about how to use Term Renewal Acceleration and Customer Segmentation to pull forward profit in times of economic uncertainty.