Five aspects tech product companies must consider in their journey
My first experience of the excitement of a product company being acquired was back in 2004, while working at Virtusa. A client, edocs, was acquired by Siebel Software, which was later bought by Oracle in 2006. Being acquired is one of the successful exit strategies for a product company, especially if it has scaled with visible traction in its target market. The acquisition provides the founders and early investors a significant payback, while providing the company with additional resources to scale faster.
I’ve also seen several exits among Norwegian clients at 99x; many during the past six months. Adra, a product that helps organisations manage their financial close more efficiently, was purchased by Trintech in 2017. More recently in August 2020, Sikri Holding AS, a listed company in Norway, purchased Sureway AS and WhatIf AS. In December 2020, Visma, one of Norway’s largest IT companies, acquired Compello, a cloud-based solution that helps companies manage the movement of invoices and other documents, making a paperless work environment a reality. In January 2021, DNB and SpareBank 1 purchased Uni Micro, a platform to manage accounting services. Each of these are examples of companies that were successful in their product development strategy. The interest by larger players and their subsequent acquisition is a validation of the product and business model.
Building any new digital product is a blur of decisions relating to the solution and functionality, design, revenue models, and implementation. This article will focus on some areas a product company must focus on to influence a successful outcome, either through acquisition or growth.
Know your target market
Analyse your market to understand size, competitor offerings, trends in terms of new entrants, acquisitions, and industry drivers. These will provide you with insights to identify a gap or opportunity to explore further or validate your initial idea. The existence of established products vendors with legacy products will also indicate an opportunity for disruption.
Understand how a company in this space is valued and other measures of success, e.g. engagement among users, size of the user base, subscription-based revenue. Be willing to let go of your initial assumptions or convictions and pivot to a new opportunity. The opportunities and assumptions start-up companies had in December 2019 were no longer valid in January 2020.
Ask the hard questions about your solution
Challenge yourself and your core team on the solution. What is the problem you are aiming to solve? Ask yourself if it is important enough, widespread enough, and painful enough for potential customers to be interested. Would they consider the solution worth paying for? Can the benefits be identified and quantified? While some answers may come later in the lifecycle, these are essential questions to ensure the product is relevant to the intended customers or users.
Monetisation cannot be an afterthought
During my time at SLASSCOM (Sri Lanka Association for Software and Services Companies), I was able to attend many pitching events where start-ups presented their ideas and business models. It was encouraging to see so many tech start-ups emerge and their entrepreneurial spirit. However, one area the start-ups had not always thought through was how the solution would be monetised. This should be addressed and debated during the initial stages to arrive at the revenue model.
Most product companies now opt for a subscription-based pricing structure instead of a steep licensing fee up front. This enables the user to pay for either the features and functionality used, resources consumed, or level of usage, instead of a flat fee. This also enables companies using the product to move these costs to operating expenses. For the product vendor, it provides a recurring revenue stream, which makes the company more stable. However, the churn rate, i.e. based on how many customers cancel their subscriptions, must be managed. This is a key area that determines the attractiveness of a company for acquisition as well.
Build on the cloud
In the early days of my career at DMS, I remember uploading a new release or “patch” to a diskette and going over to the client site to install the update. The updates were done while all the users were offline and sometimes the entire system was tested over a weekend to ensure there were no side effects. Now, the addition of new functionality or an upgrade to a new release is often seamless. The product is designed, built, deployed, enhanced, and scaled up on the cloud!
It is important to identify a suitable architecture that utilises cloud services, from the start. Both AWS and Microsoft Azure offer a range of services, which in the past would have been a sizeable part of any product development effort. The architecture should consider and exploit these features. Two main benefits as a result are on the end-user experience and being able to scale the product to meet demand.
Implement a customer success programme
The cost of acquiring a new customer is always more than what it would cost to nurture and upsell to your existing customers. Losing customers is even more critical for product companies that operate in a Software as a Service (SaaS) model, as onboarding a new customer has an additional support cost. The book “Customer Success: How Innovative Companies Are Reducing Churn and Growing Recurring Revenue” by Dan Steinman, Lincoln Murphy, and Nick Mehta is an excellent resource to understand the implications.
The three goals of planning for customer success are to reduce churn, increase contract value of existing customers through up/cross-selling, and to improve customer experience and customer satisfaction. This ideally will generate new leads through referrals.
The areas discussed above are important but not exhaustive. Other aspects such as branding, marketing, and customer acquisition also need to be addressed when launching an impactful digital product.
(The writer is the Chief Marketing and Corporate Affairs Officer at 99x and spearheads marketing activities while supporting business development and customer success initiatives. He is an accomplished practitioner with over 25 years of experience in the tech industry with complementary roles in programme management and corporate consulting. Prior to joining 99x, he was employed as the Executive Director of SLASSCOM. His industry experience includes banking and financial services and global IT services with organisations such as Virtusa, Societe Generale (SOCGEN), Nations Trust Bank, and Union Bank of Colombo)