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Product / Business Phases

26.05.2020

Products and Business areas live and die with defined phases of a life cycle. Each phase has its own optimizations and traps.

Long ago, I worked with an engineering manager (Gregor) with a fantastic intuitive sense for business. One of his product area manager was presenting the budget for the next year and was planning reduced margin and modest growth. Gregor forced the product manager to choose one of three modes and behave accordingly. (and I have used this ever sense)

  • Investment
    • Limited by how long you (months) you can try to build a business. Eg. 12 months before paying customers must justify the product / business area.
    • Key management focus is on testing and activity levels. Eg. get first customers.
  • Growth
    • Must generate 15% higher growth than the company average.
    • Margin can be lower than average, but there should be a clear path to profitability.
  • Cash-Cow
    • Must generate 15% higher margin than the company average.
    • Growth rate is possibly negative. There is no “recovery”

In the particular example where I first heard Gregor explain this concept, the product area manager was trying to “invest” his way out of declining revenue through increased product spending and increased sales and marketing spending. Gregor told the product manager to either find a strategy to return to growth mode or make massive cuts to costs to do proper cash-cow. Confronted with this choice, the product manager was forced to confront the reality that this business area did not have a bright future; however, it still had an important function– generate the free cash for the new investments.

I often see companies cling to the past and “chase the revenue”. Late stage products / business areas will always face decline– consuming all your attractive margin on trying to change this fact will only slightly extend this inevitability and kill your ability to invest elsewhere.

Real growth mode can be extended while life cycle realities can’t. Indications of Growth phase coming to an end:

  • What is your cost of new customer acquisition? If it is increasing but customer growth rates are not increasing, your are possibly reaching natural limits– time to give one last try to fix to your sales strategy.
  • Is revenue growth primarily through price increases rather than expansion of real value of existing customers or through expansion of the number of customers? While the financial guys are happy when this happens, you may already be in cash-cow mode and not know it. Is it possible to expand significantly the number of users, value that users get…? If not, you are likely a cash-cow denier.

Finally, I rarely see a company that can return to growth after two years of flat/declining customer growth unless there was an underlying market disruption (eg. recession). As I write this in 2020, macro economics are the best they have been in 15 years. Are you investing where you should?

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