What Startups Should Consider When Shifting to be Product-led
A client recently asked some insightful questions as they prepared to transition from a services-led business to a product-led one. Many companies face similar challenges, so here are my thoughts.
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If you’d like to support the growth of this resource, consider upgrading to paid and take advantage of the other ways I can help you.Questions from a Company Looking to Shift to be ‘Product-led’
I recently had some questions from a someone working at one of my client companies. The company has made a strategic choice to shift from a services style offering to one that is more ‘product-led’.
They currently offer bespoke analytics solutions on top of several stable datasets, making the opportunity to be a product-based business is quite viable both as a business-to-business (B2B) and a business-to-consumer (B2C) venture.
So, on to the questions:
I would be interested in (Daniel’s) approach to forecasting for team growth effectively.
What he sees as the largest things that… (we) need to adopt from a mindset perspective shifts towards becoming a product-led organisation.
What has (Daniel) experienced at this next curve in growth trajectory that we should be actively planning for (possible) blindspots based on his experience, e.g, security, scale, minimising tech debt.
Many startup businesses follow a similar path, validating ideas and generating early revenue with more bespoke offerings, and then later intentionally adjusting to productise their offerings as they validate product-market fit.
On the flipside, many startups fail precisely because they fail to make this transition successfully. They are stuck delivering short-term, unsustainable revenue and never put enough focus into finding what can be built once and sold many times.
Considering this, I thought it might be helpful to share my responses to these questions in a post.
Forecasting for team growth effectively
This advice is targeted at startups in particular, but many of these points are also a sensible guide for businesses of all sizes, is to consider the following:
Adding a full-time salaried employee is a big decision.
Adding people from established firms is a double-edged sword.
Accounting often has the effect of separating costs associated with employees.
Adding a full-time salaried employee is a big decision.
The full-time salaries go directly to your cost base. The growth of the cost base can increase the burn rate, shortening a startup’s financial runway. As companies grow, a common mistake is to start looking at most problems through the lens of adding more people to own each new set of problems.
The issue with this approach is that it overlooks opportunities to make decisions that focus or simplify, allowing the existing workforce to take on new challenges. Startups move quickly precisely because they have fewer people; it takes less time to reach an agreement and make decisions. Startups that expand rapidly in terms of headcount quickly put themselves at risk of becoming uncompetitive, as they become as slow as the incumbents they seek to disrupt.
It’s also, in most geographies, more straightforward to add people to an organisation than remove them, so once they are there, it can be a costly decision to downsize as well as an emotionally draining one.
Adding people from established firms is a double-edged sword.
A common issue for startups is the search for greater certainty; they seek new hires who are a ‘safe pair of hands’ with experience at larger, more established firms. The unfortunate side effect is that these people can unwittingly bring with them many assumptions from the larger firms, which may be a good fit for where that firm is in its lifecycle but less so for a startup.
They may introduce standards that are premature for a startup still seeking its market fit. They have ideas of what may be ‘best practice’ which reflect where their previous firm had arrived after a long journey, forgetting the very necessary steps they had to take to get there along the way. They may assume that rather than wearing multiple hats to get something done in a startup, specialists need to be hired for each duty.
It doesn’t mean you cannot hire people with this experience, but you want to ensure they understand that the context is different and they will need to adjust their frame of thought accordingly.
Accounting often has the effect of separating costs associated with employees.
Standard cost accounting practices expenditure (and budgets) into distinct categories and assign accountability to different areas of the business. For instance, costs for computers and subscriptions may sit under I.T., etc.
The challenge this presents is that when forecasting people costs, they sometimes overlook the ‘on costs’ associated with supporting employees to be effective in their work for the business. The result can be over-hiring and then not having an adequate budget to properly support all employees in being effective, due to trying to save costs by providing sub-standard tools or less support for learning, training, or other investments.
When planning for an increase in headcount, I find it helpful to reconnect the costs of the people and all other associated costs with supporting them, regardless of which budget they fall under. After all, only the bottom line matters. With the risks associated with a startup, you may still need to tighten your belt, but at least you won’t increase the company's bloat with a bunch of people who can only be partially effective.
To take this approach and remain lean in terms of other expenses requires being explicit about the outcomes that are most important to your business. When businesses allocate their spending incorrectly, either overspending to the point of impacting effectiveness or wasting resources to the point of compromising their ability to do other things, spending becomes disconnected from the outcomes it is intended to support.
This can occur when the view of spending shifts from a holistic perspective of the company to a myopic focus on departmental budgets.
Mindset perspective shifts towards becoming a product-led organisation.
For startups transitioning to a product-led organisation, the most significant factor for success is being aware of the cognitive biases that can lead us to over-invest in less sustainable aspects of the business.
What got you to your current state is probably not what will get the business to sustainability. You have likely made some progress by demonstrating that customers are willing to pay for the value associated with your firm's activities, but that is not enough to establish the business model; it’s just a good indication that there may be something well worth pursuing.
When starting a business, you look to revenue as the first evidence of a willingness to pay for what you have to offer, and there is no such thing as bad revenue. Any revenue helps cover some of your costs, giving you more time to validate your business hypothesis and confirm that there is a large enough market to sustain it.
When transitioning towards a product-led business, it becomes quickly apparent that there are bad forms of revenue. Declining some of that revenue presents a different level of challenge again. There are strong incentives working against this happening.
The size of this challenge is significant because of the following factors:
Short-term thinking
Risk aversion
Causal Determinism
The mindset shifts that need to occur are ones that work against these factors to help ensure the appropriate level of investment is put towards activities that step your business towards being a sustainable one. If the strategy to sustainability is to offer the value you create in the form of a product that can be developed once and and sold many times then sustainability means validating the product can achieve this aim.
Short-term thinking
Part of short-term thinking involves prioritising over the wrong time frame. In the context of a startup, the pressure of covering costs and demonstrating revenues to investors can draw significant attention in the short term.
The effort that needs to be invested to create opportunities for more sustainable revenues, such as identifying a market niche audience for your offering and validating that they are willing to buy at a price point that will support your business, gets deferred.
To identify a niche often means focusing your limited resources on that niche and avoiding the distractions of potential business deals outside of it. This is easier said than done, as larger businesses often view an eager-to-please startup as an excellent opportunity to secure highly customised support due to their buying power over the startup.
Monthly Recurring Revenue may look promising with these whale customers, but securing enough of them is challenging, and each request they make is more akin to a custom software project than selling an existing product capability. Further financial scrutiny would reveal a top-heavy revenue distribution, which the loss of a small number of clients could significantly impact.
The way to combat the risk of short-term thinking is to look at longer time horizons with a focus on what needs to be learned to validate the viability of the market segment and the feasibility of providing a repeatable solution to a common set of problems that segment is experiencing at a pricepoint that makes it a sustainable business and then to work backwards from there.
What needs to be true to achieve these goals? What might be evidence that we are making progress to validating these different dimensions of our product business?
Risk aversion
I mentioned the effect that risks, such as remaining solvent while on this journey of discovery for a startup, have a key part to play in decisions that can lead the startup leadership astray. When the consequences of not paying payroll have such outsized impacts for everyone on the team, this can distort decision-making when it comes to how time is invested in the present.
Those same risks prevail in the long term anyway; at some point, if an organisation's revenues are not sustainable or a consistent market for its offerings is not found, then investors will eventually cease to support its activities and look elsewhere to other enterprises for a return. Avoiding difficult conversations in the short term can lead to even more significant hardship in the long term.
It’s very common to hear about the bumps along the way in the stories of businesses that have grown beyond the startup phase. At times, they didn’t know how to cover payroll or needed to come to an agreement with staff to overcome shortfalls in covering what was owed. Whilst those are all experiences businesses should seek to avoid, it is worse to prevent these situations but then to cease to exist as a viable concern months or years down the road because the business was never proven.
Causal Determinism
Another common issue is attributing success to the wrong factors, as some relationships are more evident than others. A classic example is a sales team. For there to be revenue, a sale must be made. The sales are attributed to the salesperson who transacted the sale; therefore, a value is associated with each salesperson. Indeed, there is substantial value, as evidenced by the significantly different performance we observe across salespeople.
But generally, salespeople cannot sell without a product to sell. And for a product to be seen as valuable enough for a customer to buy it, it depends on a whole range of factors - does it solve a problem they have, are there other options for solving that problem available on the market, is it at a price that is cost-effective, etc.
As we can see, the underlying value is a factor of contributions from people across the business. However, because attribution is often more challenging to determine, the underlying value that drives it can be overlooked, and the time and investment required to ensure the underlying value supports maximum sales may fall short.
Actively Planning for Possible Blindspots
What I suggest doing in response to the risks I’ve described in the earlier part of this post is to stack the deck against these risks. If we must have some less sustainable revenue to survive in the short term, can we ringfence effort to support that revenue? Can we track both unsustainable and sustainable revenue separately?
A way to do this is to elevate the visibility of what the company is learning towards addressing the various risks I’ve described above - especially the risks Marty Cagan describes as the four big risks :
value risk (whether customers will buy it or users will choose to use it)
usability risk (whether users can figure out how to use it)
feasibility risk (whether our engineers can build what we need with the time, skills and technology we have)
business viability risk (whether this solution also works for the various aspects of our business)
Celebrating sales wins is fantastic, and it often occurs naturally. However, the journey toward creating something valuable and marketable should also be celebrated, perhaps even more so because the connection is less apparent and the rewards typically unfold over more extended periods.
The cognitive biases that can trap us unwittingly into investing a disproportionate amount of effort in unsustainable activities can be counteracted by making the feedback loops shorter, more visible, and more connected to the longer-term effects we are seeking.
That starts with leadership communicating the direction and what the next step is towards validating one of the above risks. This process must be iterative because it involves discovery, and each step of progress reveals a new challenge. If the path were deterministic and known, competitors would already be there, winning the market share you are attempting to gain.
Have you worked in a business trying to shift from a services-led model to a product-led model? What were the key challenges? Were you successful in overcoming them? What worked in that situation? Share your experiences with us in the comments below.
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