Issues in Shifting from a Product-Based Business

Model to a Service-Based Model

Rich MironovBerkeley-Tekes Innovation in

Services Conference, 28 April 07

www.mironov.com2

Thesis: Service-Model Thinking

Most software firms use product-based models Up-front software licensing Customer responsible for deployment and operation

Firms struggle to understand and adopt service models Demands new thinking and skills Entirely new Operations function; reconceived marketing

But growth of service business models is fueled by… Visible successes (e.g. SalesForce.com) Massive venture investment in service models Broadband connectivity enabling remotely hosted services Increased willingness to offload non-strategic applications

www.mironov.com3

Defining Software Business Models

Product/licensing model Up-front licensing fee, optional maintenance Pay for full-deployment capacity or seats Software typically installed at customer site

Subscription service model Per seat per month Typically hosted

Transaction service model Per fax, per download, per transplant, per update,

per qualified lead, per session, per report…

Service models force “shared success” Vendors must engineer success, not just software

www.mironov.com4

Sources: Pulse of the Market

Front-line practitioner

204 respondents to service-vs-product survey Working tech product managers and marketers http://www.mironov.com/more/survey_results/

Consultant to 20 tech start-ups since 2001 Defining software requirements, pricing models,

organizational impact, Business plans for two recent service start-ups Product strategy newsletter, ongoing VC discussions

www.mironov.com5

Business Model Survey

Surveyed current product champions about service-versus-product 204 responses http://www.mironov.com/more/survey_results/

Pricing Model Product (license) 48% Subscription service 23% Transaction service 19% Free, advertising, other 10%

Job Role Product/service management, product marketing 55% Corporate marketing, sales 24% R&D, consultant, other 22%

www.mironov.com6

Top-Line Survey Observations

Products slant toward enterprises and government Services have larger share of small/medium business

Service sales cycles are 33% - 49% shorter

Service PMs don’t use app logs to understand users 24% vs. 1% for products, but should be 75%+

PMs say that customers use only half of features

Service PMs use product registrations more often than user profiles to identify their users

www.mironov.com7

Selling and Upselling

Versus product model: 33% faster close cycle for subscriptions 49% faster close for transaction services

Different upsell models…Product Subscript

TransxnSelling new versions/upgrades 77% 45% 39%Selling more units 81% 47% 50%Higher-priced subscriptions 29% 83% 42%Adding more users 44% 72% 32%

www.mironov.com8

Understanding Users

“We know which features/functions our customers use via...”

Product Subscript TransxnPersonal discussions 54% 47% 50%Tech support cases 35% 32% 24%Enhancement requests 27% 17% 11%Activity logs 1% 23% 18%Sales team feedback 28% 23% 32%

www.mironov.com9

Over-Featured Products

“I think my typical customer uses...”

Product: 48% of available featuresSubscription: 48% of available featuresTransaction: 52% of available features

Consistent over-design across models

www.mironov.com10

Broader Service Model Findings

Software-as-a-Service naturally slows down revenue from enterprises Also increases early capital requirements

Drives need for focused upsell marketing Case study: Replicate Technologies

Many “product” software firms lack core operational experience for service model

Hurdles are not technical Must rethink marketing, sales, operations

www.mironov.com11

Vendors Want More Colorful Story

Licensing software firms are “grocers”

Service firms are “chefs”

New requirements Service-based pricing (“Check, please!”) Responsible to end users (diners) Shared infrastructure (restaurants) Personalized service (menus) Service metrics (taste tests) Continuous usage marketing (specials)

www.mironov.com12

New Kinds of Service Metrics

Service vendors need Operations teams and skills

Uptime SLA (“Application up 99.95% of the time except…”)

Response Time (“98% of log-in take <1.5 seconds…”)

System Capacity (“Add CPU when usage >60%...”)

Support Escalations (“P1 first response within 15 minutes…”)

Reporting (“Billing reports showing all customer transactions…”)

Software Updates (“Push software weekly at 1AM Sunday with roll-back…”)

www.mironov.com13

Rich Mironov: Background

Principal, Mironov Consulting Consultant and interim executive for tech companies 20+ pre-revenue start-ups and Silicon Valley technology firms Product strategy, business/service models, market needs

Large tech company experience Engineering/product management at HP, Tandem, Sybase

Technology executive/entrepreneur iPass, Wayfarer, Slam Dunk Networks, AirMagnet

BS Physics Yale, MBA Stanford

www.mironov.com14

“Product Bytes” Newsletter

Free since 2002

Focus on start-ups, technology, product management “Service Revenue and Upsell Marketing” “Why are there Serial Entrepreneurs?” “Parenting and the Art of Product Management” “What’s Your Pricing Metric?” “So Your Product Wants to Be a Service...” “Sharks, Pilot Fish, and the Product Food Chain”

http://www.mironov.com/articles/RSS: http://feeds.feedburner.com/ProductBytes