The Importance of Business Models to Building Great Products
Don't turn product managers into mindless feature pushers or robotic project managers. (#83)
It’s been 4 weeks since my last post. Ouch. Sometimes life gets in the way, which has included a lot of travel and getting sick. I tell people all the time, “you need to ruthlessly prioritize and focus on what matters.” Admittedly I have a tough time doing that myself! But in this case I had to prioritize work and getting better. Now I’m back. 😀
Don’t Put Product Management in a Box
It’s easy to think about a product myopically and focus entirely on features. With a growing trend towards founder mode and the challenging of product management on a whole, the role of product manager is quickly reduced to “feature pusher.”
Product management is more than that.
I’d argue it’s almost everything (I’m biased, I’m a product person).
Product managers cannot do their jobs without understanding the bigger picture. Shipping features is great, but it’s meaningless unless those features are connected to the core of the business.
The more you shove product management and product managers into a box, the more they become project managers and nothing else. They’re not connected to the user/customer. They’re not synthesizing feedback from across the organization (i.e. sales, marketing, customer success, etc.) to prioritize what actually matters. They’re not measuring the most impactful metrics.
The most common way of siloing product managers is to keep them at arm’s length from the business model. They’re building/iterating the product without any direct connection to what matters—whether or not the business actually works.
The Business Model is Everything
Everyone in a company serves the business model. The business model encompasses everything. It’s not just about how a company makes money. It’s the entire connected system, representing every touchpoint that a user/customer has with a company and its products/services.
If your work has no effect on the business model, you’re not doing important work. And that’s the problem with most product managers. They’re doing stuff, but so what?
Product managers need to understand the business model levers that can have the biggest impact. For example:
If your revenue model is usage-based, product managers should prioritize work that drives usage.
If your revenue model relies on people inviting lots of other people to your solution, product managers need to prioritize maximizing invitation (and invite acceptance) rates.
These are over-simplified examples, but the point stands. Most companies, including early-stage startups, don’t ruthlessly prioritize this way. They’ll do a bunch of work on the periphery of what matters because it’s easier, or feels good, or some other meaningless reason. When startups raise a lot of capital it gets worse, because now they can hire people to “do more” which is supposed to create more value (it usually slows things down, washes out the real priorities and cause startups to stagnate…)
Here’s a high-level business model for a simple freemium business:
Depending on what stage you’re at, you could focus on any area, including:
Driving more visitors (“We just need someone to show up!”)
Freemium signup (“We just need someone to register!”)
Paid signup (“We need people to pay NOW!”)
User activation / Engaged user (“We need people using the product enough to convert!”)
Converts to Paid (“We need active users converting to paid, or we’re broke!”)
Disengaged Customer (“Crap, we’re losing too many customers to have a sustainable, scalable business model!”)
Etc.
Each of these is a massive undertaking unto itself. You can’t focus on all of them simultaneously (especially at the early stages). You have to figure out which one will have the biggest positive lift for the business in the shortest amount of time.
Product managers aren’t always responsible for generating revenue, but they are responsible for the business model. So is everyone else.
Do Stuff That Matters
People celebrate shipping features the way they celebrate fundraising. They announce it publicly, get congratulated and pat each other on the back. It feels like a major victory. I get it—building features is tough. Raising capital is tough too.
But unless those features have a positive impact on the business model, who cares?
For example, let’s say your sales & marketing people are eager to spend more money at the top of the funnel, but churn is too high. The bucket is leaky. You know it and everyone else agrees (albeit begrudgingly). Everything at that point should be focused entirely on lowering churn. Product managers should be looking for any means necessary to do so: adding/removing/changing features; testing new value propositions; targeting new customer segments; calling customers to beg them to stay; etc. Whatever it takes, because if you can’t lower churn (in this example), you’re toast. ☠️
Every feature you build comes with a price. There’s the time & money invested, but there’s also the ongoing cost of maintenance, updating, training users/customers, handling complaints (“Why’d you change what I actually liked?”), etc. No one ever takes that cost into account. Instead they rush to build more stuff. Building stuff is fun—product managers, designers and developers love doing it—so it quickly becomes the de facto answer to every problem.
Every so often I speak with a founder who says, “My competitor hasn’t updated their product in awhile. They must be in trouble. We’ll have a better product very soon.”
It’s entirely possible that competitor is in trouble. Or not. Perhaps they’ve realized that adding a bunch of new features isn’t the best way to drive the business model positively at this particular stage. Their focus is somewhere else. Or it isn’t. TBH tracking what the competition is doing is always tough, and you’re not privy to the decisions they’re making. You need to focus on what moves the needle for your business, not what others are doing.
Measuring Impact to the Business Model
Everything you do within your startup should be an attempt to improve the business model. You won’t always succeed, which is why a rapid rate of experimentation is critical.
Measuring the impact of product changes to the business model is challenging. It’s rare that you add a feature and can directly measure the results on customer close rate, conversion from free to paid, etc. Instead you measure usage. How often was the new feature used versus expected usage? You measure usage because it’s the simplest thing to measure, and a proxy of value creation. If a feature is being used, there’s a good chance it’s creating value. You collect qualitative data as well. Pretty standard best practices for product managers. But so what? Let’s say you release a new feature and people are using it like crazy. Did you win? Maybe. 🤔
Ultimately, you’ve only won if you can point to an impact on the business model. The business model is usually represented by a “higher order” metric; i.e. sales, conversion, churn, etc. It may also be usage-based; i.e. DAU, WAU, MAU (or DAU/MAU) — something that suggests the change you’ve made is having a material impact on overall product usage.
This is why the concept of The One Metric That Matters (OMTM) is helpful. OMTM suggests that at any given point in time there’s a single metric you need to focus on. All effort should be on improving that metric. Once you hit your goal with that metric, you move to the next one.
The goal of The One Metric That Matters is twofold:
To help startups ruthlessly prioritize (which imo most startups do badly)
To help measure the efficacy of work being done (product or otherwise) on something that actually matters for the success of the business
You track usage metrics at the product / feature / experiment level, but that’s not the ultimate goal. The ultimate goal is moving the business model needle.
Here are some additional resources on OMTM:
Product Managers Solve Problems
Product managers are first and foremost problem solvers. That’s the job description: solve problems. And do it in a sea of ambiguity under tight deadlines. GO!
When product managers are closely connected to the business model and how a business operates, they can see problems and potential solutions differently. The answer to every problem isn’t “build more features.” In fact that’s almost never the answer. But if you pigeonhole product management into building/improving features with no connection to the core business, you’ll fail.
Product managers: Ask “Why?” A lot. You need to get to the crux of why you’re being asked to add or change a feature (or do anything for that matter). Admittedly, being on the receiving end of constant, probing questions gets annoying (I know, I’ve been on both sides). Pick your battles. But don’t give up your insatiable curiosity and mission to find the truth. Once that’s happened, you’re not a product manager anymore, you’re a project manager pushing things through a pipe to get them done. Meh. 🫤
Founders: Hire product managers that ask “Why?” Hire product managers that are comfortable in ambiguity (I find this hard to test until you throw them in the deep end) and incredibly curious. Hire product managers that want to understand the whole business, not just their little section of it. Hire problem solvers and then let them solve problems for you. By all means get involved & lead, but don’t turn your product managers into automatons.
This was a great read. This is why the idea of PMs becoming more of GMs in an area of the business is going to trend more over the next while. PMs who don't understand and solve for "the business" will struggle in this market.
Agree, good point on the importance of business model, product managers asking why and , in general, blindly focusing on developing new features does get you in trouble... Fast.