What are the three common misunderstandings about product operation growth?

When growing, we need to make many trade-offs, and often these trade-offs put the product or business at potential risk.

The following three trade-offs can put a product at risk:

1. Focus on financial growth at the expense of innovation.
2. Growth in size and complexity limits agility.
3. Wrong decisions lead to fragile products and business models.

Without understanding the risks involved in these trade-offs, we cannot comprehend the possible long-term impacts of our decisions.

Financial Growth vs Innovation

Financial growth and technological innovation are both equally important components of a business. However, they often contradict each other.

Our plan is to review financial results on a quarterly basis. One problem with measuring growth based on short-term returns is that even if a product is the right investment in the long run, it may not be worth the investment based on the short-term returns.

"Quarterly earnings guidance often leads to a false focus on short-term profits rather than long-term strategy, growth and sustainability."

—Warren Buffett and Jamie Dimon (CEO of JPMorgan Chase)

The majority of a software company's overhead is spent on development. If you want to see higher profits on your financial statements, an easy way is to cut costs. However, if you sacrifice product development in pursuit of profits, problems will arise and growth rates will plummet. The larger the product, the greater the adverse impact of cutting development costs.

As product complexity increases, additional development investments are needed to support product growth. A small product might be able to survive with a small team, but as it grows in complexity, that becomes increasingly difficult.

Another problem with using a linear financial growth model to judge product success is that it ignores the fact that the market is not infinite. What happens when a market becomes saturated?

Financial growth will slow, however, the company can still generate significant annual revenue. They face a dilemma: be satisfied with the market and own it, or find new avenues for growth. How will the company define success?

Even large international companies have ceilings. See what's happening now:

Well-known analyst Benedict Evans said: As the smartphone market matures and replacement cycles lengthen, the growth of major smartphone giants is slowing down.

But that doesn’t mean they’re unsuccessful, or that the market is dead.

Agility is often at odds with growth

As the business grows, the added complexity limits the company's ability to do things in the past, and the company grows slower and slower.

As products grow in size and complexity, the business must also grow in order to manage them effectively. Additional management is also needed to maintain control over decision making. However, excessive red tape creates bottlenecks and is the enemy of agility.

Growth leads to complexity, which is often the opposite of agility.

Many large organizations are investing billions of dollars in transforming themselves into agile organizations, but most fail.

The irony is that large companies want to add processes to make the business more agile (DevOps, Scrum, etc.). But in reality, they should be subtracting, eliminating processes that are hindering agility. This requires management to give up a certain degree of control, so it may be difficult for companies to accept it in the short term.

This approach is known as intervention bias. When we solve a problem, we tend to add a solution rather than remove obstacles because doing so satisfies our desire for control.

Product Vulnerability

Uncertainty is probably the biggest obstacle facing product teams.

Research shows that the more complex the environment, the less accurate the forecasts and plans. As product and business complexity increases, the future becomes more difficult to predict.

It’s almost impossible to predict all the opportunities or adversities a product may encounter in the future, so it’s useful to focus on product resilience. The bigger the problems with a product or business model, the greater the negative impact. Since we cannot predict future adversities, it is helpful to focus on product resilience.

Technical debt leaves problems in the system that make the product fragile. Excessive red tape makes it difficult for teams to respond and makes the business vulnerable. If there is a problem with the product, it will trigger a chain reaction and the company will have to enter fire-fighting mode.

Is bigger always better?

Large customers bring high returns, but the business model delivered to large customers is usually very different from that of small customers. The main differences are:

• Small customers: They can sacrifice functionality and customization to save money. They are very price sensitive and therefore can adopt a standardized delivery model.
• Big customers: They are not short of money. They are willing to pay more as long as the software meets their specific needs. Customization is often essential. The sales and implementation cycles for large accounts are longer.

Delivering to large customers is more attractive and requires hiring more staff. The consequence of this is that product prices must be increased to cover the new administrative costs. This may force companies to move out of their original niche as smaller customers can no longer afford products at that price point.

There are risks in retreating from a niche market – it can open the door to innovative products. When it comes to technology, the risk of disruption is greater than ever. The cost of launching a new product is very low, which means that new entrants will continue to emerge and they will target niche markets.

Product flexibility

Product resilience focuses on controlling product downside, thereby enabling the product to take advantage of upside opportunities.

Since it’s impossible to predict when opportunities will present themselves, it’s important to take advantage of them when they do arise. If a product team is in firefighting mode (busy dealing with difficult situations), it may miss opportunities with ample room for growth.

Controlling product slippage (technical debt, red tape, etc.) can curb negative impacts and enable the product or business to recover quickly from negative impacts. It makes the product indestructible.

This is the core idea behind Nassim Taleb’s (risk management expert and founder of Empirica Capital) series of books called Incerto:

If you "had the power to choose" you would not need all that is usually called intelligence, knowledge, insight, skill, and the complex things that occupy our brain cells. Because you don’t have to do it very often. All you need is the wisdom to not do things that are detrimental to your own interests (some acts of omission) and to recognize things that are beneficial to your own outcomes.

——Nassim Taleb

Survival is often the best long-term tactic because it allows you to seize the next opportunity that may be the one you have been waiting for.

From a financial perspective, finding a business model that can deliver to multiple market sizes allows for product resilience because it hedges the risk for the business.

In small markets, the revenue per customer is small. However, there are more potential customers in small markets. Losing a small customer won't have much of an impact on profits, and there's a good chance you can find a new customer to replace the lost one. In large markets, the revenue per customer is high. However, losing a customer can devastate your bottom line, and it can be difficult to find replacement leads.

Retain small markets while expanding into larger markets to give products a certain degree of business stability. Small markets have low risks and low returns, while large markets have greater room for growth. However, the greater the reward, the greater the risk. The stability of small market users can offset the adverse effects of losing large users.

Finding a way to deliver your product to customers of all sizes has the added benefit of creating a competitive moat, building barriers to entry that protect you from disruption from new entrants.

Decisions, decisions, decisions!

As with everything, finding the right balance for your product is the most important thing.

Focusing too much on financial growth will result in deteriorating products, loss of market share, and increased likelihood of disruption, while focusing solely on product innovation will quickly deplete your cash flow.

The key to growth is to limit product decline, seize opportunities to move toward peaks, and remain flexible enough to take advantage of significant growth when it comes.

Related reading:

1. Product operation and promotion: How to compete for traffic?

2. How can product operations increase the number of new users and retain them?

3. Product operation: 2 major ways to get started to accurately capture private domain traffic!

4. Product Operation | How do stranger social products guide users?

5. How can product operations conduct good competitor research and analysis?

6. Product operation and promotion | 5 underlying ideas for traffic growth!

7. Product operation: application of data system under the growth model!

8. How can product operations conduct good competitor research and analysis?

By Joe Van Os

Source: Upskill