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Market Maturity and Business Model Choices

 

The maturity of your target market is one of the strongest influences on the selection and management of a given business model. In the early phases of a given market, business models should be chosen so that they can be quickly and easily understood, primarily because you may not be certain of the best way to structure them. You may find that your customers prefer an annual license to a subscription, or that they expect discounts if they purchase in bulk. Moreover, despite the best intentions of the business plan, innovators and early adopters may expect and/or demand special terms.

As the market matures, chances are good that your business model will become increasingly complex in order to serve the idiosyncratic needs of different market segments. I helped one client whose growth had stalled attack a new market segment with the same underlying system simply by defining a new business model. The original one consisted of an annual license. The new one was pay per use. The easy part was modifying the underlying architecture so that both models could be supported. The hard part was creating the appropriate price points so that a given customer could choose the best model without harming the relationships with current customers. This is not always the case, however, and it is more typical that changes to the business model can cause significant changes to your underlying architecture. These changes are often so large that they consume an entire release cycle (and sometimes two) to fully implement.

The enforcement of business models also matches the maturity of the target market. In early market stages, enforcement tends to be lax. As the market matures, or in cases where you suspect piracy, the enforcement tightens up. My experience is that product managers and software architects take enforcement far too lightly. You’ve worked hard to create your system, and software piracy is a serious problem. Create a business model that identifies the real value provided to your customers, price it competitively, and enforce it accordingly. Just remember that onerous enforcement will lead to dissatisfaction among honest customers, so be careful.

Choosing a business model is one of the most challenging tasks faced by the product manager, as it incorporates a plethora of factors, such as the business and licensing models offered by competitors (which may constrain you to existing market expectations) and corporate and/or environmental factors beyond your control (such as when another division does poorly and you need to find a way to increase short-term revenue). To help you through the potential morass of choosing a business model, consider these questions.

• Who is the target market? What do they value? A crisp description of the target market and what it values is the first step in creating an appropriate business licensing model. If you’re not certain of what it values, consider how it wants to use what you’re offering. Once you’ve determined your market values, show how your solution provides it.
• What are your objectives relative to this target market? In an emerging market you may wish to capture market share, so create simpler models. In a mature market you may wish to protect market share, so create more complex models to provide flexibility.
• What is your type of value exchange? In other words, what is basic mechanism that tracks and/or causes “money” to change hands?
• What rights do you wish to convey? Begin by asking your legal department for a “standard” contract, as it will contain a variety of nonnegotiable rights and restrictions. Many of these you can ignore. Focus on the business terms that motivate sales of your software.
• What is the affect of this business model on your technical architecture? Work with the software architect to make certain that any business model you propose is appropriately supported.
• What is the pricing model? The business model provides the framework for defining how you’re going to make money. The pricing model sets the amount the customer will pay. You’ll need to consider such things as volume discounts, sales and/or channel incentives, and so forth. Pricing choices may also affect your software architecture, so make them carefully.

As you develop the answers to these questions, you’re likely to find that the best way to reach a given target market will require a variety of changes to your current business model, licensing model, and software architecture. You’ll have to rank-order the changes in all areas of your product so that you can reach the largest target market. The benefits are worth it, for creating the right business and licensing model for you and your customers is the best way to maximize profits while increasing customer satisfaction.

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