Thinking Like a Software Company

Originally published on the Versett Blog

Over the last ten years, your customers have dramatically changed. Their behaviours, habits, and technical aptitude have evolved and will continue to do so. They expect to be able to interact with you through digital channels of their choosing and have high expectations of those interactions. This disconnect between customer expectations and reality presents an opportunity for a tech-enabled competitor to come in and offer a better experience, stealing away your customers.

Software provides powerful operating leverage for an organization. How can you start to think like a software company and start to build the company of the future? 

In our last post, we identified five key areas we see opportunities:

  1. Product Ecosystems
  2. Distribution & Scalability
  3. Customer Experience & Continuous improvement
  4. Transaction Costs
  5. Marginal Costs

Let’s review each in sequence and how it impacts your business.

Product Ecosystems: The Sum is Greater than the Parts

Nike sells a variety of apparel and footwear. Each of these products adds individual value for a customer, but there is little in terms of combinatorial power. By introducing Nike+, they attempted to create an ecosystem around their running products. Nike+ was a digital extension of Nike’s running brand, allowing users to track their running workouts, the lifecycle of their shoes, and begin to tie some of their products together. Creating an ecosystem is one of the more challenging ways for companies to become more software-like, but it is one with the most significant potential impact.

A product ecosystem is a series of products that you offer that connect with one another. Through these connections, customers gain additional value, creating network effects on a micro-scale for each customer. With each purchase, a customer’s entire set of products gets better. These intentional connections between your products provide additional value and staying power. An ecosystem should lead to a stickier offering and possibly higher pricing, making it a moat-like feature. An easy way to test this is to ask, “How does a customer buying a second product make that customer’s first product better?”

Distribution & Scalability: Economic Leverage

A local wine retailer has a single location and is looking to expand; however, the costs associated with opening a new one are prohibitive. To become more software-like, the wine retailer introduces an on-demand delivery program. They can now reach customers across the city who would not typically drive to purchase from their location. They have effectively scaled their serviceable market with limited cost.

Software enables a business to have massive economic leverage when considering scaling, providing both distribution and scale advantages. Software products are often immediately scalable for a large addressable market: they can increase the addressable market with no to little capital requirements. As a traditional business, you cannot just enter a new market without large expenditures. A company like Facebook can do this instantly since their product is simply information. They can serve any country—and the audience that brings—at a moment’s notice. This is the distribution provided by software.

Customer Experience & Continuous Improvement

A car manufacturer making improvements to their cars will only benefit future customers; there is little they can change about this. Opting to improve their dealer network is one way to impact the experience of all customers (present and future). By thinking about the lifetime relationship with a customer, they may see the value of investing in their dealerships. These improved touchpoints with customers may drive revenue or increase long-term customer retention.

One unique characteristic of software is that any improvements made will impact not just future customers, but all current customers as well. Improvements made to Netflix’s catalogue or sorting algorithm benefit everyone. New features added to Google Docs are available to all Google customers. When you build and sell physical products, how can you start to cultivate these benefits?

One straightforward shift to unlock ideas is to transition from transaction-based thinking (one-off interactions with customers) to relationship-driven thinking. The prevalence of customer LTV (lifetime value) in software companies is no accident. This shift to relationship thinking leaves other industries and businesses to catch up. How can you think about your relationship with customers for the long term, and make improvements available for current customers as well? 

Transaction Costs

An appliance retailer currently calls customers after each transaction to customize the delivery and finalize the sale. They recommend the required accessories for installation, select a delivery window, etc. To reduce costs, they create an online widget for delivery booking and a smart recommendation system for related and required products. This new system results in decreased costs by eliminating the need for human intervention in the sales process, freeing up salespeople’s time.

Transactions costs are those required for facilitating the transaction, making it easy for a customer to buy from you. These costs most often refer to the financial transaction fees but also include the costs required to solve information asymmetry and collection. In many industries, brokers, agents, gatekeepers, and other intermediaries collect customer information and act as a bridge between parties, leading to inflated transaction costs.

The advent of software has given customers unprecedented transparency into most industries, allowing them to make more informed decisions on their own. Companies can provide educational tools to customers and eliminate costs within a transaction. Zillow, for example, can help homebuyers reduce costs required for buying a new house through their robust housing directory.

Marginal Costs

A Commercial Cleaning Company sends cleaners to locations each day to conduct their rounds of tasks. The cleaning company adds a new scheduler and route-optimizing tool to generate an optimal schedule and path for cleaning crews. They can reduce time costs (downtime), making jobs, on the whole, more profitable.

Marginal costs are those associated with producing and selling one additional unit of your product. This attribute of software is the trickiest area to reap the benefits as a traditional company. Most products are not suited for zero marginal costs, though there is room to improve them. Technology may provide some efficiencies in serving your customers. If you can innovate on how you deliver your product/service, there are gains to be made with marginal costs.

Understanding the software opportunity

Each of these areas is a helpful lens through which to view your business. We created a simple canvas that captures some of the critical pieces of this process for assessing your own business. We have called it the Software Opportunity Canvas and are sharing it on the Versett website.

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The file is downloadable from our Tools page. To use the canvas, go through each section and use the guided comments. This process should help you identify some of the key areas of opportunity for your business. How might you be applying technology or software-like thinking to your organization?

The canvas is a tool and process we use internally to identify opportunities for our clients beyond just “build a product.” It enables us to think holistically about the ecosystem that both their customers and their employees live within to better understand their business.

We have been using this process with clients for the last couple of years to help them imagine what it would mean to become more like a software company. The harder part is having the internal processes, mindset, and capabilities in place to support new initiatives. 

Thinking like a software company is a powerful mental model to identify new opportunities for you to build products or adjust your organization to be more software-like. Versett uses this as a model that helps traditional businesses emulate elements of companies winning the competitive battle. It’s an approach that can be applied to any business, big or small, and creates leverage across the company. When looking for ways to stay competitive in this changing economy, try thinking like a software company.

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