Profits by product version 3
Profits by product version 3
Make something people want
The first mobile app I developed was a game called Conxy. It took me 18 months to design, code and launch. I spent around 800 hours on it which at, say, £40/hour equates to £32,000. From the 4,000 downloads, via in-app purchases, I had a grand total of £10 revenues. Hardly a financial success, I have to admit. However, I proved that I could develop something people liked and were happy to pay for. Version 2, called Scarper, takes onboard prior feedback and allows players to get creative. I need to complete the development, release then scale. Game on.
Product iterations
The best way to predict the future is to create it. - Peter Ducker
Tony Fadell played a key role in the development of the iPod and iPhone. In his book, Build, he suggests that for disruptive products it often takes three generations before real profits are made. This is true for atom and digital based products, for B2B and B2C businesses.
The three product steps to profitability are:
V1: Product/Market fit
Version 1 of our product is a prototype. We are testing the market to see if we can address a meaningful problem. We are Making a Minimum Viable Product and Finding Our Initial Customers. Version 1 users love trying new things; they are innovators and early adopters. It is in the phase that we experiment, try things that don’t scale, learn and iterate quickly. Our product is not remotely profitable and many will not make it beyond this point.
V2: Product unit economics
Version 2 is all about improving the product and associated business processes. We have learnt from Version 1 user experience and feedback. We can improve inefficient or costly processes, Building Our Digital Assets and automating where it makes sense. Version 2 users are the early majority who watched the early adopters before committing themselves. They expect a good product and support experience. Unit economics are improving via cost reductions and/or price increases. Each new user acquired covers their costs.
V3: Profitable business
Version 3 is a about refinement. Not so much the product itself, but more so the business processes and User Experience, polishing every touch point. Users at this stage are everybody else, the late majority and laggards. They only buy the clear market winner’s product. Crafting Our Business Plan details the 10 building blocks of a successful business, including value proposition, channels to market, business activities and profitability. At this stage we have achieved an overall net profit, i.e. the unit profits are sufficient to cover all business costs.
Tony Fadell explains how the iPod went through three versions before it became a huge success. It started as a niche product then became more affordable and user friendly and, ultimately, reshaped the way the mass market consumed music.
Crossing the chasm
Make something 10 people completely love, not something most people think is pretty good. - Geoffrey Moore
Crossing the Chasm was one of the first business books I read. In it, Geoffrey Moore introduced me to the adoption curve for products. Each adoption stage relates to a type of user: 1. Innovators (2% of the total product users) → 2. Early adopters (14%) → 3. Early majority (34%) → 4. Late majority (34%) → 5. Laggards (16%). When charting adoption over time, this has the familiar bell shape. Many products fail to move from stage 2 (Early Adopters) to stage 3 (Early Majority). This is known as the chasm into which many products fall. Today crossing the chasm is better known as finding Product/Market fit. This is the aim of Version 1 of our product and Testing Our Business Ideas can help.
Other resources
Tony Fadell interview on Lex Fridman’s Podcast
Good Problems for Our Apps to Address post by Phil Martin
How to Create a Hit Product post by Phil Martin
On an course in the Lake District, colleagues and I were tasked with crossing a chasm with ropes and pulleys. It was challenging, but with good team work, we safely made it across. Phew.
Have fun.
Phil…
