Why the transition from project to product business is difficult

I don’t know how many times I’ve been asked in recent years what a software company needs to do to move away from the project business and convert its business model to a product. Apparently, this is a topic that concerns many software companies.

Why?

I have made it a habit to first ask why such a change of business model seems worthwhile. Most companies replied that the project business was simply too tedious, there was too much pressure and the returns weren’t right either.

For those companies, the product-based business model is a savior in a situation that many project-based software companies are familiar with. And I would argue that this is rather short-sighted, because the product-based business model brings with it completely different challenges that the companies mentioned are not even aware of.

Marketing & Business Development

The project business has the great advantage that the sales effort is relatively small. Above all, they can, but should not, be unstructured. The huge demand for internet-enabled software in recent years has meant that it is usually enough to be well networked and deliver decent quality. Then a company usually has enough work to do.

Although quality is extremely important in the product business model, a good network is not enough to attract the necessary number of customers. Instead, you have to create an offering that stands out from the competition and communicate it accordingly. This requires relatively high expenditure on marketing and business development. Above all, you need to have the necessary expertise in-house.

We will therefore not simply be able to continue to be a purely developer-driven company, but will to a large extent become a company that also has to deal with very commercial issues.

Market niche

I have seen a few companies that started with a new product on a greenfield site, so to speak, and had no previous experience in the field. All these attempts went wrong and the companies had to return to the project business.

Since then, I have strongly believed that you have to have a lot of experience in an industry for which you are launching a software product. That sounds obvious. However, it’s not so clear in practice.

If a software company has already completed many projects for the machinery industry, for example, it usually knows relatively well where the challenges and problems lie. If new software solutions can be realized around these challenges and problems that do not yet exist on the market, the chances are good that the product will be successful. In a way, it meets a natural need of people who have naturally acquired knowledge in a vertical.

Market clarification: TAM, SAM, SOM

Typically, far too little market research is carried out when evaluating new software products. Assessments of the market are often too optimistic. And often the know-how for market assessment and rudimentary market research (desk research) is simply lacking. This is particularly tragic because time and money are invested in something that simply has no basis.

Cultural change

In my opinion, however, the biggest change comes from the general cultural change that comes with having your own product. While the customer sets the roadmap timing and cost framework for projects or at least plays a significant role in shaping them, developers are left to their own devices when developing a product. I have often observed that this leads to priorities not being set optimally. For example, it is popular to perfect a more technical feature without checking whether the intensified feature also offers sufficient business value.

All in all, I think this transition from the project business to a product business is very difficult. In general, it works well if a company has different skills and qualities, primarily in the areas of development, marketing and sales.

 

(This article originally appeared on www.aoe.com)