New Product Development … Staying the Course

I’ve been told the darkest hour of the night is the hour before dawn.  I’m not sure if this statement is true and the kookaburra’s that live in the trees outside my bedroom would challenge the underlying assertion, but I often think about this when it comes to B2B software businesses investing in new product development.

Why B2B software

I was first attracted to B2B software because it can transform industries. Great B2B software businesses understand their clients’ businesses and industry better than the client themself. They marry this deep domain expertise with an understanding of technology to develop products that redefine the way an industry works.

Once B2B software vendors have established client relationships, this deep domain expertise and technical capability allows for a good amount of confidence in investment decisions that maintain, expand, and enhance the product offering. Whether it be the addition of new modules, more depth of capability in existing areas or an ongoing investment to address and avoid tech debt, the return on investment in product development is easy to assess.

When it comes to brand new product development

The cost of development is more difficult to estimate, and the rate of adoption is far more difficult to estimate, and therefore the investment case involves far more risk.

Product development is more difficult to estimate because often there is not an existing software platform that is being extended upon, instead it is a new code base on a new tech stack.  Leveraging past experiences to create a t-shirt size estimate of the development effort is therefore far less accurate.

The rate of the adoption of the new platform is also far more difficult to assess. Cross-sell and upsell of new modules on an existing platform can be estimated via meaningful engagement with existing clients; the rate at which an industry will move from one generation of technology to another – for example from desktop to SaaS – is far more challenging to assess.

This, however, does not mean that new product development should be avoided – far from it. In B2B software the underlying stickiness of the products means it is often only when these generational changes in the underlying technology occur that market share moves in any meaningful manner; the chance to get a material jump on a competitor is therefore for the taking!

Over the past 25 years I’ve been a part of many successful (and some not so) new product development efforts.  During all these efforts at some point we’ve questioned whether, based on the uncertainty around development costs and market take-up rates, we’ve made the right decision to invest.

I reflect that this questioning seems most intense just before we start to see signs of success. It is often at this point that the rate of investment has grown and that the first rounds of client feedback are starting to be received. Comments like “I see where that is going but I’d never move until …” see to be prevalent.

The Risks

The industry has come a long way in lowering the risk of new product development. Getting software in the hands of users early in the process, developing for the least sophisticated set of needs and then building up, first targeting new to category adopters rather than established clients who may one-day migrate, architecting for scalability in terms of both performance and operational costs, starting early with a small team and then scaling the development effort once some of the early risks have been addressed … and all these things have helped.

In the end, however, new product development has a different risk profile to product extensions. B2B software businesses are therefore often tempted to avoid investing in new products. They are right to reflect deeply before making such an investment, but in the long run avoiding investing in new products altogether will only ensure the demise of the business.

Tim Reed,
Potentia