Product Management for Software Engineers (part six)
When a product manager joins a new company or product or project among the first questions they ask needs to be “how do we make money off of this?”. I know that everyone in the tech business is there to make the world of better place, but… let’s deal with reality. If your company (with some exceptions and I’ll get to those later) isn’t making more money than it’s spending it’s not going to be around for long. At Google a VP once told me that “revenue solves almost all arguments”. Put simply — if you are unable to say how you’re contributing to the bottom line you’re likely to have a bad time.
There are four ways of looking at this:
- Contributing directly to the generation of revenue. You’re working on a feature than brings in dosh. Amazing. It’s going to be very easy to write that case for promotion because you can see just what you’re contributing.
- Enabling other people to directly generate revenue. This is harder to articulate but do not underestimate the value of teams building infrastructure and tooling. Or people and teams supporting the operation of the business. You can measure your value either in terms of how much time you saved people (because time is money) or how much you enabled the people working on user facing features to generate. It’s a lot harder to justify your existence in this world as you have to tie it to other people’s activities.
- Preventing revenue being lost. Things like legal, devops (SRE), secops are vital to ensuring that the spice (money) continues to flow into your business. Harder again to quantify but necessary to ensure continuity.
- Building future revenue streams. This is about diversifying your company’s revenue. The good news is you can make up whatever number you want here as long as you can make people believe it. Turns out you never have to deliver anything until the number’s credibility evaporates. At Google I saw an organisation suggest the market potential of their product was $17 trillion and people believed them. Even smart people can struggle with things that are too good to be true…
If you’re not in any of those businesses then you need to ask yourself the question — “why are we here?” because if you can’t answer that your team or product or feature may not have a future. The good news is that if you can answer that question you have found the way to the hearts of your management chain because making revenue makes them look good.
Now, let’s talk about business models because, on the surface of it, making money on the Internet should be harder than it seems. This is partly down to the massive inflation of tech startups’ value and partly because it’s just a little bit counter-intuitive. Again I’m going to break it down into broad categories.
- Exchange of money for goods (including the creation of those goods). People are looking to purchase something. Examples here might be a iPhone from Apple or buying a book from Amazon. This is simple to understand. These businesses are margin based on the cost to build or acquire the product and ship it subtracted from the price the customer is willing to pay. To be profitable you have to ship a lot of products and/or have high margins on the products you ship.
- Faciliating the exchange of money for goods. This is having a marketplace where you can connect people looking to sell with people looking to buy whereby you may or may not take the money on behalf of the seller. Examples here would be eBay, Amazon, Shopify. You make money based on transaction commission so it’s a volume business where your profits scale with number of transactions.
- Monetising Intent. This is where someone has demonstrated intent to do something and you are able to connect that intent with someone looking to enable it (usually for money). The classic example here is Google Search and AdWords. If I type “BMW” into the search box I will get (at least) two sets of results come back. The first are the organic results which are likely to be about BMWs or link to BMW’s website. Then there are ads which are likely to be BMW dealers in my vicinity. If I’m looking to buy a BMW (I’m not) then these ads are going to be more useful to me than the organic results. They are also useful to my local BMW dealer because they can target people searching for BMWs in their vicinity. This is sometimes called Performance Advertising. You turn intent into action by connecting the dots. Demand for clicks means suppliers are willing to bid to be seen and so you can maximise the value you can extract from the volume of traffic rather than just charging a per transaction cost. This is how Google got big. Interestingly, Amazon also do this (search for something where there’s no results and you actually get Google Ads based on those keywords). Amazon then takes that money and invests it into making an unparalleled supply chain.
- Monetising Attention Span. Someone is looking at your product and you have the opportunity to sell their attention span to someone else. The classic example is Facebook where you scale your business by number of users and how much of their daily attention you can command. Once you have their attention people can bid for parts of it. When people say “if you’re not paying for the product then you are the product” this is what they mean. There’s still an onus to make what you’re showing useful and relevant but it’s all about attention span. Google also does this with its display advertising business. Display Advertising is less profitable per impression than Performance Advertising but is valuable to markets wanting to get their message or brand out there.
- Creating monopoly within a market. What’s Uber’s exit strategy? Right now they bleed billions every year on their product yet their backers haven’t got cold feet a la WeWork on them. The end game here is that you can take over a market by being willing to lose money. When you become the market you have opportunities to really monetise it and make back your investment. This can backfire on you. Take the example of washio that looked to offer laundry as a service. They put all the laundrettes in San Francisco out of business but never made it to profitability and folded. Tough news if you haven’t got a washing machine at home.
- Offering tools and infrastructure. Building stuff at planetary scale safely is expensive and risky. Companies which are good at it can turn their infrastructure into product. We’re talking cloud providers (Amazon, Microsoft, Google) here. Or companies offering services to manage your data (eg. Splunk). This can be big business as you’re offering a leg up to accelerate the hard parts of getting online that are costly in time and money.
Now you have an idea of how you might make money (and this isn’t an exhaustive list). Ask yourself — do you know how you contribute to your company’s bottom line? If you don’t then it may be cool to work on fun things but you may be living on borrowed time. If you want to progress your career you can do a lot worse than progressing your employer’s business.