Seven Signs of a Healthy Product
The Holy Grail of product development is often what Marc Andreessen calls product/market fit. Andreessen defines it as “being in a good market with a product that can satisfy that market.” This is an incomplete definition for the kinds of businesses we should want to run: a heroin dealer may have market fit.
Private equity firms often simplify Andreessen’s definition of market fit even more. They look only at sales numbers. If people are buying, there’s market fit, and the innocent may assume the product is healthy. But some CEOs will say anything to close a deal. Many product managers suffer under product portfolios riddled with customizations and one-offs. Without a standard definition of a product, it’s impossible to know if you have product/market fit. You may have won a lot of business, but you may not be able to keep and grow the business you’ve won.
Instead of searching for market fit, seek to create healthy products.
What a Healthy Product Looks Like
What’s a healthy product look like? Glad you asked.
You’re in a good market
People are buying and buying more than once
People are recommending it
The time from purchase to value is reasonable
You’re investing more resources in building new value than paying old debts
You’re making money
The product aligns with the higher purpose of your business
You’re in a good market
Total Addressable Market (TAM) is typically used for this. I hate TAM. Market size is only a partial indicator of whether a market is good or not. If the market is well defined, it’s probably highly competitive, and if the market isn’t well defined, you’re making a guess. Don’t stress over this one. When sizing a market, being within an order of magnitude may be good enough, depending on your development and marketing costs. The market you’ll ultimately occupy might not exist yet. The market for online retail didn’t exist when Amazon was created. Even if you had defined Amazon’s TAM at the time of its founding as “everything everyone buys everywhere,” would that have been a useful number? Bezos saw internet usage growing. That was the market he wanted to enter, and its growth was enough to justify his experiment in e-commerce. Is your market growing? How fast? What does the trend look like? It’s not critical to have exact answers to these questions, but the questions are still helpful for evaluating an investment.
For running a business rather than investing in one, knowing who your first customer will be is a lot more helpful than having an exact figure for your TAM.
How many current customers do you have who need the product? How many contacts do you have in the market? Is the market engaged, dynamic, and open to change? Can you get feedback from prospects who fit your buyer profile? All those things are helpful to know and help you define if you’re in a good market or not.
2. People are buying and buying more than once
A product that’s not growing revenue can still be healthy, just like you can be a healthy 80 year-old. You’re always at risk because you're 80, and a product that’s not growing is always at risk, too. What’s the right amount of growth? That’s tougher, but only so much as you can fulfill without losing control of the business, going bankrupt, ruining your quality, or poisoning customer relationships. Managing growth might be the highest quality problem a business can have, but it’s still a problem. 20% growth is a number that’s thrown around as a yardstick for healthy growth. I’ve never heard anyone explain why. A better answer is healthy growth is a component of several factors:
Maturity of the market
Maturity of your product
The competitive situation
Relationship between profit and scale
Your effectiveness at attracting leads
Your ability to follow-up on leads and close opportunities
The loyalty and engagement of customers
There’s a few things you can’t control - the maturity if the market and the competitive situation - that may put some limitations on your healthy growth, but there’s a lot there you can control. You’ll need to manage all these factors together to find your maximum rate of healthy growth.
3. People are recommending it
Think of this like customer commitment more than customer engagement. Engagement is just flirting. Commitment is marriage. Only a small portion of your customers are likely to recommend you, no matter how good you are. Most customers just don’t think about it.
If most of your revenue is coming from customer recommendations, you are well on your way to having a healthy product.
Here’re a few metrics to measure customer commitment. When the product is new, trends are more important than the actual number. After you get a baseline, both the number and the trend are important.
Total customer recommendations by time period
Percent of revenue from recommendations and repeat customers
Total forwards, shares, and conversions
There’s a bazillion social metrics. Only focus on ones that show customers and prospects are doing something with your content. Impressions don’t do that. Forwards, shares, and conversions all require commitment since they require someone to take an action.
4. The time from purchase to value is reasonable
Some things, like an education, take a long time to prove their value. Others, like new shoes, have immediate return. We’re all competing against new shoes. “Reasonable” is going to vary a lot by market, but the time is almost never fast enough, and there’s typically pressure to shorten it. Customers don’t have to realize 100% of the value of your product immediately, particularly if it’s an expensive, enterprise product. We tend to be more patient with expensive things than with cheaper things. If you occupy a low price point in your market, you’ll have only a short time to prove your value before you start to have dissatisfied customers. If you are very expensive, you may get more time to show your worth. It’s always best to start early, though. Slow product implementations can kill a business, and slow return on investment can wear customers out.
5. You’re investing more resources realizing new value than paying old debts
If all of your resources are being invested in new product development, sales, and marketing - functions designed to help you realize new value - you either don’t have any customers, or you’ve built the perfect business. If all your resources are invested in propping up old products, you don’t have much future. To avoid churn and wasted resources, weigh new product investment toward perfecting products rather than building wholly new ones. A small portfolio of super products beats an enormous portfolio of mediocre products, as Apple and IBM can attest, but if you have a product that needs to be retired, put everything you have in making the new product, and get off the old one.
You need to look at multiple factors to determine how much of your development budget should be spent on maintenance versus product development:
The maturity of the market
Maturity of your product
The competitive situation
Opportunity sizes and effort
Size of your customer base - the more current customers you have, the more you’ll need to invest in maintenance
Outside threats - things you can’t control but have to prepare for
Technology developments
Technical debt
Technical debt is an important concept when thinking about investment, but it’s also self-serving for the technology organization, because it’s sometimes used to scare the business.
If a business is going to take on real money debt, it typically goes through a thoughtful, formal process. Not so for technical debt.
Technical debt often accumulates in the dark or by accident. When tech teams run to the business to ask for more money to clean up technical debt, it can sound like, “We need more money to fix all these bad decisions we made.” That may be true, or it could simply be that the technology and business needs changed. Either way, just because you hate spending money on something doesn’t mean you shouldn’t. Most of us don’t enjoy paying taxes, but the alternative can be a lot worse.
The same critique that’s made about national debts can be made about technical debts - “we owe the money to ourselves.” You have to pay interest on technical debt in the form of slow performance, lost productivity, or manual processes where there should be automation, but customers don’t often feel the burden of technical debt directly. It’s possible to safely kick technical debt down the road to pursue more time sensitive strategic opportunities. But once customers do start to feel the pain of tech debt, ouch. Then you’re in crisis. But zero technical debt is not a practical goal. In the early stages of a company or product, close to 100% of investment needs to be dedicated to building new value. As a product matures, that amount can shrink to zero.
6. You’re making money
This is my favorite. Growth is great, and sometimes the very best thing to do with profit is to pour it back into the business. But making profitability a low priority is extremely risky. I can create an amazing business that sells ten dollar bills for five dollars each. This is what WeWork and Uber have done. I’ll have fabulous sales growth, great referrals, high renewal rates, and every other positive growth metric you can think of but one - the one that makes it all possible. Nothing can lose money forever except a government, and even those don’t last forever. The financial purpose of a business is to make money, and the more the better. On your way to growth, don’t forget to make money.
7. The product aligns with the higher purpose of your business
For long term health - product health, business health, and personal health - this one is the most important of the seven. Even if a product is a star, if it doesn’t fit with the organization's purpose, it will ultimately be a drain. Cancer surgeons should not own tobacco farms. Creating and launching products is tough. You need a reason other than to make money to stay invested. Besides, if every opportunity is on the table, everything is a distraction, and nothing will ever be great because you won’t be committed enough to make it great. Products that really promote your purpose are the most rewarding, even if they don’t make the most money. Be patient with them. After some additional investment, they may end up being your most profitable.