“This book will help you design sustainably profitable Software-Enabled Solutions” states the core promise of “Software Profit Streams: A Guide to Designing A Sustainably Profitable Business” by Jason Tanner and Luke Hohmann, CEO and CIO respectively at Applied Frameworks. Before we delve into the main content of the book, it’s worth explaining some of the key definitions they use:
A Software-Enabled Solution has four attributes: software, hardware, services and data.
Profit is the result of a system that provides value to customers in ways that are substantially differentiated from your competitors and that generates more revenue than costs.
A Profit Stream is a value stream designed to create a sustainable business. A value stream is the sequence of activities that an organisation undertakes to design, produce, deliver, and as needed, maintain and / or extend a product or service to a customer.
Value is the benefits a customer receives less the total cost of ownership.
The Profit Stream Canvas is a useful tool to help design and evolve a Profit Stream. The canvas is designed to help businesses focus on creating sustainable customer value and business impact with the following criteria:
Customer
- What are their goals and aspirations?
- What problems are they trying to solve?
- How do they perceive value?
- What are their economic choices?
- What licenses do they require?
Monetisation
- How are all elements of profit working in harmony?
Solution
- What solutions might you create?
- How will they promote sustainability?
- How will they generate a profit?
- How will you manage supplier relationships?
Compliance
- How does your solution ethically and responsibly comply with applicable regulations and laws?
The book offers ample tools to help assess the different elements of the Profit Stream Canvas fully. I personally found the Customer Benefit Analysis enormously helpful in mapping a proposed solution to (perceived) customer benefits.
The Customer Benefit Analysis aims to answer two key questions: (1) what dimensions of our solution provide benefit to our customer? and (2) what is the magnitude of these benefits to our customer? Benefits can either be tangible (objective) or intangible (subjective). Tangible benefits are expressed via two main verbs: “reduce” and “increase”. Naturally, the primary goal for business is to increase revenue, but there are several other tangible (and more controllable) benefits to consider:
- Reduce costs
- Reduce capital investment
- Reduce time
- Reduce risk
- Reduce effort
- Increase productivity
- Increase optionality
- Increase ease of use
- Increase data accuracy
Importantly, a Customer Benefit Segment focuses on a single customer segment only. I particularly like the look of “Dimension and Magnitude of Benefit Cards”. This card template has been designed to capture the results of your Customer Benefit Analysis for each segment:
- Title — A short title makes managing collections of cards easier.
- Who — Who is receiving the benefit? Clarifying the “who” helps maintain focus while also helping identify new segments.
- Dimension — What is the value of the solution? Can you describe it in a narrative?
- Magnitude — What is the economic impact of the benefit? How can it be measured? Expressing the magnitude of a tangible benefit in a financial formula makes pricing and financial modelling easier. Capturing the strength or importance of intangible benefits informs pricing strategies.
- Solution Demands / Costs — Understanding the demands your solution places on your customer improves total cost of ownership analysis and helps you design more elegant solutions.
- Tangible and intangible benefits — Organising your cards by tangible and intangible benefits enables you to capture the total economic benefit of your solution.
After providing tools to diagnose the customer problem, benefits and (economic) value, the book covers “solutions” in great detail, solutions being “the means by which we provide value to customers”. Solutions are by no means decoupled from understanding customer benefits; you can take your Dimension and Magnitude Benefit Cards and compare them with existing or future features. Building on this comparison, Tanner and Hohmann describe seven value exchange models, defining how a customer will exchange money for value:
- Time-based access
- Transaction
- Meter
- Hardware
- Service
- Performance
- Data
The block in the book dedicated to pricing is an important one, since pricing can be tricky — particularly for SaaS products. The Profit Stream Pricing Model comprises several components, each of which is explained in great detail by Tanner and Hohmann.
Finally, the book talks about modelling “Customer ROI”, approaching financial analysis from the customer’s perspective. The Customer ROI provides customers with information required to make a decision. These are the common drivers of Customer ROI:
- Breadth — How many people will the solution affect? How many assets or items are involved in the solution? The greater the breadth, the higher the potential return.
- Repeatability — How frequently will people use the solution? The greater the repeatability, the higher potential return.
- Cost — How costly is the task to to perform — without — the solution? The greater the cost of the task, the higher the potential return.
- Collaboration — To what extent will people need to collaborate to benefit from the solution? The greater the collaboration component of the task, the higher the potential return.
- Knowledge — What is the reuse of information created through use of the solution? The greater the use of knowledge, the higher the potential return.
There are five steps to actually calculate the Customer ROI model:
- Identify Total Benefits of Ownership (TCO) — Use the aforementioned Dimension and Magnitude of Benefit Card to identify the directly quantifiable benefits that customers receive from the solution. Direct benefits can range from reduced planning to increased customer engagement. In contrast, indirect benefits include measures such as reduced stress and increased job satisfaction. Total Cost of Ownership (TCO) can be can be calculated as the initial purchase price plus costs of operation across the software lifecycle.
- Model the benefits — Once you’re clear on the benefits, you can start creating a model to input specific customer information to calculate benefits. You’re effectively putting numbers against questions such as “How many employees provide services to customers?” and “What is the average revenue per service call?” You thus arrive at a measurable benefit that your solution can provide for.
- Identify Total Benefits of Ownership (TCO) — Gather all one-time or recurring costs for your solution. Typical costs for software-enabled solutions are expensed costs (e.g. software, hardware, training and maintenance) and depreciated costs (e. software and hardware).
- Model the costs — Once all the costs to the consumer are clear, create a model to input specific customer information to calculate costs. How many licenses does the customer need? Does the customer require additional support?
- Add formulas to the complete the model — Start by identifying the ROI for the first year. Calculate the direct benefit that a customer could realise in the first year. To be realistic in the forecast, you can look at factors that could dampen potential benefits. In the model you then offset the potential benefits against the software cost for the first year. Once you’ve calculated year 1 ROI, you can then calculate metrics such as NPV and IRR.
Similarly, the book offers practical steps to model solution ROI. This activity starts with understanding and mapping the solution cost factors: (1) costs to create and sell a first version of the solution (incl. design, people cost and marketing), (2) cost to make and sell subsequent units and (3) costs associated with ongoing use (maintenance).
Main learning point: “Profit Streams” is a treasure trove for anyone involved in building and selling software products. The book offers a logical structure, each block packed with helpful insights and practical tools. Both the customer and business side are covered in great depth, which makes for an invaluable reference throughout a product or business lifecycle.
