Overcoming the Barriers To Building Great Products

OVERCOMING THE
BARRIERS TO BUILDING
GREAT PRODUCTS
Mike Chowla Twitter: @mchowla
Silicon Valley Product Camp
March 14, 2015
Copyright © Mike Chowla 2015
Slides available at
http://www.slideshare.net/mchowla

My Background
• Education
• BS, Electrical Engineering and Computer Science, UC Berkeley
• MBA, Wharton
• Experience
• 10 years as software engineer and architect building high
performance infrastructure
• Previously Product Management for AOL Mail, StrongView, Aeris
• Currently Sr Director of Product Management at Rubicon Project

Can you win on product? [From Last Year]
Clearly yes, but seems to be the exception rather
the rule
Why is it rare?
My best answer is that it’s hard to build a culture
that creates a superior product
Culture Eats Strategy For Breakfast
Peter DruckerMark Fields, Ford Motor Company

We all believe in building great products
In 2015, everyone thinks that great products are good for
business
Every one says they want to make a great product
But very organizations succeed at it
Why?

Apple Has Made The Case
• iPhone has a 38% operating margin1
• 90%+ of the profits in the industry
• Samsung has 8% operating margin
and 9% of profits
• Phones are highly competitive but
has built a better product and
captured the majority of the spoils
1Q4 2014 Canaccord Genuity

So Has Telsa
• Telsa has 27% gross margin
• #1 selling large luxury vehicle
• After only 2 years on the market
The Oatmeal:

Google Search Is Another Proof Point
• 67% US Market Share
• 85% of all search revenue worldwide
• With 18% market share, Bing is losing money
• Even after massive effort from Microsoft Bing, Google’s
search results are still better

What is a great product?
(for the purposes of this talk)
A product that market the prefers because the experience
is better and that preference drives superior financial
results (in the absence of other competitive advantages).
Ability to charge higher prices for similar functionality is a
good indicator

Characteristics of Great Products
Frictionless
Great UX
Outstanding Support
Attention to detail
Emotional Connection
Just Works
Simplicity
Does the job it was
hired to do

Most companies competitive advantage is
not in a better product
Network Effect Cost Advantage
Economies of
scale and scope
(Desktop Era)

How Rare Should Great Products Be?
• Exceptional products are by
definition well above average and
therefore rare
• But, it’s so extremely rare see a new
superior product take over a
category that it’s exceptional
• As product managers, we’ve all tried to make our
products excel over the competition
• But it’s really really hard

Why is it hard to win on product?

Is culture the problem?
Definition in Merriam-Webster
Culture (noun): the beliefs, customs, arts, etc., of a particular society,
group, place, or time
When people talk about culture and business, they usually mean
the culture of a particular company
Example: Company X has toxic culture
But for great products to be rare because of “culture”, it can not
be the idiosyncratic culture of particular businesses as the hand
of the market would reward the good cultures.
Has to stem from a common element of how businesses work

Classical Business Thinking
• What’s the ROI?
• Finance people compute Net Present Value (NPV)
• All activities need a business case
• Reductionist in nature
• Evaluates each activity isolation
• Difficult to evaluate second order effects especially
cumulative ones
• The first bad product decision is impossible to measure
• After a lot of them, your product is now a bad product that
customers hate
• And fixing one issue or even a few doesn’t solve anything

Discounted Cash Flow
• Great if you are thinking about capital investment or an
acquisition
• If no one pays attention to the finances, companies go out
of business

But Not So Good For Product Decisions
• Can you quantify the financial impact of an individual
product improvements?
• Usability Improvement
• Improved Visual Design
• Better materials (physical products)
• Features you left out to reduce complexity
• Even more difficult to quantify the cumulative effect of 10
great product decisions

End Result: Products People Hate
Many of these kinds of companies make a lot money
But not by having better products.
These businesses have a strategic & competitive situation where their
customers do not have to like them

Back to great products that people love

Original iMac example
• The first big product introduction after Steve Jobs returned to Apple
• Apple is critically low on cash, bankruptcy is a possibility

Extra Costs in the Case
• The cost of each case was more than $60 per unit, three times that of
a regular computer case.
• At other companies, there would probably have been
presentations and studies to show whether the translucent case
would increase sales enough to justify the extra cost. Jobs asked
for no such analysis.
• So I thought, if there’s this handle on it, it makes a relationship
possible. It’s approachable. It’s intuitive. It gives you permission to
touch. It gives a sense of its deference to you. Unfortunately,
manufacturing a recessed handle costs a lot of money. At the old
Apple, I would have lost the argument.
• What was really great about Steve is that he saw it and said, ‘That’s
cool!’ I didn’t explain all the thinking, but he intuitively got it. He just
knew that it was part of the iMac’s friendliness and playfulness.”
How Steve Jobs' Love of Simplicity Fueled A Design Revolution
Smithsonian Magazine, September 2012

Math on the Case
• An original iMac was around $1000
• So an extra $40 on the case, which lowers gross margin
by 4% points
• In 1998, Apple’s gross margin was 27%
• Four points is a lot!
• Your CFO is going to want to know how colors and a
handle justify 4 points of gross margin
• And your competitors will ridicule it:
The one thing Apple’s providing now is leadership in colors.
It won’t take long for us to catch up with that, I don’t think.
- Bill Gates

Was the case worth it?
• History say yes
• 800,000 units sold in 139 days
• Apple returned to profitability
• Market cap went from $4.1B in 1998 to $725B today (+17,500%)
• Microsoft went from $245B in 1998 to $335B today (+37%)
• But the problem is that you can not prove it
• Even in hindsight, how can you prove the extra $40 was
worth it. Maybe the iMac would have sold well with a
boring case

“I’m Feeling Lucky”
• Took the user directly to the first result, there by skipping
all the ads
• Estimated that it cost Google $100M a year in ad
revenue
• Justified as keeping Google from looking “too corporate”
• Was it worth it?

Products are more than the sum of their parts
• Your product is not a bundle of attributes with a price
• A great product has 10,000 good decisions, small & large,
that people make people love it
• No silver bullets to get there
• Not based on more functionality
• Great products often do less than the competition

Imitation
Imitation is the enemy of business strategy
If your strategy can be imitated, it ceases
to be a competitive advantage

Great Products are Beyond Imitation
• If the advantage of a great product was a few discrete
attributes, it could and would be easily imitated
Imitation being difficult is what makes winning on product a
defensible business strategy

Apple vs. Samsung
So similar, that Apple sued Samsung
As we saw earlier, superficially looking the same is not enough

vs.
• Similar catalogs
• Both have original content
• Similar device reach
• Netflix charges $8 a month for just streaming vs. Amazon
bundles it with Prime
• Netflix price is higher, $96 a year just for streaming vs. $100 for the
whole Prime bundle
• To make the streaming service what it is today, Netflix split
streaming from the DVD service which tanked their stock
price

What kind of decisions are needed
for great products?

The Hard Product Decisions
• The hard ones make the product experience better but
have negative direct business impacts
• Drive cost or reduce revenue without direct offsetting impacts
• Example: Fewer ad slots in an ad supported product
• Example: No bloatware pre-installed on a laptop
• When product improvements have direct positive
business impact, these are easy decisions
• You & your competitors will make the same decisions

How do you even know you are right?
• Really understand the customer impact of your choices
• Resist thinking “more” is always better
• Keep an eye on the aggregate impact
• Monitor how your customers feel about your product
• Maybe you don’t
• Creative works (movies, books, etc) even for the best creators are
hit and miss

How do persuade your management?
Convince people you are a product genius

Sometimes even the best are wrong

Where does this leave us?

A Paradox
• Business thinking is necessary
• You have to care about profitability else you will go out of business
• All the roles that drive business focus are necessary
• Companies will go bankrupt without them
• Great products need decisions that go against business
thinking
• Too many of these that don’t pay off are disastrous
• Thinking too much about financial impacts makes it
impossible to generate superior financial results through a
better product

Ideas on What To Do
• Get the Product Management Fundamentals Right
• Really understand your customers, what they need
• Only way to know when it’s worth it to take the short run hit
• Sweat the details
• If do you don’t care about the little things, you’ll never get to a great
product
• Go as far as you can without endangering the business
• And be right that you are really improving the experience is a real
way

Things I’ve Said
• “That customer can’t leave because of X so I’m not going
to fix their problem”
• “The competition is not any better in this regard”
• “I have too many other product problems to fix that major
pain point with the product”
Was I being expedient or did I compromise
the product?

QUESTIONS?
mchowla@gmail.com
Twitter: @mchowla
www.linkedin.com/in/mchowla

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