I had an insightful conversation with a fellow product manager about how to increase a product’s value. While there were many good ideas from improving usability to building features for a broader client base, I was surprised to see resistance against opening the product for other application providers to build add-on modules. I wonder if in today’s software world, where freemium and open source are considered viable business models, there is a place for close-ended software?
The argument against open platform is simple – the competition will get a foothold in our install base by building products on our platform. It will reduce opportunities for upsell and services dollars. Agreed, on the face of it these concerns sound valid. How about the long-term sustainability of your platform? I am using product and platform interchangeably here but a product that is widely adopted in an industry behaves like a platform. Think of SAP ERP, which is a core product and almost essential software to run a business in many verticals. SAP can choose not to expose any integration capabilities for third-party providers to control that market. Is it the right strategy?
In one of my MBA classes, I learned about network externalities. The more companies build around your product the more valuable your product becomes. It is not rocket science; just think of iPhone. No doubt it is a wonderful device but majority of its value is derived from many entertainment and productivity applications built on it. Now think of switching cost of this device. Even though Android phones have similar or maybe more features and cost much less than iPhone, customers think about applications before switching!
At first the business model is not obvious, but any product that becomes a standard can offer huge value to clients, manufacturers and industry at large by becoming an open platform. Salesforce makes tons of money by selling its CRM solution, but it found a much bigger growth engine in app-exchange and force.com platform that enables small but innovative companies to build productivity applications on its CRM solution. Salesforce couldn’t have thought of and built all those applications on its own. With other companies building these apps not only they are increasing the value of Salesforce solution but they also are providing Salesforce a new revenue stream by giving it a cut on every sale. A win-win for everyone – clients get better products, partners get a platform to sell on, and providers make more money while keeping attrition rate down.
It happens rarely, but in this case I could convince my group members of the value proposition of network externalities. The next challenge is to build a business case and sell to the technology team. Who said life was easy for a product manager?