Loss Leader

My colleague Joel Harrison is good at encapsulating learnings from his experience. In 2006, while I was visiting him at his startup company, Abrevity, he said, “You can’t justify a new product based on a cost analysis of the first-generation product. You have to have a vision.”

Joel and I had experienced the frustration of trying to create new products at a company that was in a high-volume, low-margin business — hard disk drives. On the one hand, Joel had prototyped a product that could have been the first available Ethernet-interfaced free-standing disk storage unit. I had been involved with defining a disk drive that stores and plays back video streams without a computer attached. While our company had funded the early prototyping of these products, it did not make the investment needed to launch them as consumer or end-user products.

Joel’s explanation, as I understand it, is that the company did an analysis of the cost of the first products in each case and concluded that the product cost too much to be priced reasonably in the marketplace. Now here’s where “vision” comes in. When you’re introducing a radical new product, you have to price it not based on the initial product’s cost, but based on a combination of the needs of the market and the expected cost curve as volume increases.

Companies selling services, such as cell phone service, do this all the time. To make the service workable, they have to invest a large amount of capital in infrastructure, such as cell phone towers, switching equipment, and so on. But pricing of the phone service must chosen both to make it attractive to the consumer and, when the number of subscribers reaches a reasonable target, to make a reasonable return on the investment.

The same thing is true with new products. The barrier to radical innovation and new product introduction in companies that have been operating in a low-margin high-volume environment for years is primarily a failure of imagination. They need the vision to see that (a) there is a market to be created or captured, (b) the product they have conceived is viable, and (c) initial pricing will lead to losses during the early stages of market development. Venture capital is based on selecting and funding this sort of innovation. But old companies have trouble thinking outside the low-margin, pay-for-itself-or-die product box.

That’s what Joel was telling me. If we could have planned the new businesses beyond the first product, and had got a commitment to fund the initial losses, we could have made history in disk drive marketing.

Is your software on fire?

The spectacle of Dell laptops on fire in the summer of 2006 due to Sony battery problems has prodded me to think about product failures. There is nothing so attention-getting as a fire in a conference room. Few people who see this sort of failure will forget what they have seen.

Software failures may not be so spectacular, but they can be just as memorable to the people who witness them.

Examples from large-scale software systems: if you were waiting for your baggage in the new Denver airport a few years ago, you may have waited until human intervention delivered your bags, because the bag sorting system failed. And what if you dialed 911 and the call did not go through?

Examples from embedded systems: your cell phone drops a call due to a software glitch in the phone; your hard disk loses track of its position and takes an extra several seconds to recover.

Examples from everyday use of an operating system: Windows gets confused while processing interrupts from the web browser, and the browser hangs until you reboot; Outlook misses a beat and an email doesn’t appear on the screen when you expect it to.

If the computer or phone were to catch fire when any one of these failures occurs, you can bet that the manufacturer would do a massive recall the way Dell has done. But they didn’t. Instead, they let the users keep on running with a piece of software that “catches fire” regularly. If you’re like most users, you have become accustomed to seeing these fires and dealing with them. But do you like them? Of course not.

What are the consequences? Word of mouth travels quickly, and these failures have created a large population of users who resent having to use devices and software that fail. Resentment leads users to search for a better alternative. This is good for competitors who offer a better, unfailing solution.

But the whole world of software (and digital devices that depend on software) suffers from a bad image because of these failures. From consumer devices to mission-critical industrial control systems, everyone who has to deal with modern digital devices is gun-shy about failures. And rightfully so.

Is your software on fire?

There are known methods to assure that the software-dependent devices you make will not catch fire. If you’re not certain what these methods are, or who can implement them for you, you need to find someone who can help. But before you call in a consultant, be sure that you’re willing to pay the price: It takes time and money to make software reliable, just as it does in batteries and laptops. Are you ready to buy in?

What is Product Marketing’s role in development?

A colleague asked, “Do you believe Product Marketing could be the bridge between the Engineering and R&D organizations? It seems to me that market requirements are the other piece to incorporate there and Product Marketing could add that to R&D’s specs before working with Engineering to determine what’s feasible and on what time schedule… What do you think?”

It works at the front end to have an Advanced Development group build prototypes and conceptual specs/models, with specs or requirements added by Product Marketing before giving them to Engineering. But the problems (below) don’t come out until the crunch — when you’re waiting for the next milestone in actual product development.

The problem is that Product Marketing and Engineering (the department responsible for developing products delivered to customers) have a natural tension: they have to arbitrate between what’s feasible within the time/dollar/featureset constraints; Product Marketing should have the customer deliveries in mind, and should interpret “what the customer wants,” while Engineering is responsible for determining which (and how many) features can be delivered within the cost and time constraints.

As a product is developed, Engineering will naturally come back now and then to renegotiate features vs. schedule (and sometimes $) as they uncover problems (or opportunities) that impact schedule. Product Marketing cannot act as the arbiter for this negotiation — Engineering must participate as a fully-responsible party, determining what can be delivered when. When Product Marketing has all the power in this negotiation, you either get emasculated Engineering, which won’t take any chances because they’re being second-guessed; or you get promises that can’t be kept, because Engineering isn’t really running the development process.