1. Issues in Shifting from a Product-Based Business Model to a Service-Based Model Rich Mironov Berkeley-Tekes Innovation in Services Conference, 28 April 07

2. www.mironov.com2 Thesis: Service-Model Thinking  Most software firms use product-based models  Up-front software licensing  Customer responsible for deployment and operation  Firms struggle to understand and adopt service models  Demands new thinking and skills  Entirely new Operations function; reconceived marketing  But growth of service business models is fueled by…  Visible successes (e.g. SalesForce.com)  Massive venture investment in service models  Broadband connectivity enabling remotely hosted services  Increased willingness to offload non-strategic applications

3. www.mironov.com3 Defining Software Business Models  Product/licensing model  Up-front licensing fee, optional maintenance  Pay for full-deployment capacity or seats  Software typically installed at customer site  Subscription service model  Per seat per month  Typically hosted  Transaction service model  Per fax, per download, per transplant, per update, per qualified lead, per session, per report…  Service models force “shared success”  Vendors must engineer success, not just software

4. www.mironov.com4 Sources: Pulse of the Market  Front-line practitioner  204 respondents to service-vs-product survey  Working tech product managers and marketers  http://www.mironov.com/more/survey_results/ http://www.mironov.com/more/survey_results/  Consultant to 20 tech start-ups since 2001  Defining software requirements, pricing models, organizational impact,  Business plans for two recent service start-ups  Product strategy newsletter, ongoing VC discussions

5. www.mironov.com5 Business Model Survey Surveyed current product champions about service-versus-product  204 responses  http://www.mironov.com/more/survey_results/ Pricing Model  Product (license)48%  Subscription service23%  Transaction service19%  Free, advertising, other10% Job Role  Product/service management, product marketing55%  Corporate marketing, sales24%  R&D, consultant, other22%

6. www.mironov.com6 Top-Line Survey Observations  Products slant toward enterprises and government  Services have larger share of small/medium business  Service sales cycles are 33% - 49% shorter  Service PMs don’t use app logs to understand users  24% vs. 1% for products, but should be 75%+  PMs say that customers use only half of features  Service PMs use product registrations more often than user profiles to identify their users

7. www.mironov.com7 Selling and Upselling Versus product model:  33% faster close cycle for subscriptions  49% faster close for transaction services Different upsell models… ProductSubscriptTransxn Selling new versions/upgrades77%45%39% Selling more units81%47%50% Higher-priced subscriptions29%83%42% Adding more users44%72%32%

8. www.mironov.com8 Understanding Users “We know which features/functions our customers use via...” ProductSubscriptTransxn Personal discussions54%47% 50% Tech support cases35%32%24% Enhancement requests27%17%11% Activity logs1%23%18% Sales team feedback28%23%32%

9. www.mironov.com9 Over-Featured Products “I think my typical customer uses...” Product:48% of available features Subscription: 48% of available features Transaction: 52% of available features Consistent over-design across models

10. www.mironov.com10 Broader Service Model Findings  Software-as-a-Service naturally slows down revenue from enterprises  Also increases early capital requirements  Drives need for focused upsell marketing  Case study: Replicate Technologies  Many “product” software firms lack core operational experience for service model  Hurdles are not technical  Must rethink marketing, sales, operations

11. www.mironov.com11 Vendors Want More Colorful Story  Licensing software firms are “grocers”  Service firms are “chefs” New requirements  Service-based pricing (“Check, please!”)  Responsible to end users (diners)  Shared infrastructure (restaurants)  Personalized service (menus)  Service metrics (taste tests)  Continuous usage marketing (specials)

12. www.mironov.com12 New Kinds of Service Metrics Service vendors need Operations teams and skills  Uptime SLA (“Application up 99.95% of the time except…”)  Response Time (“98% of log-in take <1.5 seconds…”)  System Capacity (“Add CPU when usage >60%...”)  Support Escalations (“P1 first response within 15 minutes…”)  Reporting (“Billing reports showing all customer transactions…”)  Software Updates (“Push software weekly at 1AM Sunday with roll-back…”)

13. www.mironov.com13 Rich Mironov: Background  Principal, Mironov Consulting  Consultant and interim executive for tech companies  20+ pre-revenue start-ups and Silicon Valley technology firms  Product strategy, business/service models, market needs  Large tech company experience  Engineering/product management at HP, Tandem, Sybase  Technology executive/entrepreneur  iPass, Wayfarer, Slam Dunk Networks, AirMagnet  BS Physics Yale, MBA Stanford

14. www.mironov.com14 “Product Bytes” Newsletter Free since 2002 Focus on start-ups, technology, product management  “Service Revenue and Upsell Marketing”  “Why are there Serial Entrepreneurs?”  “Parenting and the Art of Product Management”  “What’s Your Pricing Metric?”  “So Your Product Wants to Be a Service...”  “Sharks, Pilot Fish, and the Product Food Chain” http://www.mironov.com/articles/ RSS: http://feeds.feedburner.com/ProductByteshttp://feeds.feedburner.com/ProductBytes