Warren Buffett, Product Manager

Berkshire Hathaway’s annual letter to shareholders has been called essential business reading. Buffett’s investment criteria could be read as great advice for product managers.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the low cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success. Business history is filled with “Roman Candles,” companies
whose moats proved illusory and were soon crossed.

Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.

[My emphasis]

Be careful with fireworks. Its good advice for both children and business managers.

Subscription Pricing

Saeed at On Product Management has a post cautioning against half measures when moving to subscription pricing.

There is a real tendency if you already have an on premise solution to…ensure you don’t cannibalize the revenue coming in from that solution…always [putting] the existing product ahead of the subscription based product. This is what happened with Siebel on Demand. The existing business had to be protected from encroachment or cannibalization by the on demand business and it hampered the on demand business significantly. Your company will really need to shift it’s thinking to manage this well.

Macromedia published a survey in November [free registration required] that predicts a growing number of software vendors could benefit from this advice. According to the study, roughly half of all software vendors will offer some form of subscription pricing by 2009. Oddly, only 7% of these are doing so in response to customer demand. The most popular answer, 29%, wanted to move towards subscription pricing for a more predictable revenue stream. This is not the type of rationale that will lead to a successful customer adoption.

More encouraging, 21% are using subscription pricing to increase the adoption of their software. Saeed rightly suggests that product managers evaluating subscription models need to look at the overall value proposition and that pricing is simply a tool in delivering on thatproposition . If these vendors are using subscription pricing as part of a different go-to-market strategy or targeting different customer segments, they are much more likely to succeed than the ones who simply want to smooth out their revenue.

Web Aps and Popcorn

A group academics from Stanford and University of California, Santa Cruz have completed a study on movie theater pricing in Spain which concludes that when primary goods, movie tickets, are priced higher than the secondary goods, popcorn, it can benefit everyone. The less prices sensitive moviegoers spend more money at the concession stand, in effect paying for a “premium” experience. This research is summarized here.

Pricing in this manner is such common practice that I was surprised to learn that it had not been studied quantitatively before:

The argument that pricing secondary goods higher than primary goods can benefit consumers has been circulating for decades, but until now, no one has looked at hard data to see whether it’s true or not.

Freemium pricing, popular with many web start-ups, is the logical extreme of this approach. The primary good, basic access to the site, is free while the secondary goods, premium features, integrations options, administration tools, etc., typically require a subscription fee.

There are more than a few entrepreneurs hoping that web users exhibit similar characteristics to Spanish movie-goers to make this model work profitably.

via: Dollars and Sense: The Pricing Blog