Discovery Driven Planning: Getting a handle on key metrics
A critical part of a discovery driven plan is understanding your assumptions about what makes some assumptions more important than others. This gets into the question of what we call your ‘key metrics’ – the few numbers that really matter to your unfolding business.
It starts with the reality that for many offerings, revenues and expenses don’t track each other contemporaneously. They can flow at completely different rates over the life of the offering. So, as opposed to selling things in units, like shoes (though few would buy less than by the matched pair!) ships (sold by the unit) and sealing wax (sold by weight or packet) many modern businesses derive their revenues and profits differently.
For instance with consulting services, charges can be per project or per cumulative hour. But here revenues and expenses tend to correlate pretty well. You incur costs per hour to do business, and you incur revenues for doing the same. However the unit of business is very different in the insurance industry. With insurance, you get your revenues in the form of premiums, and operating costs are incurred over time, but you incur the bulk of your costs (consisting of claim reimbursements or death payments) only after some time. Indeed, many insurance companies make no money on their underwriting at all – they make their profits on investing the money they hold during the time between receipt of a premium and reimbursement of a claim. With luck, in the case of life insurance this is hopefully decades for both the insurer and the insured.
More challenging still is software, in which there are a number of viable models. One traditional approach is to sell a basic package for a modest price (or even for free), but hope that customers will upgrade to a for-pay more advanced version. This is the strategy Adobe has used to become a dominant platform for document exchange. Another strategy is to bundle software with hardware purchases. Players as diverse as Microsoft, Norton Anti-virus and McAfee have pursued this approach. More recently popular strategies have been to offer a subscription to a software service (often offered over the web). NetSuite, for instance, offers a pay-as-you-go on-line business automation package for smaller business users. Even more new models involve giving the use of the software away for free, and making money through other sources, such as through advertising. Google’s entry into office software follows this model.
Depending on the model you choose, the critical variables and key dimensions of performance will differ. The architecture of your plan, in other words, all depends on this critical choice.
Since it is such a critical choice, it is worth spending time exploring alternative units of business, because this could allow you come up with very different profit generating structures than are normal in your industry. Sometimes, these can dramatically please your customers and vex the competitors because their embedded systems may not easily accommodate a new way of doing business. Indeed, research by MacMillan and his colleagues found that even theoretically easy to imitate products were not copied quickly when doing so would require system changes. See MacMillan, I. C., McCaffery, M. L., & Van Wijk, G. 1985. Competitors’ Responses to Easily Imitated New Products – Exploring Commercial Banking Product Introductions. Strategic Management Journal, 6: 75-86.
Filed In: Discovery Driven Planning