Jason Tanner and Luke Hohmann: Episode 1166

Transcript

[0:00:42] HA: Profit is your key to surviving. Without profit, you cannot maintain or grow your business. Without profit, you cannot serve your customers or provide benefits to your employees. Welcome to the Author Hour Podcast. I’m your host Hussein Al-Baiaty and I’m joined by authors Jason Tanner and Luke Hohmann, who are here to talk about their new book called, Software Profit Streams: A Guide to Designing a Sustainably Profitable Business. Let’s flip through it. Hello friends, and welcome back to Author Hour. I’m Hussein and I’m here with my two friends, Jason and Luke, who are here to talk about their new book, Software Profit Streams. Welcome, you two. I appreciate you coming on the show.

[0:01:26] LH: Thanks for having us.

[0:01:27] JT: Thank you.

[0:01:27] HA: Yeah, this is great, man. I mean, we were just talking about it off-air but I loved how easy it was to just navigate through your book, it was beautifully designed. So good job on that but before we get into the book and really, the beef of it all, I want to kind of share with our audience a little bit of your personal background, perhaps where you're from, maybe a person or an event that you know, shape the path that you’re on. Luke, we’ll start with you.

[0:01:51] LH: Well, I’ll give two things because they’re kind of extreme. I grew up in North Tonawanda, New York, which is outside of Buffalo, which means I grew up in a lot of cold and a lot of snow, and now I live in Silicon Valley, and I moved to Silicon Valley at the start of the .bomb Internet hype in the way back in 1996 and I like to say that once I moved here, my blood thinned and I love being warm and I loved being in Silicon Valley.

[0:02:22] JT: So I actually live now where I lived when I was in the end of elementary school, in the middle of middle school, and then we went off to Europe for about three years. I went to the International School of Brussels. So I got to travel all over Europe for sports when I was in high school before coming back to finish school in New Jersey. So from there, off to college, I was in the Marine Corps and then stumbled my way into tech by getting a job at the telecom company and then getting into software and product management.

[0:02:53] HA: Very cool. Well, how did your two paths cross?

[0:02:56] JT: I recorded a webinar with a software company. One of the early product management product companies hosted a weekly webinar and I got on the webinar and talked about what it was like to transition from a requirements-driven, document-driven product manager to an Agile product manager and Luke happened to watch that webinar and he called me out of the blue one day and said, “Hey, I’m going to come in, have you ever thought about consulting? Because your webinar is what our company does.”

[0:03:28] HA: Oh wow, that’s really cool. That’s amazing, and then you guys started working together from that point on or how did that work out?

[0:03:35] LH: Well, then Jason came on board as a contractor as part of our extended network, and the company evolved, and it evolved in such a way that we really needed a new leader to run the company, and so I asked Jason to take over as CEO and come on board full-time and he said yes, and it’s been great ever since.

[0:03:57] HA: Wow, what an incredible journey. It sounds like not only are you two friends but also, you work together, I’m sure that relationship has had a few bumpy roads in business but what I love is how you two came together and created this book from all your knowledge and wisdom, especially around software. I mean, I think that’s one world not everyone knows deeply of but I feel like it is our world today. It’s everything. So can you share a story of a time when you sort of had this big idea that doing what you're doing matters to you know, the tech industry in a way and how to make a big impact on the profitability of your business? What did you learn sort of from that growth experience that you share in your book?

[0:04:43] LH: One of the things that Jason and I are both known for is our leadership in the Agile software development community, which is a movement that started in the early 2000s as a different way to write software or to generate systems and over the last 20 years, that movement has blossomed and evolved in some really wonderful ways, and we see higher quality, more useable, and more effective software because of Agile practices. The challenge is that the Agile community and software developers were starting to over-rotate and you would hear people talk about, “Let’s deliver value,” and they were not quantifying value and they were not putting a number on that value, so they weren’t able to price their offerings in a way that creates sustainable businesses.

[0:05:38] HA: That’s really interesting. So what does your company then do to kind of go kind of help create that profitability impact? I know you talk about the importance of understanding and harmonizing like this monetization. Can you give an example of how applied systems sort of grows in the space?

[0:05:57] JT: So in Applied Frameworks, we really use the techniques that we wrote about in the book to help our clients actually work through the canvass that we designed and described in the book, starting with understanding customer benefits, and once you understand benefits, you can more accurately align your solution and how you’ll actually exchange the value you’re delivering with the product for money based on rationalizing the price across different market segments. That’s one untapped opportunity for a lot of companies is that it’s all one price for every segment, which tends to leave money on the table. There are some segments that will pay more because they’re going to get more value from additional benefits and other segments may not be willing to pay the same price or are seeking a lower price because they only need a subset of the benefit. So walking through the entire canvas actually unlocks a lot of opportunities for our clients to identify those opportunities that they can pursue.

[0:07:01] HA: Yeah, that’s really powerful. So how could a small business that may have a limited resource tank apply the profit stream canvas to their pricing and licensing choices? Are there any tips or strategies that you can share for maximizing this profitability in that kind of scenario?

[0:07:19] LH: Yeah, the small business and the large business are following the same process. There are some differences in how the framework and the canvas is applied. What’s curious about Applied Frameworks is our customer base does span tiny companies that are in startup mode to some of the largest companies in the world but all of them have one thing in common. They have to put a price on the software assets that they’re creating, and the process that Jason described were you’re starting with an understanding of how you’re providing value and who you’re providing that value for and quantifying it, putting a number on it is the same whether you’re a startup or you’re a large company. One thing that we find that startups tend to discount is the intangible value of their offerings. So when you think about a product, there’s both tangible features, like if I’m getting a gaming console, my tangible features would be, “How much memory does it have or how fast does it render the games?” but there’s also the intangible qualities of, “What games can I play and are those games fun?” And we find that small companies tend to discount the intangible benefits that they bring to the customers they’re serving and by understanding all elements of value, you can create a superior price.

[0:08:44] HA: Yeah, that’s really powerful and of course, increase your profitability once you fully understand the packaged deal you’re presenting. Man, I remember when I was like young and graphic designing, you know, I would – I was so shy of, like, just charging what I thought was fair because, you know, not only wanted the client, of course, and all those kinds of things but I didn’t value how much – You know, I would take hours sometimes just sketching up concepts that of course, the client may or may not see just sketching, but I didn’t weave that into what I charged, and I always felt like I was getting less than I, what I put into the effort and I, you know, obviously, this is on a very micro scale, but I can see how this idea could apply as you scale a business and that look, you got to recognize all the energy you’re spending around this product and what that value is really at as opposed to where you think it should be. That’s really powerful. Can you speak to the importance of long-term relationships, especially with customers, suppliers, you know, regulatory agencies, and achieving that sustained profitability? How can – especially now, I mean, with everything going on post-pandemic, how can businesses cultivate and maintain these relationships?

[0:09:56] JT: We described that as one of the applications of the profit stream canvas in the book in terms of an existing product and how to continually add value, how to think about price changes as the value increases, as additional features and benefits are added to the product so that the experience is so great that customers want to continue using the product. They’re getting more and more value, and as their needs change, we identify those ongoing benefits to add more capabilities so that we can evolve the product with the customer’s journey, and part of that, to your point, is the need for the organizations that are building these software-enabled solutions to actually think through the alignment of their business model with their license agreements and ensuring that they have the appropriate safeguards in place to ensure compliance with their agreement. So for example, if the business model is built around a per-user model for the price that I have a way for the software to actually monitor the number of users to ensure that the customer’s actually paying for the number of users that they have consuming the product. So that’s partly the business model and the thinking of the alignment of licensing and compliance but it also requires the producer of the product to actually ensure that the architecture could support that. So there’s a series of choices within the system represented by the canvas that enable all those decisions to interlink and really ensure that there’s an alignment across the product.

[0:11:39] LH: That notion spans the different kinds of businesses that are out there. So when Jason was talking and he was taking about the nature of the relationship, that license agreement or those relationships occur over time. In the consumer space, we often think of a shorter time relationship. But in the business space, you can find that those agreements span five, 10, 20 years, and so those relationships as embodied in that license agreement are including, are inclusive of the idea the product is evolving over time but the relationship is set up to be very stable over that period of time because it benefits both the producer and the consumer. The businesses that are transacting in that manner, they know that they have a relationship, so they can really work together, quite collaboratively in many cases, to ensure that the consumer, in this case, the business that’s acquiring the software is getting what they need and you can see this in business software. Imagine, for example, a financial system that helps a business manage its finances or a marketing CRM solution that is helping the company manage their customers or manage their customer relationships, these are all mission-critical to the business and those agreements can span many, many years.

[0:13:03] HA: Yeah, that’s so powerful, man, just understanding the importance of just maintaining relationships just with colleagues and people around you and how impactful it is to maintain relationships in business culture and how these businesses and suppliers really, I mean, they’re the backbone of what we do. I used to own a little print shop up in Portland, you know? A T-shirt print shop. I remember relying heavily on my T-shirt suppliers and every bit of information I can get from them, all those good things, and maintaining that relationship. They were really cool in like bringing me up once or twice a year to just learn about new products and new things. So you know, and I just felt sort of loyal to working with them, and it’s just so powerful when you just exercise one’s humanity with the people that you work with, and the vendors and of course, the suppliers, it’s so powerful. What advice do you give to software-enabled startups looking to create profitable solutions with long-term impact? What are some common pitfalls to avoid, and what are the benefits of following the strategies outlined in your book?

[0:14:10] LH: Is to think of things as static and the annotate to that is to realize that a startup if they’re successful is going up the solution market life cycle. So I’m developing my offering, I launch it, my early adopters start using it, I get a little success, I move on to my early adopters, my early majority, my late majority, and as I’m going up that curve, I continue to provide more value. But as that solution is evolving, my pricing strategy, my pricing numbers, my pricing metrics, my license agreements, all of those things are also evolving, and one the real challenges that we do see in startups is they often fail to raise their prices in a reasonable manner. We worked with one software company earlier this year, they were a small company, and they hadn’t raised their pricing from the moment they had launched their product, and it was now a two-year-old company. So for two years, they were growing and providing more value, and they had never raised their pricing or adjusting their prices. Larger companies have learned that as they improved their solution, they’re going to adjust their packaging and they’re going to adjust their pricing. That is a lesson that smaller companies often forget or never adopt and that can be seriously harmful to that small company.

[0:15:36] HA: Yeah, that’s so powerful, and I deeply resonate with that with my small company back in 2010. For three years, I didn’t raise my prices on the printing, man. It was because I was just trying to gain business, and it was detrimental because the moment I needed to, I lost a lot of business, and I knew why. Jason, do you have anything to add to Luke’s statement or a bit of conversation?

[0:15:59] JT: The one that I have is that avoid the trap of copying what everyone else is doing. The most common webpage you’ll see for a software company is three different price levels, and it’s good-better-best without any thought behind who is actually the target customer segment for each of those offerings and the thought process behind that is not necessarily need to be three levels. It may be four levels, and it may actually be a completely different product configuration that’s going to lead to the highest profitability and sustainability for the product. So when we think through that structure of how we’re going to actually go to market and advertise and promote and talk about the product when we treat our customers differently based on who they are and what segment they fall into, we actually can offer more direct solutions at different price points that are actually better for the customer and better for the provider. So that is the one pitfall that I see a lot of startups fall into is, “We’ve got to have good-better-best. We’re going to have three different price levels and we’re just going to describe them as a collection of features,” and as you go up the levels, you’re going to get a different collection of features and it’s really not a whole lot of thought put into what that means to the buyer and the buyers are different. Going back to what you said, we think of them as people who have needs, who have problems to be solved, our software-enabled solutions means different things to different people. Maybe the same product with a different configuration but it is offered at a different price for a reason. So it is not 59-79-99. It’s actually probably some different strategy and different series of price structures that would actually benefit everyone so much more dramatically.

[0:18:02] HA: Even if it costs more, it is more tailored to that experience or that pain point, it’s that much more worth it. So powerful. I love that.

[0:18:10] LH: Well, keep in mind that costing more can be a valid strategy. One of the strategies in the book and when we talk about taking a step back, people just put a number on a price, and they don’t have a strategy. Well, there is actually a number of strategies that are thoughtful and inform many other choices. So a particular pricing strategy that we talk about in the book is a premium pricing strategy. It’s kind of the pricing strategy if you imagine in the luxury car market, Mercedes starts with, you know, it’s an expensive car. Ferrari, Maserati, Bugatti, we start with, “We make expensive cars, do you want to buy one?” and part of the value, going back to that notion of where value becomes a part of the equation is, this is an intangible value. I am purchasing something that is exclusive, and the value is I get to show off my wealth. Now, some people care about showing off their wealth, and some people don’t, but for the people who care about showing off their wealth, buying a premium offering just like a gamer who brags about buying Alienware computers, which are some of the most expensive computers and some of the highest performance computers but nonetheless, they’re super expensive. They love to brag about how much money they spent on their rack.

[0:19:31] HA: That’s so powerful, yeah, and in that perception, there is either a ton of value depending on how you, you know, where you place that value and the benefits package, so I think that’s really powerful how you guys sort of display those and you know, talking about the book, I know like I said we talked about a little earlier, man, I feel in love with how your book came together with the designs, the graphics, the whole thing. You know, honestly, I’ve flipped through the first couple of pages I was like, “Oh, this is a cool beginning to a book like how they laid this out. It is very graphically appealing,” and then I kept scrolling, and I’m like, “Oh wait, this is the whole book.” So I love that because it just, I don’t know, it definitely spoke to my design aesthetic and design appeal, but I know it was a journey because, again, it is not something we normally do at Scribe. Can you guys talk about, you know, maybe, what was your favorite part about pulling this book together? I know you guys talked about sketching this thing basically by hand in the beginning but what did you learn from this journey of just putting this book together? Luke, we’ll start with you.

[0:20:30] LH: We had a great time in putting this book together, and we knew that we had to be intense because Jason and I felt and we were early on the curve but we actually sat down and talked about when we wanted this book done and we picked the early second quarter of this year because we felt that the macro-economic trends were such that we could be heading into a recession. Once we agreed that we felt there could be some significant macro-economic environmental needs for a book like this, we said, “Well, how are we going to get this done?” and I think for me personally, the favorite part of writing the book was we did writer retreats, where Jason and I would fly to a city, get an Airbnb home or a Vrbo home and we would lock ourselves up behind a door in a home and we would sit down and write from about seven in the morning until about 10 at night. And we would do that several times, and it accelerated the production of the book tremendously, and it enabled us to really explore visually how do we want the book to lay out, how do we want the book to feel to the reader, and how do we honor and I’m so glad you said that the book is beautiful because we actually said we don’t want to write just a content book. We want to write a beautiful book, one that is accessible and rich, and deep, and we’re very proud of what we’ve created that way.

[0:22:04] HA: I love it, man. I want to interject here, but I want to hear what Jason has to say because, man, it is – I felt like you guys did such a good job of just making the whole thing like an art piece, but that’s just my personal perspective. We’ll get into that later, but Jason, what do you think?

[0:22:19] JT: So the literature that you’ll find that is somewhat related to this topic, you’ll find a lot of books about product management. You will find a lot of books about pricing; however, there is not a whole lot that you’ll find that really is specific to what we wrote about, which was software-enabled solutions and pricing and licensing and figuring out the business model, really focused on software. So we start with or I should say, I started by writing in Word and it was hard and it would have wound up being another textbook similar to what exists in the marketplace. So the creativity that we unlocked by writing, drawing, and sketching really I think was the best part about this. You know, the interaction that Luke and I had and with setting our design, it was great. When we were in person in California at one point, we were writing a page and handing it directly to [Fed-A 0:23:15.3] and 30 minutes later, we had this beautiful layout. It was fantastic to experience that type of collaboration to produce something that, like Luke said, is actually usable, and you don’t need to read through all at once. You can grab the pricing section if you are dealing with a pricing problem and just thinking that went into and discussions that we had about what are we really trying to describe and how can we model it in a way that’s useful and follows a logical progression I think is what would really be most valuable to the reader.

[0:23:49] HA: Yeah. I think, you know, it’s funny hearing you guys talk about this, not really funny but I just see the correlation of how, you know, what you talk about in the book is kind of in a lot of ways you apply to how you built this book in and of itself, right? Just the philosophies are just they’re kind of – they cross paths, and I just kind of enjoyed that from a distance. I get to see a lot of books; I get to read a lot of people and meet a lot of amazing people like yourselves. The more people take care in how they approach putting a book out is really cool. It is a process; it’s a love-hate relationship at first. It goes through its phases, you know it’s a journey, there is times where we hate it and there’s times where we just love it, but I think when it all comes together, the hard work, like you said, the collaboration aspect, you know, the idea is really working towards like in a way like you know, not just a canvass masterpiece. But just something that really helps the reader become a better version of themselves or approach their work a little differently. So that brings to my last question, you know, after a reader goes through your book and experiences what I got to experience, what do you hope they feel after putting it down? Jason, we’ll start with you.

[0:25:01] JT: I hope they feel really confident in the decisions that they need to make to create a successful software product. In a way, some of the writing I felt like I was writing to myself 15 years ago because there’s some things where I was fumbling in the dark trying to figure things out as a product manager who is new to the job, and I had to deal with a lot of vexing problems and really the feeling of confidence and more skill and capability in doing the job really well and to really create a long-lasting, sustainable solution. I mean, ultimately that’s our objective is to support all the people out there that are doing great work, and we want to make them feel a lot better about what they’re doing in their roles because they have all the tools that they need really to focus and be successful.

[0:25:54] LH: Well, it’s funny, I actually thought the same word, and I think that speaks to the fact that that word, confidence, was something that Jason and I would talk about repeatedly when we were writing the book, how do we have someone who in a sense, Jason and I are designers and we’re designing an experience that produces a business result for someone. So what was the single word? And many times, the word that we were after was confidence, and the reason the book has such a focus on the visual appeal or the graphic element was because we wanted them to also feel that they could make these decisions quickly. Some of the kind of the classic books on pricing and licensing, it will take you two months to read the book and kind of process and understand what the author was trying to say, and you’re like, “Okay, what do they really mean?” Where in our book, we at times even tested by timing people saying, “Look, how quickly can you read this section in such a way that you can understand it?” and people would say, “Yeah, I read it in half an hour, and I got it.” The pictures and the words together helped, and so it’s not confidence, it is also moving with speed because sometimes these product managers and these business leaders have very little time to make decisions about their pricing and licensing models. So you need to move with speed and confidence, and we wanted our book to support them in that process.

[0:27:30] HA: So powerful. I love that because it cuts through right through the noise, man. It’s so powerful and I am glad you brought it full circle for me. Jason and Luke, it’s been an absolute pleasure just having you on the show. Of course, sharing your experiences and stories and obviously, the width of your wisdom, which I appreciate so much. The book is called Software Profit Streams: A Guide to Designing a Sustainably Profitable Business. So besides checking out the book, where can people find you two and connect with you and maybe ask questions or you know, hit you up after reading the book?

[0:28:01] JT: We’re almost on LinkedIn daily, so you look me up on LinkedIn and appliedframeworks.com and profit-streams.com.

[0:28:11] HA: Great. Well, thank you two again. Congratulations on your book launch, I’m sure it will do so much good out in the world. So thanks again.

[0:28:18] JT: Thank you.

[0:28:19] LH: Thank you.

[0:28:20] HA: Thank you all so much for joining us for this episode of Author Hour. You can find, Software Profit Streams: A Guide to Designing a Sustainably Profitable Business, right now on Amazon. For more Author Hour episodes, subscribe to this podcast on your favorite subscription service. Thanks for joining us, we’ll see you next time. Same place, different author.