Returns from Product Development: A Case Study

The way a business undertakes product development is driven by the types of returns it and its shareholders are looking for. 

In the previous article, Returns from Product Development, we covered the different types of returns companies are typically looking for from product development. 

This post will help you see how desired returns drive product development through a case study. This case study that looks at two bakery software companies will hopefully bring the concept to life in more vivid detail.

The case study is based on a real situation that I’ve then modified to enhance our case study. Behind these modifications are other real world experiences. The industry, companies and players have been made up in order to preserve confidentiality. 

Importantly, we assume that both companies have competent people who are experienced and knowledgeable about best practices in product development.

Returns for Product Development

Before we get to the case study, let’s quickly revisit the types of returns companies doing product development typically look for:

1. Equity Gains: the technology built leads to an increase in the value of the company. 
2. Revenue Growth: the technology built leads to an increase in the company’s revenue.
3. Increased Profit: the technology built leads to an increase in the company’s profits. 
4. Cost Savings: the technology built leads to a decrease in costs.
5. Improved Cashflow: the technology built leads to better cashflow.
6. Reputation: the technology built increases (or decreases) the company’s reputation.

If you want to dive deeper into any of these, then you can explore them in more detail in Returns from Product Development.

Case Study Overview

BakerTech has built software specifically for bakeries to run their business. They are competing with Bakely to service the market of small to medium bakers. 

Both companies provide software-as-a-service (SaaS) as well as some implementation and support services from time-to-time. They are similarly priced at a starting point of $149 per month and go up in price for larger bakeries in a similar way to each other. They both have a similar feature set. Ultimately, for all intents and purposes, looking from the outside in both companies look similar.

Behind the scenes it is quite different and leads to different paths. 

Company Context

BakerTech

BakerTech was started and run by a founder then grew to a team of 20. It was funded through cashflow and profits. BakerTech was acquired by CashCorp, a shareholder that valued its cashflow and the ability to be in the technology space within the bakery industry.

Due to its history BakerTech is the major player in its home country bakery market.  

At board meetings CashCorp’s representatives review any initiatives proposed by BakerTech’s management through the lens of cashflow. An initiative must show cash returns within 12-24 months, if not sooner.

Bakely

Bakely was started by a founder that quickly raised successive rounds of venture capital, most recently raising $20 million. Bakely has managed to build a comparable feature set and acquire thousands of customers in a different home market to rival BakerTech’s customer base.  

Bakely is not profitable and is losing money every month. However, Bakely has seen and is seeing success deploying capital that creates revenue and revenue growth that then results in an increased share price and overall company equity value.

At board meetings Bakely’s founder and venture investors push management to deploy capital faster to increase revenue and the revenue growth rate so that they can increase their equity value. They also push Bakely to jump onto a new technology trend (in 2023 this would be AI but could have been crypto in 2020) because this will also increase shareholder equity.

New Product Opportunity: Web Portal

Both companies have identified an opportunity to build a new feature that lets their customers run a web portal to accept online orders. Both companies are essentially looking at the same customer problem and planning to solve it with similar product offerings.

Bakeries want customers to be able to order online with a few clicks. They want these orders to seamlessly flow through to their bakery management system (i.e. the type of system Bakely and BakerTech currently provide).

So, how do these two companies driven by different types of returns think about this opportunity?

How BakerTech First Considers the Web Portal

BakerTech’s management has identified the opportunity and does some preliminary investigation. Out of this investigation an initial plan is put forward to the board with the following:

1. A request to allocate a few team members to focus on Product Discovery, including an estimated cost
2. An outline of the expected business model for the new web portal, including pricing and gross margin
3. An estimate of the development and maintenance costs

BakerTech’s board considers the proposal and provides this feedback:

1. On Product Discovery: Team members can only be partially allocated so as to reduce the cost of the initiative until it is clearer. At full allocation the impact on the budget would impact BakerTech’s target profitability and dividend to its shareholder.
2. On Business Model and Development Effort: the product must have positive gross margin and achieve overall break even within 18 months.

The management team commits to an update in 2 months then gets going.

How Bakely First Considers the Web Portal

Bakely’s management has identified the same opportunity and has also undertaken some early investigation. They make the same proposal to their board as BakerTech.

Bakely’s board considers the proposal and provides this feedback:

1. On Product Discovery: the team is urged to proceed quickly and engage freelancers to help fulfil the roles if needed.
2. On Business Model: one board member asks if they can “buy” revenue growth by initially providing transaction processing for the online orders at cost. They have a fundraise coming up and demonstrating stronger month on month growth in ecommerce will help with the valuation. Another board member, representing another venture capital firm, suggests trying to charge with appropriate gross margin to start with provided it brings the revenue growth needed.
3. On Development Effort: the team is urged to get into development as soon as possible and start hiring a small team. In the board’s view, the revenue opportunity presented by management easily justifies the cost of a small team building the Web Portal feature.

The management team commits to an update in 2 months then gets going.

Commentary

As you can start to see, the different drivers of returns lead to an opportunity being assessed differently.

Each group has assessed the same opportunity and approach differently. As a result of that the approach to pursuing the opportunity has also worked out differently. 

Each group is working to achieve the returns they want. There isn’t necessarily a right or wrong here. Both have acted in their own interest.

What you can see is how product development starts to take shape differently based on the different types of returns. Specifically:

1. The profit focused BakerTech doesn’t overinvest in an unproven opportunity which means the team can’t go “all in” on Product Discovery for this. They also need to be conscious of the scoping for their first version because of the 12 month pay back period they need to meet. 
2. The equity growth focused Bakely has the greenlight to form a “best practice” Product Discovery team that will have twice the capacity of the BakerTech team. Which in theory means they can gain twice as many insights.

On the surface it’s often easy for people to argue that Bakely is doing the right thing. However, the counter to this is:

1. Bakely may be over investing in an unproven idea.
2. The board has implicitly given less constraints, which can have its challenges. One of which being, work has a way of expanding to fill the time or budget set.
3. The focus on revenue growth comes through loud and clear, which will likely influence how the team designs the first version. 

How the Web Portal Evolves

Fast forward 2 months after both teams have run their Product Discovery and are ready to request approval from their respective boards to proceed. 

BakerTech’s Web Portal Plan

BakerTech’s plan for the Web Portal consists of:

1. Customer research indicating most of their customers base need is for a consumer to be able to order a cake for pickup.
2. A plan to build this with a small development team in 3 months, reusing the design styling already in place.
3. A business model that will make a small markup on each transaction’s fees and monthly charge of $29 for the Web Portal.

BakerTech identified other insights from customers that they could solve but had to discard them due to cost and business model constraints.

Bakely’s Web Portal Plan

Bakely’s plan for the Web Portal consists of:

1. Customer research indicating:
   • a) Most customers want a portal for consumers to order a cake for pickup
   • b) Some customers want delivery ability of instock items via a delivery service like uber.
   • c) Most customers want to style and theme their Web Portal as they can do this with their current web hosting site. 
2. A plan to build this with two small development teams over 6 months, one building the ordering and payment flow the other building the web page editor.
3. A business model that will only charge a small markup on each transaction fee so that customers feel they are getting the web portal as a free add-on to their core product. The assumption is this will spur overall revenue growth to a faster pace and win market share.

The additional insights were discovered and scoped appropriately due to the additional capacity the team had and believes it will have in development.

Bakely’s team also felt that, given the wide availability of cheap web builders that allow you to customise they couldn’t drop this feature or charge that much if they wanted to get the revenue growth they were targeting.

Commentary

Again, you can see differences that have come as a result of how the different companies think about returns. 

Neither is necessarily right or wrong. 

Bakely produced more insights but may be over investing again or going beyond what customers really need.

BakerTech is shipping a minimum version fast but may have enough of a product for customers to stick or may lose market share because of their pricing.

Development of the Web Portal

Both companies use a similar agile methodology to development. 

Bakely, due to team size and length of the development, puts more into various ceremonies and best practices. BakerTech is a bit more scrappy but still makes use of the parts they need from best practices.

Both teams achieve their development goals roughly on target.

Returns

If BakerTech continues to produce the profits its shareholder desires then its approach was appropriately taken. Similarly, if Bakely receives its next round of funding at the valuation it was targeting then its approach was appropriately taken. 

If either company didn’t quite get where they needed then they may want to assess how they are conducting product development to see whether improvements might help them get the returns they desire.

This case study could keep going however, as it is, it serves its purpose of providing a lens through which we can understand how different types of returns drive different approaches to product development.