Three Emerging Software Trends to Guide Your Product Strategy
Trends in the evolution of software products can often cause disruption in successful products and companies. This has been happening for decades. For example, the disruption of on-premise ERP software like SAP or Oracle by cloud-based software and the disruption of software purchase revenue model by subscription model. More recently, we are seeing new trends that will disrupt existing software products and give rise to new ones. Disruptive trends like these were first extensively studied and modeled by Clayton Christensen who published the disruptive innovation model in his book The Innovator’s Solution in 2003. It has been more than 2 decades since that book came out and the world of software products has evolved since then.
What are some of the evolutionary trends we are seeing in software products that will disrupt existing products in the near future? More importantly, what can you as a founder or product leader do to capitalize on these trends and avoid being disrupted?
Here are the key trends of modern software products that every leader must be aware of
Software commoditization
New pricing models
New value pools
Let’s look at each of these three trends in detail. Let’s look at why these trends are emerging, what implications they will have and more importantly, how you as a product leader can adapt to these changes.
The 3 emerging software trends to guide your product strategy
Software commoditization
Software is getting increasingly commoditized - which means the price you can charge for software is coming down. This is happening because (1) Competition is increasing and (2) AI and Cloud computing have drastically reduced the cost of building software. MicroSAAS, which is solopreneurs building niche products on their own, has gained popularity as a result. Generative AI has resulted in lower cost of custom in-house software development as opposed to buying products. McKinsey estimates that this will shift around $35-$40 billion in spending by enterprises from buying products to building their own. This shift is also caused by a need to leverage data internally within enterprises rather than risk giving away the data to train some other product’s AI model. The commoditization of software products will result in the following trends
Multi-brand strategy A multi-brand strategy means having a portfolio of products with different brand names all owned and managed by the same company. Some of these can be acquired products or they can all be developed in-house. In the early days, Adobe had just one product for photo editing - Photoshop. It was expensive and everybody who wanted to edit an image had to learn how to use it. Now, Adobe itself has many different photo editing tools targeted at different user segments (Photoshop, Lightroom, Express, Elements). This multi-brand strategy allows companies to target specific growing niche segments without making the product too complex.
Hyperpersonalization - Extending the concept of products targeting different segments, hyperpersonalization is about delivering highly customized user experiences based on individual behaviors, preferences, and context. While multi-brand strategy is about creating different products for different customer segments, hyperpersonalization is about the same product adapting and customizing the UI to suit different segments. Driven by AI and usage data, hyperpersonalization can also extend into progressive disclosure - introducing new features to customers based on their progress in the product.
Vertical SAAS or niche products - Vertical SAAS is a type of software that is designed to meet the needs of a specific industry or sector. For example, Madwire provides business management and marketing products for small businesses and franchises. Classy is a vertical SaaS company that provides an online fundraising platform specifically for non-profit organizations. The rise of verticalized niche software products is going to only accelerate in the coming decade as the niches become large enough markets and software becomes cost-effective to develop for these verticals. So be prepared to segment and sub-segment your users and either create niche products for them, or your competitors will. This means that companies will have to pay close attention to who their Ideal Customer Profile (ICP) is and cater to their niche requirements.
2. New Pricing models
Because of commoditization, there will be pricing pressure on software. Because of pricing pressure, the pricing model has to be more closely aligned to value. Traditional SAAS pricing is powerful because it is more closely aligned to usage (or value derived) over time for users who use the product regularly. But the per-user-seat nature of SAAS pricing also creates inefficiencies - companies have to pay for all user seats whether they use it or not. This has triggered the rise of pricing models like usage based pricing and outcome based pricing
Usage based pricing - In usage based pricing, customer pays more if they use more. If they use less, they pay less. This is different from traditional SAAS pricing where customer pays every month by number of user seats regardless of whether those users use the product or not. When Twilio switched to usage-based billing for its messaging APIs revenue increased by 50%. However, revenue also decreased sharply later on as customers cut back usage during Covid. Usage based pricing also works well if costs are highly correlated with usage (AWS costs, AI compute costs, communication costs, etc.). This explains why most AI based pricing is usage based.
Outcome based pricing - In outcome based pricing, customers pay based on the outcome generated. For example, Gainsight helps companies improve customer retention and grow existing accounts. Some of its pricing structures are linked to the reduction in customer churn rates or improvements in customer lifetime value.
Microtransactions - Canva recently introduced 1 day pricing in India for less than $1 for Canva Pro. See screenshot below. Also, Micropayments based monetization strategy helped Pocket FM increase revenue 75x in 2 years. Pocket FM is an audio streaming start-up which takes a unique approach to pricing by using microtransactions instead of a fixed monthly or annual fee. Users can listen to a limited number of free episodes from each audio series every 24 hours, with the option to pay for additional episodes or binge-listening. This pay-per-episode model gives listeners the flexibility to only pay for the content they choose to consume.
Microtransactions - Canva 1 day subscription pricing in India for less than USD $1
While some are proposing the end of SAAS, it is more likely that traditional SAAS pricing will be coupled with other pricing models to create a hybrid pricing model. This will ensure close alignment of price to value as well as to costs (in the case of AI) in a commoditized software world. For example, one hybrid pricing model could be applying usage based pricing to a particular feature within the traditional SAAS model. For example, a marketing software can not only charge a fixed monthly fee per user but also charge a usage fee for every 10 credits of an AI feature.
3. New Value Pools
A value pool refers to a grouping of products or features that meet differentiated customer demands leading to increased returns for software vendors. Put simply, a new value pool is a new software bundle or a new software product which combines features from multiple products across the value chain.
Let’s consider some examples to understand this better:
In India, live sports has been bundled into OTT platforms to offer a big draw for consumers.
Similarly, in India, OTT platforms are being bundled with broadband services.
Point-of-Sale, Inventory Management and Payment Software are combined into one platform. Toast is one product that does this for restaurant industry
Operations and Marketing are combined into one software. MioSalon does this for the salon industry.
While the first two evolutionary trends discussed above are expected to bring down the profitability of tech companies, this final trend of value pools will increase the profitability of tech as it will exploit a new value combination. This is the law of conservation of attractive profits playing out. This law was stated by Clayton Christensen, Harvard Professor, in his book The Innovator’s Solution. This law states that when modularity and commoditization cause profits to disappear at one stage of the value chain, profits will usually emerge at an adjacent stage.
As a founder or product leader, to find new value pools, map out the entire value chain of your industry and see which part of the value chain is increasing in profitability. For example, Popl, a digital business card provider has gone beyond just their software product to offer hardware devices like NFC cards and badges.
In future blog posts, I will discuss how some of these trends can be incorporated into your product strategy more deeply.
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About
Teja Vepakomma has two decades of experience in startups as well as Fortune 500 companies in product leadership roles. He now consults full-time. Get in touch with Teja using the contact form or via LinkedIn.
