Before startups and SaaS turned the world on its head, entrepreneurs could sell the same product almost indefinitely. Today, product-based business models may not make sense compared to platform-and-license strategies that carry the potential for more long-term value.
But pivoting from product to platform isn't as simple as flipping a switch. Making the move to a licensing model requires not only a shift in pricing, but also tweaks to strategy, marketing, customer service and even audience.
Companies can't make these sort of changes lightly. Before abandoning a product in favor of recurring revenue, entrepreneurs must weigh the pros and cons of the platform-and-license model.
To platform or not to platform?
The advantage of recurring revenue might make it seem like the licensing route is the clear winner, but there are other benefits and drawbacks to consider.
One clear plus is stronger relationships with customers and vendors. Products tend to encourage transactional relationships; long-term commitments generate trust, especially as those relationships age.
Through that trust, platform-and-license models make it easier to leverage a unique value proposition everyone in the industry wants a piece of. A company can accelerate its scaling by letting others handle sales and marketing while focusing on platform development behind the scenes.
Of course, licensing an innovation rather than selling it directly does have its drawbacks. By switching to a platform model, a company may create a market vacuum that gives a competitor a greater foothold. To get the talent it needs, disruptive staffing changes may be necessary.
Neither the product -- nor the platform-and-license model -- is right for every company. If you decide to move or expand from the former to the latter, make sure you get the legwork right.
Making the product-platform transition
Before swapping your product in favor of a platform-and-licensing model:
1. Look out over the competitive landscape.
Ford may still be an automaker first and foremost, but the writing is on the wall: In both the American and Chinese markets, its quarterly sales figures just keep dropping.
To stem the bleeding, Ford lent its name to Getaround and Easycar's car-sharing services. Although Ford may well be correct that its Millennial audience is interested in such a service, it's struggled to attract either drivers or riders to the platform.
Why? Because the space is already filled by the likes of Lyft and Uber. With no obvious way to disrupt the incumbents, Ford's platform investment is stalled.
2. Scope out a B2B audience.
All audiences are finite. If you've hit a ceiling with your existing customer base, you might be able to boost your revenue and market share by targeting a new one.
If you're a B2C company, be sure to check the B2B side of the aisle. Cocoon Health, for example, started out by selling its smart baby monitor to parents, but it's now licensing the technology to other companies that may be interested in adding vital-signs tracking to their own products or services.
Although B2C companies making a B2B play need new sales and marketing strategies, the climb is easier the second time around. Not only does the product already have name recognition, but B2B sales also tend to be larger, meaning salespeople need to get fewer people to say "yes" than on the consumer side.
3. Prepare for massive organizational change.
New models require new talent, new organizational charts and new responsibilities for everyone involved. Get ahead of the game by identifying talent within the organization and hiring to fill gaps before they become major problems.
Uber may have the ride-sharing market down, for example, but it's still learning how to be an ad platform. The project's sponsor, Stephen Chau, a senior director and head of its Uber Eats product, is hiring an ads lead to augment his own expertise. Uber may be right that the initiative will boost revenue while strengthening its restaurant relationships, but that's only if it manages to get the right talent on board.
4. Consider the user's experience.
For years, video games were standalone products. But when millions of Americans started to play them in the early 2000s, gaming companies realized they had a valuable platform in their hands.
When the 2008 election rolled around, players of popular racing game "Burnout Paradise" started to see billboards on tracks promoting then-candidate Barack Obama. The trouble is that gamers wanted a carefree experience -- not one that brought political tensions to the forefront of their minds. Just two years later, the company behind the ads, Massive Incorporated, shut down.
Don't turn your product into a platform, particularly an ad platform, before asking how end users will feel about the new experience. Their reaction may not be worth the extra revenue.
Especially if you can continue to sell your original product, the platform-and-licensing picture may be an attractive one. But success isn't guaranteed, especially if it's a crowded space or the effort requires new talent. Be prepared to do some heavy lifting before you can reap the rewards.