Opportunity cost and the systematic value loss in product development

Imagine the following scenario: You offer a product to meet the needs of a specific market niche and you do not work in the software factory model. A client hires your product for daily use in their operations, but wants a feature to behave differently, and is willing to pay for its development and implementation in the tool. 

What do most technology companies do in this case? They promptly analyze the request, often superficially due to commercial pressures, and calculate the effort required for implementation. This calculation usually involves estimating the hours required, multiplied by the cost per hour, resulting in the amount that will be charged to the client. If everything goes well, the client accepts the amount and pays for the implementation. In an intermediate scenario, the client may ask for a discount, resulting in a slight reduction in the amount and leading to the completion of the contract; in both cases, more financial resources will be brought to the company. Everyone is happy and the company records this additional amount in its monthly balance sheets! 

But does this extra amount really bring significant profits to the company? Surprisingly, the answer may be a resounding NO. Especially if your company is not a software factory. 

It is undeniable that ensuring short-term revenue is an objective of almost all commercial areas. However, many companies focus on short-term sales targets, assuming that the sum of short-term gains will inevitably result in long-term profit. However, this is exactly where the problem lies: Operations structured around immediate goals tend to neglect the sustainability of the business in the long term and accept paying for customizations by customers. After all, why would it be any different? What matters is the extra bonus at the end of the year for achieving goals, and not the survival of the business over the next ten years, right? Why would they worry about the longevity of the company, product and operations if the vast majority of professionals do not stay for more than a decade in the same company? 

In Customer Obsession, Colin Bryar and Bill Carr, who were active in the evolution of Amazon, highlight: 

"The wrong type of pay for performance can cause misalignments in two ways: (1) by rewarding short-term goals at the expense of long-term goals, and (2) by rewarding the achievement of localized departmental milestones, regardless of whether they benefit the company as a whole. Both ways can lead to behaviors that are antagonistic to the company's ultimate goals." 

To avoid any doubt about these effects, they also add: 

"By pursuing short-term goals to maximize compensation... they can cannibalize future results by obscuring current challenges... In contrast, long-term stock-based compensation incentives eliminate these decisions by making them absurd." 

This topic of short-term goals and the impact they have on business sustainability is so broad that I dedicated a whole article just to this topic, the essential thing to know now is that here is where the essential role of the product manager comes in, the company culture, and a well-structured product board with clear guidelines come into play. What often distinguishes the top 1% of managers is their ability to say NO to most requests that arise in similar contexts, even if this NO has to be said to their own superior. It may be difficult and counterintuitive to refuse an immediate financial contribution, but when well-founded, this decision to forgo revenue may represent only a fraction of the profitability that the company will achieve in the future by dedicating its efforts elsewhere. The critical equation at play is OPPORTUNITY COST, a consideration often ignored by management teams in many companies. 

Opportunity cost is the value that can be generated by redirecting efforts to activities or developments that offer a greater ROI in the long term. Let's return to the initial example: 

Let's assume that developing that functionality requested by the client would consume 200 hours of work, at a cost of $ 180.00 per hour, totaling $ 36,000.00. This functionality could be used only by the specific client or, at most, by 5 to 10% of the other clients. 

These same 200 hours could be directed towards creating a functionality that would benefit, say, 70% of the clients and that would improve commercial visibility to increase the client base by 10%, or even to improve the architecture to support exponential growth without incurring exorbitant infrastructure costs as the business grows organically. 

Companies that prioritize the first option often face difficulties, some sooner, others a little later. Rare are those that manage to adopt and evaluate the second option seriously and carefully. Long-term success belongs to companies with a culture that is strongly product-oriented and has a well-defined future focus. In these organizations, managers, directors and executive teams understand the concept of opportunity cost and disseminate it at all levels. In these companies, product managers guide the direction of the business based on loss research, reporting directly to business directors or product VPs with whom they have a common understanding of the strategic direction, enjoying the autonomy necessary to exercise the power of "no". Geoffrey Moore, in his book Crossing the Chasm, pointed out many years ago that a focused strategy is what differentiates companies that fall into the chasm from those that cross it 

"Most companies fail to cross the chasm because, faced with the enormous opportunity represented by a traditional market, they lose focus, following every opportunity that comes along but failing to deliver a saleable proposition to any real pragmatic buyer" 

He also adds that 

"Most high-tech leaders, when it comes to making marketing choices, remain hesitant to make commitments in the niche market"..."not wanting to adopt any discipline that would require them to stop pursuing sales at any time for any reason" 

The careful analysis of each option needs to be based on realistic data and projections. Pressures to bring money in-house will always exist, but if there are processes and clear delimitations of the product's target audience, there will certainly be an environment conducive to a "NO" being the final answer to a request (This is why product managers in large technology companies receive astronomically higher salaries than their counterparts in Other countries). 

This approach also explains why North American products have such a different international reach than products buil in other regions. They spend all their available effort on improving the product based on what will generate greater adherence, market penetration and future return in a specific niche, and only after they are well established do they extend their use to other audiences. They do not focus on meeting the particular needs of a few customers who request customizations or changes that are valid only for their scenarios. 

After all, a compass that points in any direction will not take you anywhere. If, even considering this warning, your company still needs to make adaptations for specific customers in order to survive in the short term, I strongly recommend that you start considering the Opportunity Cost as one of the elements brought to light and added to the budget. If the cost is too high, it is a strong indication that you should not do it. At least this way it will be clear to everyone that there is an effort and value built into the price that the customer will need to pay. 

If the product's focus is to be the best pocket knife in the world, it makes sense to have the highest level of functionality possible, otherwise allowing customers to interfere with the product with specific needs will make you lose the opportunity to create a unique product and end up creating a digital platypus: It's a mammal but lays eggs, has a beak but is not a bird, feeds its chicks with milk but has no nipples and if necessary can still inject venom when confronted. 

If even after all this, you still have that slight nagging feeling that more money must be brought into the company at any cost by any means, remember Norman's Law from the book Everyday Design: “The day a product development process begins, it is already behind schedule and over budget”.