Getting to the bottom line of valuation – Giff Constable "Product people - Product managers, product designers, UX designers, UX researchers, Business analysts, developers, makers & entrepreneurs July 07 2021 False The Product Experience, Mind the Product Mind the Product Ltd 8482 Product Management 33.928

Getting to the bottom line of valuation – Giff Constable

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Understanding your company’s business model is a key skill for all product people, but understanding how that affects your valuation is what takes things to the next level.  What are you maximizing for and how does your pricing model impact that? We talked with Giff Constable, ex-chief product officer at Meetup, about all this—and much more—for this week’s podcast episode.

Featured Links: Follow Giff on Twitter and LinkedIn|Giff’s Website  | Buy Giff’s book Talking to Humans  | Buy Giff’s book Testing with Humans | Giff’s Sci-Fi novel Becoming Monday | 7 Powers: The Foundations of Business Strategy book by Hamilton Helmer

Episode transcript

Randy Silver: 

Golly, what’s the one thing you see product people struggle to get? You know, the thing that just takes them forever to really understand? Mmm hmm.

Lily Smith: 

Well, usually, it’s probably just one of my really witty jokes.

Randy Silver: 

Those are jokes. For me, you know the differences when I see somebody really figure out that numbers don’t always tell the truth or not the whole truth Anyway, you know, especially when it comes to things like a company valuation.

Lily Smith: 

Yeah, that’s definitely a dark art or an art at least. The whole idea that your stock price might go down when you report good news, because it’s not the right good news, or it was anticipated anyway, it’s just weird. But luckily, we have someone here who can help us figure out how to get to grips with all of this.

Randy Silver: 

It’s only gift constable he tells us some great stories from his time as the Chief Product officer at meetup. So let’s just speed up the music and get right to

Lily Smith: 

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Lily Smith: 

My new product also offers free product tank meetups in more than 200 cities. And there’s probably one way you Hello, Jeff, welcome to the product experience podcast. It’s very, very nice to be talking to you today. Thank you. And we’re going to talk about a topic which is very exciting, which is all about money and kind of Finance. But before we get started, for anyone who hasn’t met you before or read anything of yours before, do you want to give us a real quick intro into who you are and your background and how you got into product?

Giff Constable: 

Oh, sure. I’ve been in technology software really, since the early 90s. Just to date myself, I began on the business side, I jumped into a company, a startup in Texas called trilogy, which didn’t really have designers or product managers. We had engineers, we had business people. So since I wasn’t an engineer at that time, I was on the business side. And it took me about a decade to realise that what I really loved was the product side of things and to sort of move myself over. And I I wore a lot of different hats. I started and sold companies back then. So I was doing a lot of entrepreneurship stuff, but to accelerate sort of more to the present time. I most recently was running product and engineering at a company called meetup that I bet a lot of your listeners have heard of. Before that ran product and engineering at a FinTech marketplace b2b FinTech marketplace. coaxial. Rana was CEO and sold two pivotal innovation consulting company called Neo and I’ve written a few books, one called talking to humans, one called testing to humans all about qualitative research and about experimentation. So these days, I’m teaching at New York University teaching product management there, because I’m on enforced bench time due to some family reasons. But looking forward to getting back in the saddle when I can

Lily Smith: 

boson and today, we’re going to be talking about finance from a couple of different perspectives. But let’s start with the kind of company valuation side of things. And one of the things you mentioned, just before we started recording was that it’s very important for product leaders in particular to have an idea of how a company’s valuation could be influenced by strategy. And so give us a quick intro into your thoughts on this like how as a product leader, do we learn this type of knowledge and and gain experience in this area?

Giff Constable: 

Right? Well, as a product manager, if you’ve ever wondered, why, why is our company seemingly chasing growth that sort of at all costs, like just top line growth, top line growth, and we’re not paying any attention to profitability? Or why are we paying so much attention to profitability and not growth or thinking about that, that those decisions that seem to be made by the CEO on the board, the root cause of that is usually tied to who the investors are, and how they’re trying to grow the value of the business. And companies are valued in different ways in different industries and different modes by different people and it’s actually quite nuanced and calm. Look at that I had the benefit when I was younger of being a technology investment banker. So I valued worked on a tonne of mergers and acquisitions and some IPO work. And so I valued a lot of companies. But most people don’t get, especially in product management these days, don’t get a peek into that. And but it’s a, it’s really important to understand, as you’re trying to understand what is important to our business? What’s the name of the game for what we do, right? We’re trying to create value for people and create value for our companies. Well, what does that mean create value for our companies? Yes, there is revenue. Yes, there is gross margin, yes, there is your bottom line margin. But sometimes some of those numbers are more important than others. And if you want to move up the ladder, for lack of a better way of putting it, if you want to move into product leadership, you want to be a safe pair of hands, in the eyes of the CEO and the board, you need to understand which levers are more important to move and why it’s so much of that just to bring this full circle comes back down to the valuation of the business that I could give, I can’t give an example actually at meetup we had when we were under the ownership of wework, which for a while there, and you may chuckle was about top line growth, top line growth, like it doesn’t matter how much money you burn, grow, grow. And they were getting rewarded for that all up until the time that they tried to go public, and then the rug got pulled out from under them. And that was an interesting time to be at meetup, I’ll tell you that. But we were looking at call it a product innovation initiative that had good revenue growth potential, but had a lot of costs baked into how it was going to be built. And so its actual gross margins, its cost of goods sold, the amount of money we’re having to spend to deliver the product was actually pretty high. So its gross margins, were actually low. Under the wework. As owners, it was a really interesting property. But as soon as we started thinking about realising that, okay, meetup is getting spun out of we work, and this is likely going into private equity hands, all of a sudden, gross margin, and profitability became really important. So here was a product initiative, the same product initiative, the same company. But you take two different ownership contexts, to different contexts where those owners expected to be rewarded in different contexts based on the valuation of their business and one look good and in one situation look terrible. And so it’s just understanding those nuances is important.

Randy Silver: 

So it’s, it’s really it sounds, it’s really about storytelling half the time, it’s, the numbers can be massaged in different ways, depending on not massage, but you choose which numbers to interpret and concentrate on based on what is the story you’re trying to tell? Is that sound accurate?

Giff Constable: 

Well, you know, it’s funny, as as a banker, well, I haven’t been a banker a long time. But I realised, immediately, almost to my shock, because, you know, there I was, you know, wet behind the ears in my 20s, I realised we could almost make the numbers do whatever we wanted. But and, and you’re right, that story is a big part of it. But there are some fundamentals, there are some fundamentals that the venture capital game is, it’s a growth game that we have, we’re gonna invest in 20 companies, and we expect to have them to pay for everything else. And we need our companies to grow, grow, grow like it’s just get as sexy growth as possible. And don’t worry so much about the bottom line, chase that growth, because we are going to be able to either sell you or you’re going to go public. And then it’s going to make it all worthwhile. And just those losses don’t really matter, because it’s all going to come back in terms of the equity value of the business. But there’s other kinds of situations and owners more established more mature businesses, or private equity owners who they’re not interested in having a hit rate of two out of 20 investments, they’re willing to take a smaller return. But they want that to happen across many more, if not all of their companies. So those companies need to be run a little safer, a little more maturely. They’re interested, they’re not interested in having to pour more capital in Well, on these high growth plays, actually, they want more capital and like let’s get more capital in so that we can get a higher return out, the opposite often happens. And so, you know, it actually depends on like, which universe are you playing in who who are your owners, if it’s a, you know, a person or a family owning this business and they want to run this really safe, then then you’re going to be making certain calls if it’s a private equity player, or if it’s like a high risk, high growth player. So in some ways, yes. While storytelling is important, it’s actually you need to understand your context. This is this is a case in all cases. Right, how to make good decisions? What’s our context? And now let’s make decisions within that.

Lily Smith: 

And is it always a kind of trade off between growth and profits? And or are there other things that you might be that you might be kind of chasing? So, in, in my experience in startups, I’ve talked before with, like team, our teams about what are the things that people are with that make us an attractive to be invested in? Is it the calibre of the team that we have, or the the IP that we’re creating, or the data that we’re collecting, or the market share that we’ve gone after, which I guess is the growth side of things? But are there other things that you could be trying to chase on in order to increase the valuation? or increase it for the types of investors that you’re going after? Yeah,

Giff Constable: 

that’s a great question. Really, I mean, there’s a lot of levers that can improve your valuation, one of the things I try to explain to people is you can improve how much your business is worth linearly. So let’s say your business is worth 10 times revenue, right? And you grow your revenue by $1, you’ve grown at 10 times that dollar. But what if you can get your revenue to become 11 times revenue? Or 15 times revenue? That’s a nonlinear growth of your valuation? So what are the things that affect the actual multiples, as opposed to just the the amount that you’re working upon? And so the, the biggest ones, tend to be your growth rate, as we’ve talked about your top line growth, like, are you a rocket ship are people excited about where you’re going? The next one is also a financial one, which is your gross margins. And so if, and this is actually typically why investors love software, businesses, and why the multiples and software business is so much better than other businesses, that, you know, if you take a take a different kind of business, let’s say you were selling candy bars, right, you sell the candy bar for $1, it costs you 80 cents to make the candy bar, you’ve got 20 cents of gross margin there. That’s not a lot to work with in terms of what you’re doing with the product and sales and marketing and all your operational costs. software companies have very low expenses, you know, there’s a bit of a myth within software that you sort of make it once and then it’s free. process. We all know, in software, that’s not how the game works, actually, we have to maintain what we do software teams only get bigger than ever gets smaller. But but we have really good gross margins. A high gross margin business that’s up in the 75 85%, gross margin business will be valued, really highly, will often be valued as a multiple of revenue. I’m not sounding too wonky here for your audience. But if you start getting pushed down, then investors say, I’m not going to value you based on revenue, I’m actually going to based value based on your profitability. There’s a very wonky term in the finance world called EBIT da, but really think of it as your operating profit, which is after you take your r&d costs and your sales and marketing and your admin costs away. Now, if you move, we probably have a mutual friend, Melissa Perry, Melissa was working with a late stage venture capital firm, you really kind of a private equity firm that likes to pretend it was a venture capital firm, and one of their businesses was trying to grow, but the way they were trying to grow was hurting their gross margins. And they were actually in danger of shifting from a company that was valued based on revenue to in the eyes of other investors, a company based on their bottom line. And that was going to really hammer their valuation. So the owners were terrified of this. Now, again, coming back to like, why is this important? Well, if you’re inside a company, trying to think about your portfolio of initiatives, what what are we going to do? How much is fixing our core? How much is innovation, a new products and new business lines? And you’re not aware of these implications, you can get yourself into hot water or just look foolish. So it can be quite dangerous. There are other things as well, I’m making this too long an answer for you, Lily, but I mean, your brand can affect this, right, you’re having a really dark dominant market share can affect this, sometimes the quality of the management team can affect this this, there are there are some non financial things that absolutely do make a difference here. Probably being in pole position, sort of the number one sort of leader in whatever the space is, is probably the next biggest one, but the financial ones are quite important.

Randy Silver: 

So a lot of what you’ve talked about so far is stuff that you can affect very much at a director level or board level, where you’re shaping the design of the company and how the product, price instruction, everything else is done. But if you’re more of a mid tier Product Manager, how do you recognise this? How do you get start to get ahead and start thinking about this and sourcing This is where I fit in. This is where I can have some influence. These are the kinds of decisions I can make that will affect that will ramp up to the to the valuation story.

Giff Constable: 

Yeah, well, the The funny thing is, is boards don’t want to, they don’t want to be designing this, they want the teams to design this. And they’re looking to the executives to make these calls. As you’re moving your way up as a product manager. This is a really important area just to educate yourself. And the best way to do that you can look online for resources. I’ve written a few things on my blog about it. But really the best way to do it because this is very context specific, is talk to your executives. So your CPO if you have one ideally is aware of this, your CFO, your chief financial officer will very much be aware of this and your CEO is going to be thinking about this all the time, all the time. So if you can talk to someone senior, your finance department and say, What are the levers that are really important for the this business? And particularly from a valuation perspective? What are you all thinking about? Is it cyclicality is that a recurring revenue? Is that the gross margin like what are the pieces, and again, as I say, different kinds of businesses, different numbers are more important. There isn’t a one size fits all approach here at all. So you talk to your most senior executives. And usually people in finance are quite happy when product people come and want to speak to them and learn from them. Because they’re always complaining that there’s not enough financial acumen inside the company. So if you got asked like, wow, okay, someone cares about what we do, and what we think is important. So that’s a great place to start. And it’s really just about, you know, I imagine that as you’re thinking about the, your own roadmap, you’re thinking about your own initiatives, why should we work in x versus y, I hope you’re thinking about what that’s going to do for the customer. That’s really important. But you’re also thinking about what it’s going to do for your business. And to get more sophisticated about that last point, what is it going to do for our business, the way to get more sophisticated about that is to realise it’s not just about dollars out, because not all dollars are created equal. Just back to my points from meetup before, same business. But all of a sudden, you know, that revenue in one context look really great, and another context look really bad. So that will affect it has influence over your strategy, there’s lots of things that go into strategy, but where the owners are trying to take this and how they’re trying to grow, the valuation of the business should ripple all the way down to your work actually, as a product team, and the more sophisticated you are, and taking that into consideration, the more that’s part of your conversation with executives, about the choices you and your team are trying to make together, the more impressive you’re going to look, the more likely they think, okay, you’re a safe pair of hands, you’re ready for more responsibility? And so yes, it’s just start talking to senior people, because they will, at least some of them will have this in the back of their heads,

Lily Smith: 

let’s say what about the p&l for the business and I realised this will be very different based on you know, depending on different businesses, but is there a case for a product manager or product leader owning the p&l for you know, for the product, basically,

Giff Constable: 

I, you know, I see, I see all kinds out there, sometimes you see a product manager owning a p&l, sometimes a GM, or business person is put there, I’ve seen it work, I’ve seen that not work, sometimes they could run into each other depends on how good a partnership can be done there. Regardless of how your company is trying to do it, any product manager should act like they own the p&l, they should understand the p&l. You know, it’s the same thing. It’s just like marketing and go to market. You may not be doing that work. But if you don’t understand how people are discovering your product, and how expectations are being set and how they’re coming to the front door, you’re about to inherit those customers and try to do something with it, then how are you going to do a good job once they come through that door? So you need to understand it. And if you want your product to be successful, you need to understand how it’s being sold or distributed. So So yeah, it’s whether you actually have responsibility or not I, I wish there were more circumstances where product leaders did have that responsibility. But whether you do or not undertaking like understanding it and feeling that ownership even if you don’t have the ownership i think is key.

Lily Smith: 

And I guess one time when that becomes particularly important is when you are looking at pricing of the products and different different pricing structures or pricing models, because you need to be able to, you need to be able to create various different scenarios from a kind of business modelling point. To view to be able to understand, you know how viable it is, regardless of whether a customer is going to pay it or not? Yeah, certainly,

Giff Constable: 

certainly. I mean, it’s going to depend on the context of the initiative. As to are you building a feature within a very established, you know, pricing and revenue model? In which case, you’re sort of slotting into that? Are you building something we’re actually the cost side is really important. Oftentimes, the more you’re tied to innovation, the more you’re trying to create a new business line. The more important it is to think through the revenue model and I have found as a product leader, as a Chief Product officer, thinking about revenue model is really essential, because I’ve seen that have outsized impact on success or failure of products.

Lily Smith: 

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Randy Silver: 

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Lily Smith: 

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Randy Silver: 

For more info and to become a member today, visit minder product, comm slash join. So how much does that come in? In the discovery stage? And in the development stage? You know, you we always test? Are people going to actually use something we talked to them and ask them if they will. We like to look at propensity to pay and all kinds of things like that to figure out is this worth doing? Right? How do you know if it’s the features that you know, have you built the right product? Or is it the revenue model that may be off if people aren’t adopting it?

Giff Constable: 

Well, yeah, so causation causation correlation challenge, that’s our jobs are so hard. And we all you know, everyone knows, I bet a lot of your listeners know this desirability viability feasibility triad, that you’re thinking about the on this topic, the thing that I’m encouraging more product people to think about, it’s not just about propensity to pay propensity to pay in what way, if you’re designing a product, then the way you decide to charge is going to affect customer behaviour, user behaviour, sometimes your customer users different dramatically, dramatically, it’s going to affect how aligned you are with your customers or not, it’s going to affect whether you’ve created a flywheel that has positive effects or has creates friction on the business that you’re trying to do. It will affect whether you can disrupt like your competitors, or whether you can’t. So thinking about this early, and trying to spot ways to design a better entire system around your product. That includes not just the features, but also how it goes to market, what you’re upgrading, sort of the backbone is behind it, and then how you charge for it is really important. So behaviours, let’s talk about behaviours for a second. So meetup You know, my product has I’ll go Scott and say it has I think probably a bit of a love hate relationship with with meetup, you know, meet up help begin it. I

Randy Silver: 

couldn’t possibly comment.

Giff Constable: 

No, I, you know, I’ve had I had I had like, some deep conversations Mark Martin, when I first got there. And it many of the things that some of meetups bigger customers are frustrated about. Those frustrations have emerged because of the revenue model that that company has. But but just to zero in for a second. Talking about how pricing affects behaviour, one of the things that we spotted at meetup we know this from from our research, is that if you do not charge for a meetup, your average show up right meaning that someone has RSVP to come to an event and whether they actually show up is around 40%. So you have 100 people RSVP you don’t charge 40 people show up. Now you have exceptions higher or lower, but that’s sort of the average. that’s problematic because people see Oh 100 people are coming They go get that bigger venue, they spend more on food and drinks and things like that it actually. And not just that there’s psychological impact on the organisers, they’re all geared up for 100 person event and 40 people show up and what could have been a successful event now feels like a failure. We also know that that meetups that only charge $1 to $3 that didn’t have to be a lot of money, just a little bit of money that show up rate jumps up to 75 80%. There’s a simple example around how just pricing changes behaviour. We know we know that pricing changes psychology changes perception, but also changes behaviour. I saw the exact same thing when I was running this FinTech marketplace, before going to meet up were the way we were we were This was also a subscription model. And we had these investors that were looking to buy companies on this marketplace. And because of subscription model, they were trying to kick every tire. Now investors love optionality, they want to look at everything, but they don’t want to look at everything, and be. And so what they were doing is because they were trying to kick every tire, and a lot of the things didn’t fit what they were actually interested in. They were coming to us going the companies on your products suck. They’re terrible. It’s like no, no, hold on a second. It’s like eBay, right? What’s the jump to someone else is gold, right? And what’s gold to someone else might be junk to you. And the same thing was happening. But it was the hopefully I’m maybe making the story too confusing. But to cut to the chase, what was happening was because of the way that because the way the company was charging was was fueling people’s desire to look at everything, rather than throttling that behaviour leading to really unhappy perceptions on both sides of that particular marketplace. So there I saw at meetup I saw the way you were charging money really distort things, create misalignment, create behaviours you don’t necessarily want and I saw it in the FinTech company as well, two companies in a row. And, and I that made me realise, actually changing how not how much you charge, but changing how you charge can change your customers behaviour far more than a UX change or a feature change? Many times. Now, it’s not always the smart thing to do. Changing, pricing midstream can be very difficult, you have to do it very carefully. While I was at meetup, we stubbed our toe quite publicly trying to run a small experiment that created and that was largely due to some executive dysfunction. But but so you have to you have to be smart about how you do this. And tread carefully. But I’m just trying to get people to think about this more. I think that product leaders are well suited, because they are thinking about business, they’re thinking about customers, they thinking about systems, you’re designing a system, you’re designing an engine that needs to work for everybody, it needs to align for the customers, and align for the business. And if you can get those two things aligned, so that as the customer is more successful, you’re more successful, and then everything gets better. meetup that was not the case. But again, that was partially why when the product has been frustrated, because making roadmap decisions at meetup with the business model it has, where you realise there’s no return on investment here. We will not gain anything from this, other than the satisfaction of knowing that our customers are going to be happier, which is not worthless, don’t get me wrong, that’s not worthless. But what happens is that it creates this dissonance, it’s sand in the gears. And that makes it very hard for product teams. If you if you’ve got if you’ve got friction in the way the products working against how the business model and revenue models working. So I think product leaders are well set up to try to design better systems.

Lily Smith: 

Do you think the product gets to a point and the kind of the model gets to a point where you found the thing that works? And then that’s it you just scale from there? Or do you always have to finesse tweak, try new things, you know, is it a kind of ongoing strategy? kind of review?

Giff Constable: 

Yeah, it’s, you certainly get into a mode, if you do it right. And you know, and the stars align, where you have momentum, where it feels like things are moving, your business is growing, the sales team is able to sell it or people are adopting the product or whatever it is, right. You’ve you’ve said, Okay. Well, you know, or you’ve managed to, you know, unseat a competitor. Just think about Spotify saying now we’re all gonna rent music instead of buying music, right? or Google saying, instead of buying word processing software, now you’re going to get it for free. You know, it began for free as an advertising model than they extended into a subscription model, you know, so you get into a mode where it’s, it’s like it’s working and you’ve got some momentum. Great, like there’s no reason to turn the table over at that point in time. You’re always tweaking your thinking about how we price the right amount. Are we thinking Do we need to customise pricing for different segments? Should we be thinking about those revenue models, which I think of as different ways to make money, such as subscription versus advertising versus paying for usage, right, or paying per leads, then there’s conversion tactics, which is freemium. freemium is not the way you make money. It’s just a conversion tactics, like discounts, it’s a way to get someone into a way to make money. So you want you’re probably always playing with the tactics to improve conversion rates, but you will often settle on a way to make money that seems to be working. And you’re only going to change that if all of a sudden you’re feeling like there’s yours in the sand. Well, what’s going to cause gears, sorry, sand in the gears, I put my, what’s going to cause that? Well, sometimes you’re now moving into a totally new market, could be a new customer base, it could be, you’ve got a new product initiative. So it’s this, this could be tied to innovation. Or it could be that, frankly, someone else has come in, and they’re now turning your strengths into your weaknesses the same way that, you know, Spotify did Tower Records and other things where you now have to think, okay, we actually have to rethink our business model again, the more you’re tied to, and this is why this particular topic is particularly important, really, for product leaders. It’s you thinking about revenue models, a product leadership problem, not so much a product manager problem, unless, as a product manager, you’re innovating a new business line, if you’re in charge of coming up with a new product, and you need to think about how are we doing distribution of this? How are we pricing this, then now it’s your problem. But oftentimes, it’s actually it’s more at the senior level. But the more again, more sophisticated you are in these topics, the more people will see you as a strategic thinker.

Randy Silver: 

So what’s one thing that a product manager who’s looking to move up that ladder? What’s one thing they should do tomorrow? To start looking at this and examine this? And do what’s one question they can ask about their own product in a way of of looking at it differently?

Giff Constable: 

You know, one, one thing that I think all product people should do, at any level, especially the leadership level, but really, at any level, is a draw, draw your flywheel or draw the forces that are happening in your product. An example of a flywheel that’s quite famous is the early Amazon flywheel, I’m not going to get it exactly right here, I don’t have in front of me. But essentially, it’s like if we, if we lower prices, that’s gonna lead to more customers, more customers will lead to more selection, more selection leads to you know, blah, blah, blah. And that comes back to lower prices. And if you look at this, this this flywheel you realise, okay, if you actually keep on lowering prices, that drives that drives the business, now they’ve taken it too far. You can over optimise for these things. And they could probably treat their employees a little bit better and do some things. But there is, it was very powerful for them to have this insight early on to understand their flywheel, draw your own. And the first version of this is going to be hugely messy, but draw the forces, like customers are trying to do this, we help them do that, that that leads to this next step that then leads to this next step, which then we recoup value. And then we invest that value back into this other thing, which is then going to lead to more, you know, the customer doing something else, draw this out, draw your ecosystem, draw your engine of the business and the product and the customer, as best you can and start with it really messy, just all the pieces. And then you could take a step back and think, okay, is this flowing? Are there are there things is a shade in our gears, right? Where’s our friction? You know, are we throttling behaviours, we actually want to encourage are we encouraging behaviours, we want to throttle because of the other features in the product or the way that we are charging money? And you could then do the same thing for other companies as well. Okay, how does that work for Airbnb? what’s what’s their business? Right? How does it work for Netflix? What’s their business? could be some of your competitors, it could be others, but you can practice this. You could practice like trying to visualise and understand the engine. And the engine is all the parts. And but a key part of the engine that I just want more product leaders to talk about is how do you choose to make money because actually, that’s more important than the amount you’ve set. The amount you set is important, but actually how you choose to make money. That’s that’s a that’s a real kicker, one that can create huge friction or it can become a huge enabler. And everyone’s talking about product led growth and things like that. And that’s, that’s exciting. And I think it’s wonderful. And the whole point of that is that product is is creating nonlinear growth engines for a business so so joy out? How does conflict growth work? And how does the money and revenue and the way you charge? How does that affect it and talk to your folks, your teammates, talk to your executives about that? Does your head of product see this the way you do? Does your head of marketing or sales, see this the way you do, that’ll lead to really interesting conversations. And by the way, you’ll probably look pretty impressive to now part of the our job as product managers is right, we begin with a huge mess. And then oftentimes, before we expose it to normal humans who aren’t in our product world, we have to simplify it. So you got to go through that exercise. But don’t be afraid of the mess, start with a mess, just start by drawing it out.

Lily Smith: 

And get in the books that you’ve written, they’ve kind of the topics have been around talking to humans, and testing with humans. So just bringing in your expertise in those areas. How would you approach like research on models with that kind of qualitative research? Like, is there anything you can do that? Or is it better to be just Reliant more on the quantitative data? When you’re experimenting in this area?

Giff Constable: 

Oh, you have, you know, as product people, it’s got to be all the above. Right? And, yeah. So when you’re, when you’re out there, interviewing potential customers, and you’re saying, Tell me about a time when, as opposed to, would you buy this? That’s not what you’re asking, right? You say, Tell me about a time when, when you tackle this problem, or you try to solve it in this particular way. And, and, you know, if it’s applicable to your context, and they could talk about either trying to buy some sort of solution, you could start asking some new questions around. Okay, well, how were you? How did you pay for that? Like, what was your purchase process? Like? What? You know, okay, you were buying in this particular way? Did that did that? Unlock certain things? Did that create certain frustration or certain frictions? So that historical story you’re trying to get people to tell you, you can go into other pricing experiences they had, it could be related to your product, or it could be for some things that are close enough that you can actually draw some interesting conclusions, but you are trying to learn how they buy and how they like to buy? And what what frustrates them and things like that? experiments, right? So talking with humans is all about how to interview people to vet a new product or business idea. testing with humans is about how do you run experiments, without having had having built the whole thing, right, AV testing is too late. We know we’ve built it, let’s let’s go figure this out before we built the thing. So you can do tonnes of pricing experiments, you have to do them carefully. I know you talked about this in a recent podcast, you have to do them carefully. You have to when you were a very public brand, like meetup or say Airbnb or something like that, the more public and well known your brand, the more careful you have to be about, about how you do this, and how public you want to be. I wish that we when we were doing some experiments, I wanted us to be extremely public and saying, We are running some experiments, they are only experiments, here’s why we’re running these experiments. Here’s why this is useful for you as our customer, that we’re running experiments, you are going to find some of these ideas scary as a customer. However, we’re not going to do this totally on our own without talking to you like, but you can set it potations you can create a conversation and things like that. But that doesn’t mean you can’t run experiments. We, the big PR mess up that we had was us just talking to 100 organisers in Delaware. It was this tiny little of experiment. We got millions of people all around the world using this. And it was this tiny little Delaware thing. And that went massively viral. And that was that was a communications failure on our part. The experiment was not the mistake, it was the communication, the promise

Randy Silver: 

that you chose Delaware. Remember, what happened in Vegas stays in Vegas, Delaware doesn’t have that slogan.

Giff Constable: 

I mean, sometimes you can’t actually get people to sign an NDA to be to be part of an experiment. You know, again, it’s be sensible with how you’re approaching it, but don’t shy away from it. You know, actually experimenting with pricing amounts that’s that’s classic A B testing kind of lands but experimenting with the revenue models. I what I find is you can you can sort of, it’s a bit like thinking through strategy. What I’m thinking about strategy, I’ll often go through like the seven powers and say, Okay, how does the seven powers Do you know that book seven powers who read that? No,

Lily Smith: 

no, give us give us the lowdown.

Giff Constable: 

Let’s see if I can get his name right. I think Hamilton Helmer might be his name. He was either a founder Someone very senior maybe at Boston, consult one of the big strategy consulting group strategy consulting companies, he wrote a book thing, after all the work we’ve done, we think that these the seven powers that companies have and tried to build. And so it’s network effects economies of scale brands, there’s, there’s a cornering a resource. And so when I’m looking thinking about strategy, I’ll often start with like a blank slate and say, let me think about my company in my context across these seven, right, and then maybe I’ll look look at Michel Porter’s, and maybe I’ll look at good build strategy framework and just come at it from different vectors. But you could do the same thing here, where you could say, Alright, let me list all the different revenue models I could think about, does pay per lead work for me does advertising work for me like, and very quickly, you can get a sense of you may be interesting, probably not interesting. So you can wind it down right there. And then, and if you’ve done some customer research, that’s sort of coming into your brain. And then you want to get into a spreadsheet. Because sometimes these ideas sound absolutely fantastic until you actually put some numbers in place. And and I always say, start with a blank spreadsheet. Because that really for like when you have to fill in the blank cells, it exposes a little you know, but you could say, all right, if we actually applied this new model to what we know about our customers, given both our qualitative and quantitative data, so we have, we can make some guesses as to what’s going to happen, how much churn Are we going to cause for this segment, we change the roof their pricing model, let’s predict that, but then what would be better because something’s got to be better, otherwise, we wouldn’t be making this change. So you could model it out. And some things are immediately going to get cut as well. So you think through it, a lot of things fall to the cutting room floor, you model it out things follow the cutting room floor, and then you’ll you’ll usually end up with a small list that then you might think about doing some experiments or some additional research for, again, I’m sort of talking about inside an existing company, because changing your revenue model, not for a new product, but for an existing product has to be done very carefully, you have to turn that ship carefully. And so you want to step into this carefully.

Lily Smith: 

It reminds me if it’s completely in, yeah, there was a talk that I saw, and I will try and find a link to it. Because I can’t remember who it was that did the talk. But it was a guy who worked at startup in Bristol, and he talks about how, you know, we all talk about product market fit. But actually, it’s not just product market fit, it’s product market, then channel then model. And you have to have all of those four things right? Before you can kind of really start to fly as a business. So,

Giff Constable: 

you know, I’ve been involved in the Lean Startup movement. Well, actually, really before Eric wrote that book, and the random, lean startup meetup in New York for years and know Eric well, and and many other the kind of ogis of that, of that movement. One thing that we saw, as we talked across each other, and Brian Cooper and Jeff Garfield and Melissa para, you name it, right? One thing we saw on a recurring basis in startup land, was that revenue model pivots were usually the most impactful, far more than feature or product pivots. Sometimes teaching your customer target customer pivot was really important. But if you thought about the different kinds of a startup was struggling, he thought about the different kinds of pivots that they could make. Oftentimes, the revenue model pivot was the most impactful. So if there’s an interesting little takeaway, caught, you know, mileage is gonna vary, right? It’s it depends on your context. But you’re right, there’s a getting a start a new product or a startup, right? This is all these dials, you got to get all the dials working together. Team has a distribution, customer acquisition, the product, the revenue, all the things have to work or, or it’ll bump and timing.

Randy Silver: 

All the things. So it’s a miracle any of us ever get it? Right. Well, you know, Randy, I

Giff Constable: 

mean, we’ve talked about this online for a long time, in some ways that we all bemoan the pathetic hit rate of new products that get into the world, whether it’s from a big company or a startup, but you have conversations like this, you’re like, Okay, now I have a little more understanding as to why the hit rate is so low. But why we care about product so much our community, we think about this stuff so much as we’re like, well, we got to bend that curve. We got to make this better. How do we make this better? How do we push our thinking harder? How do we, you know, how do we challenge ourselves more? Because Yeah, it is hard. The world is stacked up against it. So let’s, let’s do better.

Randy Silver: 

I think that’s a great place to end it. And we could talk for hours more, but this was a lot of fun gift. Thank you so much for coming on. And joining us tonight.

Unknown: 

I feel really blessed that you allowed me to join you today. Thanks for letting me talk your ear off and, and thank you so much.

Lily Smith: 

That was great. Thanks give

Randy Silver: 

you know Billy, I’ve only read one of gifts books so far, but I really enjoyed it. Well,

Lily Smith: 

he’s teaching product at NYU these days. So he definitely knows his stuff. That’s true.

Randy Silver: 

But I actually read his other book. It’s called becoming Monday and it’s a sci fi novel. It was a great holiday read. It was a lot of fun. And you know, maybe next week, our guests will have also written something fun. Who knows?

Lily Smith: 

We should have just interviewed him about the sci fi novel.

Randy Silver: 

Maybe next time.

Lily Smith: 

Hey, it’s me, Lily Smith

Randy Silver: 

and me Randy silver.

Lily Smith: 

Emily Tate is our producer. And Luke Smith is our editor.

Randy Silver: 

Our theme music is from Humbard baseband power. That’s p au. Thanks to Nick Hitler who runs product tank and MTP engage in Hamburg and plays bass in the band for letting us use their music. Connect with your local product community via product tank or regular free meetups in over 200 cities worldwide.

Lily Smith: 

If there’s not one Nagy you can consider starting one yourself. To find out more go to mind the product.com forward slash product tank. Product tech

Randy Silver: 

is a global community of meetups driven by and for product people. We offer expert talks group discussion and a safe environment for product people to come together and share greetings and tips.

[buzzsprout episode='8864632' player='true'] Understanding your company's business model is a key skill for all product people, but understanding how that affects your valuation is what takes things to the next level.  What are you maximizing for and how does your pricing model impact that? We talked with Giff Constable, ex-chief product officer at Meetup, about all this—and much more—for this week's podcast episode. Featured Links: Follow Giff on Twitter and LinkedIn|Giff's Website  | Buy Giff's book Talking to Humans  | Buy Giff's book Testing with Humans | Giff's Sci-Fi novel Becoming Monday | 7 Powers: The Foundations of Business Strategy book by Hamilton Helmer

Episode transcript

Randy Silver:  Golly, what's the one thing you see product people struggle to get? You know, the thing that just takes them forever to really understand? Mmm hmm. Lily Smith:  Well, usually, it's probably just one of my really witty jokes. Randy Silver:  Those are jokes. For me, you know the differences when I see somebody really figure out that numbers don't always tell the truth or not the whole truth Anyway, you know, especially when it comes to things like a company valuation. Lily Smith:  Yeah, that's definitely a dark art or an art at least. The whole idea that your stock price might go down when you report good news, because it's not the right good news, or it was anticipated anyway, it's just weird. But luckily, we have someone here who can help us figure out how to get to grips with all of this. Randy Silver:  It's only gift constable he tells us some great stories from his time as the Chief Product officer at meetup. So let's just speed up the music and get right to Lily Smith:  the product experience is brought to you by mind the product. Randy Silver:  Every week, we talk to the best product people from around the globe about how we can improve our practice, and build products that people love. Because it Lily Smith:  mind the product calm to catch up on past episodes, and to discover an extensive library of great content Randy Silver:  and videos, browse for free, or become a mind the product member to unlock premium articles, unseen videos, ama's roundtables, discounts to our conferences around the world training opportunities. Lily Smith:  My new product also offers free product tank meetups in more than 200 cities. And there's probably one way you Hello, Jeff, welcome to the product experience podcast. It's very, very nice to be talking to you today. Thank you. And we're going to talk about a topic which is very exciting, which is all about money and kind of Finance. But before we get started, for anyone who hasn't met you before or read anything of yours before, do you want to give us a real quick intro into who you are and your background and how you got into product? Giff Constable:  Oh, sure. I've been in technology software really, since the early 90s. Just to date myself, I began on the business side, I jumped into a company, a startup in Texas called trilogy, which didn't really have designers or product managers. We had engineers, we had business people. So since I wasn't an engineer at that time, I was on the business side. And it took me about a decade to realise that what I really loved was the product side of things and to sort of move myself over. And I I wore a lot of different hats. I started and sold companies back then. So I was doing a lot of entrepreneurship stuff, but to accelerate sort of more to the present time. I most recently was running product and engineering at a company called meetup that I bet a lot of your listeners have heard of. Before that ran product and engineering at a FinTech marketplace b2b FinTech marketplace. coaxial. Rana was CEO and sold two pivotal innovation consulting company called Neo and I've written a few books, one called talking to humans, one called testing to humans all about qualitative research and about experimentation. So these days, I'm teaching at New York University teaching product management there, because I'm on enforced bench time due to some family reasons. But looking forward to getting back in the saddle when I can Lily Smith:  boson and today, we're going to be talking about finance from a couple of different perspectives. But let's start with the kind of company valuation side of things. And one of the things you mentioned, just before we started recording was that it's very important for product leaders in particular to have an idea of how a company's valuation could be influenced by strategy. And so give us a quick intro into your thoughts on this like how as a product leader, do we learn this type of knowledge and and gain experience in this area? Giff Constable:  Right? Well, as a product manager, if you've ever wondered, why, why is our company seemingly chasing growth that sort of at all costs, like just top line growth, top line growth, and we're not paying any attention to profitability? Or why are we paying so much attention to profitability and not growth or thinking about that, that those decisions that seem to be made by the CEO on the board, the root cause of that is usually tied to who the investors are, and how they're trying to grow the value of the business. And companies are valued in different ways in different industries and different modes by different people and it's actually quite nuanced and calm. Look at that I had the benefit when I was younger of being a technology investment banker. So I valued worked on a tonne of mergers and acquisitions and some IPO work. And so I valued a lot of companies. But most people don't get, especially in product management these days, don't get a peek into that. And but it's a, it's really important to understand, as you're trying to understand what is important to our business? What's the name of the game for what we do, right? We're trying to create value for people and create value for our companies. Well, what does that mean create value for our companies? Yes, there is revenue. Yes, there is gross margin, yes, there is your bottom line margin. But sometimes some of those numbers are more important than others. And if you want to move up the ladder, for lack of a better way of putting it, if you want to move into product leadership, you want to be a safe pair of hands, in the eyes of the CEO and the board, you need to understand which levers are more important to move and why it's so much of that just to bring this full circle comes back down to the valuation of the business that I could give, I can't give an example actually at meetup we had when we were under the ownership of wework, which for a while there, and you may chuckle was about top line growth, top line growth, like it doesn't matter how much money you burn, grow, grow. And they were getting rewarded for that all up until the time that they tried to go public, and then the rug got pulled out from under them. And that was an interesting time to be at meetup, I'll tell you that. But we were looking at call it a product innovation initiative that had good revenue growth potential, but had a lot of costs baked into how it was going to be built. And so its actual gross margins, its cost of goods sold, the amount of money we're having to spend to deliver the product was actually pretty high. So its gross margins, were actually low. Under the wework. As owners, it was a really interesting property. But as soon as we started thinking about realising that, okay, meetup is getting spun out of we work, and this is likely going into private equity hands, all of a sudden, gross margin, and profitability became really important. So here was a product initiative, the same product initiative, the same company. But you take two different ownership contexts, to different contexts where those owners expected to be rewarded in different contexts based on the valuation of their business and one look good and in one situation look terrible. And so it's just understanding those nuances is important. Randy Silver:  So it's, it's really it sounds, it's really about storytelling half the time, it's, the numbers can be massaged in different ways, depending on not massage, but you choose which numbers to interpret and concentrate on based on what is the story you're trying to tell? Is that sound accurate? Giff Constable:  Well, you know, it's funny, as as a banker, well, I haven't been a banker a long time. But I realised, immediately, almost to my shock, because, you know, there I was, you know, wet behind the ears in my 20s, I realised we could almost make the numbers do whatever we wanted. But and, and you're right, that story is a big part of it. But there are some fundamentals, there are some fundamentals that the venture capital game is, it's a growth game that we have, we're gonna invest in 20 companies, and we expect to have them to pay for everything else. And we need our companies to grow, grow, grow like it's just get as sexy growth as possible. And don't worry so much about the bottom line, chase that growth, because we are going to be able to either sell you or you're going to go public. And then it's going to make it all worthwhile. And just those losses don't really matter, because it's all going to come back in terms of the equity value of the business. But there's other kinds of situations and owners more established more mature businesses, or private equity owners who they're not interested in having a hit rate of two out of 20 investments, they're willing to take a smaller return. But they want that to happen across many more, if not all of their companies. So those companies need to be run a little safer, a little more maturely. They're interested, they're not interested in having to pour more capital in Well, on these high growth plays, actually, they want more capital and like let's get more capital in so that we can get a higher return out, the opposite often happens. And so, you know, it actually depends on like, which universe are you playing in who who are your owners, if it's a, you know, a person or a family owning this business and they want to run this really safe, then then you're going to be making certain calls if it's a private equity player, or if it's like a high risk, high growth player. So in some ways, yes. While storytelling is important, it's actually you need to understand your context. This is this is a case in all cases. Right, how to make good decisions? What's our context? And now let's make decisions within that. Lily Smith:  And is it always a kind of trade off between growth and profits? And or are there other things that you might be that you might be kind of chasing? So, in, in my experience in startups, I've talked before with, like team, our teams about what are the things that people are with that make us an attractive to be invested in? Is it the calibre of the team that we have, or the the IP that we're creating, or the data that we're collecting, or the market share that we've gone after, which I guess is the growth side of things? But are there other things that you could be trying to chase on in order to increase the valuation? or increase it for the types of investors that you're going after? Yeah, Giff Constable:  that's a great question. Really, I mean, there's a lot of levers that can improve your valuation, one of the things I try to explain to people is you can improve how much your business is worth linearly. So let's say your business is worth 10 times revenue, right? And you grow your revenue by $1, you've grown at 10 times that dollar. But what if you can get your revenue to become 11 times revenue? Or 15 times revenue? That's a nonlinear growth of your valuation? So what are the things that affect the actual multiples, as opposed to just the the amount that you're working upon? And so the, the biggest ones, tend to be your growth rate, as we've talked about your top line growth, like, are you a rocket ship are people excited about where you're going? The next one is also a financial one, which is your gross margins. And so if, and this is actually typically why investors love software, businesses, and why the multiples and software business is so much better than other businesses, that, you know, if you take a take a different kind of business, let's say you were selling candy bars, right, you sell the candy bar for $1, it costs you 80 cents to make the candy bar, you've got 20 cents of gross margin there. That's not a lot to work with in terms of what you're doing with the product and sales and marketing and all your operational costs. software companies have very low expenses, you know, there's a bit of a myth within software that you sort of make it once and then it's free. process. We all know, in software, that's not how the game works, actually, we have to maintain what we do software teams only get bigger than ever gets smaller. But but we have really good gross margins. A high gross margin business that's up in the 75 85%, gross margin business will be valued, really highly, will often be valued as a multiple of revenue. I'm not sounding too wonky here for your audience. But if you start getting pushed down, then investors say, I'm not going to value you based on revenue, I'm actually going to based value based on your profitability. There's a very wonky term in the finance world called EBIT da, but really think of it as your operating profit, which is after you take your r&d costs and your sales and marketing and your admin costs away. Now, if you move, we probably have a mutual friend, Melissa Perry, Melissa was working with a late stage venture capital firm, you really kind of a private equity firm that likes to pretend it was a venture capital firm, and one of their businesses was trying to grow, but the way they were trying to grow was hurting their gross margins. And they were actually in danger of shifting from a company that was valued based on revenue to in the eyes of other investors, a company based on their bottom line. And that was going to really hammer their valuation. So the owners were terrified of this. Now, again, coming back to like, why is this important? Well, if you're inside a company, trying to think about your portfolio of initiatives, what what are we going to do? How much is fixing our core? How much is innovation, a new products and new business lines? And you're not aware of these implications, you can get yourself into hot water or just look foolish. So it can be quite dangerous. There are other things as well, I'm making this too long an answer for you, Lily, but I mean, your brand can affect this, right, you're having a really dark dominant market share can affect this, sometimes the quality of the management team can affect this this, there are there are some non financial things that absolutely do make a difference here. Probably being in pole position, sort of the number one sort of leader in whatever the space is, is probably the next biggest one, but the financial ones are quite important. Randy Silver:  So a lot of what you've talked about so far is stuff that you can affect very much at a director level or board level, where you're shaping the design of the company and how the product, price instruction, everything else is done. But if you're more of a mid tier Product Manager, how do you recognise this? How do you get start to get ahead and start thinking about this and sourcing This is where I fit in. This is where I can have some influence. These are the kinds of decisions I can make that will affect that will ramp up to the to the valuation story. Giff Constable:  Yeah, well, the The funny thing is, is boards don't want to, they don't want to be designing this, they want the teams to design this. And they're looking to the executives to make these calls. As you're moving your way up as a product manager. This is a really important area just to educate yourself. And the best way to do that you can look online for resources. I've written a few things on my blog about it. But really the best way to do it because this is very context specific, is talk to your executives. So your CPO if you have one ideally is aware of this, your CFO, your chief financial officer will very much be aware of this and your CEO is going to be thinking about this all the time, all the time. So if you can talk to someone senior, your finance department and say, What are the levers that are really important for the this business? And particularly from a valuation perspective? What are you all thinking about? Is it cyclicality is that a recurring revenue? Is that the gross margin like what are the pieces, and again, as I say, different kinds of businesses, different numbers are more important. There isn't a one size fits all approach here at all. So you talk to your most senior executives. And usually people in finance are quite happy when product people come and want to speak to them and learn from them. Because they're always complaining that there's not enough financial acumen inside the company. So if you got asked like, wow, okay, someone cares about what we do, and what we think is important. So that's a great place to start. And it's really just about, you know, I imagine that as you're thinking about the, your own roadmap, you're thinking about your own initiatives, why should we work in x versus y, I hope you're thinking about what that's going to do for the customer. That's really important. But you're also thinking about what it's going to do for your business. And to get more sophisticated about that last point, what is it going to do for our business, the way to get more sophisticated about that is to realise it's not just about dollars out, because not all dollars are created equal. Just back to my points from meetup before, same business. But all of a sudden, you know, that revenue in one context look really great, and another context look really bad. So that will affect it has influence over your strategy, there's lots of things that go into strategy, but where the owners are trying to take this and how they're trying to grow, the valuation of the business should ripple all the way down to your work actually, as a product team, and the more sophisticated you are, and taking that into consideration, the more that's part of your conversation with executives, about the choices you and your team are trying to make together, the more impressive you're going to look, the more likely they think, okay, you're a safe pair of hands, you're ready for more responsibility? And so yes, it's just start talking to senior people, because they will, at least some of them will have this in the back of their heads, Lily Smith:  let's say what about the p&l for the business and I realised this will be very different based on you know, depending on different businesses, but is there a case for a product manager or product leader owning the p&l for you know, for the product, basically, Giff Constable:  I, you know, I see, I see all kinds out there, sometimes you see a product manager owning a p&l, sometimes a GM, or business person is put there, I've seen it work, I've seen that not work, sometimes they could run into each other depends on how good a partnership can be done there. Regardless of how your company is trying to do it, any product manager should act like they own the p&l, they should understand the p&l. You know, it's the same thing. It's just like marketing and go to market. You may not be doing that work. But if you don't understand how people are discovering your product, and how expectations are being set and how they're coming to the front door, you're about to inherit those customers and try to do something with it, then how are you going to do a good job once they come through that door? So you need to understand it. And if you want your product to be successful, you need to understand how it's being sold or distributed. So So yeah, it's whether you actually have responsibility or not I, I wish there were more circumstances where product leaders did have that responsibility. But whether you do or not undertaking like understanding it and feeling that ownership even if you don't have the ownership i think is key. Lily Smith:  And I guess one time when that becomes particularly important is when you are looking at pricing of the products and different different pricing structures or pricing models, because you need to be able to, you need to be able to create various different scenarios from a kind of business modelling point. To view to be able to understand, you know how viable it is, regardless of whether a customer is going to pay it or not? Yeah, certainly, Giff Constable:  certainly. I mean, it's going to depend on the context of the initiative. As to are you building a feature within a very established, you know, pricing and revenue model? In which case, you're sort of slotting into that? Are you building something we're actually the cost side is really important. Oftentimes, the more you're tied to innovation, the more you're trying to create a new business line. The more important it is to think through the revenue model and I have found as a product leader, as a Chief Product officer, thinking about revenue model is really essential, because I've seen that have outsized impact on success or failure of products. Lily Smith:  Are you struggling to find the answers to your product questions keen to learn from others in the community and want to know where to go next in your career, mind the product can help Randy Silver:  mind the product membership will help you to level up your career, build better products, and lead successful product teams. And as the world's largest professional network for product people with decades of product management experience, you won't find this anywhere else. Lily Smith:  As a member, you'll get exclusive access to premium editorial product experts and product peers tackling similar challenges. Plus brand new self paced online training modules that cover core product skills, like goals, alignment, prioritisation, hypotheses and testing and more. Randy Silver:  For more info and to become a member today, visit minder product, comm slash join. So how much does that come in? In the discovery stage? And in the development stage? You know, you we always test? Are people going to actually use something we talked to them and ask them if they will. We like to look at propensity to pay and all kinds of things like that to figure out is this worth doing? Right? How do you know if it's the features that you know, have you built the right product? Or is it the revenue model that may be off if people aren't adopting it? Giff Constable:  Well, yeah, so causation causation correlation challenge, that's our jobs are so hard. And we all you know, everyone knows, I bet a lot of your listeners know this desirability viability feasibility triad, that you're thinking about the on this topic, the thing that I'm encouraging more product people to think about, it's not just about propensity to pay propensity to pay in what way, if you're designing a product, then the way you decide to charge is going to affect customer behaviour, user behaviour, sometimes your customer users different dramatically, dramatically, it's going to affect how aligned you are with your customers or not, it's going to affect whether you've created a flywheel that has positive effects or has creates friction on the business that you're trying to do. It will affect whether you can disrupt like your competitors, or whether you can't. So thinking about this early, and trying to spot ways to design a better entire system around your product. That includes not just the features, but also how it goes to market, what you're upgrading, sort of the backbone is behind it, and then how you charge for it is really important. So behaviours, let's talk about behaviours for a second. So meetup You know, my product has I'll go Scott and say it has I think probably a bit of a love hate relationship with with meetup, you know, meet up help begin it. I Randy Silver:  couldn't possibly comment. Giff Constable:  No, I, you know, I've had I had I had like, some deep conversations Mark Martin, when I first got there. And it many of the things that some of meetups bigger customers are frustrated about. Those frustrations have emerged because of the revenue model that that company has. But but just to zero in for a second. Talking about how pricing affects behaviour, one of the things that we spotted at meetup we know this from from our research, is that if you do not charge for a meetup, your average show up right meaning that someone has RSVP to come to an event and whether they actually show up is around 40%. So you have 100 people RSVP you don't charge 40 people show up. Now you have exceptions higher or lower, but that's sort of the average. that's problematic because people see Oh 100 people are coming They go get that bigger venue, they spend more on food and drinks and things like that it actually. And not just that there's psychological impact on the organisers, they're all geared up for 100 person event and 40 people show up and what could have been a successful event now feels like a failure. We also know that that meetups that only charge $1 to $3 that didn't have to be a lot of money, just a little bit of money that show up rate jumps up to 75 80%. There's a simple example around how just pricing changes behaviour. We know we know that pricing changes psychology changes perception, but also changes behaviour. I saw the exact same thing when I was running this FinTech marketplace, before going to meet up were the way we were we were This was also a subscription model. And we had these investors that were looking to buy companies on this marketplace. And because of subscription model, they were trying to kick every tire. Now investors love optionality, they want to look at everything, but they don't want to look at everything, and be. And so what they were doing is because they were trying to kick every tire, and a lot of the things didn't fit what they were actually interested in. They were coming to us going the companies on your products suck. They're terrible. It's like no, no, hold on a second. It's like eBay, right? What's the jump to someone else is gold, right? And what's gold to someone else might be junk to you. And the same thing was happening. But it was the hopefully I'm maybe making the story too confusing. But to cut to the chase, what was happening was because of the way that because the way the company was charging was was fueling people's desire to look at everything, rather than throttling that behaviour leading to really unhappy perceptions on both sides of that particular marketplace. So there I saw at meetup I saw the way you were charging money really distort things, create misalignment, create behaviours you don't necessarily want and I saw it in the FinTech company as well, two companies in a row. And, and I that made me realise, actually changing how not how much you charge, but changing how you charge can change your customers behaviour far more than a UX change or a feature change? Many times. Now, it's not always the smart thing to do. Changing, pricing midstream can be very difficult, you have to do it very carefully. While I was at meetup, we stubbed our toe quite publicly trying to run a small experiment that created and that was largely due to some executive dysfunction. But but so you have to you have to be smart about how you do this. And tread carefully. But I'm just trying to get people to think about this more. I think that product leaders are well suited, because they are thinking about business, they're thinking about customers, they thinking about systems, you're designing a system, you're designing an engine that needs to work for everybody, it needs to align for the customers, and align for the business. And if you can get those two things aligned, so that as the customer is more successful, you're more successful, and then everything gets better. meetup that was not the case. But again, that was partially why when the product has been frustrated, because making roadmap decisions at meetup with the business model it has, where you realise there's no return on investment here. We will not gain anything from this, other than the satisfaction of knowing that our customers are going to be happier, which is not worthless, don't get me wrong, that's not worthless. But what happens is that it creates this dissonance, it's sand in the gears. And that makes it very hard for product teams. If you if you've got if you've got friction in the way the products working against how the business model and revenue models working. So I think product leaders are well set up to try to design better systems. Lily Smith:  Do you think the product gets to a point and the kind of the model gets to a point where you found the thing that works? And then that's it you just scale from there? Or do you always have to finesse tweak, try new things, you know, is it a kind of ongoing strategy? kind of review? Giff Constable:  Yeah, it's, you certainly get into a mode, if you do it right. And you know, and the stars align, where you have momentum, where it feels like things are moving, your business is growing, the sales team is able to sell it or people are adopting the product or whatever it is, right. You've you've said, Okay. Well, you know, or you've managed to, you know, unseat a competitor. Just think about Spotify saying now we're all gonna rent music instead of buying music, right? or Google saying, instead of buying word processing software, now you're going to get it for free. You know, it began for free as an advertising model than they extended into a subscription model, you know, so you get into a mode where it's, it's like it's working and you've got some momentum. Great, like there's no reason to turn the table over at that point in time. You're always tweaking your thinking about how we price the right amount. Are we thinking Do we need to customise pricing for different segments? Should we be thinking about those revenue models, which I think of as different ways to make money, such as subscription versus advertising versus paying for usage, right, or paying per leads, then there's conversion tactics, which is freemium. freemium is not the way you make money. It's just a conversion tactics, like discounts, it's a way to get someone into a way to make money. So you want you're probably always playing with the tactics to improve conversion rates, but you will often settle on a way to make money that seems to be working. And you're only going to change that if all of a sudden you're feeling like there's yours in the sand. Well, what's going to cause gears, sorry, sand in the gears, I put my, what's going to cause that? Well, sometimes you're now moving into a totally new market, could be a new customer base, it could be, you've got a new product initiative. So it's this, this could be tied to innovation. Or it could be that, frankly, someone else has come in, and they're now turning your strengths into your weaknesses the same way that, you know, Spotify did Tower Records and other things where you now have to think, okay, we actually have to rethink our business model again, the more you're tied to, and this is why this particular topic is particularly important, really, for product leaders. It's you thinking about revenue models, a product leadership problem, not so much a product manager problem, unless, as a product manager, you're innovating a new business line, if you're in charge of coming up with a new product, and you need to think about how are we doing distribution of this? How are we pricing this, then now it's your problem. But oftentimes, it's actually it's more at the senior level. But the more again, more sophisticated you are in these topics, the more people will see you as a strategic thinker. Randy Silver:  So what's one thing that a product manager who's looking to move up that ladder? What's one thing they should do tomorrow? To start looking at this and examine this? And do what's one question they can ask about their own product in a way of of looking at it differently? Giff Constable:  You know, one, one thing that I think all product people should do, at any level, especially the leadership level, but really, at any level, is a draw, draw your flywheel or draw the forces that are happening in your product. An example of a flywheel that's quite famous is the early Amazon flywheel, I'm not going to get it exactly right here, I don't have in front of me. But essentially, it's like if we, if we lower prices, that's gonna lead to more customers, more customers will lead to more selection, more selection leads to you know, blah, blah, blah. And that comes back to lower prices. And if you look at this, this this flywheel you realise, okay, if you actually keep on lowering prices, that drives that drives the business, now they've taken it too far. You can over optimise for these things. And they could probably treat their employees a little bit better and do some things. But there is, it was very powerful for them to have this insight early on to understand their flywheel, draw your own. And the first version of this is going to be hugely messy, but draw the forces, like customers are trying to do this, we help them do that, that that leads to this next step that then leads to this next step, which then we recoup value. And then we invest that value back into this other thing, which is then going to lead to more, you know, the customer doing something else, draw this out, draw your ecosystem, draw your engine of the business and the product and the customer, as best you can and start with it really messy, just all the pieces. And then you could take a step back and think, okay, is this flowing? Are there are there things is a shade in our gears, right? Where's our friction? You know, are we throttling behaviours, we actually want to encourage are we encouraging behaviours, we want to throttle because of the other features in the product or the way that we are charging money? And you could then do the same thing for other companies as well. Okay, how does that work for Airbnb? what's what's their business? Right? How does it work for Netflix? What's their business? could be some of your competitors, it could be others, but you can practice this. You could practice like trying to visualise and understand the engine. And the engine is all the parts. And but a key part of the engine that I just want more product leaders to talk about is how do you choose to make money because actually, that's more important than the amount you've set. The amount you set is important, but actually how you choose to make money. That's that's a that's a real kicker, one that can create huge friction or it can become a huge enabler. And everyone's talking about product led growth and things like that. And that's, that's exciting. And I think it's wonderful. And the whole point of that is that product is is creating nonlinear growth engines for a business so so joy out? How does conflict growth work? And how does the money and revenue and the way you charge? How does that affect it and talk to your folks, your teammates, talk to your executives about that? Does your head of product see this the way you do? Does your head of marketing or sales, see this the way you do, that'll lead to really interesting conversations. And by the way, you'll probably look pretty impressive to now part of the our job as product managers is right, we begin with a huge mess. And then oftentimes, before we expose it to normal humans who aren't in our product world, we have to simplify it. So you got to go through that exercise. But don't be afraid of the mess, start with a mess, just start by drawing it out. Lily Smith:  And get in the books that you've written, they've kind of the topics have been around talking to humans, and testing with humans. So just bringing in your expertise in those areas. How would you approach like research on models with that kind of qualitative research? Like, is there anything you can do that? Or is it better to be just Reliant more on the quantitative data? When you're experimenting in this area? Giff Constable:  Oh, you have, you know, as product people, it's got to be all the above. Right? And, yeah. So when you're, when you're out there, interviewing potential customers, and you're saying, Tell me about a time when, as opposed to, would you buy this? That's not what you're asking, right? You say, Tell me about a time when, when you tackle this problem, or you try to solve it in this particular way. And, and, you know, if it's applicable to your context, and they could talk about either trying to buy some sort of solution, you could start asking some new questions around. Okay, well, how were you? How did you pay for that? Like, what was your purchase process? Like? What? You know, okay, you were buying in this particular way? Did that did that? Unlock certain things? Did that create certain frustration or certain frictions? So that historical story you're trying to get people to tell you, you can go into other pricing experiences they had, it could be related to your product, or it could be for some things that are close enough that you can actually draw some interesting conclusions, but you are trying to learn how they buy and how they like to buy? And what what frustrates them and things like that? experiments, right? So talking with humans is all about how to interview people to vet a new product or business idea. testing with humans is about how do you run experiments, without having had having built the whole thing, right, AV testing is too late. We know we've built it, let's let's go figure this out before we built the thing. So you can do tonnes of pricing experiments, you have to do them carefully. I know you talked about this in a recent podcast, you have to do them carefully. You have to when you were a very public brand, like meetup or say Airbnb or something like that, the more public and well known your brand, the more careful you have to be about, about how you do this, and how public you want to be. I wish that we when we were doing some experiments, I wanted us to be extremely public and saying, We are running some experiments, they are only experiments, here's why we're running these experiments. Here's why this is useful for you as our customer, that we're running experiments, you are going to find some of these ideas scary as a customer. However, we're not going to do this totally on our own without talking to you like, but you can set it potations you can create a conversation and things like that. But that doesn't mean you can't run experiments. We, the big PR mess up that we had was us just talking to 100 organisers in Delaware. It was this tiny little of experiment. We got millions of people all around the world using this. And it was this tiny little Delaware thing. And that went massively viral. And that was that was a communications failure on our part. The experiment was not the mistake, it was the communication, the promise Randy Silver:  that you chose Delaware. Remember, what happened in Vegas stays in Vegas, Delaware doesn't have that slogan. Giff Constable:  I mean, sometimes you can't actually get people to sign an NDA to be to be part of an experiment. You know, again, it's be sensible with how you're approaching it, but don't shy away from it. You know, actually experimenting with pricing amounts that's that's classic A B testing kind of lands but experimenting with the revenue models. I what I find is you can you can sort of, it's a bit like thinking through strategy. What I'm thinking about strategy, I'll often go through like the seven powers and say, Okay, how does the seven powers Do you know that book seven powers who read that? No, Lily Smith:  no, give us give us the lowdown. Giff Constable:  Let's see if I can get his name right. I think Hamilton Helmer might be his name. He was either a founder Someone very senior maybe at Boston, consult one of the big strategy consulting group strategy consulting companies, he wrote a book thing, after all the work we've done, we think that these the seven powers that companies have and tried to build. And so it's network effects economies of scale brands, there's, there's a cornering a resource. And so when I'm looking thinking about strategy, I'll often start with like a blank slate and say, let me think about my company in my context across these seven, right, and then maybe I'll look look at Michel Porter's, and maybe I'll look at good build strategy framework and just come at it from different vectors. But you could do the same thing here, where you could say, Alright, let me list all the different revenue models I could think about, does pay per lead work for me does advertising work for me like, and very quickly, you can get a sense of you may be interesting, probably not interesting. So you can wind it down right there. And then, and if you've done some customer research, that's sort of coming into your brain. And then you want to get into a spreadsheet. Because sometimes these ideas sound absolutely fantastic until you actually put some numbers in place. And and I always say, start with a blank spreadsheet. Because that really for like when you have to fill in the blank cells, it exposes a little you know, but you could say, all right, if we actually applied this new model to what we know about our customers, given both our qualitative and quantitative data, so we have, we can make some guesses as to what's going to happen, how much churn Are we going to cause for this segment, we change the roof their pricing model, let's predict that, but then what would be better because something's got to be better, otherwise, we wouldn't be making this change. So you could model it out. And some things are immediately going to get cut as well. So you think through it, a lot of things fall to the cutting room floor, you model it out things follow the cutting room floor, and then you'll you'll usually end up with a small list that then you might think about doing some experiments or some additional research for, again, I'm sort of talking about inside an existing company, because changing your revenue model, not for a new product, but for an existing product has to be done very carefully, you have to turn that ship carefully. And so you want to step into this carefully. Lily Smith:  It reminds me if it's completely in, yeah, there was a talk that I saw, and I will try and find a link to it. Because I can't remember who it was that did the talk. But it was a guy who worked at startup in Bristol, and he talks about how, you know, we all talk about product market fit. But actually, it's not just product market fit, it's product market, then channel then model. And you have to have all of those four things right? Before you can kind of really start to fly as a business. So, Giff Constable:  you know, I've been involved in the Lean Startup movement. Well, actually, really before Eric wrote that book, and the random, lean startup meetup in New York for years and know Eric well, and and many other the kind of ogis of that, of that movement. One thing that we saw, as we talked across each other, and Brian Cooper and Jeff Garfield and Melissa para, you name it, right? One thing we saw on a recurring basis in startup land, was that revenue model pivots were usually the most impactful, far more than feature or product pivots. Sometimes teaching your customer target customer pivot was really important. But if you thought about the different kinds of a startup was struggling, he thought about the different kinds of pivots that they could make. Oftentimes, the revenue model pivot was the most impactful. So if there's an interesting little takeaway, caught, you know, mileage is gonna vary, right? It's it depends on your context. But you're right, there's a getting a start a new product or a startup, right? This is all these dials, you got to get all the dials working together. Team has a distribution, customer acquisition, the product, the revenue, all the things have to work or, or it'll bump and timing. Randy Silver:  All the things. So it's a miracle any of us ever get it? Right. Well, you know, Randy, I Giff Constable:  mean, we've talked about this online for a long time, in some ways that we all bemoan the pathetic hit rate of new products that get into the world, whether it's from a big company or a startup, but you have conversations like this, you're like, Okay, now I have a little more understanding as to why the hit rate is so low. But why we care about product so much our community, we think about this stuff so much as we're like, well, we got to bend that curve. We got to make this better. How do we make this better? How do we push our thinking harder? How do we, you know, how do we challenge ourselves more? Because Yeah, it is hard. The world is stacked up against it. So let's, let's do better. Randy Silver:  I think that's a great place to end it. And we could talk for hours more, but this was a lot of fun gift. Thank you so much for coming on. And joining us tonight. Unknown:  I feel really blessed that you allowed me to join you today. Thanks for letting me talk your ear off and, and thank you so much. Lily Smith:  That was great. Thanks give Randy Silver:  you know Billy, I've only read one of gifts books so far, but I really enjoyed it. Well, Lily Smith:  he's teaching product at NYU these days. So he definitely knows his stuff. That's true. Randy Silver:  But I actually read his other book. It's called becoming Monday and it's a sci fi novel. It was a great holiday read. It was a lot of fun. And you know, maybe next week, our guests will have also written something fun. Who knows? Lily Smith:  We should have just interviewed him about the sci fi novel. Randy Silver:  Maybe next time. Lily Smith:  Hey, it's me, Lily Smith Randy Silver:  and me Randy silver. Lily Smith:  Emily Tate is our producer. And Luke Smith is our editor. Randy Silver:  Our theme music is from Humbard baseband power. That's p au. Thanks to Nick Hitler who runs product tank and MTP engage in Hamburg and plays bass in the band for letting us use their music. Connect with your local product community via product tank or regular free meetups in over 200 cities worldwide. Lily Smith:  If there's not one Nagy you can consider starting one yourself. To find out more go to mind the product.com forward slash product tank. Product tech Randy Silver:  is a global community of meetups driven by and for product people. We offer expert talks group discussion and a safe environment for product people to come together and share greetings and tips.