How is product value determined today and how do customers make product choices?

Consider a simple example, 20 years ago you would choose a car based on your ideal product characteristics (make, size etc.) and how much you could afford to spend. Your choice would live with you while you paid it off, or until you could justify changing it. The idea of choosing products based on product features is of course at the core of all consumer choice. Were it not so, how would we decide what to buy? However, what happens when we relax the assumption that you have to live with your choice for some period of time? What would happen to your choice of car if any choice you made today could be rescinded tomorrow and a new choice made?

The advent of open source software gave the first hints of how this product model might look. If the software we use to make software products costs us nothing then the only cost of production is labour — even infrastructure costs become vanishingly small when you can purchase computing power in the cloud, on demand. If labour is the only significant input cost then it follows that we want to ensure that we are using that about as efficiently as possible. So, instead of making large product bets by working on something for months before showing customers, we try to release small increments of the software at regular intervals to enable us to get customer feedback. Many software startups use these ideas, which have been popularised in The Lean Startup by Eric Ries. The customer now has the opportunity to make feature choices at a greater frequency than has been possible in the past.

What if your car was updated every week instead of every year? What of there was a March 2016 model of the new Ford instead of just the 2016 model? Well, in many cases this is beginning to happen at the software level as car operating systems are updated wirelessly and provide new features — through software updates — to existing owners. In this case, the car becomes a software platform, or rather a platform for software. The physical choice of platform (car) is also beginning to change though. For those who wish to change their car regularly there are many services (e.g. Zip Car) that allow you to rent access to a car and return it (or just leave it somewhere) when you’re done.

The contrasting cases of cars being easily swapped when you don’t want to own one and the case if a car you own being software updated regularly are instructive: They both aim to reduce the friction of make changes. The former, of the physical product itself and the second the speed of addition of new features independent of the physical platform itself. However, in both cases these features are accessed using some software — car operating system or car app.

Let’s apply this to software. Imagine if for a particular piece of software, say a task management application, you could get it for nothing (or at a very low price) — such that changing it becomes unconstrained by its cost to you. Add to this that new features are being added to the application, and its competitors very frequently. The only feature limiting your ability to move to another application is the application’s ability to let you transport your data (e.g. your tasks in the task app) to the new app. If your requirements changed very slowly and other products changed very slowly it is likely, as in the past, that the value of switching would be low. But if you were constantly on the lookout for new features and wanted to try them out, it follows that every app you chose to move to would need to enable you to move ‘back’ again.

This is because the prevailing assumption of the software product consumer is that other applications will conceivably meet their needs better in future.

Every software product has a set of threshold features without which consumers will tend not to choose it. A car needs to be waterproof with airbags and ABS brakes. A task app needs to allow you to add dates to your tasks. This set of features starts off as what if often termed a minimum viable product. However, this set now includes the ability to switch away from the product and back again.

What does this mean for how we define value. For those economists of the marginalist persuasion, it establishes that value is driven by optionality. However, it also highlights that this optionality really arises from the elimination of barriers other than pure labour costs from the production process.

It therefore follows:

We must create product development processes that are lean in order to be high velocity in order to enable the translation of new product features into customer choice as frictionlessly as possible.