The more complex a product, the more complicated it is to achieve growth with it. In this article we explain how that works, and we offer concrete guidance on how to deal with complexity.
Earlier I wrote: the entrepreneur who are technology company wants to sell successfully, would do well to develop a business model with recurring revenues. The holy grail for many business owners is a SaaS model: the so-called software-as-a-service, where software is offered as a subscription. Preferably, the software is in the cloud: online, accessible to as many customers as possible at the same time.
Less is better
But what actually makes customers actually buy that product (or service)? Availability is one thing, that is of course good in the cloud, and an application must of course also be useful. In addition, complexity is important. The basic rule is: the less complex a tech application is, the more valuable it is for the customer, and therefore also for the provider.
Particularly valuable from an entrepreneurial perspective are products that are low in complexity:
- to develop
- to implement
- to maintain
- to monetize
Check it out. Layer complexity is the basis of many of the greatest high tech successes of recent decades: from Meta's Facebook via LinkedIn to the taxi platform Uber. The latter company has no taxis and no consumers as customers. Yet it is the world market leader in taxi services. Thanks to an online platform, centrally developed and easy to use, the company was able to grow in less than 15 years into a stock exchange giant with a value of 65 billion euros.
There is a direct relationship between the valuation of companies and the average complexity of their services. It is outlined as follows:
The more complex a product – the more features, bells and whistles – the more negative that is for the company valuation. A high one multiple (multiplier), in the drawing, means that in a takeover, a buyer is willing to pay many times the sales (and/or profit) as the takeover amount.
This 'rule' is not always intuitive. Low-complexity applications are sensitive to competition. Certainly because technology is developing rapidly (and therefore becoming even more low-complexity for a growing number of providers), there is a tendency for companies to win and retain customers through ever new features.
That is rarely a good idea. With low-complexity solutions – think of a platform like Thuisbezorgd.nl – it's not about adding all kinds of services, but about gaining market share as quickly as possible and keeping the own application as understandable as possible for customers. Customers recommend the product to other customers (social selling) and thus rapid growth can be achieved.
For the record: of course there are also high-tech companies that are very valuable and offer quite complex products and services. Just think of the services provided by SAP, which offers incredibly sophisticated software packages with long implementation times. Or also take ASML. The company from Veldhoven produces the most advanced lithography machines in the world.
What you don't want to become, however, is the provider of a product that is complex to make and complex to implement, with relatively little to earn.
How to navigate within this field of tension as an entrepreneur? With the following five steps you can take a closer look at your own activities.
- Step 1: Organize a proposition workshop.
List all products, services with all options and possibilities and prices. make a pie chart based on the percentage contribution to turnover per product.
- Step 2: Organize a features workshop
List all the features of the services and products and analyze the use. If 20 percent of your product generates 80 percent of your sales, that's a bad sign.
The reason, incidentally, that No Monkey Business recommends organizing steps 1 and 2 in workshop form is that colleagues often view the range of products and services from a very personal lens. Looking together provides a more complete picture.
- Step 3: Create one less is more-list
Based on the results of steps 1 and 2, create a new custom price list of products and services.
How do you make the right choices? It is important to always keep an eye on the relationship between complexity and turnover. For a software company, it's about the complexity in the basic product, but at least as much in features that have been added over time.
Take a critical look at which features customers really use. You will often see that customers mainly use the basic features. And that while all the extra features ensure long implementation times and also maintenance costs and R&D efforts. Third, complex products are often difficult for sales reps to explain.
This also plays a role in other subsectors of the tech industry. Take the example of the resellers and implementation parties – who install and maintain Salesforce, Microsoft and so on at companies.
What you see there is that sales staff really like to have a solution for everything. In addition to the basic products, more and more apps are then offered - until a whole Christmas tree of apps is created - all apps that only yield a few hundred euros.
The problem here is also that all those apps require attention: sometimes contracts have to be concluded with the providers. There are always implementation issues. And what if a smaller provider goes bankrupt? As an implementation party, you are also responsible for this.
- Step 4: Create a business plan
If the thinking exercise of step 3 has been carried out correctly, a clear and focused product and service list will emerge. Create a business plan around that. What is the effect of any loss of turnover? Also think of cost savings, and new ones sales forecasts.
Do not forget about the services you are letting expire. Microsoft mentions that in its app offerings retire, to retire. The suggestion is that such an app has had its day, that it is time for the young generation as well. A system in which not everything and anything is kept in the air also creates room for innovation.
Finally, in this phase, it is also useful to have a possible sale of your own company in mind. To a dream exit because you have to build. I always recommend looking through the eyes of a potential buyer. What does he see? If you offer a buyer a company with a super good product that can be implemented within three days, the buyer will think: scalable! Wow! If you offer him a company with a product that is very complex but tightly structured and easy to explain, then that will also benefit the valuation.
- Step 5: Get started
Present the created plan to all stakeholders and execute.
No Monkey Business presents a series of 16: the NMB Value increase Top-16. Step 1 wash the focus on recurring revenue, step 2 so the focus on (less) complexity. Step 3 will follow shortly: high market potential.