Thursday, January 1, 2009

Market caculus

I am very surprised to see that Microsoft is still having trouble selling Vista. I would've expected, by this point, it would have been the uncontested operating system.

Every time that Microsoft has released an operating system there has been some resistance to it. Others, like Windows ME were a flop. Operating systems, like windows 98 SE and Windows XP were, eventually, a great success.

What does it take to have a successful operating system? Why did some operating systems do better than others? What I want to concentrate specifically on is how a company can release a follow-up and have it fail to catch on.

Let's look at word processors for moment. Word processors are like operating systems when it comes to whether or not their follow-ups will be successful. If I buy version 1 of a word processor I make a natural assumption that version 2 will be similar, better, more stable, have more features, and most importantly will be backwards compatible with all the files that I wrote in the previous version of the word processor. It will, in essence, be a better version of the product that I already own.

Let's say I buy version 2 of the word processor I really like. Version 2, however, does not work at all like version 1. It's, in fact, completely different. It doesn't have the bugs of the old version but then again it has brand-new ones. It has new features that the previous one doesn't but then again it's missing features that the previous one had. Finally, it doesn't read the files created by the old version. In a situation like this, I would argue that this is in fact a brand new product.

What is the difference between a version 2 of an existing product and a competitor (completely different product)?

Is it the name? Is it that I know I'm getting something with at least as many features as the previous version? Is it that I know will work with my old files? Is it that I know it will work in a way that I like and am used to?

If any one of these things is missing will it be a true version 2? How many of these things does it need to miss before calling it version 2 becomes a lie?

Instead of looking at version 1 and version 2 of the product why don't we just think of each version as a completely new product. By looking at it this way, version 2 of a product is actually in competition with version 1.

Version 2 has a lot going for it in its competition with the existing version of itself. For one thing it's called version 2. This naturally implies that it is like the previous version in every way that matters only better. While we could be a bit pedantic and assert that this is not necessarily the case, this is exactly the impression we give when we name a new version of a product version 2.

What does version 2 have to its advantage when in competition with other word processors in the marketplace? Well, if you didn't like version 1 because it was missing a certain feature then why not try version 2? It might have the things you need.

When someone is upgrading from version 1 to version 2 things that they are interested in is

1 -- I assume it still works the way I like.
2 -- Have they finally fixed that bug that annoys me?
3 -- I assume it is compatible with everything else that I'm running.
4 -- I assume it has all the features I need.
5 -- Does it have any new, useful features that I want or can make use of?

When someone is looking to switch to a competitor the things that they are interested in are

1 -- Does it do everything I need it to? Does it have all the features I want?
2 -- Will allow me to use my existing files?
3 -- Is it robust enough to be usable?

(Note: someone buying their first version of the work process or does something very similar to the person looking to switch from a competitor. The main difference is the competitor is something that is not a word processor. Another possibility is that this is the first time they have done anything that would require a word processor. In this case what they can do is ask people's advice and ask only question one.)

The barrier to go from version 1 to version 2 of an existing product is almost always lower than to switch to a competitor. The reason for this is because upgrading an existing version tends to be a drop-in replacement. So long as you're version 2 is a drop-in replacement of version 1 and doesn't do anything stupid like take away existing feature or make things that used to works just fine in the previous version now not work due to bugs, people will always upgrade.

If the barrier from version 1 to version 2 is high then the mask used by consumers to decide whether or not to upgrade becomes progressively more similar to the math they use in order to decide whether or not to switch to a competing product. If version 1 and version 2 are different in ways that matter to the consumer than the decision to upgrade or not becomes indiscernible from a decision to switch to a competitor.

The opposite is also true. If a competitor comes out with a product that is a drop-in replacement to an existing product but with more features, fewer bugs, fully compatible and a streamlined workflow that consumer is more likely to see a competing product in terms of an upgrade to their existing product. If you have such a product, all you need to do is wait for your competitor annoying their user base enough and you are practically guaranteed that your market share will increase (assuming you are known as an competitor).

Over the lifetime of a product the calculus of whether or not to invest developer time in a new feature or refinement of a good and existing feature slowly changes. When a market is new the overwhelming drive should be to add new features and to try to grab as much market share as possible by adding the features required by each segment of the marketplace. As the product matures it will have enough features for every segment of the marketplace. When that happens the competition becomes more about refinement to those features and about the features themselves.

This switch from competing on features to competing on the refinement of those features can occur very rapidly. As soon as a segment of the market (a niche, if you will) is satisfied with a given feature set they will tend to start to switch their purchasing decisions to be based more on refinements over features. It's not always obvious what the niche is our because nieces are dependent on feature sets rather than any other kind of categorization.

I think the way to play this game is to map out the niches available to a product is in terms of feature sets used (structured in terms of workflows used). Using this map you can then get a handle on which niches are the easiest to target in terms of how easy it is to implement the new features required to have a product for that niche. You then compared this to how many users (and how much money) you can make in that niche.

Once the market is saturated you need to shift to targeting your competitors by making the transition to and from your competitors as painless as possible.

Notice I said to and from your competitors and not simply from your competitors. The reason I say this is because it's very easy to switch to and from your competitors and there is no risk for your clients to switch to. It is difficult to go back then you need to be significantly better for your competitors before your clients consider going on with you. The reason is because it is far riskier for your clients. If you're competing in the marketplace we are far, far superior then you don't need to worry about going back to your competitors. If you're working in a marketplace where the differentiation between your competitors and yourself is small then you need to worry about the fact your client is taking a risk. If you're product was drastically better they would go with you but since it's not a fear of switching will win out over the potential benefits.

(I could go on on this topic for long time. If you're interested in this sort of thing I would recommend reading "Crossing the Chasm", and "Inside the Tornado" by Geoffrey A. Moore.)

How does all this play out with Vista and XP? Well, let me ask you this: what is the new feature in Vista that will make you upgrade from XP? Let me also ask you this: what's the downside to upgrading to Vista? Will your drivers work? Will your programs all work? Will your hardware, scanners, printers etc... all work? Is Vista more robust than XP? Is Vista faster than XP? Does Vista to work like XP? (I actually know the answer that question! It's no. Sure, it's similar but the answer is still no.) Is there any compatibilities with Vista and XP? Like CD-ROM formats? Like network problems?

And there you have it. People aren't buying Vista because it creates problems and it doesn't offer anything compelling enough to justify fighting through the hassle.

I think Microsoft is too concerned with coming out with something different. If they just came out with something slightly better than XP they be able to sell it. If they reduce the memory, increase the speed, improve the experience of setting up a network (!!!) And they probably have enough to endear themselves to the consumer space. If you do that, though you can't break backwards compatibility. The thing is, I don't think Microsoft has the ability to come up with something slightly more compelling than XP. The company is undoubtedly geared towards large features and sculpting its software based on user feedback. In order to go beyond that they would need to pull user feedback and go do some real usability testing. Anyway, maybe I'll elaborate on that later.

How will this Vista upgrade disaster interact with the 2 gig / 64 bit barrier? Will the need to address more memory be Vista killer feature? yuck.

(Funny enough, years ago when Apple transitioned from Mac OS nine to MacOS X I switch to Windows. I've never regretted that decision.)

(Yay, no wikipedia links in this one!)

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