For the last 75 years products (both durable goods and software) were built via Waterfall development. This process forced companies to release and launch products by model years, and market new and “improved” versions.
In the last few years Agile and “Continuous Deployment” has replaced Waterfall and transformed how companies big and small build products. Agile is a tremendous advance in reducing time, money and wasted product development effort – and in having products better match customer needs.
But businesses are finding that Continuous Deployment not only changes engineering but has ripple effects on the rest of its business model. And these changes may have unintended consequences leading to customer dissatisfaction and confusion.
Smart companies will figure out how to educate their customers and communicate these changes.
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The Old Days – Waterfall Product Development
(skip this part of you’re conversant in Waterfall and Lean.)
In the past both hardware and software were engineered using Waterfall development, a process that moves through new product development one-step-at-a-time.
- Marketing delivers a “requirements” document to engineering.
- Then engineering develops a functional specification and designs the product.
- Next comes the work of actually building the product – implementation.
- Then validation ensures the product was built to spec.
- After the product ships, it’s maintained by fixing flaws/bugs.
Customers would get their hands on a product only after it had gone through a lengthy cycle that could take years – enterprise software 1-2 years, new microprocessors 2-4 years, automobiles 3-5 years, aircraft a decade.
Waterfall – The Customer View
When customers purchased a product they understood that they were buying this year’s model. When next year’s model arrived, they did not expect that the Ford station wagon or Maytag washer they purchased last year would be updated to match all the features in the new model. (Software at times had an upgrade path, often it required a new purchase.)
Waterfall allowed marketers to sell incremental upgrades to products as new models. First starting in the fashion business, then adopted by General Motors in the 1920’s annual model year changeovers turned into national events. (The same strategy would be embraced 75 years later by Microsoft for Windows and then Apple for the iPhone.)
As the press speculated about new features, companies added to the mystique by guarding the new designs with military secrecy. Consumers counted the days until the new models were “unveiled”.
With its punctuated and delineated release cycles, waterfall development led consumers to understand the limited rights they had to future product upgrades and enhancements (typically none.) In other words, consumer expectations were bounded.
At the same time, manufacturers used new model changeovers to generate excitement over new features/versions convincing consumers to obsolete perfectly functional products and buy new ones.
Agile Development: Continuous Delivery and Deployment
In contrast to Waterfall development, Agile Development delivers incremental and iterative changes on an ongoing basis.
Agile development has upended the familiar consumer expectations and company revenue models designed around the release cycles of Waterfall engineering. In a startup this enables deployment of Minimum Viable products at a rapid pace. For companies already in production, Continuous Deployment can eliminate months or years in between major releases or models. Companies can deliver product improvements via the cloud so that all customers get a better product over time.
While continuous delivery is truly a better development process for engineering, it has profound impacts on a company’s business model and customer expectations.
Continuous Delivery/Deployment – The Marketers View
Cloud based products has offered companies an opportunity to rethink how new business models would work. Adobe and Tesla offer two examples.
Tesla
While most of the literature talks about continuous Delivery/Deployment as a software innovation for web/mobile/cloud apps, Tesla is using it for durable goods – $100,000 cars – in both hardware and software.
First, Tesla’s Model S sedan downloads firmware updates on a regular basis. These software changes go much further than simply changing user interface elements on the dashboard. Instead, they may modify major elements of the car from its suspension to its acceleration and handling characteristics.
Secondly, in a break from traditional automobile practices, rather than waiting a year to roll out annual improvements to its Model S, Tesla has been continuously improving its product each quarter on the assembly line. There are no model years to differentiate a Tesla Model S built in 2012 from one built this year. (The last time this happened in auto manufacturing was the Ford Model T.)
Adobe
Adobe, which for decades sold newer versions of its products – Photoshop, Illustrator, etc. – has now moved all those products to the cloud and labeled them the Adobe Creative Cloud. Instead of paying for new products, customers now buy an annual subscription.
The move to the cloud allowed Adobe to implement continuous delivery and deployment. But more importantly the change from a product sale into a subscription turned their revenue model into a predictable annuity. From an accounting/Wall Street perspective it was a seemingly smart move.
Continuous Delivery/Deployment – The Customer View
But this shift had some surprises for consumers, not all of them good.
As many companies are discovering, incremental improvement doesn’t have the same cachet to a consumer as new and better. While it may seem irrational, inefficient and illogical, the reality is that people like shiny new toys. They want newer things. Often. And they want to be the ones who own them, control them and decide when they want to change them.
Adobe
While creating a predictable revenue stream from high-end users, Adobe has created two problems. First, not all Adobe customers believe that Adobe’s new subscription business model is an improvement for them. If customers stop paying their monthly subscription they don’t just lose access to the Adobe Creative Suite software (Photoshop, Illustrator, etc.) used to create their work, they may lose access to the work they created.
Second, they unintentionally overshot the needs of students, small business and casual users, driving them to “good-enough” replacements like Pixelmator, Acorn, GIMP for PhotoShop and Sketch, iDraw, and ArtBoard for Illustrator.
The consequence of discarding low margin customers and optimizing revenue and margin in the short-term, Adobe risks enabling future competitors. In fact, this revenue model feels awfully close to the strategy of the U.S. integrated steel business when they abandoned their low margin business to the mini-mills.
Tesla
What could go wrong with making a car incrementally better over time? First, Tesla’s unilateral elimination of features already paid for without consumers consent is a troubling precedent for cloud connected durable goods.
Second, Telsa’s elimination of model years and its aggressive marketing of the benefits of continuous development of hardware and software have set its current customers expectations unreasonably high. Some feel entitled to every new hardware feature rolled into manufacturing, even if the feature (i.e. faster charging, new parking sensors,) was not available when they bought their cars – and even if their car isn’t backwards compatible.
Model years gave consumers an explicit bound of what to expect. This lack of boundaries results in some customer disappointment.
Lessons Learned
- Continuous Delivery/Deployment is a major engineering advance
- It enables new business models
- Customers don’t care about your business model, just it’s effect on them
- While irrational, inefficient and illogical, people like shiny new toys
- Subscription revenue models versus new purchases require consumer education
- If your subscription revenue model “fires” a portion of your customers, it may enable new competitors
- Companies need to clearly communicate customer entitlements to future features
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Filed under: Customer Development, Marketing, Tesla |
Spot on Steve, as usual. Indeed it has been very difficult to persuade media students from Central Asia and East Africa that the new Premiere Pro (the adobe video editing tool in the cloud suite) is the way forward. Adobe looked the best way forward a couple of years ago. They were clever to make it possible to open legacy systems from Apple’s Final Cut Pro 7 and initially wooed many editors away from the Apple and Avid camps.
But one student from the Seychelles likened the new subscription model to hiring a suit. Imagine if you could no longer buy a pair of trousers – only hire them. And when the subscription ran out you’d lose the trousers. Wandering around in underpants isn’t an option.
Many of these students later become the CEO of their respective media companies. They will always remember the companies that helped and hindered that journey. And with all the problems associated with recent Adobe password hacks as well as espionage scandals, I just cannot recommend the cloud-only solutions for now.
I want to a buy a good solid video editing suite. I am willing to spend time learning it provided I know that I own permanent access to anything I produce. In these uncertain times, subscriptions, however cheap, are really an expensive lock-in. And a great call to the community to come up with a open alternative. With off-line storage so cheap and fast, What should I be recommending people to buy?
Adobe says the stuff you create with its tools is — like its software — stored both in the cloud and on your machine(s). If your sub changes or you cancel, you still have what you created. But note: You’ll probably need Adobe tools to modify it, or possibly even access it, unless you’ve stored it in a widely accessible format.
Subscription also has the potential to alter the way innovation is looked at within organizations. Not saying this is true for Adobe or Tesla but I wrote an article on it sometime back. http://www.crunchyfriday.com/how-business-models-like-subscription-impact-innovation-culture/
Another area of customer dissatisfaction Adobe overlooked (and that agile development may be prone to) is lack of choice. It’s retail offering is top down rather than bottom up. Subscribers now have access to all of Adobe’s software programs, a mind-blowing workshop of major and minor tools that few will ever use in their entirety. But surely Adobe could offer different packages for appropriate prices. What if somebody just wants Photoshop or Dreamweaver? Best of all would be a menu that allowed the customer to design the package and change it at will. Adobe might even consider one-time or short-term lease arrangements. That’s the kind of flexibility customers will truly appreciate — and reward a company for offering.
So true. I simply wanted Premiere Pro. Have no use for Photoshop or Dreamweaver. I’m an editor not a designer. I’m not going to be sold something I don’t need. I want to buy not hire – purchase rather than license. Adobe is trying to persuade me this business model is cheaper in the short term. I’m not convinced.
Most consumers have been trained to enjoy the “marked contrast” of switching from an old product to a new one – which allows consumers to easily imagine the difference between two fixed ideas; old picture and new picture.
It’s easy to differentiate between two fixed still pictures.
The psychological process of comparing old and new as a new owner and noticing vividly what is better can literally prompt and forge a lasting perception of “now I have something better”.
However, in continous deployment, the thought process underlying comparison is more complex and unbounded. Making comparisons may not be rewarding if thinking this way requires effort and only minor change is witnessed. If you watch a tree grow on a daily basis, there is not much to notice compared with the day before. In the news, breakthrough changes are much more newsworthy than minor but worthy improvements.
My take-away from this post is that marketers must peer into the cognitive and perceptual differences of staged upgrades versus continous evolution, and find ways to prompt the customer to regularly convince themselves and have the experience of vivdly rationalising that the product is getting better and more satisfying.
A key psychological advantage of the continuous-upgrade subscription model for many users is that you know you’ve always got the latest, most advanced software. The purchase-this-generation model starts with elation but that soon sours into feelings of inadequacy, of obsolescence anxiety—a serious problem in a highly competitive, creative field.
Enterprise chip design software provides an example between the ‘waterfall’ and the ‘agile’ – the 20 year old subscription model gives customers access to the current release and its updates for typically a three year period, which can then be renewed.
The team developing a new microprocessor would typically select the set of tools for the design project at the beginning (often competitively), and once committed to a flow, would refuse any upgrades during the design process; only installing bug fixes. The design team did not want the uncertainty, and the rework often required to ‘port’ to a design tool with new features.
Design tool providers who didn’t understand this, and included changed features in a bug fix release earned the wrath of their customers; and quickly learned to change their ways.
There is higher cost incurred by the enterprise software providers to maintain multiple versions of the current product line; and to separate the bug fixes from the incremental features. However a happy customer is better than no customer.
The new cloud model brings perceived efficiency where the tool provider (can silently and) automatically install updates and bug fixes; where as the old model had the customer doing this, and choosing when and what to install.
A lesson here is that the choice of when and what to install is quite valuable.
Great post, Steve,
Solid.
Seeing stats, if available, would be fascinating, particularly on the impact of the Adobe subscription model. Microsoft Office is doing the same at several price points perhaps to soften the blow. Regardless, it’s irritating.
Jay
The fundamental problem, for every entrepreneur, is that “customers” don’t really want to be customers, unless they have to be 🙂
“Second, they unintentionally overshot the needs of students, small business and casual users, driving them to “good-enough” replacements like Pixelmator, Acorn, GIMP for PhotoShop and Sketch, iDraw, and ArtBoard for Illustrator.”
I have to disagree with that statement. The subscription model that Adobe now offers makes the tools much more approachable for students and beginners. Purchasing Illustrator, Photoshop, Lightroom, and After Affects used to total $1000+ — driving the low-end users to use torrents. As a professional, it was a no-brainer, since your profession relied on the suite. But as a student or beginner, that was a steep barrier to entry — just to test the waters.
The ‘good-enough’ alternatives were already gaining ground on Adobe for low-end users, regardless of Adobe’s switch in pricing models. Pixelmator had already topped the App Store with $1 MM in revenue before Adobe’s switch.
I agree that small business users may prefer the old model — since they don’t *need* the newest features to benefit from the suite. But they would likely be driven to the ‘good-enough’ alternatives regardless.
Here is a youtube link to Clayton Christensen’s talk about the strategy of the U.S. integrated steel business given at Oxford business school.
Very nice post. The very high quality expectations are for me not the only thing that can make the customers feel unsatisfied. For my personal experience I sometimes feel overwhelmed by rapid changes in functionality or ux, espacially when it comes to A/B testing. On the one side you have to get used to new interfaces very quick which might be good on the long term but can brake your workflow in the beginning. On the other side you might feel unsatisfied because your friend has a certain feature (e g. Facebook’s Graph Search) and you not. People maybe tend to like stability due to switching costs.
Remember, when the big steel companies in the USA stopped caring about the low profit market area of rebar, it let in other newer, more agile and smart competitors, who eventually in a disruptive manner acted like David and killed the Goliath entrenched big entities. Adobe redux?.
Interesting article. I actually find Adobe moving to the cloud a better move for them. In the short run, it may be less beneficial for their P&L but the long tail prospect is great. For 3 years, I have used Adobe-Alternative but Adobe new price point (at US$9.99/month) just convinced me it is time to go back to Adobe. Ultimately, all consumers have a price of how they value your product and in my case, I decided it was US$9.99. For a designer or creative person, their price point could be ultimately higher which is US$29.99 or more. The key is perhaps how you balance the two while not minimizing the potential value of your product.
The biggest problem as a consumer is the unknown schedule for updates, and having to learn new features on the producer’s schedule, not mine. Things worked fine one day, and the next day the interface is different. I spend time learning how to work one function, and then it suddenly starts working differently. This could happen during a down week when I have nothing to do, or the day before a big project is due, and now my tools work differently. When there are discrete releases, a company can spend money advertising the new upgrades, which doesn’t happen on a continual upgrade cycle.
The other problem is that it does mean products get shipped before they are complete, with the promise that they will be fixed some time in the future. This is bad for the company because a consumer will see a product that is missing features and will instead shop around for another product that has the features now, rather than wait some undetermined time for upgrades.
Thanks Steve. I see a big market space open and recommend “Innovation Rings” in companies to apply a hybrid model using agile development for fast innovative product development to roll out annual product releases and update older models with downloads and customer paid upgrades.
Happy 2014, Steve. I hope to get out your way this year.
@Steve, can’t agree completely – giving and receiving early feedback is key business imperative of today’s world.. so it is all based on context of your business strategy. No one hammer for all the nails
~ Prasad
@Steve, one more thing, I borrow your words Discovering a business model Vs Executing
[…] This post first appeared at the author’s blog. […]
Great post
One miselling 🙂 Inverted the word to ot somewhere
______________ Jerome S. Engel UC Berkeley
thanks. fixed.
Nice post, Steve. As a Tesla owner of early models of both the Roadster and the Tesla S, I like the new upgrades I can get and really want the ones I can’t get like the new suspension on the Tesla S that make it tighter and faster in handling.
So as a user, I am viewing this an an expensive iPhone. When will I pop for the next upgrade? I’m thinking this might be the same as current cars. Many people upgrade every 3-5 years.
No matter what, the effect of Tesla on the market is like the effect of the iPhone. Some vendors will go the way of Nokia and RIM.
I am so glad i found your blog…my daughter will be working in this arena of engineering..fascinating…Robyn
Not everyone is willing to spend the time and effort required to stay atop a faster horse, especially one that keeps accelerating! Especially if it risked tripping as it learned to deal with its new speed(s).
Eventually perhaps a car company with a roughly comparable product to Tesla’s but sticking with the Waterfall model will offer an alternative. I wonder if both approaches could be offered by the same company, in parallel, and allow a choice.
Consider the number of consumers and companies sticking with XP even without MS support! They keep a stable, familiar tool, avoid abominations like Vista, but forgo more and more new and potentially valuable, even crucial, capabilities as time goes on. Some bail and migrate to the Linux model, which is a blend of Waterfall and Agile.
The idea of continuous enhancements works to a point. Where it falls down was alluded to earlier – when the customer – whether corporate or individual creates special applications to tailor the s/w to their high frequency special requirements. This is a great strength used in many apps for Adobe’s products but also for a wide variety of software used in creative production. If there is suddenly a change in the way a particular command works, it can cause massive havoc especially when the user / tech support person has to determine the root cause of the problem. Murphy’s Law strikes home because it is always when the output is mission critical. Also, if the modified command is embedded in something from the past and it needs a simple update, then the original result will be different BUT also any derivative using that now “wrong” original will also have the potential to be wrong.
This literally, in the CAD/CAM world could have fatal consequences.