Preface: This post is the first in a new chapter of my thinking about product. While I’m passionate about the diagram presented below, my explanation of it is a bit too brain dumpy for my taste, and I’m not convinced I’m framing it optimally. After many failed attempts to refactor how I walk through it, I’ve decided that it’s better to get this out there in the world while I continue to dwell on some of the problems. I’m looking forward to your thoughts.
In crafting products, there’s a tension between two dispositions.
On the one hand, methodologies like lean startup and agile push us to regularly fit our product to the real world. By regularly running tests, validating demand, and shipping in small iterations, we can keep an up-to-date map of our product’s environment. Using market signals as a steering mechanism seems to be the surest way to create value.
On the other hand, the most impactful products, don’t just react to their environment, they change it. Igniting real change, it seems, requires a leader’s unwavering commitment to a vision of how the world should be.
How can “unwavering commitment to a vision” coexist with “using market signals as a steering mechanism”? The options are to (a) bend your vision to fit the discovered realities of the real world or (b) charge straight through obstructions until you break through or blow up.
While it’s alluring to commit to one disposition over the other, the great companies simultaneously change the world and operate within it. There’s no formula for how they do it. But I’ve created a diagram that can at least help describe how the most impactful companies reach for their vision while adapting to the world as it is.
Now that I’ve bombarded you with the full diagram, I’ll unpack it through describing three types of loops:
- Reality-Orientation Loops. How companies create feedback loops to win customers and markets.
- Transcendent Loops. How companies use markets as stepping stones for “world changing” impact.
- Vision Loops. How companies create new behaviors, markets, and industries.
Companies have a vision for where they want to go, but the evolving landscape around a product is filled with surprises, both good and bad. A company faced with a setback can overreact like a government in the wake of a terrorist attack. And new pathways to success can go unobserved. The reality-orientation loops represent how companies, guided by market signal, stay oriented as they move forward. If you can maintain the healthy functioning of these loops, you can retain mastery of your context and act accordingly.
Let’s start with the loop that frames the reality-orientation loops.
Tech, Users, & Capital
The loop encircling Tech, Users, and Capital represents how companies try to win markets. The objective is to apply resources to build a technology and attract users with a stellar user experience. Hopefully, people will love or need the product so much that they’ll pay for it (or be valuable to advertisers). If all goes well, the company will reinvest revenue or other funds back into enhancing the technology. The loop, given success, repeats.
Companies can’t conquer markets guided by only gut feeling. To stay oriented, they need three intersecting feedback loops.
Users & Tech
No matter how powerful a company’s vision, even if you’re Apple, you can’t blindly sustain a great user experience. Companies require insight into the people who use or might use their product. This type of insight exists in qualitative forms, like user testing and surveys; and quantitative forms, like web analytics and A/B testing. When this feedback loop breaks, the organization can’t adjust when the product doesn’t stick. When the loop is healthy, product usage provides a strong signal for product direction.
Users & Capital
The terms of the loop connecting Users and Capital is how we traditionally describe the health of a business. No matter how viral a product is, to grow revenue, companies must invest specifically in acquiring users, whether it’s through traditional or untraditional methods. Even Facebook advertises itself. Industry thinking about how to balance user acquisition and revenue is ever-evolving. The feedback loop is problematic when the product is not achieving the intended balance between customer acquisition cost and revenue. If you’re trying to be profitable, the loop is broken when acquired users are not converting to paying customers. If you’re trying to grow, the loop is broken when your pricing strategy introduces too much friction. For an example of a thriving users-capital loop, see how Uber used “Capital as a Performance Enhancing Drug.”
Capital & Tech
Engineers shouldn’t build, build, build all day. To ship the right product at minimal cost, teams need to examine their process regularly. Process improvements can be in the form of tweaking project management structure, communication methods, or tools. When the Capital-Tech loop breaks, teams fail to deliver within business parameters; i.e., they ship a flawed product or run out of time. When the loop is functioning, the team continuously improves its velocity and the soundness of each release.
All companies must create reality-orientation loops to navigate their local environment. No matter how grand a company’s vision, to realize it, they must win real markets. Customer-driven companies, as defined by Venkatesh Rao, operate only in these inner loops. These companies play a zero-sum game, remixing established technologies and business models to engage customers already made legible by a market. They win by taking customers from others. The winners ultimately fade away when larger forces erode the market. In contrast, product-driven companies (again, in the Rao sense) alter their environment, feed off the flux, and create new markets, industries, and behaviors.
The “transcendent loops” in the diagram represent how companies can use their local environment as a stepping stone to set in motion a more fundamental impact, transcending current markets. We can use this framework to separate the paths of the most impactful companies.
Capital & The Economy
A company’s business model can do more than capture wealth; it can transform the economy around it. Google’s search advertising business model, for example, disrupted findability for businesses, creating a new class of Internet-based companies. Google’s platform is now foundational for anyone striving to make money online.
For this to happen, Google had to start by taking users from competitors like Yahoo in the inner loops of the search engine market.
Users & Society
Product-driven companies, through their user base, impact society at large. While Facebook started by scratching the social itch of college students, the power of the platform has reached global proportions, even playing a role in political movements like the Arab Spring.
For Facebook to reach for its vision of “making the world more open and connected,” they’ve had to monetize through the inner loops brand advertising market.
Tech & What’s Possible
While customer-driven companies meet customer and business objectives through remixing established technologies, some companies create new building blocks, opening new possibilities for all developers. Amazon, for example, created AWS as a side effect of their eCommerce business, making it easier and cheaper for anyone to launch an internet company.
Amazon started by taking on incumbents in the inner loops of the booksellers market.
While some people work at startups to make money, others dream to make a dent in the universe (and, conveniently, make money). The most ambitious companies, if successful, introduce novelty into the world, causing unpredictable change. The company who creates a dent is positioned to be the primary benefactor of the change they create. They are the first on the scene to understand it and build on top of it.
Society & What’s Possible
Winning a market requires tapping into established patterns of behavior, often solving problems for their users. Deeper product impact, however, unearths latent behaviors. To grasp the phenomenon of Twitter, one might ask “What problem does Twitter solve?” You can force an answer, but to pose the question misapplies customer-driven dynamics on a product-driven phenomenon. Rao suggests that product-driven companies tap into an “anomie.” He writes:
… there exist untapped regimes in their universe of behavior that are marked by undefined restless energy and undirected curiosity… This creates a certain level of anxiety, and a regime of under-developed behaviors (often bucketed under “play” or “hobby” behaviors, characterized by amateurishness, which is another way of saying pre-economic).
When a product unleashes new behavioral forms, a slew of new companies follow to build technologies around the behavior, e.g., all the companies striving to re-channel the desire to tweet.
Product directions can fail by prematurely banking on their ability to create new behaviors. Blippy and Swipely failed to entice users to broadcast their purchases socially. Now, Venmo has successfully created this new behavior. Why Venmo succeeded and the others failed could be a combination of execution and timing — the precise factors are impossible to know.
Society & The Economy
It is has been argued by Peter Thiel and others that the most significant innovations don’t play in existing markets, they create new ones. Apple, for example, wasn’t the first company to produce a tablet. However, they created the tablet market with the iPad and captured the majority of the market’s value. When a market is legible, customer-driven competitors can attack the space from a variety of angles to win share. While erosion will happen with time, market creators are so valuable due to their high probability of extended business success.
Marc Andreessen says that if you’re looking for the next great startup idea, you can dig through the graveyard of failed companies from the late 90s. The grocery delivery market, for example, is growing now, fueled by Instacart and other players. Companies like Webvan and Kozmo failed to reach the same vision previously, perhaps due to lack of the smartphone and the entrenched online shopping behaviors we have now. One might argue that the iPhone and Amazon.com products created the grocery delivery market, not because they are competing in the space (although Amazon is), but because they created the necessary conditions for the market to form. Visionary companies, to massively succeed, don’t need to capture all, or even the majority, of the new value they create.
The Economy & What’s Possible
When new behaviors and markets enter the picture, new industries form to support the changing world order. You can walk down the value chain to anticipate the rippling effects of market changes. To bolster the iPhone, Apple expedited the formation of the mobile app industry by creating the App Store marketplace. Slack is applying a similar strategy with their developer fund and app directory.
While some companies intentionally create supporting industries as a strategy, the most impactful products can engender supporting industries as an unwanted side effect. For example, the rise of search engines created the SEO industry. While SEO can be a good lens through which to improve the relevancy of web pages, Google continuously has to battle SEO specialists who try to game their algorithms.
That’s it for walking through the diagram. I hope you found it useful. It begs the question: what do we do with it? Unfortunately, I’m not sure yet, and I feel like I still have a long way to go wrestling with the subject matter of this post. If you think of any applications of the diagram or ways to improve it, let me know. Otherwise, stay tuned!
Update: My new post, A Visual Framework for Product Vision, uses the concepts described here to create a practical format that companies can put to use.