#1 The DHM Model
Product strategy answers the question, “How will your product delight customers, in hard to copy, margin-enhancing ways?”
When I join a company as a product leader, advisor, or board member, I brainstorm ideas to answer three questions:
1) How will the product delight customers?
2) What will make the product hard to copy?
3) What are the business model experiments required to build a profitable business?
The answers to these questions provide high-level hypotheses for your product strategy.
Think about how your product delights customers, both now and in the future. As an example, think about how Netflix delights you today. How could it deliver even more delight in the future?
Here is a list of ideas Netflix explored in the past, along with potential future experiments:
- Next day delivery of DVDs
- Instant delivery via streaming
- A large selection of movies & TV shows
- Easy to find & watch videos
- An entertaining website experience
- Unique movie-finding tools
- Movie suggestions from friends
- Original content
- Episodic TV binge-watching
- 4K video quality with surround sound
- Available on all devices, “anytime, anywhere.”
- Personalized choices for each family member
- Download videos for playback later
- Interactive, branching stories
- Ability to play videos faster/slower
- Live sports
- News and current events
- 3D/VR immersive stories
Netflix has explored most of these ideas. Some delighted customers, others didn’t. What’s the list of “delighters” for your product?
Creating a hard to copy advantage
What makes it hard for companies to compete with Netflix? Hamilton Helmer’s book, “7 Powers,” outlines seven hard-to-copy advantages. Below I describe each of these seven powers and how they apply to Netflix:
- Brand. Building trust with customers takes years of delivering value with a minimum of “trustbusters.” Today, more than 185 million members trust Netflix with their credit cards. The Netflix brand provides a significant hard to copy advantage.
- Network effects. Starting in 2008 with Xbox, Netflix built a device ecosystem. Today, nearly all TVs, DVD/Blu-Ray players, game systems, set-top boxes, and mobile devices are pre-wired to stream Netflix.
- Economies of scale. Netflix members enjoy original content, enabled by the company’s economies of scale. Because Netflix can amortize content cost across 185 million members, it can invest significantly more than its smaller rivals.
- Counter-positioning. This “power” — an offer to customers that is impossible for competitors to match — is rare. In 2004, however, Netflix advertised “No Late Fees.” Blockbuster could not respond as late fees generated nearly all of their profits. They could not afford to make the same offer.
- Unique technology. Helmer’s “7 Powers” book does not list this attribute, but I think it’s essential. An example: Netflix’s personalization technology. Because Netflix knows the movie tastes of 185M members, they can generate accurate forecasts of streaming hours for each potential title, and spend accordingly. They effectively “right-size” their investment in original content. An Everest climbing documentary is forecast to have 1 million views, so they invest $5M dollars. “Stranger Things” is anticipated to have 100M views, so they spend $500M.
- Switching costs. This hard-to-copy advantage exists when a customer invests so much in one product that it’s hard to switch to another. To a small degree, Netflix customers don’t turn to Amazon or Hulu because it’s too much work to recreate profiles for each family member.
- Process power. Netflix has many unique, hard-to-copy processes. One example: they encrypt tens of thousands of titles each year at multiple bandwidths for thousands of different hardware devices.
- Captured resource. The clearest example of this power is a patent. Another example is a close-knit team not available to other companies. The Netflix startup trio of Reed Hastings, Neil Hunt, and Patty McCord — who all worked together at a previous startup — is an example of a captured resource.
How will your product build a hard to copy advantage?
How will your product generate margin? You’ll need profits to invest in innovation to build an even better product in the future. Below, are the many business experiments Netflix executed:
- In 1998, Netflix launched a DVD site, where customers could buy or rent DVDs. About 90% bought DVDs, and 10% rented. Netflix stopped selling DVDs as they correctly anticipated Amazon would dominate online DVD sales.
- The initial rental model was $4 per disk, but the service attracted few customers.
- In 1999, Netflix bet the company on a three disk-at-a-time DVD-by-mail rental subscription, which cost about $25/month. This “all you can eat” model succeeded.
- In 2004, Netflix began to offer lower-priced plans — $10 for one DVD at a time, $17 for two disks at a time, and $23 for three DVDs at a time. Over time, Netflix lowered its prices, based on ongoing price test results and the company’s ability to reduce costs through its automated DVD delivery hubs and economies of scale.
- In 2005, Netflix experimented with advertising on both its website and DVD envelopes. It also sold “Previously Viewed” DVDs. Both of these efforts generated profit, but Netflix eliminated both in 2008 as its core DVD-by-mail service began to create higher profits.
- When streaming first launched in January 2007, Netflix placed a cap on monthly streaming hours, corresponding to the price of a member’s plan. Members with the $23, three DVDs at-a-time service could stream 23 hours/month. Netflix quickly tested an unlimited offering and switched to an “all you can eat” model for streaming, too.
- The Qwikster disaster ( when Netflix attempted to separate its DVD and streaming services) was an attempt to establish a higher price for a streaming-only service. Netflix never executed the plan, but instead, let the DVD-by-mail program die through natural obsolescence.
- Netflix continues to experiment with both price and plans. Today, prices range from $8.99 to $15.99. Higher-priced plans have higher quality video and the ability to watch more streams simultaneously. Today, Netflix is testing lower-priced mobile-only plans in international markets.
You’ll need to experiment to evaluate different prices and business models over the life of your product. You’ll never be “done.”
Product Strategy Exercises
Exercise #1: Take a moment to jot down how your product delights customers today, then add a few ideas about how you might delight them even more in the future.
Exercise #2: Using the eight hard to copy powers above as a springboard, list ways your product might create a hard-to-copy advantage in the future.
Exercise #3: For your product, list a few price and business model experiments you might explore over the next 1–3 years.
At this point, you should have a list of hypotheses to delight your customers, create hard to copy advantage, and experiment with price/plan combinations and business models. We’ll bring these three components together to articulate a product strategy in the next essay.
PS. Here’s an index of all the articles in this series:
- Intro: How to Define Your Product Strategy
- #1 “The DHM Model”
- #2 “From DHM to Product Strategy”
- #3 “The Strategy/Metric/Tactic Lock-up”
- #4 “Proxy Metrics”
- #5 “Working Bottom-up”
- #6 “A Product Strategy for Each Swimlane”
- #7 “The Product Roadmap”
- #8 “The GLEe Model”
- #9 “The GEM Model”
- #10 “How to Run A Quarterly Product Strategy Meeting”
- #11 “A Case Study: Netflix 2020”
- #12 “A Startup Case Study: Chegg”
- #13 “TLDR: Summary of the Product Strategy Frameworks”