In my previous two articles, I explained why a company should worry about having more than one product and how a software product company can diversify its portfolio. In this article, I will talk about managing a product portfolio.
When you have two or three products, it is reasonably easy to manage your product portfolio. However, when it comes to about 4 or 5, it is interesting to have some tools to help. Imagine Locaweb, with over 35 products, between active and discontinued products, or Google, with over 250.
The BCG Matrix
At Locaweb, we use the BCG matrix. BCG Matrix is a graphical analysis tool developed by Bruce Henderson in 1970. In 1963, Bruce Henderson founded the American Business Consulting Company Boston Consulting Group (BCG), of which he was chairman until 1980 and chairman of the board until 1985. It is not a new tool, but it is very useful, as you will see in a moment.
Its goal is to support product portfolio analysis based on the product lifecycle concept. It is used to assist in resource allocation decisions across different products.
It is made up of two axes. On the Y-axis is represented the growth of the market, and on the X-axis is represented the participation of your product in this market.
This divides the matrix into four quadrants:
- Bets: In the original, it is called a “question mark”, “questioning” or “problem child”. I prefer the name “bet” to be a little more positive! :-P In the bets quadrant, this is where all startups should be trying solutions to a problem of a set of people. And this is where all new products should start, because, on the one hand, you always start with a small market share. On the other hand, in terms of the market you are entering, it is always better to enter a market that is booming. If you are considering entering a low growth market, you can be sure that you will have much more work. Products in this quadrant have two options: they become stars, or they become dogs when they do not cross the chasm. When following a product portfolio diversification strategy, it is important to have a good amount of bets, as a considerable amount of bets will not cross the chasm and become a dog.
- Stars: When the bet works, you start to get more market share, and that makes that bet a star. Stars are the main growth element of your business, as they are the products with the highest absolute growth in user numbers and revenue.
- Cash Cow: Usually, here are the oldest products of a company. As the market no longer grows so much and the company has a sizable chunk of this market, there is no need for big investments, and the revenue from these products usually finances the development of stakes and stars.
- Dogs: They are products that haven’t crossed the chasm of the technology adoption curve. It is very important to realize when a product enters this quadrant, because in most cases when this happens the product must be discontinued.
Placing the technology adoption S curve in the respective quadrants of the BCG matrix, we will have the bets as the moment of innovation, the stars as the moment of growth, the dairy cows as the maturity of products, and the dogs as the products that do not cross the chasm between the early adopters and the early majority.
A relevant point to note is the distribution of products in the different quadrants. At Locaweb, we have a huge concentration of bets because, as many methodologies as there are to develop better and better products, the truth is that many products still do not cross the chasm and become dogs. That’s why it’s important to test new product ideas quickly. Later I will show a simplified version of Locaweb’s BCG Matrix.
Effort allocation and investment
From the company’s resource standpoint, we should allocate them as follows:
That is, for each phase of the product, your investment in development, operations and marketing will be different.
During the betting phase, you should allocate your efforts as follows:
- Development: Bets require high development effort. The market is growing fast, and your product needs to adapt and gain a relevant space in this market because only then it can go to the star phase.
- Operations: In a bet, operational concerns should be small. It is even acceptable to have some manual processes. And you should not create an infrastructure for millions of customers if you are placing a bet. After all, it’s just a bet that may or may not work.
- Marketing: Marketing investment follows the development investment. In a bet, you must invest to win the market.
When the product is no longer a bet and becomes a star, the points of concern change:
- Development: Stars also require high development effort. The market is still growing fast, and your product still needs to adapt to that market. Besides, you just made a minimal product to find a market. You will certainly need to add features to make your product more complete.
- Operations: When your bet becomes a star, you should be concerned about the scalability of your product. So, you need to think about doubling, tripling or even multiplying your customer base by 10. What do you need to do with your infrastructure to reach this size? And manual processes should be minimized or preferably eliminated. Manual processes, besides being subject to random errors, do not scale.
- Marketing: In a star, you should also invest because the market is growing fast and, although you already have a good market share, you need to keep investing to keep up with your growth.
Eventually, your star could become a cash cow. At this point you should direct your efforts as follows:
- Development: Cash cows need a moderate development effort, only the development required to keep the product stable and with as little manual operation as possible. You may also use development to optimize certain metrics, like engagement and churn.
- Operations: When a product becomes a cash cow, its scalability should be excellent. No manual processes and no headaches.
- Marketing: When your product becomes a cash cow, your growth is organic, you are already the market leader (or one of the leaders), and you no longer need to invest so much marketing for these products.
When a product turns into a dog, either by not crossing the chasm or after maturity (as seen in the End of life article), effort and investment allocations should be adjusted as follows:
- Development: In dogs, you must take out all the development effort. If you have yet to develop something for a dog product, something is wrong. Probably not a dog yet.
- Operations: The main source of dogs are the bets. In this case, the product did not have large investments in scalability. And so, it must go on! If he has reached the dog stage after maturity, his client base is likely to be shrinking and, as a result, his scalability concerns as well.
- Marketing: In a dog, it is no longer necessary to invest in marketing.
The first example is Google, which I mentioned in the article Are you thinking about your new product? No? So you are already late. First of all, I need to make it clear that:
- I don’t know if they use BCG matrix for portfolio management of their products; and
- If they do, I don’t know if the classification I made matches how they see their products.
Well, caveat made, let’s go to the BCG matrix. I did not include all 177 active products plus 79 discontinued products because it would be too much to see. I selected some products in each quadrant to give you an idea. Some bets:
- Google App Engine: Cloud market, competing head-on with Amazon, and PaaS market, competing with Heroku and Jelastic Cloud Locaweb.
- Google Driverless Car: There is no strong growth market here as there is not even one market. Google is trying to create a new market.
Among the stars, we can mention YouTube, where Google is the market leader and it is still growing fast. Besides YouTube, there is also Android, which came to compete with iOS and today already has a relevant position in the market.
Google’s big cash cow is Search with AdWords ads. The search ad market is completely dominated by Google, and if you do a Google search (!), you can find some stories talking about growth of that market of around 15%.
Finally, some discontinued dogs are Google Wave, the “real-time” email-killing collaboration system, Google Health, which allowed people to store and manage their medical information in one place, and Google Reader, an RSS newsfeed reader.
Now, something I can talk about with more authority, Locaweb. We used the BCG matrix and some of our products are in the following example. I preferred not to put all the products to make it simpler, but in our BCG matrix we had over 25 products.
As bets we had in 2015:
- Jelastic Cloud: PaaS we launched to compete with Amazon, Google App Engine and Heroku.
- Eventials: live event broadcast startup.
- TrayCheckout: payment service, similar to PayPal and PagSeguro.
Our stars are Cloud Server and Email Marketing products, whose markets are growing fast. Our cash cow is our first product, Website Hosting, and a dog we discontinued in 2015 is WebChat.
2019 update: Jelastic was discontinued since it didn’t cross the chasm. Traycheckout grew to become Yapay, a star in Locaweb’s product portfolio, as well as Eventials is now a star.
So now you not only know why you need to diversify your product portfolio and how to diversify it, but you also know how to manage a product portfolio with several products. The BCG matrix, while an old tool, is very useful for understanding at what stage your product’s life cycle is, as well as what kind of investments and efforts to make in each product.
We used the BCG matrix at Locaweb since 2012, and it’s a really useful tool. Each quarter, we revisit our BCG matrix to understand if any movement is necessary and, consequently, reallocate our efforts and investments.
In the next chapter, I’ll talk about the option of not diversifying — that is, focusing on one product — and looking at the advantages and disadvantages of each strategy and when each strategy is most appropriate.
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