3. 4  Function of the product: what to sell?

Careful consideration of the type of product to develop is very important. One of the questions we need to ask is whether the product is intended to be an industry leader, follower or a complementary product.

Although being the industry leader may seem more attractive at first, it may not be the most effective approach. When it detects a lack of functionality in a product with widespread adoption, a company has two options: develop its own version with the missing functionality and try to compete with the leader, or build an add-on to complement the possibilities of the leader.

The first option will prove very complex and can easily fail, as it requires a substantial investment not only in the new development but also in the marketing campaign and subsequent sales. In the second, besides the possibility of developing the product in less time, much of the marketing will have already been done by the leader, so it will be much easier to secure adoption of the add-on. Moreover, conservative users (the majority) will be much more willing to incorporate an add-on to a known and proven solution than to change technology and supplier. A common danger is that the leader may decide to incorporate the developed functionality into its core product, thus eliminating the need to purchase the add-on. In this respect, the relationship with the developer of the core product will be essential.

Consequently, it is important to define the role played by other companies active in the sector: which will be direct competitors, which will be partners and which, although in the same sector, will not compete with our product because they have a specific specialisation. By segmenting niches and offering differentiation, we can avoid direct competition from strong companies, and the existence of companies that produce related products or services may be an important factor in our success.

When positioning a product, it is also important to consider the platform that it is being developed for, i.e. which basic set of software will be required to run the product. Consider, for example, the choice of operating system and related technology with which the application will run. This decision will affect the definition of the niche market to be exploited and the type of customer it could be aimed at, but it will also be important for defining our relationship with allies and competitors.

An application designed to run on a particular platform will be a complementary application for that platform. If it is a software package already established on the market and widely accepted, we will also expand the potential market of our customers but reduce the chances of finding allies among the developers of the platform. The value of these platforms will be largely determined by the number and diversity of applications that can be run on it, so a company trying to establish itself as a platform leader will be very interested in the development of related applications and will hence be a more willing ally.

However, although it is more difficult, it may be better for the company to position itself as leader of a given sector. The question in this case will be whether to try and create a new product category for an untapped niche or whether to try and push out an existing product.

Segmentation and potential customers

For a modest company, the only possibility might be to segment the market until it finds a particular niche in which to position itself. It may be difficult to position oneself as leader in enterprise resource planning applications (ERP), but it could prove easier to develop an ERP for SMEs or for hotel and catering SMEs. Naturally, as we segment further, the competition will decrease, but so too will our potential customer base.

Topping a given market will undoubtedly generate advantages when it comes to positioning oneself as leader and defining the standards that this technology will be based on, but it offers no guarantees. The industry leader is not always the first company to develop a given technology. Sometimes, arriving first and attracting technology enthusiasts can give a false impression of success, since the product must reach the majorities before a company can become the leader. Subsequent strategic and technological decisions will be critical in determining whether the company can capitalise on economies of scale on the demand side to position its product in the number one slot of its sector.

Breaking on to a market that already has a leader will take sales and marketing campaigns that are often outside the scope of recently formed companies. However, the use of a free software product, which competes with a price of zero, can be a sufficiently powerful disruptive agent. In future modules, we will see this and other strategies available to free software for competing on different markets.