a In the early days of a software market segment, people building new software applications often try to be all things to all people. The idea of a “software platform” is usually not a consideration. The segment is typically growing fast, and the idea is to meet as many market needs as possible. But as a segment expands, becomes more competitive (sometimes fiercely so), and eventually matures, the situation often changes.
With greater competition, it becomes much more difficult to “be all things to all people” and remain viable in the market. There may be a big dog or two that can try to cover everything required in the market (usually with multiple products), but for everyone else, it’s the road to nowhere. A software company without massive resources that employs this approach will quickly find itself a “Jack of all trades and master of none,” and will have great difficulty winning deals. So let’s take a closer look at the options for a software company as a market segment evolves along its lifecycle, starting with a couple of definitions:
Definitions
A point application or simply “application” is software primarily designed to solve a specific problem faced by an end user. It is not part of an integrated suite with other software functionality or applications
A software platform is primarily intended as a building block for other software applications to build upon or attach to. It may include some software applications in its functionality, but its value lies in providing a base for other software application developers to build upon.
An integrated suite is a set of point applications combined most often using a common user interface. It may or may not serve as a platform for integrating 3rd party applications.
I want to point out that these terms apply to software built in many form factors. Whether traditional on-premise, SaaS, mobile, etc. For example, while many SaaS applications started out as point applications, a number have evolved into integrated suites or major software platforms, with Salesforce being the most prominent.
Keys to a successful point application or integrated suite
The most important thing for a point software application is providing a great end-user experience (which puts the focus on creating a great UI). You’re trying to be the best at solving a very focused problem in the most user-friendly way. This is often centered around a particular business process. As mentioned above, this must include a great user interface. As a result, companies building successful point software applications almost always have a preponderance of skilled front-end developers. Integrated application suites are similar, except you’re trying to attack more than one business function required by your target vertical market.
The application may also include some integration capabilities. Sometimes this is important, but this integration functionality is secondary to improving the end-user target’s ability to work more efficiently in the area(s) that the application targets. If you don’t get the functionality and the UI right, you won’t live to fight another day. But if you think you might someday transition to a platform, by all means, build in some integration capabilities and even a full API.
Well-conceived point applications enable a tightly focused marketing/sales program that concentrates on an easily identifiable customer profile. As well as secondarily on a well-developed channel partner profile, if one exists. When well executed, this business model should minimize sales & marketing expenditures.
Keys to a successful software platform
Software platform business models look very different from those of point applications or integrated suites. On the technical side, it’s always good to have a great user interface. But for a true software platform, this is secondary to the powerful underlying functionality and integration capabilities. 3rd party developers will use this underlying functionality and build upon it rather than “recreating the wheel”. As a result, in platform companies, the technical premium is on back-end developer skill sets rather than on front-end capabilities, which are more important in a point application. The defining attribute of a platform is a robust API that enables tight coupling with point applications for data exchange, functionality access, and UI integration. In fact, that API is usually crucial to the platform’s success.
The marketing model for a platform is also very different from a point application. The marketing and sales emphasis is on developers. Secondarily, it is often on channels rather than end users, unlike for point applications. The key to a platform’s success is getting other developers to write applications for/or connect applications to your platform. So your target market profile might be other commercial software developers, VARs, systems integrators, or in-house enterprise developers. But with the focus on developers rather than end users, both the product functionality and the marketing and sales execution for platforms differ from those of the typical point application.
The chicken and the egg
Lastly and most importantly, the real gotcha in building a successful platform business is that it falls into the classic “which comes first, the chicken or the egg?” category. Developers are attracted to write applications for platforms that already have a tremendous number of end users. But to attract tremendous numbers of end users, you need many applications written for or connected to your platform! This is a similar marketing issue to the “network effect” faced by many Internet-based businesses, such as social media.
The result is that it’s challenging for a startup to create a platform company from scratch. Many have tried, but most have failed miserably. They often can’t attract a critical mass of developers or end users to their platforms. There are exceptions, of course, but the examples are few and far between. It’s much easier for a vertical (point) application developer or integrated suite developer who already has market traction to add platform features. This allows a more gradual transition to a platform player. The only case in which success in creating a platform from scratch is more likely is when a large, integrated software giant with a huge market presence decides to enter a platform business.
The software market cycle endgame
In the long run, as a market segment matures, change doesn’t stop. One of the initial changes is the desire of market segment end-users to integrate the various functions important to the market segment. These functions may have initially been covered in their own silos as point applications. This functional integration may initially occur via one-to-one integrations between point applications. The next step is often the rise of integrated suites.
The software platform is the final step
Finally comes integrating platform software, sometimes sprouting from a successful point application. Other times, they come from a well-known industry giant. The final step usually occurs by the time growth slows, flattens, or even becomes negative. The segment enters the consolidation phase. This happens because by this time, investors are no longer willing to fund the secondary and tertiary players who have no obvious way to survive. At least it’s not a way for standalone companies to thrive.
In addition, at this point, even the companies that are “winning” face dramatically slower growth. Most “growth” companies want to keep growing. Whether that’s always a good idea or not will be the subject of another article. So these winners face two choices:
- diversify into other markets
- or buy their less successful competitors
Often this takes the form of becoming a “software platform” player. They acquire point applications to create a “one-stop shop” application suite to meet market needs.
One scenario of many
What I’ve portrayed here is just one scenario about how the life cycle of a software market segment evolves. Obviously, every situation is different. But I’ve seen something very similar play out many times over a wide variety of market segments.
What’s the takeaway? If you want to maximize your return to your investors, it’s important to know “who you are” as a software company. Take a realistic inventory of your resources and capabilities. As well as where you fit best over time in your market segment. Don’t bite off more than you can chew. Be ready to proactively transform your business and play your optimal role in industry change and consolidation at the most advantageous time for your company.
That’s my take on software market segmentation by platform and application. What’s your view? Post a comment below to fill us in on your thoughts.
Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or subscribe to the Morettini on Management Newsletter hosted by LinkedIn. Contact Phil directly at info@pjmconsult.com
Things change, and that’s the nature of life. Software will always become outdated as business needs evolve. I think the world gets it. I also think there’s a scramble to find the platforms, applications and software that can manage the software development life cycle. Change happens too quickly in the IT world. There are standards in place, across every industry that are establishing protocols to manage the frequency of this change. It’s an attempt to bring a little order to the chaos.