Talking about the profit logic of To B software service enterprises from the perspective of product managers

From the perspective of the product manager, how to look at the company's business as a whole? This article will talk about the profit logic of the To B software service company from the perspective of the product manager.

I have been engaged in the product work of To B software services for a long time, and I have been thinking: how should a company that relies on the sale of information systems and its peripheral services look at the company's business work as a whole? Is there a "golden line" that organically connects the specific business work, so that each other can be mutually causal support and achieve the final business goal.

How product managers should view all aspects of the company's overall operations. This article first explains the most basic business logic from the perspective of customers, gross profit margin, return on capital, and profitable growth, and emphasizes how to look at the synergistic relationship between these four aspects, then explains how to create wealth from making money to creating wealth, and finally emphasizes the importance of execution. Based on this content, we try to understand the business logic of companies that rely on companies that sell information systems and their peripheral services.

First, the most basic business logic

1.1 Client/Customer Needs

Customer, the goal of a series of related work of the enterprise is to fully understand the needs of the customer. If there's one thing you have to set for this goal: make sure you never get blamed for not knowing your customers well enough. Understanding customer needs is essentially looking at the market and customers from various angles, and finding profitable opportunities in the market.

For a To B software service company, the three core tasks should be market research, business research, and user research. This is to deeply understand customer needs from three different levels, find out which companies in the market are potential customers through market research, deeply understand the business logic of potential customers through business research, and comprehensively and meticulously understand the entire transaction process and business promotion process through user research.

1.1.1 Market Research

Market research starts with identifying the company's target market, then segmenting the target market, and finally conducting an in-depth analysis of the market segment to find the most potential opportunities.

Identify your target market:

The products and services of To B software service companies must focus on a specific business of a company in the whole industry, or all the businesses of a vertical industry, or a combination of the two, usually the first and third are the most common. Determine the target market is to clarify this boundary, in general, it is difficult to directly answer the target market, and it needs to be segmented and analyzed to be able to finally confirm, therefore, don't be too embarrassed about yourself as the first step, a good way to have a customer boundary is to first answer which mobile will not become their own customers, which businesses will not become the ultimate service object, through this way you can cut off a lot of possibilities, flow to a relatively vague target market can be the next step. For example, a marketing cloud company serves the marketing department of the whole industry, mainly including advertising, customer operation, membership operation, customer service, etc.

Target Market Segmentation:

After obtaining a preliminary market boundary, it is necessary to further subdivide the market within the boundary, which is generally more common: if it is a single business of the whole bank, it will generally be subdivided from the perspective of the industry, and if it is the whole business of a single industry, it will generally be classified from the perspective of business. For example, the bank's single-business enterprises divide the market into the automotive industry, the financial industry, the FMCG industry, the retail industry, the TOB industry, the education industry, the pharmaceutical industry, and so on.

For example, the automotive industry needs to continue to be divided into traditional automobile industry, new energy automobile industry, and new retail brands of traditional automobiles, and the traditional automotive industry can continue to be divided into domestic and foreign. Of course, the more detailed the better, the more detailed the better, the cost of work brought by this is also a significant rise, the specific level needs to be according to the size of the enterprise, market position, maturity, etc., I personally suggest that you can use "whether the business logic is the same" as the standard of classification, for example, the traditional car brand in the automotive industry and the new energy car brand are very different in business model, then it should continue to be subdivided, until the business mode is basically the same.

Segment Analysis:

Once you get a market segment, it's not right away, and we need to do an in-depth analysis of many market segments. In the final market segment analysis, we must not forget that the goal of market research is to discover market opportunities, so it is necessary to finally clarify whether there are opportunities in each market segment, how big the opportunities are, and why? Usually we will conduct a detailed analysis of each market segment in six aspects: market size, number of customers, profit model, competitive situation, entry conditions, and moat. For example, the banking industry in the financial industry generally meets the requirements of information innovation and innovation requirements, which is the entry condition. It is worth noting that if we are not a new company, the company's existing business has been running for a while, we must be called the financial, sales and delivery departments when analyzing the market segment, and the relevant financial and other data in the past 3 years is very, very, very helpful for the analysis of the market segment.

Through the market analysis of the above three processes, we can basically get a relatively complete market research report, which will clearly answer where the potential opportunities in the future are.

1.1.2 Business research

Just because we know where the potential opportunities are doesn't mean they can turn into profits, we need to continue to understand our customers through business research. The goal of business research is to find out what is the business logic and business goals of the customer enterprise in each market segment, how the business is carried out in the eyes of the customer, and which business goals are ultimately focused on.

Whether it is a single business model in the whole industry, or a single industry and a full business model, or a single industry and a single business model, it will eventually fall into the analysis of a single business in a specific subdivided industry. For the analysis of a single business in a specific subdivided industry, it can generally be analyzed from three aspects: business logic, department division, and business indicators:

Business Logic:

It refers to what kind of big strategy is generally used in the whole business development process, how to serve the overall business objectives of the final enterprise based on such a strategy, the business logic of different industries and businesses is very different, the production business, marketing business, cognitive management business, financial business and other business of the same enterprise are very different, and the same business in different industries generally has certain differences, and even the business logic of the same business of the same company is different at different stages.

We take the marketing business of the retail industry as an example, the ultimate goal is simply understood as GMV, then the business logic can be simply understood as 5 steps, (1) how to turn people who are not customers into new customers, (2) how to make new customers interested in the product, (3) how to let new customers make the first purchase and become old customers, (4) how to let old customers continue to buy new products or value-added services, (5) how to make old customers continue to trust without loss

Divisions:

In a non-small and micro enterprise, a business, especially a complex business, will not be completed in the process of promotion and completion, if the business logic contains a number of different departments, then we must pay attention to what departments, how these departments cooperate with each other, whether there are obvious boundaries. For example, how the design department, logistics department, production department, quality department, equipment department, warehousing department, etc. in a manufacturing industry can cooperate to complete the final product from raw materials to the final product business, which must be clearly known for an ERP system.

Business Metrics:

The whole company, business line or different departments will have some clear business indicators, and understanding these business indicators will be very beneficial for us to understand the business logic and subsequent user research. In general, business indicators will be reflected on the KPIs or OKRs of different first-level and second-level departments, and figuring out KPIs and OKRs will basically figure out why these departments are working.

In the process of business research, we must focus on the business, not on a specific person, not to say that there is no need to analyze some important roles, but these work should be completed during user research, at this stage we need to exclude the role of the in, to look at the business from the perspective of CEO or COO, with a not very appropriate but very satisfactory understanding of the metaphor is: "the right thing is not the right person".

1.1.3 User Research

After completing the business research work, I basically figured out the logic of business recommendation and the logic of collaboration between different departments, but the final decision on whether to buy products and services, use products and services, and evaluate products and services is still a specific person (it is more appropriate to use a role as a live user, but it is not easy to understand, so it is still the word "person"). Therefore, we need to study these people, and the research methods are generally divided into two types, one is to analyze around the transaction model, and the other is to analyze around the model of products and services.

Around the trading model:

Surrounding the transaction model refers to the analysis around the entire transaction process, and the focus of the analysis is on what impact different people will have in the transaction process. Generally, it is divided into transaction decision-makers, opinion makers, transaction executors, users, etc., and the decision-makers of general transactions are the company's CEO, VP or department heads, who ultimately decide whether to make a purchase or not, and are also responsible for various situations after the purchase.

The person who put forward the opinion also needs to be taken seriously, usually the head of the core department of the business or the head of the support department (IT, procurement, etc.), and their opinion often affects the final decision. The executors of the transaction are generally the finance department and the procurement department, and most of their work is carried out after the purchase decision is made, but they will put forward various requirements and specifications for the entire transaction process, which will affect the transaction cost of the entire transaction process.

The end users are some of the people who are most closely involved in our daily work, and their satisfaction with the product or service often affects the next transaction, and their degree of cooperation often affects our delivery costs and customer service costs.

Around the product and service model:

Focusing on product and service models is about in-depth research on users (users don't necessarily mean front-line employees). Looking at the products and services we provide from their point of view, we usually call them "user stories", different people use products and services from different angles, so this way often allows us to understand some of the most subtle truths and shortcomings of our products and services in the eyes of customers.

Through market research, business research, and user research, we will be able to clarify the needs of customers at different levels, and find and select powerful and profitable opportunities based on the situation of our own enterprises.

1.2 Gross margin & net cash inflow

If there are 3 tasks in customer needs that can help companies find valuable opportunities, then gross profit margin is the guiding light on how to choose opportunities. Before calculating gross margin, it is important to distinguish between "cash" and "revenue", because there are business types such as credit sales (accounts receivable and accounts payable), resulting in different concepts of "cash" and "income". One indicator of revenue is gross margin, and cash corresponds to another indicator: net cash inflow.

1.2.1 Gross margin

The formula for calculating gross profit margin is: gross profit margin = (total revenue - cost) / total revenue, the reason why it is called gross profit margin rather than net profit margin is because some brief costs such as general administrative expenses and sales expenses are not calculated in the cost, and only some direct costs such as production costs are calculated, so that the calculation will be easier. Positive or negative gross profit margin directly reflects the health of a business.

1.2.2 Net cash inflows

Because of the existence of business types such as credit sales, we cannot only consider gross profit margin, but also need to have another indicator "net cash inflow" to supplement. The difference between all cash flowing into the company and all cash outgoing from the company over a period of time for a business (not counting non-profit businesses) is called net cash inflow.

The net cash inflow must be positive for a period of time, and the short-term net cash inflow is not a big problem, such as the start-up stage, but if the net cash inflow is negative for a long time, then the cash flow of the enterprise is unsustainable, which means that the company has not found a profit model, or cannot implement a profit model. In my personal opinion, a company that is not profitable is a company that does not provide reasonable value, and sooner or later it will be eliminated.

Both gross margin and net cash flow can help us select potential opportunities, and at the same time, gross margin can guide our daily work. In To B software service companies, BRD is a common way to select potential opportunities through gross profit margin and net cash inflow, and after the final selection of all potential opportunities, it will generally form a document that guides the future development direction and time specification of products and services, which we call Roadmap.

BRD develops one or more product or service proposals based on the needs of the potential market, and analyzes the performance of these solutions in terms of gross margin and net cash income to determine the willingness to a potential opportunity.

It is worth noting that there may be mutual influence between different potential opportunities, which will affect the final analysis results, which is more difficult to find and solve, and generally needs to be solved from a higher perspective, which is the "combination punch" often mentioned in Internet slang. The calculation of gross margin affects how we determine the product mix, customer mix, price mix, channel mix and cost structure. After completing all the potential opportunity analysis, combined with the company's own resources, select some potential opportunities with the highest degree of intent and formulate a clear promotion time plan, which forms the majority of the content of the Roadmap.

1.3 Capital Gains

If net cash inflow and gross profit margin can help companies choose a good direction, then capital gains are the martial arts secrets that teach companies how to do it. A positive net inflow of gold and a positive gross profit margin can ensure that the company is basically making money, but if you use less money to make more money, this needs to be answered by "capital gains".

The rate of return on capital is not equal to the rate of return on capital, and the formula for calculating the rate of return on capital is: rate of return on capital = rate of profit * rate of capital turnover; from the formula, we can see that the rate of return on capital is jointly affected by the rate of profit and the rate of turnover, and when the rate of profit is determined, the rate of return on capital is increased if the rate of return on capital is increased.

Take a very vivid example of a trolley clothing stall to illustrate what the turnover rate is: the stall owner of the clothing stall relies on borrowing money to start a business, and the annualized interest rate of borrowing money is as high as 30%, but the gross profit margin of her selling clothes is only 10%, so how does he make money? The answer is in the turnover rate. Borrowing money to start a business is not only carried out once a year, but many times, that is, after a lot of 10%, as long as the turnover rate is more than 3 times a year, you can repay the interest brought by the loan.

Businesses find ways to get cash from customers faster, increasing the return on capital by increasing turnover. In fact, we often encounter this method in daily life, but we don't pay attention to it, and we don't apply it to specific work. For example, fast food restaurants play music to increase the turnover rate, cafeterias are divided into noon, afternoon, evening, and even supper and limit meal times, clothing store owners will sell at the end of the season and at their low prices, and limited-time discount promotions in supermarket stores are essentially increasing the turnover rate of capital.

In To B software service enterprises, they are generally project-based, and each project represents the entire life cycle of a project from lead acquisition, to pre-sales work, to bidding and bidding, to delivery and implementation, and to final acceptance. The return on capital guides us to continuously optimize in this process, I can give an extreme example, suppose the company has 100 yuan as the initial capital, each project needs to invest 10 yuan cost, the complete cycle of each project is 1 year, and after one year to complete the acceptance to get 15 yuan of income.

Company A opened 10 projects at the same time at the beginning of the year, and received an income of 150 yuan by the end of the year. Company B negotiates with customers and can give each customer a 20% discount, that is, the price drops from 15 yuan to 12 yuan, but the customer must support the 12 yuan at the beginning of the year, so company B can theoretically carry out countless projects at the same time, and the income at the end of the year is far more than 150 yuan, which is the charm of the turnover rate.

Of course, the actual work will not be as simple as in the example, but the basic principle is the same, whether the customer can pay part of the payment first, whether it can reduce the delivery time, whether it can divide a project into different stages, whether it can pay the upstream supplier later, etc., these will help to improve the return on capital.

The rate of return on capital reminds me of a concept in technical economics called the time value of money, although it is not the same principle, but it can also be understood as an aid, in essence, money has a time value, today's dollar is not the same as tomorrow's dollar, in an inflationary society, find a way to get cash earlier, pay cash later, which is conducive to improving the final rate of return on capital.

1.4 Profitable growth

In today's fierce competition, it's either growth or death. But why do we often see many companies that grow very fast, and why do they sometimes suddenly leave us, which reminds me of ofo, eggshell, daily fresh, Evergrande and so on. Of course, the ultimate fate of these companies must be due to a variety of factors, and it cannot be attributed to growth alone, but it is true that these companies do not recognize the basic requirement of growth, that is: growth must be profitable and sustainable.

Profitable growth must be accompanied by improved margins and turnover, as well as improved ability to net cash inflows. What kind of growth is good growth? Good growth is profitable, organic (from the company's business), differentiated (differentiated products or services), and sustainable, all of which are indispensable. In ToB software service companies, there are more such examples, which eventually go bankrupt or are acquired, and these companies expand frantically without focusing on profits, and finally burn all the financing and collapse in a very short period of time, which is regrettable.

So, how can we identify growth opportunities and how to determine the direction of growth? A simple way: use the profit growth matrix, that is, distinguish between new and old customers and new and old needs, form a 2*2 matrix, and consider and evaluate whether such growth is profitable and sustainable in the 4 quadrants. From the customer dimension, it is to consider the growth of customers, and from the demand dimension, it is to consider the growth of product range, and the growth of ToB software service enterprises is either to expand different industries in the original business direction, or to serve more different businesses on the basis of the original industry.

The four elements of customer demand, gross profit margin, return on capital and profitability growth do not exist independently, and we must pay attention to the synergistic relationship of the four elements, and look at them organically and non-independently. The world's top CEOs know this.

2. Business Intelligence

"P/E ratio", if the four elements of customer demand, gross margin, return on capital and profitable growth teach us how to make money, then the P/E ratio will teach us how to make money to create wealth.

The P/E ratio is calculated as follows: P (price of U.S. stocks)/E (profit per stock) = P/E ratio (if the P/E ratio is negative, then this indicator loses its reference significance). The essence of P/E quality is to reflect the expectation of a company's future profitability, which is also the essence of stock market trading, I think that a listed company has better profitability in the future, and his P/E should be higher, so buy the company's shares.

The logic of the P/E ratio is not only effective for listed companies, but also for companies that are not listed, all of which are to increase revenue and profits without reducing the turnover rate. In essence, this is a test of the company's profit model, if the profit model is correct, or a better profit model is found, and the company can stick to it, then the company's P/E will definitely rise. For example, in ToB software service companies, some companies are doing SaaS systems, some companies are completely customized development, and some companies are standard products + customized development, and at the same time, the system deployment is also divided into privatized deployment, public cloud deployment, etc., different profit models will be reflected in P/E, and for companies that are not listed, they will also be reflected in valuation, and different profit models may affect the company's valuation in 3~7 times.

3. Perfect execution

In the part of perfect execution, how to implement the goal is explained through three aspects: job matching, coach coaching and internal collaboration process of the organization. In fact, job matching and coaching can also be summarized into the internal collaboration process of the organization, and the entire company can operate efficiently by formulating internal business processes and management mechanisms. Feng Tang, a strategic management expert, novelist, and poet, once said that the general meaning is that in the short term, the formulation of some management mechanisms and processes may reduce efficiency, and in the long run, it must be necessary.

There are a lot of contents on how ToB software service companies formulate internal management processes, including market analysis processes, demand management processes, R&D processes, project delivery processes, etc., and I will continue to explain them in the follow-up articles.

Quote from the book "What the CEO Says"

This article was originally published by @Seven on Everyone is a Product Manager and is prohibited from reprinting without the permission of the author.

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