Three questions to ask before building that next software company

This article is geared toward starting new businesses, but even if you work within a large company, you should be able to answer the below questions about your product effectively.

If you’re starting a software or service-oriented company your idea probably falls into one of the two main categories:

B2B (business to business): Your product or service is going to be sold to businesses.

B2C (business to consumer): Your product or service is going to be sold to consumers or individuals.

I’ve worked at several companies over my career, covering both B2B and B2C use cases. In this article, I’ll focus on the questions to ask before building a product to sell to other businesses, and discuss the ideas that felt lackluster because they had a “no” or less convictive answer to one or more of the following:

Selling to a cost or revenue center

1. Is your product being sold to address something your customer is paying for as a cost of business or something that is driving revenue?

Out of the many products I’ve built or helped build, the best ones have focused on driving revenue. There’s clearer return on investment and value propositions almost every time.

To explain this, let me give a couple concrete product examples:

Drift: Focuses on engaging potential customers when they hit your website with chat bots for setting sales meetings (driving revenue)

Toast: Focuses on selling tablet systems that help increase restaurant throughput and operational efficiency. Also enables online restaurant storefronts(driving revenue)

Stavvy — my current company: Our mission is to deliver software to help the mortgage lending industry manage their loan pipeline more effectively and close on loans faster (driving revenue)

Example industries I’m not as partial to:

• Cloud cost reduction software (ex: lowering your Amazon or product hosting costs),
• Recruiting software (sorry but not sorry about this one — there’s a million HR systems out there)
• Procurement (for example, workplace food, company swag and office supplies, wholesaling).
• Open source as a freemium product. There’s a few successful businesses that do this (see MongoDB, Elasticsearch, etc). I love open source, but you’re going to get copied, other solutions are going to pop up, and folks are going to continue to look for ways to either recreate it or make it free. The successful companies with business models here are more the exception than the norm. That said open source can be awesome for recruiting and branding (see React / Angular / anything from Square).

These cost-center focused models will plateau faster and have a higher chance of failure.

Focus on the revenue centers.

Product perception and timing

2. Are people willing to pay for this kind of product, and will they pay for it now?

If the product market you’re serving primarily consists of folks that expect services for free or very low cost, you’re capping your revenue potential and will face an uphill battle. Generally these are solutions and markets that solve problems that are small or only deliver marginal improvements. A lot of this does fall on to your sales team, but you’ll know right away based on your customers’ response to pricing when you say your solution solves a certain problem X.

Market conditions also play a big role in product perception.

What seems like a really good idea now might not be worth pursuing because the market for it doesn’t exist yet. It might be around in 10 years, but you’ll be too early. If you’re tackling this future facing market you need to have a ton of resources or the addressable market needs to be huge — preferably both. In this category, think things like self-driving cars, space travel, cures or therapeutics for cancer, etc. These are worth exploring — but these areas are a whole separate niche and require a completely different go-to-market and revenue generation strategy.

Your product’s potential value also directly ties back into the first question of whether your solution would be perceived as addressing a cost center or assisting in revenue generation. Keep the vision and focus of your product ideally on driving revenue, saving time, or improving customer outcomes.

Unique differentiators

3. Is the market saturated or can you develop a competitive advantage?

Only build a product to become a company if you have significant domain experience. The world doesn’t need another marketing automation platform built by a team that has no marketing automation expertise. Put differently, if someone asked you to present on the topic your product is addressing, would people respect your opinion because of past work you’ve done or clear knowledge you have acquired?

A product and successful company, in my view, is a combination of many pieces fortuitously coming together to address the holes of any individual. To build a successful product, you need to have the right combination of the builders, the managers, and the vision on your team to be successful (for more on this, the book The E-myth Revisited has some great stories and advice).

Any missing piece and your product will falter.

I’ll close by saying that the list above only scratches the surface.

There’s many other things to be considered when starting or building a new software product and the points above may not always be absolute; however, take these questions with you the next time you work on a project, and you’ll be well on your way to that next big idea.

-Chris