The DHM Model

Gibson: Product strategy answers the question, how will your product delight customers in hard to copy, margin enhancing ways?

When I join a company as a product leader, advisor, or board member, I brainstorm ideas to answer three questions.

One, how will the product delight customers?

Two, what will make the product hard-to-copy?

And three, what are the business model experiments required to build a profitable business? The answers to these questions provide high-level hypotheses for your product strategy.

Delighting customers. Think about how your product delights customers, both now and in the future. As an example, think about how Netflix delights you today. How could it deliver even more in the future?

Here's a list of ideas Netflix explored in the past, along with potential future experiments:

• next day delivery of DVDs;
• instant delivery via streaming;
• a large selection of movies and TV shows;
• easy to find and watch videos;
• an entertaining website experience;
• movie suggestions from friends;
• original content;
• episodic TV binge watching;
• 4K video quality with surround sound; available on all devices anytime, anywhere;
• personalized choices for each family member;
• interactive branching stories;
• download videos for playback later;
• live sports;
• news and current events;
• 3D/VR immersive stories

Netflix has explored most of these ideas. Some delighted customers, others didn't. For your product, what's your list of delighters?

Creating a hard-to-copy advantage. What makes it hard for companies to compete with Netflix? Hamilton Helmer's book, 7 Powers, outlines seven hard-to-copy advantages. Below I describe each of these seven powers and how they apply to Netflix.

Brand. Building trust with customers takes years of delivering value with a minimum of trust busters. Today, more than 150 million members trust Netflix with their credit cards. The Netflix brand provides a significant hard-to-copy advantage. Network effects. Starting in 2008 with Xbox, Netflix built a device ecosystem. Today, nearly all TVs, DVD, Blu-Ray players, game systems, set-top boxes, and mobile devices are pre-wired to stream Netflix.

Economies of scale. Netflix members enjoy original content, enabled by the company's economies of scale. Because Netflix can amortize content cost across 150 million members, it can invest significantly more than its smaller rivals.

Counter-positioning. This power, an offer to customers that is impossible for competitors to match, is rare. In 2004, however, Netflix advertised no late fees. Blockbuster could not respond, as late fees generated nearly all of their profits. Blockbuster could not afford to make the same offer.

Unique technology. Helmer's 7 Powers book does not list this attribute, but I think it's essential. An example, Netflix's personalization technology. Because Netflix knows the movie tastes of 150 million members, they can generate accurate forecasts of streaming hours for each potential title, and spend accordingly. They effectively right-size their investment in original content.

Switching costs. This hard-to-copy advantage exists when a customer invests so much in one product that it's hard to switch to another. To a small degree, Netflix customers don't turn to Amazon or Hulu because it's too much work to recreate profiles for each family member.

Process power. Netflix has many unique, hard-to-copy processes. One example, they encrypt tens of thousands of titles each year at multiple bandwidths for thousands of different hardware devices.

Captured resource. The cleanest example of this power is a patent. Another example is a close-knit team not available to other companies. The Netflix startup trio of Reed Hastings, Neil Hunt, and Patty McCord, who all worked together at a previous startup, is an example of a captured resource.

How will your product build a hard-to-copy advantage? margin enhancing? How will your product generate margin? You'll need profits to invest in innovation to build an even better product in the future. Below are the many business experiments Netflix executed.

In 1998, Netflix launched a DVD site where customers could buy or rent DVDs. About 90% bought DVDs, and 10% rented. Netflix stopped selling DVDs as they correctly anticipated Amazon would dominate online DVD sales. The initial rental model was $4 per disc, but the service attracted few customers.

In 1999, Netflix bet the company on a three disc at a time DVD-by-mail rental subscription, which cost about $25/month. This all-you-can-eat model succeeded. In 2004, Netflix began to offer lower-priced plans, $10 for one DVD at a time, $17 for two discs at a time, and $23 for three DVDs at a time. Over time, Netflix lowered its prices, based on ongoing price test results and the company's ability to reduce costs through its automated DVD delivery hubs and economies of scale.

In 2005, Netflix experimented with advertising on both its website and DVD envelopes. It also sold previously viewed DVDs. Both of these efforts generated profit, but Netflix eliminated both in 2008, as its core DVD-by-mail service began to generate higher profits.

When streaming first launched in January 2007, Netflix placed a cap on monthly streaming hours, corresponding to the price of a member's plan. Members with the $23, three DVDs at-a-time service could stream 23 hours a month. Netflix quickly tested an unlimited offering and switched to an all you can eat model for streaming, too.

The Qwikster disaster, when Netflix attempted to separate its DVD and streaming services, was an attempt to establish a higher price for a streaming only service. Netflix never executed the plan, but instead, let the DVD-by-mail program die through natural obsolescence.

Netflix continues to experiment with both price and plans. Today, prices range from $8.99 to $15.99. Higher-priced plans have higher quality video and the ability to watch more streams simultaneously. Today, Netflix is testing lower-priced mobile-only plans in international markets.

The point of all this, you'll need to experiment to evaluate different prices and business models over the life of your product. You'll never be done.

Product strategy exercises. From this chapter, there's three exercises I'd encourage you to participate in. Exercise number one, take a moment to jot down how your product delights customers today, and then add a few ideas about how you might delight them even more in the future. Exercise number two, using the eight hard-to-copy powers as a springboard, list ways your product might create a hard-to-copy advantage in the future. Exercise number three, for your product, list a few price and business model experiments you might explore over the next one to three years.

At this point, you should have a list of hypotheses to delight your customers, create hard-to-copy advantage, and experiment with price/plan combinations and business models. We'll bring these three components together to articulate a product strategy in the next essay. Thanks for listening. Now we'll move on to chapter two, From DHM to Product Strategy.

Suzanne: I love this DHM model. I mean in general I love the acronyms. I never say that usually, but in this case super, super helpful way of simplifying complex ideas down. I want to focus on the margin enhancing part because I think the delight customers is, it's exciting.

That's just if you give me enough time to sit around and think about cool stuff I could probably create a really great list. And hard-to-copy is a tricky concept but you've mentioned the Seven Powers book which is a great reference. I think in general these ideas of that which can be copied will be copied, so staying away from obvious things like brand voice, and logos, and colors, and button styles, and all of those things that seem like they differentiate you until, "Me too."

I guess why I want to focus on margin enhancing is because there's still so much debate about the extent to which the product manager, or the product leader owns the business of the product itself. You're in a position as VP of product. How does the average product manager or product leader step into this aspect of your strategy?

Gibson: Yeah. I think the first message - is I want all product leaders to care about building a great business. My point is it's not enough just to delight. It's not enough just to be hard to copy, but you'd like to deliver a great business. The way I think about that is as a product leader you want to generate profit so you can reinvest to make your product even better in the future.

To your question it's really there's some organizational stuff hiding in there. I'll just tell you how I've worked this. At Netflix, the product leaders would enable all the A/B testing to test price and plans. At the end of the day, we would provide results and then the marketing team would make a decision about what they wanted to do. We were providing insights and we were the ones building the stuff.

I think the first point is care about the business. The second thing that I've found over and over again is people kind of alight on a business model that works, and then they just stop experimenting. My point is the more that you can engage in experimentation on all three of these dimensions, on the delight, on the hard to copy, and then the margin enhancement, the more successful a company, and product, and business that you can build. Don't ever stop on any three of those vectors. Just try to keep getting better on all three.

Suzanne: It's a perfect segue to the other question that I had about this same piece which is in regards to experimenting with business models. In your previous answer you said, "We ran A/B tests and then we used the insights to say, 'Hey do with this data what you will.'" I imagine that in a SaaS type model where what you have is a price and a subscription that people pay, because of the way that we can now sort of separate technology it's easier to say, "Send 11.99 to these users and send 7.99 to these users."

But how does a product team experiment with business models or pricing when the pricing structures, or the inherent business model, goes deeper than just a sub price?

Gibson: I guess the first thing is just to acknowledge that there is a balancing act between delight and margin. The simplest way is for that SaaS customer, if you chop the price in half, they'd be delighted. But are you building a long-term sustainable business? At an enterprise company, that's just when you want to have the conversation with those folks across the aisle whether they're in sales, or marketing, or what have you, about how to think about that delight versus margin trade off.

You can't always A/B test but you can have a conversation with customers about how much value are you getting? You can search for the clues about whether you could raise the price, or whether you need to lower your price. Certainly with SaaS customers you often have some sort of signal for retention. At the end of the year do they re-sign up?

Some of them are monthly. Those are excellent signals that are totally analogous to retention for me at Netflix.

Suzanne: Let's swing the other way and go into the startup terrain, and startups perhaps more than anyone, especially pre-product market fit really do need to be this aggressive in their testing of everything including the business model. But a lot of the times I've seen founders are afraid because if customer A finds out that they're being offered price A, and customer B finds out they're being offered price B, and one is significantly better than the other. What advice do you have for product teams in that context?

Gibson: I'm going to abstract it a little bit. One thing I learned at Netflix, I'll say this to myself because I'm directing this statement to myself, it's the new customer stupid. What I mean by that is I learned over time not to care or worry too much about existing members because in most cases they might voice some concern or be unhappy but they wouldn't quit. If you're trying to build a great business in the long-term, you're highly dependent on all those new customers coming into the system.

I learned to focus almost all my energy, my attention, the A/B testing on the new members. Knowing that you had to optimize for them in order to substantially grow and create a great worldwide business. From time to time I would A/B test with the newbies, and it was so crazy. I would say, "All right. We'll do a little test with the existing," see how crazy it was. In most cases it was never crazy enough to cause them cancel. Those existing members have been there with you for a while and they're not nearly as sensitive as the newbies. That's what I discovered.

Suzanne: Yeah. I guess if you've proven value...

Gibson: Yes. Exactly.

Suzanne: That's great. Thank you so much. DHM model essay number one. You can find it in the show notes.