The GEM Model

Gibson: As companies grow, product strategy helps teams maintain focus, but misalignment, especially across product, marketing, sales, and finance organizations happens often. One of the biggest causes is differing opinions on how to prioritize growth, engagement, and monetization. The GEM model forces cross-functional teams to prioritize these factors and helps build a metrics focused organization.

In 2005, Netflix had nearly two million members, was growing 30% year-over-year, and monthly cancellation, the proxy for product quality and engagement, was about 4.5%. Each month, 4.5% of our customers would cancel. The key challenge at the time was how to build a profitable business, so a force-rank of growth, engagement, and monetization, along with the metrics we used to measure each, looked like this.

This is the GEM prioritization for Netflix in 2005. The first that was prioritized was monetization, and monetization was measured by lifetime value and gross margin. The second most important thing was engagement, and we measured this by monthly retention. You can think of this as a proxy for your overall product quality. Because of this, growth fell third. We measured by year-over-year member growth rate. In 2005, that was about 30%.

Based on the forced-rank prioritization above, monetization first, engagement second, and growth third, we put some new projects at the top of our prioritized list. In 2005, we started testing advertising, we experimented with selling previously viewed DVDs to members, and we initiated lots of price and plan testing.

Our priority was monetization to answer the question, how can Netflix deliver a high margin business?

Eventually, we figured out how to deliver a more profitable DVD rental service through the introduction of lower priced plans. We maintained our $22 a month, three disks at a time plan, but added $15 and $9 monthly plans for two and one DVD at a time. Both of these lower priced plans generated a higher lifetime value.

By 2008, we were confident that we could deliver a profitable business, and we flipped the priority as we set a goal to achieve 20 million subscribers by 2010. We wanted to convince investors we would have a big, profitable business in the long-term. Here was the forced rank, growth, engagement, and monetization in 2008. We did it exactly in that order. We put growth first, engagement second, and monetization third. It's an absolute flip of what it had previously been.

By this point, we had reasonable confidence that we could deliver higher margins, and the priority shifted to growth. At different times in a company's life, the priorities change. It's an excellent habit to reassess the priority of these three factors every six months or so.

Here is product strategy exercise number 11, a companion to this essay. Thinking about the overall needs of your company, how do you prioritize growth, engagement, and monetization? Which metric will you use to measure each? Now, compare notes with your CEO and leaders in other parts of the company to see how they prioritize the three factors. If the answer is different, find ways to debate the prioritization and reach an agreement. Doing this every six months will dramatically improve cross-functional alignment.

I hope you enjoy the next essay. It outlines how to bring strategic thinking front and center in your product organization. Essay number 10 is called The Quarterly Product Strategy Meeting.

Suzanne: GEM. GEM. Truly outrageous. GEM. I have to say that I felt two ways about this because I was like, GLEe! GLEe! GLEe! And then it's GEM, GEM, and DHM. Are you trying to inspire infighting over which of these acronyms is the best one, the most inspirational?

Gibson: Well, I know the worst which is DHM.

Suzanne: Yeah. DHM sounds like a shipping company.

Gibson: Exactly.

Suzanne: This is DHM strategy.

Gibson: I couldn't fix it.

Suzanne: Okay, GEM. I love this. It stands for growth, engagement, money. Are you saying at the end of the day these are the three things and are you also saying at the end of the day that is the order in which they matter?

Gibson: I'm always trying to help product leaders to anticipate future challenges. If I walk into a startup the number one source of lack of alignment across the organization tends to be along, in this area. I can ask the simple question, how do you prioritize growth, engagement, and monetization? I can ask it in the finance area. If I get a different answer than from the marketing or product area I know there's a lack of alignment.

This is a super simple model. Generally it's good to reevaluate it every six months or so. The other thing that I appreciated about it is if you start getting into it very quickly you start getting into a metrics conversation. What do you mean by engagement at different companies? How do you evaluate product quality? That's really the question.

Now you're having a real metrics conversation which I just find incredibly helpful. Then as a leader... You can grow up in product and at some point if you become a muckity muck like a VP or product, now you have to coexist with your marketing partner, and you have to coexist with your finance partner. I joke you can no longer say, "Those bastards," in marketing right? But you start to understand this notion of cross functional alignment.

This is one of the models that, I just find it the most helpful in teasing out whether there is a lack of alignment. And a lack of alignment is really painful. Imagine that you're rowing a crew shell, a boat, with eight rowers and one side's going at twice the speed of the other side. That's a disaster, and that's what lack of alignment looks like.

Suzanne: In one of our previous Q&As you were talking about those fussy people that need to put everything into puzzles. I was quiet because I think I might be one of those people, but I'm trying to also put all of this together because I do a lot of coaching on product management as you know, and I think it's so valuable for people. People are hearing great ideas all the time. They're not always getting that actionable. Your essay series is incredibly actionable as we've spoken about but I want to make sure I understand how it stitches together. How does GEM feed back into that roadmap, or those strategies, and is it competing with the proxy metrics? Is is that the proxy metrics should be laddering up to one of these three cornerstone metrics?

Gibson: First, think of it as like a temperature check on health. It's everybody in one.The example I gave at Netflix, we were going along growth first, engagement second, monetization third. Then two years later for a variety of reasons we flipped the switch and we said, "Actually we need to prove that this is a... We can build a profitable business. We can deliver a financial return," so we put monetization first, engagement second, and then growth third. We said we'll accept slowdown in growth to prove out that we can deliver a real business model.

Suzanne: Is that when I got my first, just an FYI your price is increasing as of this day?

Gibson: No. Actually, well we can come back to that. This is early. Because of that we said, okay how are we going to make money? That's when we said, "Okay, we're going to try advertising. We're going to try selling our used discs. We're going to do lots of pricing plan testing." To answer your question it fundamentally said we're putting more resources against the projects around monetization. We dedicated new resources to other business models. That's how you can think about the coexistence.

Then your point when you started to notice that the price increases at Netflix had been going up...it's funny. I've thought about this. How do I guess that Netflix prioritizes growth, engagement, and monetization today? It's tricky. Here's my challenge. It's like a coin flip between growth and monetization because to your point they know what folks value. It's the original content.

They're trying to raise their prices so they can have the cash to invest more in what customers are asking for. Maybe their monetization first, growth second, and engagement third. Retention's at 2%, like only 2% are canceling each time. The product is great, okay? Frankly at their scale I'd probably accept a less clear prioritization. Punk startups I will accept no ambiguity. These are for strength or I'll kill you, right? Netflix is playing a different game at scale.They might get away with having things almost tied.

Suzanne: This plays into a framework that I write about called The Four Fundamental Tensions of Product Management. Is this business value, customer value? If you swing too far into business value too soon-

Gibson: Shareholder value, customer value. Yep. Yep. Yep.

Suzanne: Exactly. You got it. All right. This has been musings on essay number nine with Gib Biddle.