SaaS 102 #18 Why Some Products Don’t Need to be Profitable
If you’ve ever looked at the prices of different Tesla cars, you might find yourself wondering why they are priced so differently. The Model 3 and Model Y are much cheaper than the Model X and Model S. But even the Model X and Model S look cheap when you compare them to the Tesla Roadster.
What is the reason behind these differences in pricing strategy?
The answer is: the product positioning is different for these cars.
Using product positioning, we can usually divide products into the following three categories:
- Volume-driving products (Model 3 and Model Y)
- Profit-making products (Model X and Model S)
- Star products (Tesla Roadster)
Volume-driving products don’t necessarily need to earn money. The purpose of these products is to attract as many people as possible to use them, thereby increasing volume for the company. Tesla’s Model 3 and Model Y are examples of volume-driving products.
This is why Tesla will do its best to subsidize them and reduce prices in order to gain market share.
(Even though Tesla tries to sell many of its cars as cheaply as possible, they still make an astoundingly high gross profit. In Q4 2022, they made more than 25% in gross profit. That’s much higher than their competitors. Tesla’s sky-high gross profit is related to competitive advantage, a concept we can discuss more in later articles.)
Once a company has a volume-driving product, it can start to transfer some of the volume it generates into a profit-making product. The profit-making product can then bring in money for the company. For Tesla, the Model X and Model S are profit-making products.
As the goal for these products is to create profit, they will very rarely get cheaper, and will quite likely get more expensive.
As well as volume products and profit products, there are also star products.
The focus of star products is satisfying certain specific customer requirements, while at the same time also strengthening the brand and differentiating it from its competitors. An example of this is the next-generation Tesla Roadster, which will be one of the quickest electric cars in the world once it is released. (At around 200,000 US dollars, it will also be one of the most expensive.)
The goal of a product like the Tesla Roadster is not simply to pursue an increase in sales, but to attract people’s attention and increase Tesla’s brand strength. The goal is that when people think about fast electric cars, they think about Tesla.
Once you are familiar with the concept of volume-driving products, profit-driving products, and star products, you can discover that actually many companies are using similar product model strategies.
Taking Google as an example, their volume-driving product is Google Search, which attracts users and traffic. Their profit-driving product is Google Ads, which they use to create revenue.
Google Analytics 360, meanwhile, is their star product, with subscription costs starting at 150,000 US dollars per year.
Product positioning also applies to SaaS products. When creating SaaS products, we must think carefully about product positioning. This is because we can only get to the stage of setting pricing once positioning is clear.
In the following parts of this article, I’ll share some examples of how to decide on product positioning for different SaaS products.
Product positioning at the product feature level
When we talk about product positioning at the product feature level, we might use terms such as volume-driving products, profit-making products, and star products, even though we might actually be talking about different features of the same product.
When we design product features, we need to think about:
- Which essential features can be offered for free to attract users and drive volume?
- Which advanced features will users be willing to pay for? Can we use those features to create profits?
- Which star features can satisfy the needs of some high-value customers and help differentiate the product from its competitors?
Let’s take our AfterShip Tracking product as an example.
AfterShip Tracking offers a free plan which includes some basic features.We use this free plan to attract small to mid-sized retailers to use AfterShip Tracking.
Under this pricing strategy, our email notification and SMS notification features are only available as part of our paid plans. These are the AfterShip Tracking’s advanced “profit-making features.”
Among the retailers who use our free plans, there will certainly be some retailers who would like their customers to be able to receive shipment tracking update notifications, and who are willing to pay for the feature. We can create profits by satisfying the needs of this particular group of customers.
AfterShip Tracking’s star feature is AI Predictive estimated delivery dates.
Many carriers don’t currently offer an estimated delivery date feature. Even for the carriers that do offer the feature, their accuracy is often not very high.
AfterShip Tracking’s predictions are based on vast quantities of past data and AI algorithms that take into account real-time factors such as weather and peak delivery times. This allows AfterShip Tracking to predict package arrival times more accurately than many carriers. This is very important to our business customers who want to improve their own customers’ satisfaction with their brand. Customers who value this feature are willing to pay more to enjoy its advantages.
When we use product positioning strategy at the product feature level, we can divide our approach into three different steps:
- The first step is to use essential features to drive volume (volume-driving products).
- The second step is to charge for advanced features to make a profit (profit-making products).
- The final step is to use star features to satisfy the relatively specific needs of high-value customers (star products).
This is how the concepts of volume-driving products, profit-making products, and star products can be applied at the feature level.
Product positioning at the product level
Product positioning can, of course, be applied at the product level as well as at the feature level.
Again, we can divide this process into three main steps:
- First, select some products to drive most of our customer volume.
- Secondly, allow some other products to create profit.
- Finally, create a SaaS product matrix.
For example, back in 2018 the only product our company had was AfterShip Tracking. Our company relied on AfterShip Tracking both to drive volume and to make a profit.
Since 2018, though, we have successively developed a series of products based around the entire eCommerce process.
At the moment, we are in the process of gradually adjusting the positioning of our AfterShip Tracking. We aim for AfterShip Tracking to be a volume-driving product that we use to attract customers.
We developed our freemium model for some of our features to help attract customers.
Once we have attracted customers to use AfterShip Tracking, we can then prompt them to use some of our other products. Driving more users to other products will help to increase functionality and revenue for those products. This helps them to become profit-driving products.
There’s actually another benefit to this method. That is, once we have created a product matrix including several mature products, it becomes very hard for our competitors to take market share from us, even if they have one outstanding product.
For example, suppose that a customer wants to find a shipment tracking service, there might be around five companies on the market providing that service.
Now suppose that a customer not only wants to find a shipment tracking service, but also wants to manage returns and exchanges. In that case, there might be around three or four companies on the market providing those services.
If the customer not only wants to track packages and manage returns and exchanges, but also to manage their marketing, collect customer reviews, and create web pages, then AfterShip might well be the only company on the market providing all those services.
So, if we can make enough products mature, we can create a product matrix that protects our business like a fortress.
One product by itself might not meet all the requirements of a star product, but five products that can be used together, complement each other, and provide interoperable data access, can work together to effectively create a star product.
You can read my SaaS 102 article “Why Do We Want to Create a Saas Product Matrix?” to understand more about how SaaS product matrixes work.
Summary
When we create SaaS products, we need to think clearly about product positioning.
In most cases, we can divide products into volume-driving products, profit-making products, and star products.
Volume-driving products are used to attract customers. We aim to attract as many customers as possible to use these products.
Once we have generated enough customer volume, we then try to convert as many customers as possible to become customers of our profit-making products.
Finally, we can create star products to build the company brand and differentiate ourselves from our competitors.
If a company wants to do well, it needs to create and build its own star product. The goal of star products is to build and differentiate your brand.
Our goal for the AfterShip brand is that anyone who wants to run an eCommerce business will think of AfterShip when they think of the best eCommerce SaaS tools. We aim to use our star products to differentiate our brand in this way.
In your work in the SaaS industry, have you considered the differences between volume-driving, profit-making, and star products?
I'm Teddy, Co-Founder & CEO of AfterShip, SaaS 102 is a series of articles where I share my experience in SaaS startups.
We are looking for great SaaS sales talent and welcome you to join us at careers.aftership.com.
(Article translated by Joseph O'Neill)