An Introduction to Product Strategy: Expansion

Part 3: Solutions Expansion

Note: this is part 3 of a series on strategic Product Expansion. The introduction and outline can be found here. The previous section on Segment Expansion can be found here.

Solutions expansion prioritizes deepening the relationship with the customer by providing more features and services that solve ever-more needs within the realm of your current product. There are a few strategic reasons to expand through depth.

higher annual contract value (ACV)

The obvious benefit of solutions expansion is increasing revenue generation per customer. The more your service does—the greater number and depth of problems you solve for the customer—the more you can justify charging.

Up to September of 2015, ZenPayroll (as it was then) cost $4 per employee per month. Starting in September, it cost $6 per user per month. While the product was identical from August 30th to September 1st, the product was significantly improved from, say, April of 2013. We had added AutoPilot which could run your payroll automatically, accounting integrations for keeping data in sync across systems, contractor payments and 1099 form generation, net bonuses, detailed reporting and analytics, one-off payrolls for bonuses…the list goes on.

ZenPayroll of 2015 was not only a better product, it’s functionality expanded to handle a wider range of the payroll ecosystem. As such, we could charge the same sized customer more for the same general service (payroll.)

Pairing with segment expansion

Solutions expansion often goes hand-in-hand with segment expansion. For ZenPayroll, segment expansion alone was selling a $6 per employee per month product to companies with more employees. Solutions and segment expansion together are adding features that cater to larger total value customers (more employees) and charging a higher incremental cost (more dollars per employee.)

When we were ZenPayroll, there was no tiered pricing; every company paid the same incremental fee per employee. At some point post-rebrand to Gusto, the pricing was segmented—today, in ascending order of cost: Core, Complete, Concierge, and Select. Some features were pulled up, only available in higher-tiered plans. User administration is one example, available only to companies at the Complete plan or above. If you need user administration, the per-employee fee goes from $6/employee/month with the Core plan to $12/employee/month at Complete and Concierge, to who-knows-what with Select.

There are two primary reasons for segmenting features.

For one, different segments of your market have different use-cases. As we talked about above, user administration isn’t really that useful for tiny companies. A small business of five employees, for example, usually has one person managing all HR functions. Configuring nuanced user permissions is not a feature they need. Larger organizations—ones with dedicated HR teams—might have some users who need to see PTO across the organization but shouldn’t be snooping around to see employees’ salaries.

We don’t want to bloat the product experience with functionality they won’t/shouldn’t use.

Secondly, larger companies have more pricing flexibility; they can pay more. (It might be a bit more nuanced than that, but also maybe not.)

Segmenting solutions means the product can handle more complex use-cases for companies with larger workforces and allows Gusto to charge them more relative to their employee count.

Combating competitors’ defensibility

The more problems you solve for a customer, the harder it is for a competitor to reach feature parity. This was certainly true for us as we competed with entrenched incumbents.

If ADP’s sales team said, “We have accounting and HR and benefits and payroll and time tracking” then a prospective customer couldn’t switch to us for payroll even if our payroll product was better because they would lose functionality in other parts of their business.

One way to combat this type of lock-in is through integrations.

Instead of offering only payroll, we could say, “Yes, ADP does those things, but they’re mediocre at all of them. Instead, you can use us for payroll plus Xero for accounting plus BambooHR for employee management plus TSheets for time tracking plus Expensify to manage expenses.” I know,, it sounds more complicated, but the customer was getting the best of all worlds: data continues to flow seamlessly between every piece of their HR stack and each individual piece was “best in breed” at its function.

ADP covers payroll, HRIS, and time tracking. ZenPayroll builds payroll itself, then offers HRIS and time tracking via integrations with bambooHR and T-Sheets, respectively.
ADP covers payroll, HRIS, and time tracking. ZenPayroll builds payroll itself, then offers HRIS and time tracking via integrations with bambooHR and T-Sheets, respectively.

Another delightful differentiator was handling the switching cost by fully onboarding a customer. Instead of them moving employee data from a competitor—a mind-numbing exercise—we would get set up everything ourselves. Customers wouldn’t have to dread switching because the hard parts were done for them. This wasn’t a product feature in the way you might typically think of them—early on there was no code, just us taking on the manual entry on behalf of the customer—but offering this service was good for the business and gave us the expertise to build these features in-house.

Retention

The flip-side of combating competitors’ defensibility is building some of your own. Some features accomplish both, but often what attracts a customer might not be what gets them to stay. Our seamless onboarding process, for example, is a one-time delightful experience that has little long-term retention value. While first impressions matter a great deal, their initial delight fades with time.

I think of retention as falling into two broad buckets: positive retention and negative retention. Let’s look at those.

positive retention

Positive retention is building features that actively encourage users to stay, which manifests itself in qualitative ways (customer love) and quantitative metrics like Net Promoter Score (NPS). Fanatic customer service, delightful user experience, and regular product improvements are all categories of positive retention.

Gusto’s AutoPilot feature is a concrete example. The best kind of running payroll is the payroll you don’t have to run. What could be a better experience than that?

negative retention

Negative retention is also referred to as “lock-in”. The harder it is for customers to switch, the less likely they are to do so. I mean, if the main reason people stay with you is that it’s a pain to switch then, you know, there are higher bars for helping people. While negative retention might seem evil, it’s nonetheless quite real.

These can be features you build or ones you don’t. One-click data export might be good and useful for the customer—it could also help sell the customer because they know they can leave if they don’t like you—but also means they have an easier time switching to a competitor. Discounting annual contracts provides cash up-front for your business and drastically reduces the likelihood that a customer will leave in the middle of the contract because they won’t want to pay for two services at once.

To be quite honest, I cannot think of a feature we built during my time at ZenPayroll that is an example of negative retention. And I think that’s pretty cool.

And sometimes a bit of both

Some features contribute to both positive and negative retention. Products with network effects are more useful as more people use them and provide defensibility. Social networks can have exponential growth because the more people on their network, the more attractive the service.

At the same time, the stickiness of that network can stifle broader innovation. While LinkedIn is not a great product, building a competitor means solving the “cold start” problem of bootstrapping a network. People won’t switch until other people switch and those other people won’t switch until the first people switch.

Conclusion

As we've seen, expanding the solutions you offer your customers provides a range benefits. It opens up higher ACV as your product depth justifies higher pricing. It combats defensibility of competitors while raising the bar for potential upstarts to reach feature parity with you. And it improves retention by deepening your relationship with your customers.

It expands the heft of what you offer, but doesn't change the core product you're building or necessarily the profile of customers you're selling to. For some features, like the API integrations with ZenPayroll, it can provide a bridge to expansion into new verticals without the high cost of building them right now.

We'll cover vertical expansion and expanding into adjacent products in the next installment.