How do you balance investing in competitive differentiation with building for customer retention?

I generally don't believe in investing in differentiation for differentiation's sake – if the feature doesn't solve a core customer need then I'd have a hard time prioritizing it over a feature that does simply for the purpose of checking a box on a table unless there's a strong belief (preferably: clear evidence) that it will drive a purchasing decision, and that is the right priority for the business at the time.

That said, the place where I could see this being a key driver of strategy is if you're looking to enter a new market or serve a new segment. In this case, differentiators may help test & validate a new unmet need, allowing you to move more quickly to establish a winning position in an adjacent market. 

When building a product strategy, you want to focus on identifying your target users and creating a plan to solve their biggest problems. You'll consider your product's unfair advantage and how you can lean into it. Many times, we, as product practitioners, overemphasize the need to differentiate. Don't get me wrong, you do need to have a clear why a user would choose you over your competitors, but it's okay to have boring solutions for the problems that are not core to your strategy. Let your users guide you to the problems that are worth spending the time and effort thinking of new and interesting ways to solve.

Here’s how we approach this balance at Barracuda, taking inspiration from Cagan’s principles:

1. Deep Customer Understanding: We prioritize deep customer insights through continuous interaction and feedback. Understanding customer needs and pain points helps us identify features that will not only retain customers but also attract new ones because they address real problems effectively.

2. Focus on Value Creation: We invest in features that provide significant value to our customers, which naturally aids in retention. Simultaneously, we also look for opportunities where innovation can create a competitive edge. This often involves leveraging technology in new ways or enhancing user experiences to distinguish our offerings from competitors.

3. Empowered Product Teams: Following Cagan’s advice, we empower our product teams to make decisions that balance short-term needs with long-term visions. Teams are encouraged to experiment and iterate, allowing us to quickly adapt to changes in customer preferences and market dynamics.

4. Strategic Resource Allocation: We strategically allocate resources to ensure that investments are made not just in scaling and optimizing existing successful features (which aids retention), but also in exploring new areas that could become significant differentiators.

5. Iterative Development and Release: By using Agile methodologies, we can iterate rapidly based on user feedback and changing market conditions. This allows us to refine our offerings continuously, which helps in maintaining a competitive stance and enhancing customer satisfaction.

6. Monitoring and Metrics: We rigorously track success metrics not only for user engagement and retention but also for how well new features are received. This dual focus helps ensure that our investments are appropriately balanced and effective in achieving both differentiation and retention.

These don't have to be mutually exclusive. In many of the companies I worked in the install base actually were former users of old products and had some legacy tools still existing in pockets of their organization. It is critical to thoroughly understand your customer and deep dive into what will win your market. Often those don't have to compete or take away from each other. Some examples can be:

1. Critical workflows for managing specific tasks in the platform - usability

2. Improving integrations with ecosystem tools - expanding compatibility with customer tools and new logo acquisition

3. Improve onboarding experience and reduce CAC - improves set up experience for existing and new customers - while also standing out from the competition

Those aren't mutually exclusive. But, customer retention is a marathon, while differentiation is a sprint. Customer retention is crucial for long-term success, while differentiation can provide a short-term boost.

I typically follow a simple framework when determining what to invest in:

1. Start by looking at the top customer requests and compare our product capabilities with those of our closest competitors

2. Next list the features based on which are "table stakes" (i.e. all your competitors offer them), those that are nice-to-haves, and those that are differentiators.

3. The, use a prioritization model (RICE, Kano, etc) to rank the features in each group

4. Finally, decide on your investment with roughly 70% in the table-stakes, 20% in the differentiators, and 10% in the nice-to-haves.

If you aren't providing your customers the basics they're likely to leave no matter how exciting your new AI feature is.

Balancing this is a delicate act that requires constant reassessment and a strategic approach. It's essential to recognize that both competitive differentiation and customer retention are critical to a product's success. Differentiation makes you stand out in the market, attracting new customers, while retention ensures that your existing customers stay satisfied and loyal.

One approach I use is a cyclical evaluation process. Every month, I reassess priorities to see if anything has shifted. This means regularly checking if new information or changes in market conditions should alter our focus. It also means checking in with strategic customers to ensure that their priorities are still the same.

For less mature products, it can be difficult to differentiate when there are table-stakes features that aren't implemented. Definitely not impossible, but difficult. In these situations, it's important to focus on features that deliver the highest ROI and have the broadest appeal. These features might not always be differentiators, but they are essential to build a solid foundation. However, even at this stage, I believe that you should allocate some resources to developing innovative features that set you apart in the market.

In more mature products, the balance might shift. A significant portion of your development efforts can then focus on differentiation. These could be features that only apply to a small number of current customers, but grow your ability to reach new customers. Still, customer retention should never be neglected.

For the more mature products, here’s a practical breakdown (the actual numbers are going to be different for everyone): if 15% of your sprint is dedicated to maintenance and tech debt, and 20% to bugs, you have 65% left for new feature work. How you split this remaining time between retention and differentiation depends on your current priorities and business needs.

For example, if you have a groundbreaking new feature that could dramatically increase your ARR by expanding your total addressable market, it might be worth dedicating 50% (or more) of your sprint to it, leaving 15% for retention-focused features. On the other hand, if customer satisfaction is slipping because you haven’t delivered on requested features, you might flip those numbers to ensure you keep your current users happy. However, it's important to always keep some capacity for innovation. Make sure part of your iteration is dedicated to differentiating your product. Plan for this in your sprints, even if it’s just at the proof-of-concept or validation stages.

Think of this balance like balancing spinning plates while standing on a board balanced on a pipe—it's a constant struggle, with the ground always shifting beneath you. But with careful planning and continuous reassessment, you can maintain that balance. It might shift one way one month and a different way the next month, but you can do it.

Keep evaluating your strategy regularly. Align your feature development with your company's vision and current needs. By balancing short-term customer retention with long-term differentiation, you can ensure your product not only stays relevant but also leads the market. And remember, never get too comfortable—flexibility and constant reassessment are your best tools in maintaining this balance.

Balancing investment in competitive differentiation with customer retention involves a strategic approach that ensures sustainable growth and loyalty. Few pointers (in no particular order):

• Understand Customer Needs: Regularly conduct customer research to inform both differentiation and retention strategies.

• Market Segmentation and ruthless prioritisation: Tailor your efforts to different customer segments, addressing both acquisition and retention needs. Use a transparent prioritization framework to balance investments in innovative features and retention-focused improvements.

• Balanced Roadmap: Develop a product roadmap that includes both differentiation and retention initiatives, aligned with business goals. Invest in initiatives that offer immediate retention value while also funding long-term differentiation projects

• Customer-Centric Innovation: Ensure innovations are driven by customer needs, creating unique value propositions that enhance differentiation and satisfaction.

• Measure Key Metrics: Track and analyze metrics like CAC, CLV, churn rate, and NPS to evaluate and adjust your strategy.

Focus on the Core, Expand with Purpose

First focus on growing and protecting your core (what product area is a cash cow for your business). Always play by strength before expanding too thin and peanut spreading features just because competition is doing something.

Some Key Strategies to find the balance:

• Invest in features that not only differentiate your product but also directly enhance user experience and satisfaction. This reinforces your core value proposition and strengthens customer loyalty.

• Understand your customers' deepest pain points and develop innovative solutions that address these issues while maintaining your product's unique identity. This approach ensures sustained growth and market differentiation.

• Continuously gather and analyze customer feedback to refine existing features and introduce new ones that deliver tangible benefits. This data-driven approach ensures your product stays aligned with evolving customer needs and market trends.

The balance changes based on the context of the business so as a first step, product leaders need to be fully in-tune with the business. For example, if churn is high, you should invest more to fix the leaky bucket. Similarly, if churn is low, you should invest more in building differentiators and innovating to create better moats.

I've used the 30-30-30 rule as a starting point:

• 30% of your investment towards driving growth,

• 30% towards keeping customers happy and

• 30% towards debt, whether it be tech, design, process or people.

It is important to note that this is the starting point; you should tweak these percentages based on the context of your business. For example, if your product is early (pre-PMF), you shouldn't worry about tech debt and instead focus all your effort on keeping current customers happen and thinking about ways to grow the number of new customers. Or, if you have a lot of churn, perhaps you don't invest as much in driving growth (new customers) until you fix the churn issue.