For Starters #46: Defining Inventory in a SaaS Business?
To embrace the constraints, one must first identify them.
Last week, I was talking to the Head of Pricing at a local law firm.
Yes, you read that right, a law firm employing a full time Head of Pricing (turns out this is fairly popular).
The firm’s leadership considers each billable hour equivalent to a seat on a flight or a night in a hotel room - a perishable good that either gets sold or… evaporates.
The Head of Pricing suggested every firm, whether or not it employs hourly billing1 , has some constrained "inventory" that must be managed similarly to fully maximize revenue.
This got me thinking, what’s “inventory” in the SaaS space.
Inventory could be measured in server capacity….how many requests can the application respond to and how quickly. For all but the least sophisticated software and database engineer (I’m looking a 2009 version of me), this should be nearly infinite, so yes, it’s inventory, but it’s not constrained under normal conditions. Servers might be more of a production bottleneck, in the same way shipping times are a production bottleneck (See For Starters #34 for a discussion of production bottlenecks).
Inventory is what customers are buying….or more accurately the closest thing you’re selling to what they’re buying.
The constrained inventory in SaaS is likely still human.
For example, if full white-glove customer onboarding and time-to-value for a new piece of business software is 90 days, that may translate to an inventory of just 24 Customer Onboarding Slots for the year. (That can’t be right, how can we meet our goals with that?)
Once we’ve identified this as the inventory, we can use revenue management techniques to grow within those constraints, by adjusting packaging around it.
For example, rather than only offering a white glove onboarding experience, we could offer nothing at all.
Or offer a self-guided video training,
or a weekly group onboarding,
or anything other packaging along the spectrum.
All at different price points.
All without increasing the size of the onboarding team or touching the backlog of product investments that could improve onboarding.
“Making a train journey 20 percent faster might cost hundreds of millions, but making it 20 percent more enjoyable may cost almost nothing - Rory Sutherland, Alchemy
Sure, it means not every customer is going to get the same experience. That’s actually the point. Not every customer wants the same experience. But they all bought a similar outcome. The outcome can be achieved across a spectrum of comfort levels.
Looking hard at, and defining, the constrained inventory is will dramatically simplify your customer segmentation and packaging.
Admittedly, you might be surprised at what stripping away all the bells and whistles begins to look like. You’ll also get that much closer to understanding what your customers are actually buying. Transforming both of you.
What’s the inventory in your business?
What's your strategy to maximize revenue from it?
Who owns this strategy?
I can help you figure this out -- grab a time so we can chat: https://cal.com/garrick/inventory
There are a million reasons I don’t recommend billable hours as inventory, but that’s a post for another day.