Product SKU agility – what’s it all about?

InishTech’s Head of Sales Andrew O’Connor discusses SKU agility – the obscure but perhaps not-so-secret sauce that enables ISVs to create customer-centric software applications.The term SKU (pron. “skew”) is a funny one. You’re either intimately familiar with it (to the point where it occupies much more than its fair share of your conscious thought on any given day), or you’ve never even heard of it – your blissfully ignorant of its meaning, relevance and import and have never had to worry about it as part of your day job.

Maybe you’re better off staying that way. In this particular case, I reckon ignorance really is bliss. But if you’re determined to muddy the waters and dive in – well, don’t say I didn’t warn you.

SKU stands for Stock Keeping Unit. I’m borrowing from Wikipedia now, in the interests of accuracy and bone laziness, so bear with me. SKU is a term rooted in data management, and more specifically associated with the process of managing stock – a task that is a core part of the business of warehouses and wholesalers and retailers – in fact anyone that holds and moves large volumes of diverse products.

A SKU is typically a number or code that acts as a unique identifier for a particular product or service. So the barcodes on the bottom of the box of cornflakes contain a SKU for that item – real-time tracking of which SKUs are being sold means the retailer knows what products to reorder and when. SKUs allow for the tracking & management of products & services, and can represent much more than the product itself – for example the SKU for a particular item of electronic equipment might contain the part number, product category, batch number, plant ID, date of manufacture and even information like destination & price. Equally, a SKU might be a number of uniform products in a single box or even a billable event with no product involved at all.

For the Independent Software Vendor (ISV) the common or garden SKU is very much a part of everyday life,  irrespective of whether you choose to label it as such. If you’re busy developing the next great social networking application in your garage, you will probably find it hard to see beyond the fact that you’re creating this one amazing app that’s going to change the world, and who needs to worry about SKUs?

But the vast majority of successful ISVs most definitely need to worry about SKUs. Just a couple of weeks ago, I met a large software company that has in excess of 25,000 distinct SKUs. That’s a hell of a lot of product management! It’s no secret that the software business has traditionally been quite poor at SKU management. Why? Maybe it’s because most software companies start with that guy in his garage, trying to get the product out the door, and then grow from there. They don’t approach the business in a way that would plan for complex SKU management. Or maybe it’s just the nature of what we sell – intangible / virtual / soft products that change regularly and have almost zero incremental cost to manufacture (once you’ve built it once…) – perhaps people don’t think of software in the same way as they would food stuffs, pharmaceuticals or electronics.

But to illustrate the point on SKUs, let’s take a typical mid-size ISV, with $20M in revenue per annum. They have probably been in business for 10 years. They started out with a single product, but over time this has been added to, and now they have 5 distinct but complimentary products, which they can sell separately or in combination. They need to support several platforms for each of the products and they also have specific versions of their products that plug into particular applications. So, they have all products on Windows 7, they have 2 legacy products on Windows Vista, all products are also on Windows Azure offered as a SaaS solution, 3 of their products are supported on Windows Mobile and 2 of their products are connected into Microsoft SharePoint. For each product, there is the current shipping version, the 2 previous versions and the next version that’s being beta tested by a select group of customers – all of these versions are supported in the market and have live customers. For each of their products, there are 3 variants – a trial version of the product (that lasts 15 days and is provided free of charge from their website and channel partner websites), a standard commercial version (which provides basic functionality and a silver SLA) and the professional edition (more features / gold SLA). They offer 3 main business model options to their customers: an on-premise deployment priced on an upfront fixed fee basis, a hosted option that is priced with a smaller upfront payment + an annual per user fee, and a cloud-based model that is charged per concurrent user per monthBased on the description above, our mid-size ISV could have up to 200 distinct product builds that come out of engineering and 600 distinct SKUs which they offer for sale. With proper SKU management & the right product  licensing tools, you could bring this number down to 50 or 60 builds and what’s more, you could increase the number of SKUs exponentially, without impacting your leaner, more efficient engineering team. 

So, how do you do it? Basically it involves moving a particular task from one place to another in the software lifecycle process. The task in question is the creation of distinct SKUs based on customer demand. And the move in question is from it happening within the code itself (courtesy of the engineering team) to happening at a higher level – within the application (courtesy of product management). Effectively, you are taking the task away from engineering and you are giving it to product management. So, the engineering team still creates the baseline products for each distinct platform, but all other definition and configuration that is involved in packaging a particular product or service happens within the application itself.

So for example, engineering create “Report Manager for Windows 7” as a baseline application, but on top of this, the product management team define 11 different SKUs for Report Manager for Windows 7 that the sales team can sell as follows: on-prem trial, hosted trial, commercial (upgrade), commercial (SaaS), professional (upgrade), professional (SaaS), channel trial, standard channel edition, channel professional edition, standard fixed fee option, professional fixed fee option.

The benefits of this approach, where you separate SKU creation from the product development function, are many.

• Firstly, it means the task for engineering is greatly simplified. You can get your products to market quicker, at a lower cost, and with a much stronger bias towards actual innovation & development.
•  Secondly, it gives the product managers more control over what they can provide to the sales team by way of market ready propositions. This is a really important, as ideally you want SKU management under the control of a team with equal visibility over what the customer wants and what is reasonable to deliver.
• Thirdly, it gives the sales team the capability to become much more customer centric. With unlimited SKU agility, there are no limitations on what the sales team can offer, whom they can offer it to, and which channels they can offer it through. In a world that is evolving and changing as rapidly as the software business, this level of agility in selling is a real competitive differentiator.

In my opinion, SKU Agility is the unsung hero in the field of software licensing. It’s a key feature, and one which perhaps drives monetization most effectively, because it allows ISVs to run their business so much more efficiently. But often it can get outshone by the more easily understood, more familiar feature / benefits, like entitlement management and code protection. To my mind, it’s the sleeping giant inside InishTech’s SLPS platform, the feature that can really help you monetize your software in a changing world.

aoconnor@inishtech.com