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.