While I originally created this as part of a hiring process, the truth is that I would have done it the same way if I was internal at a company that was based around a hardware device and looking to grow beyond being so tightly coupled to it. It’s a common dynamic these days—Peloton is probably the most obvious example—and it adds some significant complications to the usual expansion decisions around software or SaaS products, because that device is a fixed cost, and it’s usually expensive. When you’re expanding, which axis are you going to go on: Are you going to continue to include the device with everything? If your answer is “yes,” are you going to expand to other types of devices and keep targeting the kinds of users who can afford a more expensive product? If you decide not to include the hardware as part of all your offerings and move toward a more affordable software-only option, how’s the new product offering going to be different? So in the end, it’s not just a product expansion decision, it’s also a business strategy decision.

The level of research you need to bring to the table when you’re evaluating a product strategy is going to vary widely based on the context. If you’re interviewing for more junior roles, you’ll likely just be working with mock data, and what’s important is that you’re giving a clear picture of how you think while solving problems and proving that you know how to do the analysis. For more senior roles, you’ll often be working directly with company data and showing people at the leadership and executive levels that you’re aligned on the strategy. In that case, you do need to have some outside validation, whether it’s customer or market information, that can help show that your analysis is sound. And of course, if you’re doing this internally as part of your role, you’ll want to take an even more rigorous approach to the latter option.

Doing this kind of analysis well can occasionally lead to some uncomfortable conversations. You need to be very clear about the scale of the strategy shift. I’ve seen plenty of instances where people just default to saying that product expansion is great because they want growth, so they don’t actually consider or understand the level of commitment that a product expansion strategy is going to require. If you’re a company with a hardware-based product, you’re going to have a lot of people whose work is only focused on producing, selling, and shipping those devices. If that’s not going to continue to be the main focus area of the company, you’re going to have to hire different people and you’re going to have to develop a different company culture that’s suited to the new product that you’re building. That’s a very big cultural and mindset commitment to expect from the executive team. You can get some of that down in a document, but ultimately it’s going to have to be driven home while you’re walking them through it live.

Sarah Payne

I originally created this case study as part of a hiring process, but would have done it the same way if I was internal at a company that was based around a hardware device and looking to grow.

The following document outlines a business strategy for [redacted] as it looks to accelerate growth from early adopters to a dominant company in the large [wellness with accompanying device] category. This business strategy first reviews [redacted]’s current business state, then evaluates different strategies for expansion, and finally recommends a specific path forward with a preliminary path for execution.

[Redacted’s] current business model has the following distinct financial attributes:

High priced packages to support a high monthly COGS from the hardware device

Prices at [redacted]/mo with ~35-43% margins, depending on package

Fixed cost for device limits ability to lower pricing while maintaining strong margins

Additional coaching offered at break even as an add on, primarily used as a competitive differentiator against other wellness companies who don’t offer coaching

High CACs ([redacted]) primarily from paid marketing, supported by high AOV products (CAC payback period of ~1-2 month across all packages)

Strong retention in 3, 6 and 12 month plans*

 Lowering prices to attract more customers is not possible with the current business model, if we want to retain strong margins and CAC payback periods. The fixed cost from hardware devices and high CAC leave little room for lowering prices, without dramatically altering the product and primary acquisition channel.

Note: Would like to clarify that LTVs for 3 & 6 month packages are indicating strong upgrades to longer term plans. This is critical to understand product market fit of existing customer segment.

Understanding the total addressable market and current customer demographic provides an important backdrop for driving growth & product strategy going forward.

Comparing Current Pricing to Average American Consumer Spend

Looking at typical spend for an average American by both annual out of pocket medical costs and annual health & fitness spend, we see that our current product & pricing is not accessible to an average American:

Median out of pocket spend on medical costs, annually $800

Note: This is only for those with employer coverage and does not include premiums, but includes copays, prescriptions, lab costs, deductibles, etc.

Average spend on health & fitness, annually $1860

Note: Includes gym memberships, gym clothing & accessories, supplements, nutrition advice

 A 1-year plan ([redacted]) costs MORE than what an average American spends on all health & fitness in a year. Based on this pricing, the current product will realistically only be accessible to a high income population.

In addition, household income also strongly correlates with presence of certain health conditions.

 The current target demographic (high income) self reports as the most healthy, meaning spend on our product (and other health products) will be dominated by wellness, rather than medical conditions.

Finally, looking the US population distributed by household income gives perspective on the TAM of the current product.

 The current target demographic (high income) represents only 1/4 of the US population. Expanding into other segments will require much lower prices, in order to fit into the average American’s budget for health & wellness spend.

Product Market Fit Expansion - Two Distinct Strategies

Expanding can take two distinct approaches:

Up or Down Market Expansion: Expand to adjacent customer segments, either up or down market. Given that we’re already going after a high-income segment, further product expansion would be down to lower-income demographics.

Category Expansion: Stay within the same customer segment (high income, wellness focus), but cross sell additional products that solve additional use cases.

The following two strategies outline how we could expand, either down market or with additional categories.

 Add Products Within Existing High Income Segment

Focus on wellness, rather than solving specific health conditions

Expand AOV by selling additional products, such as lab tests, supplements, coaching packages, etc.

Product focused on selling additional goods & services, rather than focused on software-first product

Positioning focused on benefits of the health products, rather than a health outcome

Markup products, take a marketplace transaction fee, or a membership fee to gain access to products

Business profile as a marketplace with software stitching the products together for incremental value add

Focus on marketing & brand to differentiate, given the products themselves may be commodities

High CAC, driven by paid marketing supported by a larger AOV

Note: Levels has taken this strategy, as they mention in a March blog post, “We’re moving forward with a new structure where customers pay an annual fee to become a Levels member and gain access to purchase products and services to improve their health” 

 Widen Demographic Profile with Cheaper Product

Software-focused product building metabolic health strategies to improve specific health conditions

Target specific conditions (such as [redacted]) to build an outcomes-driven software based product

Hardware device can be used on a much lower cadence (once a year, twice a year, etc.), either to track progress or personalize software recommendations

Health coaching can become an add-on (similar to Noom’s coaching add on)

Positioning focused on health outcomes, rather than the hardware product

Dramatically lower price and focus on long term retention for software product

Sell hardware & health coaching at cost, to lower costs and increase adoption

Focus on generating software business margins (60%+)

Hardware device used as a “hook” or entry point, rather than primary method of monetizing. Used periodically

Dramatically lower CAC to sustain lower price point

Find organic acquisition channels utilizing virality, community led growth and/or UGC

Evaluating these two expansion strategies across multiple attributes reveals their market attractiveness.

*Depends on each specific condition category

 Expanding down market provides us with the largest TAM opportunity, meaning investing in finding product-market fit will provide many, many years of growth.

In order to build a product that can compete down market, major shifts in marketing, product development, and pricing would need to occur. First, dramatically lowering the price requires removing hardware devices from the monthly product, to instead act as an add on. This software first product would:

Focus on a specific condition, such as [redacted] or [redacted]

Incorporate key elements of metabolic health to improve their condition, recommended without a hardware device

Add additional software features, such as community or group engagement with health coaches

Utilize hardware device as a way to personalize software, in an optional way. For example, when using the device, a user may learn that she can [redacted]. The software will then make [redacted] a top goal for the user & provide rewards or encouragement to continue this habit.

Building for the product expansion could take multiple implementation forms, based on the level of ambiguity:

Phased development: Building a robust product with many features, in stages. This approach is best in low ambiguity, high confidence situations.

MVP: Build a product with a minimum amount of features, releasing the first version as soon as possible and then iterating. Best in medium ambiguity and confidence

Experiment: Focus entirely on experiments to prove/disprove assumptions. Best in high ambiguity, low confidence situations.

Evaluating expanding into a lower cost, software driven offering for a lower-income demographic across this framework:

⬆️ High ambiguity, given assumed limited understanding of each condition/persona

⬇️ Low confidence, given limited knowledge of each specific persona & needs

Product Expansion Case Study by Sarah Payne

Product Expansion Case Study

Overview

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Business Model & Monetization

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