At the start of their journey the typical software company will have built a great product for a particular use case. Adding additional software products to a company’s core proposition can accelerate growth by broadening the addressable market and through cross-selling more products to its existing customer base.
Below we explore the three key points all software companies should consider when expanding their product sets.
- Organic product development vs M&A
A growing software company will typically expand its product suite through either an M&A strategy or via organic product growth.
Both pathways can be effective, but the choice of strategy should be informed by the experience of the software company’s senior team and the projected timeline to exit.
The M&A route expedites the opportunity to cross sell new products to existing customers, although it can make the integration of a new product with existing technology more complex. The strategy is a good fit for software businesses who want to expand their product suites at pace and have a clear vision of how they want these products to fit together from an end customer perspective.
Livingbridge-backed CitNOW, a provider of front-office software to the automotive retail industry, has expanded its product suite since our investment with the acquisitions of digital solutions company Auto Imaging, sales-led management tool AutoSLM, aftersales software supplier RTC and German-based customer relations platform Dealerdesk. The acquisitions have enabled CitNOW to expand its geographic presence, open up new revenue streams by adding products to its platform and broaden its offering to its existing customer base.
The alternative pathway of organic product growth is an option for software companies where owners and management teams are product-focused and have strong technology backgrounds. Organic product growth is challenging, requiring significant investment and time to develop and add new software to a platform. However, it allows for a solution to be built from the ground up and ensure full integration with existing products, reducing the risks associated with M&A led growth.
Livingbridge portfolio company TitanHQ, a cloud and software-as-a-service security vendor, for example has accelerated its growth through increased investment in product development and talent, resulting in the organic launch of an advanced Anti-Phishing solution post our investment which is gaining strong traction across all customer groups.
- Siloed products vs a single platform
When adding new products to a software platform, the key strategic question for management will be whether to integrate new products on a single platform or keep additional offerings siloed.
For the software purist any acquisitions or technology developed internally should roll up into one platform that gives users seamless access to all modules through a single pane-of-glass. A full, seamless integration is complex to execute, but when done effectively can provide an uplift to a company’s valuation when it is sold, as well as driving user experience and facilitating cross-sell. It is important that management teams have clarity on the commercial benefits of pursuing an integration, given the complexity and investment required. An alternative approach to full integration is to acquire new products and keep them completely siloed, with the focus entirely on fine-tuning cross-selling conversations across sales teams and back-office synergies. Whilst this approach is a trade off vs a fully integrated platform, several software companies have expanded successfully without undertaking a full-blown integration of the product suite.
The question for any software company is how integrated the product set has to be to grow revenues and create value over time? The route to market should play a key role in this decision – our experience suggests where the product is sold via a Channel partner or Managed Service Provider integration is more important given the complexity of end-customers they manage.
- Cross-selling is key
Whether expanding the product set organically or through acquisitions, cross-selling to the customer base is the ultimate strategic reason for bringing new products onto a platform.
If cross-selling is to work, new products have to open up business lines that are complementary to the core offer. Livingbridge portfolio company Mobysoft, for example, a provider of predictive analytics software to social housing landlords, has invested in deepening its product set to provide customers with analytics tools that help to mitigate welfare reform and reduce arrears in addition to helping social housing officers to manage workloads and improve rent collection efficiency.
To grow share of the customer wallet, businesses must understand how the additional services they want to sell to customers align and address the specific needs of existing clients. Detailed understanding of the key purchaser is critical: do they differ from the core product sold; is this a new product requiring a new budget or displacement of a competitor, and if so what is the contract period for that customer.
A final word
Ultimately the route you take completely depends on where you are on the growth journey, and having a complete understanding of your customers’ needs and wants. Assessing both together will help determine what route aligns most with your business.
Above all, your “right to sell” a new product will always be closely linked to the customers experience and engagement with your existing product. Ensure your Customer Success team and NPS are strong before considering new product expansion.
To learn more about navigating the growth journey, read about the key inflection points for software companies, the obstacles hindering progress, and how to move past them here.