In my previous posts, I’ve talked about two flow Items from the Flow Framework™ and how they are analogous to other types of financial transactions. Tech debt is similar to financial debt and risk items are similar to security costs. Today, I’m going to discuss how defects are similar to warranty costs.
Why do we spend time fixing defects? It’s obvious why customers want defects fixed, but what’s in it for the software company?
Software vendors fix defects because if they didn’t their customers would leave. That may not be so bad in the old days when you’d pay one time and buy software off the shelf, but now that software is priced as-a-service, you expect ongoing enhancements and fixes. Even back when software was sold in shrink-wrapped boxes, you’d still be able to get patches to download.
In a SaaS (Software as a Service) model, renewals are king. If customers get fed up and don’t renew, the metrics look bad, investors put their money elsewhere, and analysts decide to recommend other companies. Which is where defect fixes come in.
So in this financial modeling analogy, defect fixes are analogous to warranty costs.
When a physical product goes out the door, it often has a warranty associated with it. The manufacturer promises to fix anything that fails within the first 30 days, 90 days or even the first year. Now, you’ve paid one time for the product, but the company realizes that you may want to buy from them again at some point, so they’re willing to lose a bit of money on you after your purchase.
With software, you’re paying monthly or annually and in some respect, you’re never out of warranty.
When the software ships, or gets pushed to the cloud servers, the vendor has either implicitly or explicitly made claims about what the software can do. Either way, when a flaw in the software is found, the vendor should make good on that promise and fix the defect.
This warranty cost can also be thought of as customer retention cost.
When it comes to trying to figure out how much capacity should go towards features vs. defects, the overarching goals of the business should be taken into account.
- Is the goal to retain the customer through a relatively mature product? If so, it’s likely that the focus should be on defects.
- Is the goal new customer acquisition? Then net new features are probably the best way to go.
We fix defects because we’ve made a pact with the customer. We’ve promised them working software in exchange for their hard-earned dollars. Fixing defects costs money in the short term, but by helping customer retention, ultimately pays off in the end – a Gartney study projects that 80% of future profits will come from just 20% of your existing customer base.
Next time, I’m going to talk about the fourth and typically most talked about flow item, features. We all know pourquoi we build features, but how would you describe their importance on a financial statement? Where do they come into play? After that, I’ll dig into how to bring this all together and attempt to answer the question: How do you determine your Net Product Value?
Want to know more about how to manage the flow of defects?
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