The world of software has changed—you now have to be a multi-product company to win. Specifically, you have to have multiple products that work better together, or as we call it, a Platform of Compounding Greatness (PCG).
There are four methods to becoming a PCG, as described in our essays: Follow the Workflow, Follow the Money, Single Source of Truth, and Data Enriching Data.
Follow the Workflow (FTW) is the strongest form of multi-product. It is centered around a simple truth: software applications exist to automate. A company deploying this strategy builds applications that mirror user’s workflows, extending throughout their flowchart of responsibilities. There is no better example of this than ServiceNow. Using the company as a case study, we’ll take a deep dive into FTW.
From its start as a workflow engine, ServiceNow executed the FTW strategy to build a multi-product application platform with $6.9B+ in revenues and approximately $115B in market capitalization (at time of publication). We’ll start this series by sharing an overview of the ServiceNow story, and then feature interviews with three key leaders in the organization’s journey to cover product, go-to-market, and pricing:
- Dave Wright, former Chief Strategy Officer and current Chief Innovation Officer
- Alex Saghatelian, who served as the Global Vice President, Monetization Strategy
- Kevin Haverty, former Chief Revenue Officer and current Vice Chairman, Global Public Sector
Theory is good, but practice is better. This essay is intended to be pragmatic and immediately applicable to companies trying to become a PCG, so let’s dive in.
The ServiceNow Story In Four Headlines
Finding Product Market Fit in IT Service Management (ITSM)
“We thought we had this incredible workflow platform that you could build anything on top of. And then we would go out on sales calls and have these terrible conversations trying to sell it. The customer said, “What does your product do?” - Cofounder, CTO, Pat Casey (Stanford Business School Case E-771)
Founded in 2004 as a workflow infrastructure company, ServiceNow started out as a platform with no product market fit. It was only once founder Fred Luddy focused on an area he knew well, IT service management (ITSM), that the company found success. Being built as a platform ended up playing an important role down the road, but for now, the company was simply about service management. Luddy knew the space: his prior company was Peregrine, a public leader in ITSM.
In our interview with Chief Innovation Officer of ServiceNow, Dave Wright, he explained it like this:
“No one could understand the platform [they built], so they sat down and said, ‘This platform is for building service apps on. What can we do to show people the power of the platform?’ They built a service management solution as a demo of what you could build on the platform. They only did that because they were all ex-Peregrine. If everyone had been ex-Siebel, they would have built a CRM system, or if they’d been ex-SAP, it would have been an ALP system.”
This initial market powered ServiceNow to $92M in revenue in 2011 and an IPO in 2012.
Expansion Within IT
ServiceNow found product market within ITSM. The only issue was TAM. Investor Kerrisdale Capital Management argued in their blog post in 2012:
“Leading technology research firm Gartner estimates that the IT Service Management market opportunity is $1.5 billion, and is growing at a modest 7% per year. Furthermore, Gartner's research predicts that only 50% of IT organizations will move to SaaS by 2015, implying that the total market opportunity for NOW's ITSM business is less than $1 billion.”
ServiceNow was catering to a small fraction of the overall IT market. This plus the company’s ~$2.2B valuation at their IPO resulted in strong pressure to expand. Thankfully, there were numerous adjacent markets that touched ITSM that were much larger and enjoyed favorable competitive environments against legacy players. A young, scrappy $2B rookie could dance circles around the aged prizefighters of yesteryear—BMC, CA, HP & IBM.
Fast forward today in 2022, ServiceNow’s revenues in IT alone are $2B, exceeding the size of the initial ITSM TAM—and it is going far beyond the employees of IT.
Expansion out of IT
In 2014, when ServiceNow started to notice that non-IT users were also building applications on ServiceNow, then-CEO Frank Slootman drove an agenda of aggressively building products outside of the IT realm. To spark this transformation, they completely reorganized the company into five business units: four functional units and one somewhat confusingly entitled “platform as a business.”
In our interview with former CRO of ServiceNow, Kevin Haverty, he described it like this.
“When we hit about a billion, we needed more products to continue the growth. There was still plenty more to get inside IT, but to get to the big numbers, you really need to be in multiple domains. That’s when the corporate structure shifted. [The executive team] decided that they were going to create a general manager structure. Inside the product organization they created GMs of four or five different business units. One for ITSM. One for ITOM. Then we carved out HR as its own domain (today we call it Employee Workflows). Then we opened up a security domain, a customer service management one, and then platform as a service, which today we call Creator Workflows. CEO Frank Slootman made a decision that we were going with that structure, and within a week, it was there.”
The temptation for many forward-thinking founders is to lead the market. You know the phrase, “You can lead a horse to water but you can’t make it drink?” The same can be said of software buyers. Having customers ask for a product expansion is the easiest/best way to know where to go multi-product, which is exactly what ServiceNow did. More from Kevin in that same interview:
“What led us to these markets, by the way, was customers taking us there. The great thing about the ServiceNow product is that the workflow is really how employees interact with each other to get their work done. We had a lot of customers dropping the ServiceNow IT service management app into HR and using it for HR functions.”
By 2017, non-IT workflows comprised over 20% of revenue, and by 2021, they accounted for nearly half of ServiceNow’s revenue. Not bad for starting off with a less than $2B TAM!
In 2020, ServiceNow’s new CEO, Bill McDermott, announced an orthogonal expansion—Industry Solutions. ServiceNow was not only extending workflows but also verticalizing them. He was offering Vertical SaaS for enterprise customers!
ServiceNow in 2022
Today, a decade after initially going public, ServiceNow has “Followed the Workflow” to expand, first within IT and then into other functions within a customer. It now boasts four application areas—Customer, Employee, Technology, and Creator.
This multi-product approach has allowed ServiceNow to scale at historic speed and efficiency. Many now view ServiceNow as the future of enterprise apps.
From an overlooked niche player to a sprawling, fast-growing, high-margin giant, ServiceNow executed the FTW strategy to build one of the largest and most important software franchises (or, Platform of Compounding Greatness) in the past 20 years. Doing so required incredible execution across product, sales, and pricing/monetization.
To put together this case study, we interviewed three leaders who were there during this journey. We will be publishing each of these individually in the upcoming weeks. In the meantime, here are the highlights:
Product Strategy (Dave Wright):
If you decide to pursue a FTW strategy, perhaps the most difficult decision is over which workflows to follow. There will be far more options than you can imagine, and each step needs to be carefully considered. We talked with Dave Wright about how to do this, and he offered the following:
- The starting position is perhaps the most important: There is a tension that comes when your ambition is to become a platform. That first product has to be a visceral, real thing that solves a concrete problem. However, the better you get at solving the first problem, the tougher the transition will be when you jump to multi-product. To make your life easy, make sure the primitives that your first product is based on will naturally transition to platforms. For ServiceNow, it was about managing tasks and assets.
- Everyone needs an Eric Hemmer to help the customers: Eric was a scrappy generalist who was willing to lead customers to the next level. You need to make sure you have the right people as you start to expand, as they will set the DNA of the organization. If your employees believe you can be a platform, your customers will too. “Initially, [the expansion outside of IT] was customer-led [...] Eric Hemmer had started going around, speaking to existing ServiceNow customers and saying, ‘You could take a copy of the IT incident module, and you could modify it, change the forms. Because it’s a platform, change the classifications and you can use this for human resources requests.’ [...] He was pushing the story, and we were realizing that people were finally understanding that service management could move outside of IT.”
- Follow a maturity model as customers grow: Just as ServiceNow followed customer demand to pull the product, they also followed customer growth. As a company scales, complexity increases exponentially and the system requirements do too. The products you launch should track the customer's journey.
- Building platforms is about balancing trade offs: How do you think about resourcing platform vs. product? This question is another way of thinking about the trade-off between bespoke flexibility and the power of standardization. Unfortunately, there are no universal answers, and this tradeoff shifts as you move down from the UI to the workflow to the data layer. The further you go, the more important the power of standardization and taxonomy are. "There are two routes that you can go down. You [can] follow a Gmail philosophy, where it’s like, ‘This is what you’re getting. You won’t even know when you’ve upgraded, but we’re not allowing you to have flexibility around what it looks like.’ Or [you can have] a system where you can not just add and remove fields, but choose which widgets are being shown, choose the layout of forms, choose what information density you want. We do try to give people as much flexibility as possible, but if you give people enough rope, they’ll hang themselves.”
- Focus on creating the best experience, not just being first: If you want to transform something from a platform perspective, “you don’t have to create something new. You’ve just got to create something that’s so good that it far surpasses whatever someone had in the past.” Create something that’s Better Together!
Pricing Strategy (Alex Saghatelian):
Pricing is both an art and a science, weaving together many elements to drive growth and business success. There is no right answer or one size-fits-all approach, as every pricing exercise is highly situational—especially since it is so impactful. A firm has to carefully strike an integrated balance between things like market share capture, profit, and churn. In our discussion, Alex Saghatelian shared some strategic frameworks you can use, and perhaps most importantly, the questions you should ask:
- Pricing is highly cross-functional: Within a firm, the pricing function touches almost all aspects of a company's success across product, sales, marketing, customer success, finance, and operations, to name a few. When thinking about B2B pricing and packaging frameworks, it’s important to carefully consider the various components that culminate into pricing execution success. For example, in sales lead motions, there is no perfect list price or packaging approach, given the deal packaging and discounting negotiation dynamics at play. In product-led growth motions, you have to iterate to optimize price points and packages.
- Pricing should align to value: When pricing and packaging to value, it is critical to keep the customer benefits at the center, with an understanding of their next best alternatives and degree of choices you provide. ”Understanding your customers, the market, and the value drivers of innovation that you have in your portfolio is critical [...] In a SaaS business model, there’s an expectation of ongoing innovation. How do you actually support that ongoing innovation in a subscription business to drive continuous value and ongoing increases in value realization for your customers?”
When building out a FTW pricing strategy there are dozens of questions to consider. Here are just a few that Alex recommends you consider when making decisions around pricing:
- What features to package & price: What is a feature vs. a product? What degree of innovation fencing is reasonable to support expansion of customer lifetime value? How do you decide what is included in the product package and what is left out? Where does Product One end and Product Two begin? Are we ready for good/better/best packaging tiers?
- Multi-product value complications: How much should you anchor on pricing and packaging consistency when selling multiple products, each with their own value proposition and value drivers? What if there are multiple customers within a given function, or net new functions and buying personas that emerge? How do you use pricing and packaging to facilitate cross-sell across the portfolio?
- Frequency of pricing changes: As you move into multi-product, when do you raise the level of your pricing across your portfolio lineup? When do you change the unit of measure of the pricing and or introduce a new package tier? If you sell to multiple customers, should you maintain the same pricing levels and structures? How do you move install-base customers along the journey as you make changes—carrot or stick?
- Other big questions: When you’re launching a new product, do you bias toward simplicity and adoption with the pricing model out the gate, or do you do more diligence to create a durable pricing model that balances simplicity, value capture and change management? How many packaging choices do you give—a la carte vs bundle vs tiered options? As AI impacts accelerate, how do you quantify the value drivers to support making it a tailwind vs headwind for growth?
GTM Strategy (Kevin Haverty)
As you go multi-product and expand throughout an organization, there is an existential question you must answer: when (or should) you verticalize your GTM org? Do you split the team around functions they sell to? Around industries? Around customer size? ServiceNow went with the radical choice: expanding from one GTM team to five in the span of a month. This highly unusual experience led Kevin to recommend the following:
- Reputation is how you’ll get started: “In the early innings of going multi-product, you’re going to win some business based on your reputation, assuming it’s a good reputation and your customers love you. Your advocates will help you on your behalf, but that’s only going to get you so far. The challenge is that ServiceNow was an IT product with IT lingo, and HR people wanted an HR product [...] Know who the buying persona is and be able to get to them. Then, when you get to them, know how to speak their language. That’s why we built out the solution sales organization.”
- Build specialist teams to target new personas that your core team cannot reach: Your team will do their best, but solution sales will be necessary for the first push. This is especially true before you specialize your sales team by customer type. "In the early days, Solution Sales was very small [...] We started hiring salespeople who had expertise in those domains: HR specialists, ITOM specialists, security specialists."
- You’ll have to simultaneously push your core product and your new products: “If you’re all about the new product or market and you get your whole sales team over there, your core product starts to slow down and it’s really hard, with the law of numbers, to get the new product to make up for the revenue that you’re not growing in the core product. The trick is to do both. Continue to grow your core product as you’re getting the new product revenue going. That’s where adjacencies, or similar types of products, are important. [...] We came out with software asset management a few years ago. Our sales team just ate that up because they could understand the value proposition. It was being sold inside an organization that they already knew, and it was really compelling. It was like, ‘If you use our software asset management, analysts say that you’re going to reduce your spend on software in total by 15%. We estimate that you spend X amount of dollars on software every year. That means you’re going to get this much of a return, and it only costs this much.’ I don’t want to say it was an easy cross-sell, but it was a really logical cross-sell for us.”
- Keep sales teams focused with pricing floors: The temptation with new launches is to go too cheap, or too wide. ServiceNow avoided this trap. “A pricing floor is a pretty good way to keep your salesforce pointed where you want them. I’ll give you an example that predates me: I know when David Schneider and Dan McGee—and I’m sure Scarpelli was involved as well—came into ServiceNow [...] they came up with a minimum $42,000 annual contract value. Below that, it’s not profitable for us and it’s not really going to scale. [We decided that’s] just not who we’re going to be.”
- Don’t over/under index too quickly: These things take time, way beyond the one or two quarters that Wall Street will push you to have. To ensure that you are getting accurate data, “it’s learn, learn, learn as you’re going. Try to get a lot of at-bats, so you have a lot of data to inform you on why it works, when it’s working, and when it’s not, why not? If they’re solvable things, then stay at it. Do we have a differentiated product? Would the market benefit from us being there? Can we articulate the difference and the value? It’s not just about whether we could build this great product. Should we build this great product?”
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