Decide whether to buy or build the next product

1. The constraint and what graduates it

Item	At this stage
What product means here	The goods, services and results the business delivers
What breaks	Changes to a product that already succeeds, a cash cow, now make it worse; growth still needs something new
What graduates it	Buy the next product through mergers and acquisitions, or build it through research and development, hunting for the next rising star to add to your suite
How far ahead you look	One plus year out, as a matter of course

Why the proven product is left alone. At this size you probably have a pretty good product. People like it, buy it and renew it. Keep trying to change it and you run into a base of customers five years old, or eight, and a lot of them say, in effect: do not mess with it, we like it, it works, leave it alone. Messing with it more sometimes, oftentimes, ends up just hurting the core product.

2. Sort your products on the growth-share grid

A very famous quadrant, drawn up by a consulting firm, sorts products by how fast their market is growing and by how much of that market you hold. It gives, kind of, four product life cycles:

Box	Market growth and your share	What it means for you
Star (the rising stars)	A growing market, with your share in your market, your percentage of the pie, growing too	The kind of product you are hunting for next
Cash cow	A lot of market share, in a market that is maybe not growing as much: you are plainly the market leader, the dominant player	It throws off cash, month after month. A lot of times the product you have at this point is this one; obviously that depends on the market you are aiming at
Question mark	Not established on this page	Unknown: these are bets
Dog	A low share of something that is not growing	Probably just a mistake: something you thought would be a really good idea that turned out not to be

Bet instead of pushing the cow. Rather than messing with the cash cow to make a rising star of it, you basically have to bet on how the next five years or so might look, and then buy or build that rising star.

3. Pick the bet as an investor would

At this point you kind of function like an investor. It sounds crazy, it is said, but these are the questions:

• Market trends. Where is the market going to be in the next couple of years? What are the trends?
• Adoption. What are the adoption rates of new technology?
• Something to bet on. What is happening in the market that you can bet on, so that you are there when demand surges?
• Service lines. What service line are people asking for today, and what will they ask for tomorrow?
• Geography. What geography or country is underserved? This one, it is said, is little spoken about. You might have crushed the US, and you might have crushed the UK, but maybe Mexico, or one other market (section 12), is a really interesting market you could go after.

A bet read off the trends. In one business described, the team looked at the market trends for its industry and noticed that AI was actually taking out a lot of the smaller players. The decision, recalled as made about 16 months earlier, was that its next big product needed to be AI-driven technology. That product is said to be rolling out now and to be incredibly successful. People might have asked, 18 or 24 months before, whether that was really so. The lesson drawn: you start to see the trends, read about them and see what is coming, so you start building, and a year or two later you have your next product.

4. Score the bet for its risk-adjusted return

What you are optimizing for is the highest risk-adjusted return. The score used is named for the initials of its questions, the same score that ranks fixes to an existing product on SOP 148, section 3, and SOP 157, section 3 (here called the "rice formula"). As put at this stage:

• Reach. What is the reach of this potential market or product?
• Impact. What impact do you think the solution is going to have?
• Confidence. How confident are you that you will achieve this outcome?
• Expense. How expensive is it to make this bet, in time, money, resources and so on?

Then comes the question itself: do you buy, or do you build? It is framed as a classic business case-study question. There are horror stories on both sides of it, and amazing unicorns on both sides.

5. The questions to ask when weighing a purchase

When you are weighing a purchase, ask:

• Core or side? Is this very core to the business, or could it kind of sit off to one side, simply a good return of capital?
• Cross-sell. Is it something you can cross-sell to your existing customers?
• Cost savings. Are there savings to be had by bringing the company in, if it is in the same industry?
• A platform company. Will your company now become a platform company? The famous case is a waste business: the man behind it did nothing but keep buying trash routes until it became one of the biggest trash-management businesses, or the biggest, in the US at least. Doing it on your own costs money and time, set against taking a company in.
• Speed. Is there a race coming, where getting one year or two years ahead makes a material difference? In a market unlike that, lawn care or trash, there probably was not much in the way of technological breakthroughs; the man in the waste case still ran a rapid scaling system, through acquisition, and it obviously worked well for him. Where speed is a massive factor, you may lean more toward acquisition.

Core or not, and how fast. If speed is super important and the thing is not going to be core to the business, it might be something to acquire. If it is really core to where your future lies, building it in house might make more sense. Building tends to give better results over the long term. Where market dynamics require speed, that is when the other variable comes into play; so do relationships, or regulatory agreements such as licensing that take years to get. And sometimes the purchase is just for the underlying assets or the IP, which you could then cross-sell to the customers you already have.

6. Know which piece you are paying for

When you buy something at this point, think of it as buying a business that becomes a product of your business. As with a product, kind of as at the earlier stages, not every piece of it is useful to you. So ask what you are buying:

• the customer base
• the team
• the product
• the potential
• the list

The view here, put tentatively, is that this is where much of the rest fits: you have to know why you are buying the thing, and which piece of the business you want most.

7. Price a customer base whole, and look for customers you already share

The example, with a made-up number. One buyer described acquires private wealth-management firms: he buys the book of business from people retiring from private wealth management. Call the cost to acquire one private wealth-management customer $10,000; the number is said to be made up. The conclusion: it is literally cheaper to buy the whole base in one shot than it is to go out and win customers one or two at a time through marketing, events, conferences, speaking and the rest, over time.

What it suggests. Sometimes it might make even more sense to break the decision down to your customer acquisition cost times the entire customer base, especially where you have a big cross-sell: the new customers clearly merge into the journey you already run.

The leading indicator. How can you tell the cross-sell is real? The easiest way to know that is if you already share those customers with them. There are, it is said, a zillion case studies of people certain they would cross-sell everything, and then nothing happens. So the view here, put tentatively, is that the easiest leading indicator for this kind of deal is customers already being shared: the deal just formalizes that and makes it easier.

8. Buy a vendor to get into a channel

One last consideration. Say you want to expand into a new marketing channel, with TikTok as a crazy example. At this size you could build out the whole team for it, and that is possible; but sometimes buying a vendor, a specialist in it, is simply the sensible move. The reasoning offered, put to the vendor: if you can manage 10 customers, well, I am a really big one, so we can take 100 percent of your resources and point them at us. That might just make a ton of sense.

There are different reasons to acquire a business in order to grow; these are offered as some thoughts, and at least as a framework to think through. Paying an agency to teach your team a new platform, rather than buying a vendor, is SOP 45 — Engage an agency as a teacher.

9. When you build

Hire the people who have done it. If you are building, ask who has already done this. Sometimes you can simply go hunting for whole teams. Sometimes you go after a competitor's number two, ask who all the people that person knows are, and hire them, willing to pay massive signing bonuses because that is way cheaper than trying to buy a business. The question becomes the relative return: this money can go to buy something, or it can go on massive bonuses to acqui-hire or to bring in whole teams from another company that already function well.

Before you build, ask:

• Do you understand the space well? If not, it might be something to bring experts in for.
• Is it worth the delay to ramp up? That is the speed component.

Deciding, role by role, whether to train people or hire ready-made skill is SOP 44 — Buy or build talent.

Pros and cons. The pro, obviously, is the same culture. The cons concern speed, plus cost and risk when set against buying.

Flag: whether building costs more or less than buying. Hiring away a competitor's people with massive signing bonuses is called way cheaper than buying a business. Among the cons of building, cost and risk are listed as compared to buying. This page does not settle which reading is right.

10. The bet, in short

At this level you have your cash cow, and you need to make a big bet: either you buy the next thing or you build it. The core product is not something to keep messing with. Normal break-fix work goes on, maybe a couple of changes, but there is no huge order-of-magnitude change to it at this point: that will probably have to be a new product or service altogether.

11. The checklist

Question	The answer
What breaks at this stage	Changes to a successful product make it worse, yet growth needs something new
What you do about the core product	Leave it alone, apart from normal break-fix work and maybe a couple of changes
The routes	Buy through mergers and acquisitions; build through research and development
What you are hunting for	The next rising star to add to your suite
How far ahead you look	One plus year
How you pick the bet	Kind of as an investor: trends, adoption rates, what demand will surge toward, service lines asked for now and next, an underserved geography
What you optimize for	The highest risk-adjusted return, scored on reach, impact, confidence and expense
What leans toward buying	It might be something to acquire when speed is super important and it is not core; relationships, or licensing that takes years to get; sometimes, just the underlying assets or IP
What leans toward building	It might make more sense when the thing is really core to your future; building tends to have better long-term outcomes
What you are buying, as asked	The customer base, the team, the product, the potential, the list
How to price a customer base	Sometimes, your acquisition cost times the entire customer base
The leading indicator for a cross-sell deal	Customers already being shared, in the view offered
Another way into a new channel	Sometimes, buy a vendor that specializes in it
How to build with people who have done it	Sometimes, hunt the teams; sometimes, go for a competitor's number two and hire the people they know, with massive signing bonuses
What to ask before building	Do you understand the space; is the ramp worth the delay
The pro and the cons of building	The same culture; speed, cost and risk compared to buying (see the flag in section 9)

12. What this page does not decide for you

• What the buyer would pay for 500 clients in the example. Not established on this page.
• The second market named beside Mexico. Not established on this page.
• Whether building costs more or less than buying. See the flag in section 9.

13. What this page does not cover

Valuing a business, financing a purchase and due diligence are not covered on this page. Running the research and development work itself is not covered on this page.