Alpha is a financial measure used to track the performance of a specific investment. It measures the excess return relative to the return of some benchmark.
For example, if you invest in a stock that returns 15% in a given year, while the Fortune 500 index returns 10%, your fund would have achieved positive alpha of +5 for the year. Essentially, you beat the market (time to plan for retirement!).
So what is product alpha?
Here is how we define it: Product alpha is the measurement of value that a differentiating process creates compared to a competitive benchmark process.
Most firms (including Versett) go to great lengths to describe the methodology and quality of our proprietary process. But these elements are only one part of delivering consistent results. More importantly, it is how our process differs relative to our competition that matters more.
The same goes for your business too. Complimentary and substitute products are widely available, and your customers know it. So how do you stand out? Understanding the concept of product alpha can help address this.
Practically, this means that while the strategic, design, and engineering tactics you employ are consistently adapting to best practices, to truly “beat the market” and create positive alpha, you have to incorporate proprietary tooling, processes, and strategies that are significantly better and differentiated from the market to create performant products.
Put another way, it’s not the sophistication of the process that matters, it’s the quality and outcomes of the process relative to the competition.
So while you can do all of the design thinking, post-mortems, discovery sessions, process checklists and everything else, these incremental improvements do not tackle a fundamental problem: most of the market is doing it too.
Outperforming the market
Is it possible to consistently outperform other products? I think it is, but it often requires reframing how you think about your customers, your business model, and ultimately the products you offer and how effectively you adapt. This reframing is especially true in digital environments.
Most mobile apps, e-commerce sites and digital platforms fail to deliver superior relative performance because they are created using the same flows and the same practices by the same types of people placing post-its on a whiteboard.
These processes are not inherently wrong, but they result in zero alpha.
So how do you increase the frequency of delivering positive product alpha across your organization? Here are a few of the systematic initiatives we have found helpful when thinking through this with several of our clients.
- Learn Better, Faster
One of the most significant and sustainable competitive advantages a firm can develop is the ability to consistently learn and interpret knowledge faster than your competition. (Knowing what to learn is another tricky part). Apply this systematically throughout your organization.
- Leverage Data
You can only benchmark performance if you fully understand the metrics of the business. Be analytical, but more importantly, define how to leverage this data to drive decision criteria across your products.
- Avoid Outcome Bias
Howard Marks of Oaktree Capital has a saying: “The fact that something worked doesn’t mean it was the result of a correct decision, and the fact that something failed, doesn’t mean the decision was wrong.” Find ways to understand the real underpinnings of successes and failures in your product decision making.
These are just a few of the thousands of factors that directly contribute to positive product alpha. To begin marking progress holistically, audit the strategic frameworks that you are currently employing across your organization.
Ask yourself—Which processes consistently deliver results? Which ones are failing? Do we follow a process just because it’s best practice?
These will help guide you to better understand what levers to pull to build a more effective model for product alpha.
It’s an endless pursuit, but a rewarding one.