Product profitability and retirement framework

Author: @Cavalier_Eth
Reviewers: @JosephKnecht @DocHabanero @anthonyb.eth @edwardk

Summary

Product profitability is a focus for Season 1, so Product Nest launched the Product Profitability Initiative. We propose a framework for when and how products are retired due to unprofitability, which includes pre-launch analysis, time since launch, and ongoing profit margin. Under this framework, $BED would be flagged for steps to be taken to improve its profitability.

Please review and share your feedback so that we can finalize a robust framework.


Situation

Index Coop seeks to make investing simple, safe and easy. To do this long term, and build an enduring organization, Index Coop needs a path to profitability. Our share of product revenue needs to exceed the costs directly, and indirectly, associated with building, launching and maintaining them.

With “Building a portfolio of sustainable products” as a DAO objective for Season 1, Product Nest launched the Product Profitability Initiative.

The KPI used to drive the outcome is that products have a 70% Contribution Margin where

Contribution Margin = (Revenue-Cost)/Revenue.

  • Revenue is defined as the revenue to Index Coop after fee splits
  • Costs are the direct gas costs from rebalancing
  • Contribution Margin will be averaged over a 3 month period, to account for rebalancing periods

Notes:

  • Contribution margin does not include operational costs (eg, salaries, marketing, rewards) or liquidity mining and other incentives. Even with all of our products having a contribution margin of 70% or greater, indirect costs of sufficient size would continue to make us an unprofitable organization overall.
  • As a growing organization, we expect to “invest ahead of the curve”, i.e. our costs can exceed our revenue for a period of time, while we create and grow products to profitability.
  • Set pays some rebalance gas costs, so not all gas costs are currently realized by Index Coop. This framework assumes that at some point, Index Coop will bear the actual costs.
  • We have previously retired $CGI, but we would like to formalize the process.

A key outcome of the initiative is for products to be scrutinized on their contribution to Index Coop’s profitability before launch, and once launched. This is the first time that products have been assessed on profitability, so we acknowledge that there will be an adoption period. We expect product profitability to take a central role in the planning and maintenance of Index Coop as an organization.

Complication

  • To meet our ambitions, we need massively successful products, that reach tens and hundreds of millions of AUM each
  • We currently have a suite of products, of which only some are profitable, and until recently we have had only limited visibility on individual performance
  • Products were launched in different market situations, with different incentives, and level of support from Index Coop
  • It’s impossible to know the profitability of products before launch, but we would like to increase the rigor of pre-launch analysis
  • We need to listen to the market, and take action to deprecate products we no longer believe will become profitable.

Questions

  • At what point do we lose confidence that products will reach profitability?
    → We propose 9-12 months is sufficient, depending on rebalance period
  • What is the process to retire products?
    → We need a framework and outline one below
  • Who has the decision-making rights?
    → An IIP in the current product governance framework
  • How does this change our product development process?
    → More, honest scrutiny about the performance of our products
  • How are existing and future methodologists affected?
    → The profitability hurdle and timeline is clear
  • How do we communicate these changes?
    → This forum post, direct discussion with partners, and at recurring Index Coop meetings

Proposed Framework

All products are experiments, so we want enough time to find product market fit, without being loss-making indefinitely. Product nest will perform the analysis, reporting and any retirement, but the decision with require an IIP.

Before launch

Ongoing transparency

Ongoing reporting and calculation for product profitability - so everyone knows what’s going on

  • A Dune dashboard and simple query for all products in one place (WIP)
  • Product profitability reported monthly by Finance Nest

At 6 months since launch

Any product with <70% Contribution Margin gets flagged and we suggest the following:

  • Revise the rebalancing policy to extend intervals or reduce cost
  • Increase the streaming fee (increase to market if currently lower)
  • Terminate any LMI or other incentives paid by Index Coop

First rebalance after 9 months since launch

Any product that is still loss making in the first rebalance after 9 months:

  • Product updates the community 1 month ahead of retirement proposal
  • An IIP is drafted to retire the product

(eg for a product with quarterly rebalances, this would occur at 12 months since launch)

If retirement IIP passes

  • Comms shared in appropriate channels and product page that the product will no longer be rebalanced
  • Clear instructions for how customers can redeem for underlying
  • Index Coop no longer markets or has it on website (ideally in archived section)
  • Set no longer features the Set prominently on website
  • Pay out accrued fees once every 6 months (if worthwhile)
  • [optional] Once Dex liquidity disappears, have a “redeem for ETH” option on website

Next Steps

  • Product Pod: Gather feedback from the community on this framework this week
  • Analytics Pod: Finalize Dune dashboards to measure each product’s Contribution Margin
  • Product Pod: Analyze all existing Index Coop products and identify any that should be flagged for profitability - currently $BED would likely get flagged.

Links:

14 Likes

Appreciate you posting this.

It’s also important to note that methodologist do not pay IC when their product operates at a net loss, but they receive a check when the product operates at a profit. This means that IC takes all the downside and splits the upside.

As IC seeks to become profitable, it’s important to retire products that are continuously operating at a loss.

Interested to hear community feedback!

5 Likes

Thanks @Cavalier_Eth

This provokes a few (unstructured) thoughts and maybe a few suggestions.

It’s great to see the analytics and more visibility on the costs we are incurring.

Low AUM products have a number of costs:

  • Gas to rebalance.
  • Time to rebalance
  • Time to market / promote
  • Liquidity incentives / liquidity provision costs (for coop liquidity)
  • Reputational cost to having "Unsuccessful " products on the market.
  • Reputational cost due to access costs (high slippage buy and sells) for our users.

They do, however, have some advantages:

  • We still dominate the market, for each sector (DeFi, balanced, metaverse, infrastructure, small-cap DeFi).
  • We have a full (and growing) suite of product offerings.

So, it could be a case of during a bear market, nothing will grow to the size we desire. However, they are maintaining market dominance (and Lindy) ready for the next Bull (which may be sector specific).

There is always a danger of cutting a product, and then launching something very similar in 12 months’ time when market conditions change.

Suggestions

  1. If we can build a product on L2 and rely on exchange issuance it can save liquidity costs (but has other costs as we educate our users).
  2. We need to have all the sector products with a post gas fee. Then Methodologist and the coop are aligned in controlling costs.
  3. We can try to reduce the gas cost of rebalancing via technological uses. This could include:
  • rebalancing using an aggregator (0xMatcha etc).
  • Adding more dex’es with deeper liquidity allows fewer rebalance trades (Bancor v2.1 has much better liquidity for some tokens, but is inaccessible at the moment, Bancor3 should fix this).
  • Rebalance via on-chain auctions
  • rebalance via L2 / zk roll up solutions.
  1. Adjust the methodology so rebalances have less turnover each year.

Larger and more frequent rebalances may allow a more responsive tracking of market movements. However, I feel that many of the methodology choices have created a significant turnover that adds little value to our products.

Note Liquidity weights in product methodologies, may help reduce the cost of issuance/redemption arbing and so keep closer to NAV. However, the benefit may be small compared to the cost of rebalances.

Prelaunch suggestions

  1. post rebalance gas fee splits.
  2. methodologies should try and reduce the annual turnover of the product (fewer rebalances, only rebalance to add or remove tokens). I personally wonder if using MCAP bands rather than square root would be better

This is something that IIP-138 proposed for MVI (which I supported):

Post-launch suggestions (say 6 months)

Assess AUM and profitability.

My intention is to allow us to maintain low AUM products with minimal support in case they get a better market fit in the future. If we reduce the costs to the coop to zero, then it becomes a (softer) discussion around customer experience/sector combination /offering a broad portfolio.

2 Likes