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
- Profitability analysis to be done before launch - so we can launch with more confidence, eg see Product Profitability Model v1
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.
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