rebelutionary / 2.0

The high price == stable company fallacy / 2005 Apr 11

I recently got yet another email from a customer intimating that we are selling our software far too cheaply, and should really raise prices to make more money and, more importantly to him, convince the customer that we will stay in business.

I quote:

In a conversation yesterday with someone who purchased XYZ Enterprise KM system ... "How are they making any money at $4K for the Enterprise license??? It sounds like this Confluence thing could replace XYZ... They could charge 100 to 1000 times that amount!"

I seem to get asked this question an awful lot - both by customers and by VCs confused about our apparent "flaunting" of their standard software company growth models.

In my mind, this customer (and his colleague) are being seduced by the "high ticket price" == "stable company" idea. Do you really think that companies which charge a lot of money are more stable? I don't - let me explain.

I know we could quite easily sell a few copies of Confluence at $400k - with a larger team of developers, and an army of expensive sales reps armed with PowerPoint presentations and the eponymous "whitepapers".

However we've just added ~$4 million to our costs, and put the entire operation in jeopardy because we now have to sell 20 high priced copies a year just to stay in business.

Add to that the fact we then have to care for our customers. I don't mean care about them (we care dearly about all our customers at the moment), I mean care for them. In this scenario, AcmeCorp is now worth $400k/year to me - so I assign them a special rep to make sure they're happy, that they will pay the maintenance next year, that their golf handicap is always lower than mine etc.

Right now, I don't go out of business if AcmeCorp leaves as a customer - I lose $2k/year. I need to lose 200 customers to lose $400k/year. Call it the "portfolio theory of customers".

Not only that, this is the age of the internet and low priced development around the world. Some smart kid comes along, looks at our products, says "I could build that hunk of crap a lot cheaper thank $400k", sells it cheaper and we're suddenly yesterday's startup darling.

Our VC (because we would have to raise VC to pay for the million dollar sales force we now have) no longer cares because "hey, it was just another gamble anyway - I only need 1/10 to succeed wildly for my fund to make money."

On the other hand, I care dearly because I don't have 10 other companies "gambled on" - I have only one. The classic connundrum, VCs want to take risks to make huge wins, entrepreneurs have all their eggs in one basket so while we are risk takers, we're risk averse at the same time.

(Oh, and incidentally 23 awesome people are now looking for jobs - and personally, we failed.)

Sure - servicing, supporting and managing 2000+ customers is not an easy task by any stretch of the imagination. In fact, it's proving quite a challenge - but it's a challenge we're convinced can work.

Remember in university when they taught you that you were incapable of original thought because all ideas were really extensions of other people's - therefore you must quote your references whether you had them or not? (that always pissed me off no end)

Well, I have references! I recommend reading Paul Graham's How to start a startup essay - in particular this, very poignant, section:

Start by writing software for smaller companies, because it's easier to sell to them. It's worth so much to sell stuff to big companies that the people selling them the crap they currently use spend a lot of time and money to do it. And while you can outhack Oracle with one frontal lobe tied behind your back, you can't outsell an Oracle salesman. So if you want to win through better technology, aim at smaller customers.

They're the more strategically valuable part of the market anyway. In technology, the low end always eats the high end. It's easier to make an inexpensive product more powerful than to make a powerful product cheaper. So the products that start as cheap, simple options tend to gradually grow more powerful till, like water rising in a room, they squash the "high-end" products against the ceiling. Sun did this to mainframes, and Intel is doing it to Sun. Microsoft Word did it to desktop publishing software like Interleaf and Framemaker. Mass-market digital cameras are doing it to the expensive models made for professionals. Avid did it to the manufacturers of specialized video editing systems, and now Apple is doing it to Avid. Henry Ford did it to the car makers that preceded him. If you build the simple, inexpensive option, you'll not only find it easier to sell at first, but you'll also be in the best position to conquer the rest of the market.

It's very dangerous to let anyone fly under you. If you have the cheapest, easiest product, you'll own the low end. And if you don't, you're in the crosshairs of whoever does.

So I think I'll keep my prices where they are. Of course, if you think they're too cheap, you're most welcome to pay as much as you need to to convince yourself we're going to be around next year ;)

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