Tuesday 17 September 2019

Startup diary: Price is right: seeking the holy grail of startup economic strategy

You must price your firm's first offerings high, not low - otherwise you'll get caught in a trap that every fledgling company must try to avoid, argues the voxgig founder

Stock image
Stock image

Richard Rodger

Who are your deadly enemies? Every startup has them. You will sometimes hear the statement "we have no competitors" from founders who are very wet behind the ears. Never indulge that delusion-you always have competitors.

Your worst and most powerful competitors are often not even companies offering the same services. The "way we have always done things around here" is a turn of phrase that should make you break into a cold sweat. Startups can't sell to those who aren't even buying.

This week in the startup diary I'm going to write about our competitors, and our strategy for dealing with them. If you follow the world of technology, you'll know that both Bill Gates and Mark Zuckerberg have referred to "world domination" with completely straight faces. As a startup founder you might be inspired. You might believe that both of those founders got to where they are by ruthless execution and you are determined to have the iron will to do the same.

You'd be better served trying to understand how Gates and Zuckerberg ended up riding a wave of extreme growth. That does not happen just by playing hardball with your competitors - that just exhausts both of you. This is known as "perfect competition". There are so many buyers and sellers, and nothing to differentiate any of them, that no profit margins remain. Get into a price war with a competitor and you'll receive this little economics lesson as a homework practical.

Let's take a look at the market that voxgig has entered. We're building a software-as-a-service platform for the events industry. We help connect conference speakers and organisers. Do you know how many other companies do something similar? Over 300 at last count. Yes, we have 300 competitors.

And that's not counting the most fearsome competitor of all: spreadsheets and email. Over half of all conferences are organised manually without any specialist software at all.

This is an interesting market. There is clearly a need. There are clearly sufficient buyers to sustain many solutions. It looks like once an event organiser gets out of the spreadsheets and email zone they pick a solution and then stick with it - all their data is uploaded, and they're pretty much stuck. Going back to the old way would be more painful.

There are big players, of course. In most complex systems, you find a "power law" effect - 20pc of the companies own 80pc of the market. And the effect is even more extreme in many online markets, such as search (Google), auctions (eBay), ecommerce (Amazon), and so forth.

Here's the funny thing about my market - there is no power law. The top players combined own at most 20pc of the market. I smell disruption!

Let's dig into this a little more. The top players are companies like cvent.com, bizzabo.com, eventbrite.com, ... and there are quite a few more. Each has annual revenues in the hundreds of millions of dollars. Yet none gained market dominance. Nor do they form anything like an oligopoly. The middle tier of players offer shallower solutions, fewer third-party integrations and are mostly interchangeable. Yet they form the majority of the market. If you read the software review sites, you will often find the top players criticised for being overly complex. There is a need for simpler solutions.

The bottom tier of the market is composed of 'point' solutions. There are offering that are merely features for the larger players. For example, when I wish to speak at a conference, I must submit a proposal to the "call for papers" (CFP) process. My talk is reviewed and scored by a committee before being accepted or rejected. This is piece of traditional business workflow - data input, checklists, messages. The top and middle players all offer CFP features. But there are websites that are just for CFPs - that's all they do. For €500 a conference, you too can have a CFP process.

This competitive landscape tells me that there is scope to build a broad, but shallow, feature offering that can meet the needs of most of the participants in the market. It will never displace the enterprise offerings, but if it is widely used, then it can displace the bottom and middle tiers of the market. These are, don't forget, 80pc of the market. That displacement can only happen if can trigger extreme growth. What differentiators can we use to do this and build a defensible position that lets the company grow?

We could compete on price. This is an easy way to win customers. What you lose on each deal, you make up for in volume.

And that is exactly why it does not work. This is hugely common error of first-time entrepreneurs. For some reason it is a lesson that cannot be taught. Everybody makes this mistake - your prices are just far too low.

The first software licence I ever sold was for $50 unlimited usage. The customer was expecting to pay $5,000-still far below the cost in developer time it would have taken to build the thing themselves. It took many years to learn that lesson properly.

Here's what you actually do. You start high. Your prices should be too expensive. You position yourself as a premium option. You can always reduce prices later.

Looking at the software-as-a-service market, you only have two pricing strategies: low-touch, and high-touch. You'll recognise high-touch: it's when you won't find the price on the website, and you have to call them to get a demo of the product. You end up talking to a sales person on commission. You can be pretty sure that unless the deal is $50k or more, it's not going to happen. Sales people are expensive.

Low-touch is where you put in corporate credit card and select from three pricing options, presented in a nice table. You pay monthly based on usage. There's no sales person, the website, and lots of "inbound" marketing content (all those useful blog posts about topics in your industry) do the selling.

We are low-touch SaaS. We don't compete at all with the enterprise offerings. But in the low-touch space we don't compete on price -we'll go with the high end of what others charge.

Will we compete on features? No. That is a fool's game. It is tempting to think that this is the essence of good execution when it comes to online businesses. Surely a great feature set, that's user-friendly, and has wonderful online support, is the key to success?

Here's the problem. No matter what new and wonderful feature you implement, your competitors will replicate it within six months, at most. They'll just copy you. Patents are useless to a startup. You don't have the resources, or management headspace, to take people to court.

Why are technical features so easy to replicate? Because nobody has engineers that are vastly better than anybody else. Larry Page and Sergey Brin (Google's genius founders) do not work for you, nor anyone close to that level. You're not doing rocket science. SaaS applications are mostly about organising and presenting data. Any feature that moves the needle for customers will get copied, and there's nothing you can do about it.

Slightly better feature might get you slightly more customers for a while, but that's not what we're after. We want a sustainable competitive advantage.

The way to compete is to use the Internet as intended: it is a network meant to connect people. If you can find a way to make you service more useful when more people use it, then you can find a high-growth model. Bill Gates found it with Microsoft Office - the more people used it, the more people had to use it. Mark Zuckerberg found it with personal relationships. If your family and friends are on Facebook, then so must you be.

It is perhaps ironic that I offer two waning networks as examples of the strategy we are seeking. All good things come to an end, but I don't think Gates or Zuckerberg complain too much about famine after feasting for a decade or two.

This strategy is simple to state, and very hard to execute. We have to find a so-called 'network effect' that will make our offering competitive. The more that people use it, the more useful it must be. We have to figure this out by the end of the year. You'll hear about it as soon as we do!

(Newsletter numbers for this week: 1,379 subscribers, 18pc open rate).

Richard Rodger is the founder of voxgig. He is a former co-founder of NearForm, a technology consultancy firm based in Waterford.

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