Tag: business model

Pros and Cons of the Freemium Software Business Model

One of the hottest trends in the software business over last several years has been the rise of the “Freemium” business model. For those unfamiliar with the term, a Freemium model is characterized by an entry level version of your software which is totally free to users–forever.

This business model has actually been around in the software industry since the 80’s and was originally referred to as “crippleware” or “lite” entry level versions of software. The term “Freemium” apparently entered the software industry lexicon when used by Jarid Lukin of Alacra in 2006. But enough history. Regardless what you call it, the model on the surface is well suited to the software business due to no (or very low) cost of goods sold.

Whatever term you use, the model is predicated on creating a large “free” user base quickly, usually by using viral marketing methods such as referrals and word of mouth along with other very low cost methods such as SEO. The large free base is then “monetized” by selling advertising to their eyeballs and/or upselling them on premium software features or services. The Freemium model today is widely used in the software biz across a number of form factors including Open Source, SaaS and traditionally licensed software.

What’s most interesting to me about the model is the trendiness of it the last few years since the term Freemium came into use. I see many companies that appear to be adopting it because they feel like so many others are using it — that it must be the right thing to do. But is it the right thing to do in all cases? In my opinion–it is not. Let’s take a closer look.

Freemium Model PROS

Fundamentally viral: he more users you get–the more users you get. Free users will refer other users who could turn out to be paying users.
Allows you to upsell your own (free)customers–upselling a customer that’s already incorporated your tool into his workflow is generally easier than selling a new customer from “scratch”.
Keeps prospects in your target market away from being locked in by the competition.
The barriers to entry to your product line are at the minimum possible (even less friction than free trials and money back guarantees)
Great for startups to say be able to say ”we have XXXXX gazillion users”.
Enables Free Beta testing of new products with a large number of users.
“Free” traffic and user bases can sometimes be converted to advertising revenue.

Freemium Model CONS

Usually has low conversions rates to paid version, average is about 1%–although this obviously varies widely.
If you do offer customer/technical support to free users, it’s potentially a large expense unsupported by little if any revenue.
If you don’t offer support or only offer poor/reduced support to free users (such as forum-only support), what does that do to your conversion rates to paid users–as well as your overall reputation?
If you do offer reduced or no support to free users, lots of time can be wasted trying to figure out who “qualifies” for what level of support .
99% will never pay you a dime–are they REALLY customers?
In addition to customer technical support costs, if you’re SaaS-based the cost of data/bandwidth/hosting for free users can be significant.
Requires EXTREME application ease-of-use to work well.
There is some evidence that having a free version reduces your conversion rates on free trials of your paid product.

The main reasons I don’t like Freemium models, except when circumstances clearly call for it:

Having a free version conditions the market that “free” is the appropriate price.
A free version can reduce the overall value perception of your product
It’s critical to the success of a Freemium model and difficult to get the free/paid feature set split “just right”. If you don’t get this split just right, you either won’t be able to attract enough free users (too little value in Freemium product) or you won’t be able to convert you Freemium users to paid versions (too much value in the Freemium product).
“Free” is a mentality that’s hard to overcome in a user; it’s much harder from convert a free user to a paid user than it is from an entry level (cheap) paid user to a premium paid user. An example of this is the difficulty of online newspapers in converting readers to paid models after years of “training” them that their content should be “free”.
I’d prefer to use available profits on professional marketing programs rather than starving the marketing budget due to excessive support/hosting costs.

Even taking my biases above into consideration, there is definitely a place for a Freemium business model in some situations:

The Best Circumstances to use a Freemium Model

Although the Freemium model has worked in B2B markets, in general I believe it’s better suited to consumer mass markets where viral is possible, price points are already low and free user bases and traffic can be high–making it possible to monetize the traffic via advertising
Entering a market with a very strong, embedded competitor.
When attacking a market with very limited resources or lacking in marketing skills.
With a product has a great “social pull” which lends itself well to viral marketing.
Freemium has already become the standard in your market segment, so you’re almost forced to follow suit.
As an act of desperation when nothing else has worked.

I’m sure there are others circumstances where a Freemium model makes sense–the list above is what comes to mind quickly.

So that’s what I think about Freemium–many will not agree. What’s been your experience with it? Leave a comment below with your own thoughts, lessons or best practices.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

5 Comments by admin on May 11, 2013

filed in B2C, Business Models, Corporate Strategy, Online Marketing, Product Marketing/Management, Promotion

What Does It Takes to Build a Great Software Company?

Software-based businesses come in many different sizes and shapes: SaaS or cloud-based, mobile, open-sourced, consumer, SMB and Enterprise, etc, etc. Even many successful “hardware” companies could really be viewed as software companies, as they are in fact driven primarily on novel software or firmware under the hood. With the diversity of form factors, it’s very hard to generalize what makes a great software company.

But I believe that there are some common factors among the great ones. It’s much easier of course, to take a look at successful companies and work backwards in a postmortem fashion. The problem with this approach is that you tend to see a lot of “revisionist history” utilized when folks tell the story of what made a company successful.

Institutional technology investors have there own pretty well documented list; in general it goes something like this:

Strong Management Team with relevant experience in the space
Distinct competitive advantage, usually via breakthrough, defensible technology
Product/Service that addresses a serious pain point felt by the target customer
Large market opportunity

You’ll see various flavors of the above list and ordered in a variety of ways, but I think this is a pretty good representation of what VCs and other investors say they look for before they’ll write a big check. When discussing what makes great companies, there’s no doubt in my mind that the list above is valid and important. But I think it’s also incomplete. Here’s a few criteria of my own that I would add:

Management team chemistry

I’ve seen a whole bunch of management teams that looked like a great group on paper from a skills/experience viewpoint. But in practice they couldn’t work together for a variety of reasons: excessive competitiveness, selfishness, incompatible personalities and different communication styles are a few common reasons. As an example, I often see hard-driving CEOs with Type-A personalities who hire exclusively in his/her own image. The resulting management team often resembles a pack of hungry dogs fighting over a single piece of meat, with everyone fighting to be in the lead. Putting together a management team with good chemistry and mutual respect is more art than science and requires a leader with refined sensibilities in the “softer” aspects of management practice.

Lack of management arrogance and openness to learning

Management arrogance big problem that you find in people that perceive themselves as very successful. Sometimes they start to believe their own headlines and think they have all the answers. The problem is that when leading a software company the certain answers of yesterday can be the disastrous strategies of tomorrow, as software markets change so rapidly. I find that most leaders who are able to take their companies to greatness are not so full of themselves that they won’t listen to other internal and external voices. This is an attribute that enables management to navigate the treacherous road up the software industry food chain and raises the odds of taking a software business all the way to the top. Of course there are some famous leaders of large software companies that don’t fit this description–but I believe they are exceptions to the rule.

Realistic self-evaluation at every stage of development

To maximize the potential of a company to reach greatness, it’s important that once you’ve had some success you don’t get become over-enamored with it or underestimate what more is possible. At every stage of a company’s development the financial resources, personnel resources and realities of your market dictate what’s “possible” going forward. It’s sometime very hard to self evaluate where you’re really at as a company; some people are natural optimists and others pessimists. I’ve always felt that a little bit of marketplace paranoia is healthy in a management team. But the closer you can get to “reality” in your evaluation of what’s really possible, the more likely you will be to optimize that next step and keep moving forward on that long path to greatness.

Positive overall company culture

I believe that this may be the most important factor of all when it comes to a path to true greatness. There’s an old sports saying that “it’s not about the X’s and O’s, it’s about the Jimmy’s and Joes”. For those of you who aren’t sports fans, it’s just a funny way of saying that coaching (management) can only do so much; it’s the players (company staff) you recruit that really make it happen. In my opinion, this is very, very true and means that getting the best people possible really makes the difference in how successful a company will ultimately be. What is the biggest factor that allows you to recruit great people? In the long run, it’s a positive company culture that the current employees really feel good about which allows you to recruit great new people.

Those are my thoughts on what it takes to have a GREAT–not just good–software company. What would you remove or add to the list? Leave a comment below with your own criteria for software industry greatness.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

1 Comment by admin on April 27, 2013

filed in Business Models, Corporate Strategy, General Management, SaaS, Startup/Early Stage

tagged business model, cloud, company culture, consultant, consulting, Corporate Culture, culture, early stage, management, Management arrogance, Phil Morettini, PJM Consulting, SaaS, software, tech, technology, VC, Venture Capital

BYOD, Enterprise Mobile ISVs and Cross-Platform Support

One of the hottest trends in the technology industry these days is the phenomenon know as “Bring your own Device” or BYOD. For IT departments, this is the latest control-related nightmare they loath so much. The original technological shift from Mainframes to Minis and PCs was probably the start of many control-related sleep disturbances and BYOD continues the trend. Mobile computing in itself was bad enough from the perspective of the internal IT folk;. Mobile BYOD may be enough to push them all to drink.

But enough about anguish for the IT guys: what are the implications of BYOD for independent software vendors?

Cross-platform support

One of the major challenges–or opportunities–that I believe software vendors face in a BYOD world is the potentially wide variety of mobile platforms to support. Many readers are likely thinking “its only the iPhone/iOS and Android, so not a problem. Nothing else is relevant.”

Maybe-But bear with me for a bit.

Things aren’t always what they seem on the surface. For one thing, Android is hardly a single, tightly unified platform like iOS. It’s basically an open source operating system in which every OEM can (and often does) modify the OS to provide differentiation on their hardware platform. In a way this can be a good thing by spurring innovation; but if you’re a third party software vendor dependent on the parts of the OS that is often modified–it can also be viewed as problematic. But should it be?

Google has recently sought to rein in the fragmentation issue as the numerous hardware-focused variants were causing a lot of consternation in the third party software community. At a minimum this fragmentation causes a great deal of testing complexity, and at worst the necessity to maintain different code for each hardware OEM’s platform.

Back in the old days

This reminds me of back in the 80s in the early days of MS DOS. IBM had its PC DOS version and all of the other PC hardware OEMs had their own version of MS DOS as well–almost compatible with each other, but with just enough variation to cause problems. Needless to say, this caused problems in the ISV community which had to choose between supporting myriad platforms–or picking winners. Neither appeared to be a great choice.

Even if you don’t consider the Android fragmentation issue serious, I contend there are other similar platform support issues. In a world tightly controlled by the IT department, the platform choices might indeed be limited to Android and iOS. But what about Blackberry, Microsoft and any new platforms that might come along in this large and competitive market? Again I can almost see the smirking by some reading this: “those platforms are market also-rans with very small market shares. I don’t need to support them!”

Or do you?

Back in the old days–one more time

One more time I’ll take you way back for another analogous situation. In the 90s I was running a systems/network management software business targeted at the enterprise IT market. This was an “add-on” product business; our product ran on top of the Network Operating Systems (NOS) of the day. Back then, Novell Netware dominated the market with an estimated 60-80% share of the business. The other major NOS platforms (widely considered also-rans) were Banyan Vines (about 5-8% market share) and numerous OEM variants of Microsoft LAN Manager (10-15% share total). LAN Manager was slightly different depending upon the OEM hardware platform, much like Windows itself in the earlier example and Android today. The fragmentation of LAN Manager made it even less desirable for an add-on ISV market segment like our category.

All of our competitors looked at the market and designed their products to run strictly on Netware. On the surface this made total sense. There was just one problem—in the enterprise IT market (the primary target for our segment) the customers are huge companies with a lot of buying power; they like to get vendors to do what they want. Of course, many enterprises did standardize on Novell Netware at that time.

We took a contrarian approach at the time and chose to extend our product, supporting both VINES and LAN Manager in addition to Netware. We found that the larger the company, the more heterogeneous their networking environments tended to be. Even if 90% of the systems within an enterprise were based upon Netware, there was a strong desire in enterprises for support of ALL of their networks companywide. So although Banyan and Microsoft LAN Manager each had a modest number of accounts using only their NOS (we won those by default), we were in a much stronger position than our competitors in the largest enterprises with heterogeneous network environments. We won far more than are share, and the additional revenue more than made up of the modest additional development cost and support complexity.

So how do software vendors capitalize?

I bore you with the old case study above because I believe BYOD in the Enterprise will only accentuate the benefits of supporting as many platforms as possible. Although many companies with highly influential IT departments will limit choice, this is really against the spirit of BYOD. While it may look unlikely to some right now, I see BYOD generally moving the enterprise mobile software market toward heterogeneous, multi-platform environments. Forward thinking ISVs would be wise to consider this in their product plans.

There are many new challenges that are already rising as the BYOD movement takes hold. BYOD in the enterprise is a rich area for discussion. In addition to the cross-platform support issue discussed here, there are major security, legal, support and economic/cost considerations to consider. Some of these issues don’t yet have great answers–maybe we’ll explore them in a later column. BYOD is a major paradigm shift for all segments of the IT business. I believe that there will be many more yet unforeseen factors that will greatly impact the landscape for enterprises, end users and software/hardware vendors as the situation matures.

What are your thoughts on the cross platform support issue we’ve raised in this article? Give us your take. And what are some other issues brought on by BYOD that aren’t widely being discussed yet? Post a comment so we can all benefit from your experiences.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on March 16, 2013

filed in Business Models, Corporate Strategy, General Management, Product Marketing/Management, Software/Product Development, enterprise software

Software Product Marketing: Horizontal vs. Vertical

An important discussion for most software companies–both in the product planning stage and in the downstream active marketing phase–is the manner in which it will be marketed. The decisions to be made in each phase are separate but closely related. This set of discussions need to happen regardless of whether you are marketing a traditionally licensed application, an open source application or a SaaS application.

One of the more important aspects to this is whether the product will be aimed tightly at one or several vertical segments, or marketed more broadly to the widest possible audience. This is the crux of the vertical vs. horizontal decision. Let’s examine a few topics which can be useful in framing this discussion.

How specific is the “language” of your application to a vertical audience?

This is very important because in some product categories the unique business processes of a vertical can be very important, while in other categories there is great commonality in process and language across industries. If you’ve written your application specifically to solve one market segment’s unique problem, it’s probably VERY specific. When this is the case it’s pretty obvious that you’ll start (and possibly end) with a highly vertical marketing effort. Sometimes as thing go along you may find that you’ve solved a problem for market A, but it’s also useful in market segment B and C–although there often needs to be at least some modification. If you’ve solved a more generic problem that applies to many markets, the decision to market the solution horizontally or vertically can be much less clear.

How big is your overall market?

A key consideration when you’re entering a new market with a new product. The larger the market the more likely it is you will need to take a vertical approach get initial traction. In many cases this means verticalizing the product in the product development phase. But even if there isn’t a strong set of vertical needs with respect to product features and “language”, in large markets a vertical promotional approach may be required to build market traction. It is often far easier to build a brand name and market traction in a tight vertical before you move on to the next segment, than by taking a more scatter-shot approach with no vertical focus.

What is the level of competition in the overall market?

This question is related to first question above as strong competition often goes hand in hand with large markets. They are separate issues, however, and should be evaluated individually. If the level of competition is high, regardless of market size, a new entrant is likely to have a better chance of success with a more vertical approach. It there isn’t significant competition in the segment, you may be able to have success with a horizontal approach, which can be a more efficient way to use both product development resources and marketing dollars.

Market maturity: has the overall market verticalized already?

Regardless of the level of competition and the market size if the larger market has already evolved into a number of vertical sub-markets, it may be too late to take a horizontal approach. It is usually very difficult to defeat entrenched verticalized competitors when entering a market with a horizontal application. The exception to this would be a new competitor with a product that provides a quantum leap forward in functionality (usually as a result of a technological paradigm shift).

What level of marketing resources are available to you?

The level of marketing dollars available to you are quite important in formulating your approach to the vertical vs. horizontal question. As one example, let’s say you are entering a market that is large, quite competitive and you won’t have a lot of marketing budget available. In this case, it would be very important to develop the product upfront with the strongest vertical focus possible and market it accordingly. On the other extreme, you might be entering a market of modest overall size that hasn’t verticalized to a great degree to date and you are well funded, enabling a substantial marketing budget relative to the competition. It this case it might be an easy decision to take the ROI-efficient horizontal approach both from a product development and promotional perspective. There are many potential scenarios between these two extremes which unfortunately will lead to less obvious decision-making.

Is your software a “point” or “platform” application?

Most software applications are “point applications”, meaning they have little or no integration with the rest of the software infrastructure. In addition, any possible customization is generally intended to be done by the application vendor themselves or maybe their channel partners.

I define a software application as a “platform” when it utilizes an open API which enables BOTH channel partners and third party software vendors to write add-on applications which extends the platform software’s functionality in two key area:

1) by adding “vertical” functionality not present in the platform software thereby enabling a complete solution for a specific vertical market.

2) using the API to integrate the application with other parts of the software infrastructure

In this way a platform software application allows a software vendor to “have it’s cake and eat it too” with respect to the Horizontal vs. Vertical discussion. The platform software itself provides basic functionality which can be sold broadly across many markets, while the open APIs enable the product to be tightly customized for specific verticals as required, by both your channel partners and independent ISVs. The platform application can be a product manager’s dream and is the Holy Grail of software when it comes to efficiently serving as many market segments as possible by leveraging partner investments. But it’s not something that can be forced; there needs to be a natural reason for the platform to exist, or there will be no third parties willing to write the add-on applications so critical to the platform’s success. Without these add-on application a platform will more often than not die a quiet death in the marketplace.

In some cases, such as when you write an application which aimed at a problem specific to a single vertical market, the answer to this “vertical vs. horizontal” question is easy. In many other cases you’ve created a product which is useful across several market segments–but do you have the resources to attack multiple market segments simultaneously? How do you approach this common problem? Leave a comment below with your take or shoot us an email with your questions.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

3 Comments by admin on February 16, 2013

filed in Business Models, Corporate Strategy, Distribution Channels, Product Marketing/Management, Promotion, SaaS, Software/Product Development, Startup/Early Stage, VARs, enterprise software

tagged business model, channel sales, consultant, consulting, early stage, marketing, open source, Phil Morettini, PJM Consulting, Product Development, product management, product planning, Promotion, SaaS, Software as a Service, strategy, traditionally licensed, VAR, vertical market

Software Company Diversification

One of the difficult strategic decisions that software industry management teams have to make is finding the delicate balance between “focusing on the core business” and “not putting all of your eggs in one basket”.

One obvious way of differentiating how much diversification is appropriate for a specific company is by company size and maturity. A brand new startup better be very focused on doing one thing well or they may not last very long. A large, established company generally needs to have at least several new irons waiting in the fire as initial products and market segments mature, or they risk shrinking in size rather than continuing to grow. The two ends of the spectrum are pretty obvious, but there is a wide continuum of situations in between where the proper strategy isn’t as obvious. Let’s look at some factors to consider when formulating your own diversification strategy:

How much growth is left in your primary business/market/technology

This may be the first thing you should consider when contemplating the diversification question. If you’ve hit on a huge market opportunity with a lot of room to run and have gained good traction, it’s often unwise to develop “eyes bigger than your stomach”. In this environment your best growth opportunity is usually keeping your eyes on that single ball. Everything else being equal, a focused strategy is always easier to execute than a diversified one. So if you have explosive growth prospects ahead as far as the eye can see, it’s better to defer the diversification decision for sometime down the road.

Competition level in your primary business

Strong competition in your primary market is often a factor that can cause a management team to either look toward diversification or decide it needs to focus on it’s core market-depending on the details. The key is how competitive you are: if you are very competitive and yet caught in a heated battle with that strong competition the choice is often to stay focused. However, if that competition is so strong that your company is an also-ran, a decision to diversify is often taken. On the other end of the spectrum if the competition is weak, that may also allow you to more easily take on some diversification without the risk of losing hold of your profitable core business.

Level of available resources

This is a big key; if you only have the resources to do one thing well it’s critical to keep you focus on a single ball. It doesn’t matter if you have five great ideas–pick the one you think is best and sell out to be successful there. I often see early stage managers make this mistake. They aren’t sure which of their ideas is the best and this uncertainty causes them to split their very scarce resources among multiple paths. Unfortunately, this usually dooms them to not gaining critical momentum in a single area. It’s also important to measure all types of key resources when considering this factor, not just financial. Do you have enough skilled engineers, marketers or management bandwidth? If any of these or any number of other resources are in too short supply, diversification at this time is probably a bad idea.

Ease of extending proprietary technology into adjacent markets

This requires an evaluation of your existing IP. Often software companies have cutting edge technologies that can be adapted to other market segments and provide a similar differential advantage as in the initial core market. But what if the technology is very specialized, or you just can’t see another good market opportunity to invade using your existing technology as your entry advantage? In these cases it’s best to be realistic and look at other ways of diversifying, such as acquiring new technology/product categories via M&A that are usable in your current segment.

Can you create or acquire new technologies which your existing market wants?

There’s a lot that goes into answering this question. A lot of it relates to your technical staff–are they specialists in your existing technologies, or do you have the type of talent that is constantly coming up with outside-the-box ideas and potential new products?

If there isn’t fertile ground internally for innovative new ideas you many need to look at acquisitions which can bring fresh technologies and products to your pipeline. These don’t need to be huge, costly acquisitions; often you can acquire highly innovative startups which are little more than a small engineering team, a core product and a few initial customers.

Also, are your product managers identifying unmet needs from your existing user base? This is usually crucial to bringing SUCCESSFUL new products to existing markets, whether driven by internal development or acquisition of external technologies/products/companies.

Diversifying to Completely New Markets with Completely New Products/Technologies is very dangerous

Above all you want to avoid moving into a completely new market with a completely new product/technology. The odds of pulling this off successfully are very low, roughly equivalent to that of any brand new startup company. If fact, this is often referred to as a “restart”. It generally occurs when a company looks forward and sees certain failure ahead due to a hopelessly out-of-date technology or an evaporating market segment (often due to a technological sea change). I often see this from managements that are very discouraged and desperately seeking “greener grass on the other side of the fence”. But of course the grass isn’t always greener. This approach should be viewed as a last resort only; every attempt should be made to diversify into an area where there is some technological or market experience.

Like most strategic decisions, diversification in the software business isn’t inherently good or bad. The circumstances really dictate how much you should pursue. What do you think about the strategic tradeoff between focus and prudent diversification?–leave a comment below with your experiences and views.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on January 13, 2013

filed in Business Models, Corporate Strategy, General Management, Product Marketing/Management, Software/Product Development, Startup/Early Stage, Uncategorized

Selling and Marketing Software Through the VAR Channel: Morettini on Management Video Series

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on November 4, 2012

filed in Business Models, Corporate Strategy, Distribution Channels, Promotion, SaaS, Startup/Early Stage, VARs, Videos, enterprise software, sales

tagged B2B, business model, channel, channel sales, consultant, distributor, marketing, Phil Morettini, PJM Consulting, SaaS, sales, software, VAR

Musings on Software Market Segmentation and TV Morning Shows

I like to check out one of the morning TV shows on one of the major US-based networks for a few minutes, as I’m eating my breakfast cereal. There are 3 major programs on at the start of the day: NBC’s Today Show (the traditional market leader), ABC’s Good Morning America (the perennial runner-up) and the recently re-branded CBS This Morning in (last place for many years).

So what the heck does this have to do with software market segmentation, you ask?

I’ve been struck by how much the morning show race reminded me of the software industry has become more vertical over time. In particular, there are some strong parallels between the software business and the morning shows with respect to the product being “soft enough” to make relatively easy product changes as part of a new segmentation strategy.

Recent changes in strategy on the TV morning shows

The Today Show has been the “10,000 lb Gorilla” of the morning shows since the beginning of the category. They’ve had a large lead over their competitors across multiple changes in on-air personnel and even societal cultural changes over the years. The Today Show’s format has been aimed at a “horizontal” audience–a little bit of something for everyone. They start with hard news at the beginning of the show and it gradually becomes “lighter”, transitioning to Pop culture, celebrities and gossip as the show progresses through its marathon 4 hour time slot.

The other two major shows have taken a real beating at the hands of NBC in the ratings, with many tweaks to their formats and even more turnover in personnel over those many years. Fundamentally they have tried to compete by “building a better Today Show”, essentially competing head on with the market leader in a horizontal fashion. But over the last couple of years, ABC and more recently CBS have changed their strategy, utilizing a much sharper segmentation than at any point previously. ABC has essentially gone “younger and lighter” over the last couple of years. The show has the least serious tone and is the most “fun” of the three, focusing a lot of time on pop culture and other topics skewed toward younger viewers. It’s paid off. Good Morning America has taken a clear lead over the Today Show due primarily to this new segmentation and to a lesser extent some personnel missteps at NBC.

After many years in last place, CBS has segmented sharply in the other direction with a shorter 2 hour program focused almost entirely on hard news and staffed by serious, credible news people. It’s too early to say how successful this will ultimately be for CBS, but they have won over this writer and have picked up some market share overall-I’m watching consistently CBS in the morning for the first time. The Today Show has been struggling to remix it formula and regain its clear lead, looking much like a complacent large company that has grown fat, dumb and happy as a result of years of unchallenged success.

Software Market Equivalents

Ok, enough about TV morning shows! How does this relate to segmentation in the software market? A very similar situation albeit in a B2B rather than B2C market, is the ERP software market. The ERP market is also a very large, horizontal market–a mass B2B software market, if you will. Just about every company in the world needs some type of ERP software to run its business, from an entry-level, basic accounting application like Intuit’s Quickbooks all the way up to very expensive, complex enterprise suites such as offered by Oracle, Microsoft, SAP and Sage.

This of course is one form of verticalization–segmentation by target customer size and sophistication. Intuit and Oracle aren’t targeting the same segments. But the ERP market is so large that over time it has also segmented by industry; nearly every industry group of any significance now has ERP software vendors with specialized applications aimed at a narrow industrial segment.

Another similar example is Medical Practice Management Software. The last time I looked, there were over ONE THOUSAND software vendors with products targeting this very large market. You would think the software requirements of most medical practices would be pretty standard across the board. But because the market is so large and lucrative, nearly every market segment (Surgeons, Gynecologists, Dentists, Chiropractors, etc.) has it’s own sub-market of competitors, with applications that speak that particular medical practice’s lingo and strictly models its business processes.

I have a personal example from earlier in my career that illustrates how important segmentation can be as part of a software company’s overall strategy. I took over as CEO of an early stage mapping software company with excellent technology but an unsophisticated business strategy. While the company had a neat technical advantage over its larger competitors, the product otherwise was positioned directly against the market leaders in that space. The primary distribution channel for the mainstream mapping products of the time was computer and electronics retailers, a notoriously tough and expensive channel. I was able to make some headway in penetrating this channel. But even with our technical feature advantage it was already too late in the game and we lacked the resources to compete and win head-to-head with the larger market leaders of that time.

So we quickly came up with a segmentation strategy that proved quite helpful. Initially we took out some features away from our primary product and created an entry level product priced far below the mainstream mapping products. This allowed us to occupy the price leader position targeting the most price-sensitive consumers, and distribute through both consumer/gaming software stores of the time as well as mass market retailers such as drug and grocery stores. The mainstream mapping software players had almost no presence in these channels due to their higher price points. This entry level product, created with minimal development costs, allowed us to generate cash flow to fund our longer term segmentation strategy which was to target the B2B market. The mainstream mapping products were fairly generic and used by business people as well as consumers, but really designed for any consumer with no business-oriented features to speak of. We were able to create a premium, business-focused version of our product which we positioned as the mapping products for mobile workers/road warriors such as sales reps and service technicians. We included important business-specific features, such as integration with the popular CRM systems of the day, which weren’t found in any of the other mainstream mapping products of the day.

Important considerations in segmentation strategy

Hopefully we’ve established that segmentation of your software market can be a very powerful tool to compete with and outflank strong competitors and ultimately maximize the value of your business. So what are the important things to consider in formulating your segmentation strategy? Let’s look at a few:

Horizontal vs. Vertical – The first thing to consider is how horizontal your segment currently is and how vertical you think you need to be to compete effectively. There is a fine line here; the more horizontal you can remain (targeting multiple segments with the same product) the higher your product’s ultimate profit potential. But you must be realistic about your market position–go as “vertical” as you need to win–or your profit potential is likely zero!

Market Maturity – The more mature the market is when you enter, the more likely it will be important to segment smartly and attack a vertical niche. Of course this or any single factor shouldn’t be used in a vacuum to create a strategy–many factors need to be considered in your segmentation decision.

Market Size – The larger the market size, the more likely it is that it’s ALREADY segmented and will likely force you to do the same. There are several prominent potential exceptions here, listed in the bullet points below.

Market experience of the company - Do you know the market well, and just as important, are you known by the market? In cases where you’re known and understand your market well, it raises your odds of success even entering with a more horizontal approach.

Levels of funding – Big companies with massive resources or heavily funded startups may be able to successfully use a horizontal approach, although many confident late entrants of this type have failed in a variety of software market categories.

IP/Technology & other strategic advantages – A true innovator with market changing IP may also be able to attack and win in an established market using a horizontal approach, as they are effectively changing the ground rules of the market. But again, I’ve witnessed many companies very confident in their technical advantage that have ended up with their hats handed to them when competing head on in an established market.

Important upfront decision–but never too late to change

Like any important business consideration, it’s far better to optimally segment the market for your products up front then to wait until you are FORCED to do so. But just like a morning TV show, in the software business it’s relatively easy–at least compared to other technology categories such as computer hardware or semiconductors– and almost never too late to modify your target segments.

What’s your feeling on how best to approach segmentation in the software business? Post a comment so we can all benefit from your experiences.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on October 21, 2012

filed in B2C, Business Models, Corporate Strategy, Distribution Channels, Pricing, Product Marketing/Management, Retail, Software/Product Development, Startup/Early Stage

Separating Technology Wheat from the Chaff

In software and hardware businesses new ideas, technologies and products come down the pike at a rapid-fire pace. Many fail immediately and some muddle along before finally fizzling out. Some meet with modest success. Only a very select few turn into long run big hits. How can you tell which products will become hits, out of a sea of mediocrity?

Not many people can differentiate between these new ideas, technologies and products at an early enough stage to profit massively from it. Keep in mind I’m not talking about small successes, but the really big ones. The ability pick the big winners out early is a rare skill set, yet one that is applicable across a wide swath of functions including general management, product planning/management, inventors, venture investing, stock analysis/selection and many more.

Short of having a brilliant mind, multidisciplinary worldview and the ability to see the future—how do you go about maximizing bets on what will hit it big and what won’t? Here are some questions that may be useful to ask when making your evaluation:

Does it solve a fundamental problem, bend a cost curve or create a new playing field?

Not every new product is based upon a fundamental technical breakthrough—but it sure helps! After all, innovation is still the basis of the technology business. This is where you look first when seeking big ideas you can profit from, something that fundamentally changes the game in a particular marketplace. One of the most spectacular examples of a breakthrough that met all three of these criteria is the personal computer. It solved some fundamental problems of the time associated with mainframe computing, certainly bent the cost curve of computing downward (and continues to due so even today) and created an entirely new ecosystem with broad societal implications. Meeting all three of these criteria is a very tall order that you won’t see often, but passing one of these three tests is almost essential for a big-time winner with staying power.

Where does it fit in the marketplace?

There are certainly many great stories of fundamental research breakthroughs without immediate, obvious market applications that ultimately found a market and became a great hit. The problem occurs when the second step—finding a market—is given short shrift, or skipped completely. This can happen when there is pure excitement and the folks funding the project have a purely technical viewpoint. The number of big successes without expert market vetting is actually pretty rare although there have been some spectacular exceptions.

We’ve all heard of the invention of super glue by accident. And Thomas Watson Senior, Chairman of the IBM Corporation in 1943 was quoted as saying: “I think there is a world market for about five computers.” Five units do not make a commercial market, but IBM made the investment anyway—and look how that turned out. But in reality the number of fundamental breakthroughs in the research lab dwarfs the number of truly successful, innovative new commercial products. So it’s important to not get too excited about these breakthroughs until a commercial application becomes obvious and realistic. Avoid at all costs the proverbial “Cure looking for a disease”, regardless of the almost mythical stories of a few massive winners borne from purely technical circumstances.

How does it compare to alternative solutions, both current and forecasted?

After deciding the breakthrough isn’t a cure looking for a disease and which market segment it fits in, it’s also very important to evaluate how it stacks up vs. rival technologies and products. And not just with respect to a current market snapshot, but looking forward as well. Forecasting really comes into play here; which technical platform has the longest runway? An example is satellite TV vs. Cable TV. When Satellite TV came into play it took a lot of market share quickly by providing innovative new services which the utility-like Cable TV companies were slow to match. But in the long run the wired infrastructure of the CableCos may provide a strategic technical advantage in that long running battle that may enable a more advanced and diverse product set.

Do the owners have what it takes to bring it to market?

This question applies not only when evaluating someone else’s product or technology—but also your own. Realistic self-reflection is important here. There have been some great new innovations that have been wasted due to bad marketing, lack of financial resources or just plain ignorance and incompetence. These weaknesses often lead to the “ arrows in the back of the pioneer”, where the folks that initially bring out the “next big thing” fail or are quickly overtaken by a more tactically skilled competitor, who improves on the idea and/or out-executes them in the market. The software spreadsheet market is instructive here, conjuring up images of several bigger fish progressively swallowing smaller ones. Visicalc was the original spreadsheet innovator overtaken by Lotus who was then in turn overtaken by MS Excel. The resources and capabilities of the innovation’s owner matters a great deal in the long run.

Is it defensible?

This is what often separates the “flash in the pan” from a true long term winner. Defensibility can be defined by the traditional technology means of patents, copyrights and trade secrets. But there are more subtle ways of defense that can be very successful in the long run: branding, entrenched distribution channels, strategic partnerships and cost advantages.

Especially in the software and hardware businesses there are tons of fast followers, who are lying in wait for an emerging trend or new market segment, where they can apply deep resources and tactical skill to out-execute the pioneers. In hardware markets the major Japanese manufacturers long ago mastered this model by taking US inventions and productizing them cheaper and better. The large Korean manufacturers then found success with this same model and most recently it’s been replicated by the Chinese. In the software business Microsoft and other large software companies have grown by either mimicking or buying up technology leaders who have pioneered a new market segment. However it’s done–make sure the next big thing is defensible before betting on it becoming a big-time, long term winner.

Does it pass muster from every angle?

As stated earlier, it really helps to be a “renaissance man” man with a multidisciplinary worldview. But people meeting that description are in very short supply, so it’s really important to employ experts across several key disciplines such as technology, finance, manufacturing and marketing, to evaluate market potential and possible weaknesses. In the technology business marketing and technology are usually the key differentiating factors, so at a minimum make sure that expertise is brought to bear in those areas during your evaluation.

There you have my view—how to do separate the winners from the losers. Post a comment with your own view of this very debatable topic.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on September 8, 2012

filed in Business Development, Business Models, Corporate Strategy, Distribution Channels, General Management, Product Marketing/Management, Software/Product Development, Startup/Early Stage, market research

Has the Virtual Tech Company Arrived Yet?

If you go back to predictions over the past 20 years or so, we should all be independent contractors, heavily utilizing technology to work full-time from home in temporary teams, within virtual software & hardware corporations throughout the world.

Has it happened yet?

More than one definition of virtual

First of all we need to define what virtual can mean, as it can mean different things to different people. The two main ways I would segment “virtual”:

Workers who are working remotely from a main physical corporate location
Worker who are full-fledged “employees” such as temps, sub-contractors, interims and consultants

For the purposes of this article I am referring to both of these definitions when I talk about the virtual company. Workers fitting each of these definitions have the potential to offer companies increased flexibility, lower fixed costs and higher skill levels for a given project/function at a specific point in time. Of course, in many cases a worker could fit into both of these definitions.

Virtual adoption varies by function and industry

In general, companies that are early adopters of technology tend to be those that are further down the path of virtualization. This makes sense, because technology itself is a very strong enabler of the ability to use the virtual model. In the old days it was much harder to be adequately connected as a non-employee and working remotely with only a landline phone and fax machine. So industries that adopt technology faster tend to virtualize faster as well. Old line industries that have stayed with manual methods longer tend to rely more heavily on the on-premise, full-time employee model. Of course some industries just don’t lend them themselves to heavy virtualization; it’s hard for physical retailer to virtualize most of its jobs. Also, there are always exceptions to this type of generalization on an individual company and manager basis. Virtualization also varies widely by function as well. As alluded to above, it’s hard to virtualize a retail clerk. On the other end of the spectrum, programmers and some call center employees can be located wherever phone service and an internet connection are available. There are many, many other attributes that influence how quickly a particular industry or company proceeds down the virtualization path. Companies very concerned about security, for example, often evolve in this direction much more slowly than industries and companies where security is less of a concern.

Tech companies are definitely on the leading edge of the virtual trend

The Internet and related technologies have provided a tremendous platform for driving more rapid acceptance of the virtual work model. Since software and hardware companies tend to be early adopters of productivity enhancing technologies, it’s only natural that the virtual work model is progressing faster in tech companies than in most other industries. Even in companies that still rely primarily full-time employees, it’s very commonplace to work from home occasionally, or attend meetings remotely while they’re on the road via video conferencing or online meeting software. In my consulting business, I also do see quite a few small or early stage software companies who are using primarily or completely a virtual business model.

All things considered—on premise employees are still preferred

There’s no doubt there has been a slow march toward the virtual corporation over the last decade or two. In my experience, however, most hiring managers still prefer a full-employee sitting in the office next to them over all other options. There are obviously many, many exceptions to this. But on a overall basis I believe this is overwhelmingly true. People still are most comfortable with the feeling that they will be able to deal with their subordinate in person, and would rather have the added comfort of a full-time permanent employee they believe they will be able to get to know and count on heavily over the long run.

The reality is that there are trade-offs to both the virtual and old standard on-premise, full-time employee approaches. The virtual approach offers flexibility, better matching of cost and workload and the potential for a better skill fit for a particular project. The on-premise employee approach is favored because of stability, known availability, cultural fit and company-specific training. In a perfect world a mix of both would be utilized, and every project and position would be evaluated on an individual basis to decide which model is a better fit for a particular situation. I do think that in many industries this will come to pass eventually. But old habits die hard and I don’t expect we’ll totally get there in my lifetime.

So what do you think about how virtual the world is—and how virtual it becomes in the long run? What has been your experience? Post a comment and share your thoughts on where we’re at in this long running trend.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

1 Comment by admin on August 13, 2012

filed in Business Models, Corporate Strategy, General Management, Operations, Startup/Early Stage

Is Your Tech Business Marketing or Sales Driven?

Software and hardware business are often segmented by the vertical or horizontal market they’re targeting, their technology platform, small vs. large companies and so on. One of the important ways to segment tech businesses, which isn’t often discussed, is by whether the company is sales-driven or marketing-driven in their customer acquisition strategies.

A balanced approach

Now some reading this article may ask “why wouldn’t you take a balanced approach”? Indeed, I don’t mean to suggest that either sales or marketing should be absent in the customer acquisition efforts of tech companies. There are a few scenarios that could be drawn up to support such a singular approach—but very few for sure. There are also some situations where the customer acquisition circumstances are “in between” in price, complexity, market size, etc. and you end up with a fairly balanced approach between marketing and sales. But in my experience the sales or marketing function will rise to the lead, more often than not.

Key criteria in choosing customer acquisition techniques

There are several considerations that often drive whether marketing or sales will dominate:

Product Complexity – This often decides whether or not a product can be truly driven to purchase by marketing or whether significant sales rep intervention will be required to close a deal. It should be noted that when product complexity is high, marketing support in the form of sales tools (examples: case studies, road map presentations by product management) will still be very important in the sales cycle. But this will generally be a sale that is driven by the sales force with marketing in a supporting role.
Product Price/ Typical Sale Size – The smaller the product price and typical sales size, the more likely you’ll be able to acquire customers exclusively through marketing, or in conjunction with inside sales that is largely “taking orders”. Conversely, products that cost a lot may require the extra interaction provided by an outside sales force (and the deal size also justifies the cost of the sales force).
Market Size – Very large markets with lots of customers are more easily and cost-effectively reached with effective marketing. A tight market with a small number of total prospects (think nuclear power plants) will usually be served almost exclusively by an outside sales force with minimal marketing intervention.
Use of Channels – While companies selling heavily through channels often need reps to call on the channel partners, far fewer channel reps are required than if the reps are dedicated to direct selling. Generally the heavier the use of third party channels in the customer acquisition approach, the more heavily the mix will lean toward investment in marketing.

Marketing driven keys to success

Adequate marketing funds – If you’re going to be marketing-driven in your customer acquisition approach, you better dedicate enough money to fund marketing programs with superior performance. To do otherwise will cripple your business.
An objective, data driven culture – The beauty of a marketing-driven approach is that it can take much subjectivity out the management of optimizing your customer acquisition activities. Especially in this era of highly measurable online marketing, decisions should be made on what the data says—not on the whims of the CEO or some other senior executive.
Excellent inside sales in support – Except for very simple, low cost products where marketing can truly drive the sale all the way to completion—these days that often means a software download, SaaS signup or physical product order—it’s still important to have an efficient (but low cost) inside sales operation supporting your marketing machine.

Sales driven keys to success

Great sales people – Hiring good people is so very important in every area, but when your relying on an expensive outside sales force to drive revenue—you better hire the best reps you can afford and attract.
Success driven comp plan – If your success depends upon them, make sure your sales reps become really happy only when the company is happy as well.
Good marketing support in the form of lead generation programs and sales tools – Unless you have a tiny market with obvious, easily identifiable prospects, it’s still very important to have a marketing function which generates leads as well as supplies good sales tools.

The best approach isn’t always chosen

Unfortunately, logic and situation analysis doesn’t always win out when designing a customer acquisition strategy. Usually by the time a company grows to be large, their approach is in line with what’s best for the business. Of course, your chances of growing to be a big company are reduced if you make serious errors in sales and marketing strategy. But in any event, by the time a company is big they are usually utilizing both sales and marketing heavily and in the proper balance.

Startups and early stage companies are another matter. Often the emphasis on either sales or marketing is based on the experience of the founders and senior executives. If they’ve been successful in the past and their new company has a similar focus, maybe it’s fine and their approach works again. But a problem occurs when these executives start up a very different type of company than they’ve had success with in the past. It’s human nature to fall back on what I refer to as your “common business sense”, which is formed by your personal background and past experiences. This is when you can get a misalignment between what a company needs and the approach taken in the sales & marketing mix.

Even worse still is when the customer acquisition approach develops more or less haphazardly. This can happen when the founders of a company really don’t have much functional experience in sales or marketing. This occurs somewhat frequently in software and hardware companies, as many startups are created by technical types. In these cases there may be a fairly unsophisticated approach to both sales and marketing—and whatever works early may end up dominate. For example, a sales rep is hired who has some success, so the model becomes hire a lot more reps and turn them loose without much (or any) support on the marketing side. Or an early direct email campaign or online advertising generates some sales, so money is poured into that method. Unfortunately, these may not be the best approaches strategically for the business in the long run.

That’s what I think about Sales vs. Marketing driven orientations in software and hardware companies. What do you think? Post a comment with your own opinions or stories about what drives customer acquisition in high tech companies.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

No Comments by admin on July 27, 2012

filed in Business Models, Corporate Strategy, Distribution Channels, General Management, Marcom, Online Marketing, Pricing, Product Marketing/Management, Promotion, SaaS, Startup/Early Stage

Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Pros and Cons of the Freemium Software Business Model

BYOD, Enterprise Mobile ISVs and Cross-Platform Support

Software Product Marketing: Horizontal vs. Vertical

Software Company Diversification

Selling and Marketing Software Through the VAR Channel: Morettini on Management Video Series

Musings on Software Market Segmentation and TV Morning Shows

Separating Technology Wheat from the Chaff

Has the Virtual Tech Company Arrived Yet?

Is Your Tech Business Marketing or Sales Driven?

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