Friday, June 27, 2008

How to sell your software for $20,000

I guess you can either sell $20 software to 10,000 people a year, or $20,000 software to one business a year that buys 10 seats, and either way have a pretty good lifestyle business. I don't know which is easier, but I did the latter. When it was just myself and I just needed to get that one customer a year, I thought it was a pretty good life.

So here's my ideas if you're thinking of going that route:

1. Find software out there that sells for $20,000 a copy

The idea is you don't want to try to come up with something new. Every business problem has been thought to death, and if there isn't a product for it already, it's probably because there just isn't a need.

Also with something "new" you have to convince businesses or organizations they need it, and that takes marketing money and extra time overcoming their resistance to a new concept.

That's why I think it's easier and cheaper to start with a "better" version of an existing product, because customers will already know what it does and know they need it.

And the fact they already might have your competitors' products doesn't matter -- you're going to sell it when they decide to do a "technology refresh" or otherwise update to the latest and greatest. Or when they decide they can't stand their current software provider and need better support or just something different than the junk they currently use.

As for finding software that sells for $20K a copy, I don't really know where to go. For my product idea, I happened to be working with $20K (actually more like $50K) software on my job and found out that's how much they paid for it. I knew I could make it better so that's where I happened to get my idea.

I also know when I was working for a large tech company/contractor, we had stuff selling for $10K or $20K a position. And I've seen people on other boards mention theirs sells for $20K or $30K a seat, so it's definitely out there.

However, $20K software isn't going to be advertised on the web with a price next to it, I don't think, because it's usually sold as a custom-quoted "solution." So it won't be as easy as doing a web search.

I think then the best way to come up with a $20,000 B2B product idea is to focus not on "what kind of software do businesses really need?" but "what kind of businesses depend on technology to operate their business?" And behind that technology is probably going to be a computer, and you can write better software for that. If the rest of the technology is off-the-shelf specialty peripherals, you can easily provide those too and sell it as a "turnkey solution." That's what my company does.

Here's an example B2B idea: automated parking garage software. I was thinking about this the last time I had to pay $100 at my local airport. They certainly depend on technology to run their operation -- you punch a button, it prints a ticket with the time, takes a digital photo of your license plate, then 5 days later you exit and hand the attendant your ticket (or stick it in the automatic box), they feed the ticket into the reader and calculate the price and probably keep all kinds of stats and make all kinds of reports. The software running that can't be that complicated, can it? Yet they use it all day long every day and depend on it to operate. I bet the software portion of those systems easily sells for $20K, or $50K, or $100K. Think of all the money they take in... $100K is nothing to them if it saves them just 10 seconds per car times 5,000 cars a day.

And what would be involved in a "turnkey solution?" Besides the "terminals" in the ticket booths (standard PC's, maybe with touchscreens?) and maybe some central computer in the main office, you'd have the network, automatic gate things, ticket printers, those kiosk things you press the button on to get your ticket, some kind of camera pointed at the license plate... network switch... what else? I don't know but all those things you can probably buy "off the shelf" from whoever makes them. So you integrate it all together and your software runs it and prints out nice reports and alerts the boss when the garage is getting full or whatever it is they need. You sell it as a turnkey system for let's say $200K, of which $50K is your hardware cost and the rest all "profit" from your software. I have no idea if it sells for that but I'd certainly research that industry if I was looking for new ideas.

But my idea to possibly look into that product and market comes from considering businesses that depend on technology, not just considering what software they need. There's more out there than stuff that runs on an office PC or a web browser, so I'd suggest don't limit yourself by asking "what software should I make?"

2. Pick the products that are supporting a handful of million-dollar companies.

If the main providers are multi-million dollar companies, obviously it's supporting them or important enough to them which means it's a viable market and there is probably room for you. You only have to get 1% of a $100 million market, or 2% of a $50 million market to make a million a year, for example.

Also, those million-dollar companies are going to spend lots of money convincing any new customers why they need their (and by extension your) products, which means you don't have to. Your competitors will spend all that time and effort convincing them to buy, then the customer will get quotes from everyone and might end up buying yours instead, at no real cost to you. When you don't have any money, might as well ride your competitors' coattails!

3. Build the product but only with the core features

You only have to make a "lite" version initially, which you will sell for less to get your first customer. The idea is to get that initial customer and use that money to continue to build it, continuing to make it less "lite" and higher in price until it's similar to the existing products on the market and hopefully at that point better.

A "lite" version is probably still useful to the customers because the current software on the market will almost certainly be bloated with bells and whistles. That's just what happens to software over time. Their core product sells when they first get in the market, then they need to upgrade it and add new things as the competitors do, both trying to make something unique. Yet the core software sold before just fine without all that, so you can possibly get away with just the basics.

Your strategy is going to be make just those core features, and price it a lot less. Customers don't always buy on price, they buy on value. Maybe they can buy your software for $5K a seat with a handful of features that are the main ones they use, or buy the mature, market-leading, proven software for $20K a seat with five times the features although they're not all needed or used.

That may not be an easy decision for customers and some will go one way and some the other. But the important thing is sometimes it'll go your way, especially with the segment of the market that may have had previous bad experiences with the existing products or companies, or are looking for something different than what their own competitors use. Remember you only need 1% of a $100 million market, you don't have to take it all over.

Naturally, you need to figure out what are the basic core features you need to build. That takes knowledge of the domain. I was in my domain already and knew what the core features had to be, but maybe being outside the domain looking in might be a good thing too, since you might approach things differently and come up with something new.

I know if I decided to make automatic parking garage systems, I'd at least want to hang out at some garage and shadow the workers for a few days. Not to figure out what they're doing wrong and how my software could fix it, but just to learn their job, learn what their current system does, and find out what they like and don't like about what they currently use.

Now, of course it's easy to say "make a lite version of the product with just the core features" but what if there are a whole lot of core features and required basic functionality? It took me almost ten years off and on (part time/nights & weekends) to make my "lite" version. Maybe that's an extreme case, but if it's $20K software I doubt the core functionality could be slapped together in six months or a year, because a lot of people would have already done it. Wouldn't they? Maybe not, I don't know. It took me a long time though. I'd expect to spend a couple years at least on it, which also helps keep out potential future competition (barrier to entry).

I think too many people though want to get rich quick slapping something genius together in a month. I say let them waste their time making a handful of shareware apps in the same time you're building up a real product!

4. Get your name out in the industry

$20K software is certainly going to be "niche" software, with not a whole lot of customers out there who buy it. Maybe it's in the dozens, or hundreds, but certainly not tens of thousands. So it's probably likely they all gather at some main industry conference, or all subscribe to their main industry trade magazine, or a list of all of them can be bought from their industry trade association or their trade magazine publisher, and it's possible to call every possible customer directly.

At this stage you want to just get your company name out there so everyone knows you sell your systems and could be an alternative to what they already have. You don't have to sell them your systems yet, just get your name out. You can email, mail or cold call all potential customers just to say hi and introduce yourself and company. They're in a niche and they probably don't get a lot of sales calls so it's not the same as general cold-calling, in fact they may be glad to hear of a new supplier in their business. But do normal marketing here, which is beyond the topic of one post, but for example you can also get a booth at their trade show, take out ads in their magazine, get their industry magazine and websites to print your press releases, etc.

The idea with just getting your name out versus trying to sell is when one of them is looking to upgrade, or they hate their current system and want to try something else, they know to send you a request for proposal or ask you for a quote or demonstration. That's when you'll do the selling. For now just make sure everyone knows you exist so you get those requests for quotes and proposals.

(Obviously, once you're ready to sell you have to have your product finished, basic business set up, brochures ready to send, etc which are their own topics. This is just illustrating the steps.)

5. Present yourself as consultingware -- it won't matter that it's you against big companies

Don't assume your product requires an army of a company behind you to sell, even though that's what your competitors do. Consider:

  • Any software that's used a lot is going to have a segment of people who hate it
  • Any company that "owns" or has a large part of the market will have people who hate them
  • In some markets, business customers may not want to use the same things their competitors use, and will be willing to try a new or unproven system in the hopes of getting an advantage (better productivity, lower overhead costs...). The unproven product may fail, but some are willing to try.

So you will have at least some segment of the market that will be open to something new or at least consider you even though it's a sub-complete product and a one-man show.

So, how do you sell it?

Firstly, the fact you have a "lite" version is covered by your reduced price. You're going to sell your lite version for $5K or $10K a seat or something well below the competition, to account for its being a basic product. At the same time though you're going to sell them on its value, convince them that it doesn't need all the bells and whistles like the other products, so why pay for them? Etc.... sales is beyond the scope of one post here but you can use standard sales techniques to convince them the value of your features versus the price they pay.

The bigger issue is the company being just you. They're going to ask you outright, or you'd better address up front how you expect to give them the same service and support the 100 person competitor would give, and recognize that it's a key technology or product for them and what if you get hit by a bus or disappear? What do they do then?

Here's how I've addressed the common questions about a one-man company:
How can you give the same level of support?

You tell them your business approach is different -- yours is "consultingware" and you're only selling to one business at a time. That way you become dedicated to them and their exact needs. And of course it's true! If they're paying you $150K for your "turnkey" system, it should be no problem to check on them weekly, fly out to their site monthly, really hold their hand, put in requested new features for free, really get their feedback over the year. They'll love it and be your champion for your next customer.

Ask them if they're getting that from their current provider now... probably not.

Also point out they would be a major customer and a really big project for you. With the big competitors they're just a number. They'll like that idea too.

As for getting hit by a bus, well your competitors could go bankrupt tomorrow too. Who knows? But assure them you're fully insured for liability and performance ("errors & omissions insurance"), and point out once software is installed and running, it doesn't change. Software doesn't wear down, it'll keep running the same way forever. And they don't pay until it's installed, running and accepted, so if you got hit by a bus or your company went away, they'd still have it and it would still continue to work.

How do we know your product works? You haven't sold it to anybody yet.

You say yes it is a new product, and the bad thing is it's not established, but the good thing is they're getting the latest and greatest technology has to offer. Then you reiterate how they don't pay until it's installed and proven running and they accept it, so there really is no risk. If it doesn't work as advertised, they don't pay. And you're confident enough and have tested it enough you're willing to spend the money to do all that installing, training and demonstration of functionality before they accept it.

You should also admit that sure, there will be things that will come up, but that's also why you're running your company as "consultingware." You'll be there on call and devoted to them and how they're using the product. If there's something major, you can be on the next plane out, will have it on your laptop and can make changes right then and there. Do the large competitors do that for them now? Most likely not.

See? A one-person company is actually a good thing!


Well, my first customers all responded really well to the above, anyway. And I wasn't being deceitful at all, I really did hand hold them and was devoted to them, because after all my first customer was my only customer!

So that's one way you can run a big money software company by yourself. Many customers really do care more about support and quick responsiveness more than how many millions your company sells a year. And remember, you don't need to win over 100% of the market, just 2% maybe to make good money. Target those 2% who hate the current products and companies on the market and they will probably be glad to give you a chance.

Then with that first happy customer, you use them as a reference and build up from there. Or more likely in a small niche market they'll rave about you to everyone and everyone will want to know more.

I know with my first customer, I did all the above and flew out probably 10 times that first year and spent easily $20K on travel and stuff I didn't have to do contractually. They needed more monitors? Sure, I ordered them from Dell and they had them two days later, for free. They loved that kind of thing. It was a $140K sale so that year I think my net was only around $50K because of all that kind of stuff, but they really became my champion and paved the way for many more future sales.

Government Follies

My last post about government contracting might have given the impression I was somehow gouging the government by pulling some price out of my ass. You can't do that and exist for long in business or certainly government sales. Nope, it was market price for my product, established market, commercial items, and the competition was sealed bid, fair and open with multiple companies competing. With an open competition and sealed bids it's in nobody's interest to inflate the numbers because your competitors will undercut you easily.

I think now my conversation with that contracts guy happened because he was thinking it was time & materials when it was actually firm fixed price, and I just didn't know enough about contracting to realize that was the misunderstanding.

So to you government contract guys who criticized me, I really don't care. Don't buy from private industry if you think the open, free market is too expensive. How about instead, you buy from my competitors for 30% more? Or just hire Mega Contract Corp to build it for you for three times the price, then spend another five years and another $10 million fixing it when it doesn't work?

Meanwhile I'll just keep selling to private industry who don't bitch about every single line and every single dollar like you government types do. Yea, I know it's to prevent waste and fraud, but it's still annoying.

(Actually no, I love you government types... keep those orders coming in!)

Tuesday, June 24, 2008

Government Whore

Even though I once worked for a defense contractor, I never thought about federal government contracting until a government contractor approached me about subcontracting on an extension to a contract they had. I looked at the requirements, which my product met off the shelf, and thought wow, that's a lot of money I could make if we win! 500 seats at $10K a seat (the off-the-shelf discount price), means easy government contractor money! Woo-hoo!

Hmmmm, doesn't quite work that way, at least for a product company like mine. For whatever reason, the contractor (the "prime;" I was a "sub") just didn't understand how a subcontractor could exist that simply sold products. They just couldn't fathom it, for some bizarre reason!

Well, by "they" I mean the mid-level project manager lackeys that were running the contract.

I admit there was confusion on both sides though because I just couldn't fathom how anyone could think otherwise, and I was new to government contracts. I mean, isn't buying products from a vendor very simple? You order the product, the vendor ships it to you, and bills you. I kept telling them this but they kept asking for a "cost breakdown." I kept saying "look, we're just a vendor of a product and we sell it to you and you resell it to the government. Isn't that all it is?"

Then they'd say no, we want you to be a subcontractor. We need a cost breakdown.

Our initial conversation went like this:

Prime: "Send us a quote for 500 seats with cost breakdowns"
Me: "500 x $10,000"
Prime: "Okay, but how did you arrive at that price?"
Me: "That's the market price -- that's what I and my competitors charge."
Prime: "You can't price it like that. I need you to break it down by material cost, and labor."
Me: "That's all included, it's turnkey, we install, train, provide support for one year, everything."
Prime: "I know but I need you to break it down. I have two columns here: material cost, and labor. What are those numbers?"
Me: "We don't break it down that way, we have a firm fixed price. $5 million for everything."
Prime: "You can't do it that way on this contract. You have to break it down."
Me: "Okay, material cost is $5 million, labor is zero."
Prime: "You can't have zero labor. About how many hours does it take to install and train those locations?"
Me: "Ummm, 300 hours?"
Prime: "Okay, and the labor rate for that is $97.65 an hour, times 300 is $29,295. Is that all the labor? What about one year help desk support?"
Me: "Hold on, where did you get $97.65 an hour from? We don't price that way, I'm telling you it's very simple, send us a purchase order and we'll..."
Prime: "Sorry, but that's how you have to price it. How many more labor hours are involved?"

Well that all seemed stupid but I didn't want to lose a $5 million sale over some lackey contracts guy wanting numbers to fill in his boxes, so we came up with some "labor" estimates and "travel" estimates, and "project manager" labor estimates, and "administrative labor" estimates, then it got to materials cost which I presumed would be for the actual software. So I took $5 million minus the above computed labor and said that's the material cost for the software.

Prime: "You can't do it that way. How much do the materials cost you?"
Me: "What do you mean -- the CD's and binders?"
Prime: "Yes, if that's what's involved."
Me: "I don't know, are we delivering one per seat or what? $2500 maybe?"
Prime: "Okay, and this contract allows 13% markup so we'll put down $2,825."
Me: "Fine -- put the rest as the software license."
Prime: "We can't do it that way. You have to get quotes from three vendors."
Me: "We are the vendor! That's the price."
Prime: "You can't charge that. You have to charge it by labor or materials. How many hours does it take you to make?"
Me: "Zero, it's already made."
Prime: "Then you can't charge for it."
Me: "Yes I can."
Prime: "No you can't."
Me: "Yes."
Prime: "Sorry, no, that's not how this contract works."
Me: "Well that's our price."
Prime: "Sorry but no, it has to be labor and materials."
Me: "Sorry but yes, it's my company and that's how we sell it."
Prime: "Doesn't matter. You're the sub and we're the prime, you have to price it how it's allowed in the contract."
Me: "No."
Prime: "Yes."

There was a lot more detail but that was the gist of it in so many words. This was all before we had signed any agreement, too, so I didn't have to do anything -- who were they to tell me how I had to sell it to them? It was bizarre and confusing to me because we were just on different pages. I "had" to sell my $10K software for five bucks because I was only "allowed" a certain profit level above the physical material cost? Screw that.

So I did some research and asked around. I just wasn't clear on how government contracting worked (and I'm still really not, there are entire professions devoted to understanding it)! But the way I believe most these big government contractors work and make their tens of billions annually, is they're simply whores to the government. They don't make money creating and selling things. They sign up to be a whore and do whatever the government tasks them to do, and they simply get paid by the hour and reimbursed for expenses plus pre-agreed profit markup. The rates are already set or are established in the contract. For them, income billed minus salary paid to the employee = their profit.

Build you a widget transducer you say? Okay.... whew, that took us 10,000 hours. Here's your bill. What do you want next? Build a new missile? Okay, that took us X hours times the labor rate, and $10 million in materials. Here's your bill. On and on for billions of dollars.

So the confusion between me and my prime was they assumed my business was the same as theirs -- that we simply whore ourselves out to provide whatever the government wants, or in their case whatever they decide to task us with. They assumed I knew they knew this, but I didn't because I didn't know anything about that. Recipe for mutual confusion.

The "confusion" got cleared up though after talking to the VP in charge of that division, so the project manager reluctantly massaged their numbers ("wellllllllllll, we'll make an exception this time but that's not how it's normally done here...") into whatever format their boxes required, and we agreed on the $5 million firm fixed price.

Oh and we won, yay! (Although it turned out to be "only" $4 million because the government revised their needs... and wanted it installed over multiple years).

My lesson from that though was "no, people don't necessarily understand what your business does. You have to explicitly tell them sometimes and sometimes refuse something when they insist."

Actually I still encounter that kind of confusion. Like they then sent a "subcontractor agreement" to be signed and returned. To me it had a lot of weird non-applicable clauses, left out key important things like ownership of the product, etc, and our lawyer had the same and other concerns. I told the prime we were reviewing it because it had problems, to which the contracts guy seemed baffled. "What do you mean? Everybody signs it... we've never had problems with it."

"Maybe, but we're not a labor company like this agreement assumes. We're a product company and just want to sell you our product. Don't you have a vendor agreement or something?"

"No, this is what we use -- everybody signs it."

"Well I'm not signing it because it doesn't cover what we're providing. Here's our revisions and my signature at the bottom."

After lots more back and forth: "Fine...we'll make an exception this time."

They signed it and so far it's going well. But wow, you'd think they'd have a better clue. Is all of federal contracting like this?

What's with these customers, anyway?

Other than federal customers I also sell to institutions (sort of "public utilities"), some for-profit businesses, and local and state governments. Institutional and government selling is its whole sub-art form from regular consumer sales, so some of what I've described is unique to that. But businesses I've found are pretty good customers because they "get" business. It's the government and institutional customers that can be a pain because sometimes they just don't "get" how businesses work, I think. Maybe 30 years in a government office will do that to you, but I have to deal with it a lot.

One issue I keep having with them and is really, really annoying is the whole "request for proposal" and their requiring anything they want in the proposal. The customer has their procurement process and like the anal projects guy above has specific boxes they need filled out, and if they're not filled out they will simply throw your proposal away. Just like that. All my competitors know that, and so does anyone who sells to government entities I'm sure, but I didn't know that at first and found out the hard way.

It was a request for proposal that required audited company financial statements showing sales and profit, and breakdowns of the product price showing costs and profit. Huh? I'm a privately held company and am not about to give that out. I politely put down "company confidential/privately held" and of course they promptly threw away my proposal without even looking at the rest. We had the lowest price and were truly best value I think, yet they just threw it away, just like that. Fail.

Huh? What gives a customer the right to demand that and expect to get that confidential information? So I asked them that afterward, in so many words. They said they needed to know our costs to make sure we weren't gouging them. That was just their procurement rules which they were required to follow. Oh, and they generally "allowed" no more than 20% profit.

Uhhhh, okay, but this is a free market we have, isn't it? I mean, if this were a communist country I could imagine justifying prices, but the market price in a free market is simply the going market price. Or am I way off base here?! Do western countries tell OPEC "sorry, you can't charge $135 a barrel because your costs are only $5 a barrel. Therefore you have to sell it to us for no more than $8 a barrel."

Well of course a customer can ask for whatever they want and demand whatever they want and throw out whatever proposal they want. Fine, but it's "their loss." I'm just mystified why some organizations operate that way, but they do.

Unfortunately, I soon found out all my competitors bend over backward and kiss any customer's ass and give any and all requested information, so now I have to as well. Whatever. Another thing I get to gripe about, like they probably do too I'm sure.

Next Time

I'll try to start posting some positive things about running a small software company eventually... it's not all bad!