The Price is Right…
It is autumn and that means there are a lot of trade shows happening. I confess to visiting a couple myself. I find them a useful opportunity to quickly find out about a number of software businesses that I am unfamiliar with as well as having a face to face chat with those who I have a longer established relationship.
I chatted to a number of owner managers who were consolidating their position in their home market prior to internationalizing. The great thing about the software business is that the pace of innovation and growth never slows. One thing, however, disturbed me.
On several occasions I asked the owner how they positioned themselves against the leading player in their technology niche. Far too many of them answered ‘price’.
Now, ‘Me too, at a lower price’ is a long established business strategy. However, it can be a very dangerous one to have in the software industry. There are two reasons why this is so:
1. Innovation in software always drives down the cost of it, so as a new entrant to a niche market you can virtually guarantee that the next new entrant into your niche will be even cheaper for a given set of functionality.
2. The marginal cost of producing a software product is close to zero, so it is really easy for your existing, higher price, competitor to introduce a ‘Lite’ version of their product and rapidly erode your competitive position.
So if the facts on the ground are that you are ‘me too, at a lower price’ how should you position that product in the market?
1. Choose a price sensitive segment and position the product as optimised for that
That will more often than not be the SMB segment. In order to succeed in this segment you will need to build a value chain that is optimised for it. The critical success factors are, arguably, not how good your value proposition is to the end customer – clearly it has to be competitive – but how good your value proposition is to your channel partners and how good you are at recruiting effective partners who will build your business.
2. Compete on Lowest TCO – not price
If your software is cheaper, it is presumably also simpler to install and use and has lower maintenance charges? Assuming this is correct then you should benchmark the TCO of your solution against your higher priced competition. The licence price is easily discounted, the time taken by people to install, configure and then use the system is not.
3. Find a feature/benefit that you do better and get the market to fixate on that
As your software is newer and cheaper it is also likely to do something that your competitor’s product does not. Research their software and the users thoroughly and find something you do that has a tangible benefit and focus your marketing on why the customer must have this.
4. Carry on regardless and hope your more expensive competitor buys you
This strategy can work remarkably well if your principal markets are, at least initially, in countries that your competitor is not strong in. You would not be the first small ISV to be bought to achieve better geographic coverage. The key success factor here is to irritate your competitor enough that they are aware of you, but not so much, or in such a manner, that makes them want to crush you – beware the ‘Lite’ version of their product backed by their larger marketing budget.
All four suggestions require some investment of time and resource to implement, but this investment will have a greater payback than simply trying to out-code or out-price your larger competitor.