This is an example of how VCs distort the market for other businesses.
I had a recent conversation with a prospect and they took issue with the price of our software. Our app is in a specialized industry (ie. a smaller market). We charge a per use fee of $35. This fee enables our customer to immediately earn nearly $200 (a 5x return with no risk to them). Despite the significant benefit and profitability of using the app the prospect took issue with our price and referred to the cost of other apps.
It was that conversation that made me realize how we've become accustomed to the quality and price of software that's been heavily subsidized by massive VC investments.
I agree with the idea that venture capitalists alter ("distort" is a loaded term) the market in their favor. That's part of the natural process of systems commoditizing their complements. But I really think that you characterize this in an uncharitable way with your example, which I have difficulty believing as it was stated.
If your lead really understood that they would "immediately earn a 5x return with no risk", and that was the truth, they would be cartoonishly foolish to not take that offer. Furthermore, wouldn't that mean your company could be printing money with its results? It's hard for me to believe a rational customer wouldn't take that deal, so either they didn't understand or believe that would be the result, or you're exaggerating here for the benefit of your point.
I know it's easy to think I'm just griefing you over this, but I'm trying to make a point in good faith. There are certainly legitimate reasons to dislike the profit incentives that venture capitalists encourage, but I think you portray their impact on small companies as unrealistically bad (and perhaps your product in a more favorable light than is warranted), to the detriment of a discussion about it.
None of this is personal, mind you. Just a comment.
Perhaps you live in a world different from mine, but what you describe as "cartoonishly foolish" behavior I consider completely standard. Customers refuse to spend 5000 to make 20.000 all the time, or they're willing to waste weeks finding a different vendor that can offer the same for 3000. Others are willing to walk away from a great deal unless they get a discount, but are content with a tiny discount. Because a discount to them signifies a moral victory, or that they're not being taken advantage of, or they simply want to believe they're great negotiators or something like that. I don't get it, but I have seen it often enough for it not to be unusual.
We don't live in a world of rational agents. And even if we did we don't live in a world where most business purchases are made with people's own money. People have complex and contradictory goals and in my experience pointing out the value customers get for the price they pay is the least effective sales strategy.
Too true. I had a potential client who had already spent months and a bunch of money on external consultants regarding an intermittent identity management integration issue. They heard about me through word-of-mouth.
I offered a fixed-price "no win, no fee" rate equal to about a week of my normal hourly rate. I thought it was a great deal given how much they'd already spent, plus it gave some certainty to them around something could have been very messy and open-ended.
The client got hung up on, "What if Tom only takes an hour to solve it? What an expensive rate! What a rip-off!" They were more concerned with seeing me put in time and effort than actually getting results.
Forgive me if this comes across as patronizing, but I think you might avoid this in the future by doing the following:
* Charge daily or weekly, not hourly.
* Don't anchor your results to "free" (this includes not getting paid unless specific results happen).
* If a customer has been repeatedly burned by other consultants and believes this problem could be solved in an hour, consider either 1) avoiding those customers or 2) working on an agreeable scope that precludes an absurd amount of time.
I'm not saying that will fix all your problems, but if it helps, I've never encountered this issue with this formula.
This can work for the provider of a service, in certain circumstances.
But my opinion is that it is always better to charge a price that reflects the value delivered, no matter how long it takes to deliver that value.
There is a (possibly apocryphal) anecdote I read once in which a consultant was brought in to service a machine with many parts. He replaced one part and invoiced (say) $10,000 for replacing a part worth $1. When asked why his bill was so high, he said: "I charge $1 for the replacement part. The other $9,999 is for knowing which part to replace."
As knowledge workers, those who are skilled must remember that "hours spent sitting in a seat" is not a valid measure of their productivity and should not permit clueless managers/clients from judging them in that way.
That's good advice, but I don't think getting paid to produce a specific result is anchoring to "free". I guess it depends on how precise the scope is. If it sounds vague and up to the client's discretion, that they just want free work on spec, then run away. But if it's easy to define and measure, then it's a useful way to signal competence and avoid anchoring to a rate instead of the business need.
Anyway, I'm happy to say that I avoided this customer (and others that care excessively about timesheets) and I have no regrets.
Anchoring is a different effect than you might have thought. In breakthrough research, it was shown that when people were asked to write down completely random numbers (such as the last four digits of their social security number), before taking a guess at the value of a home (say; might have been something else), it had an absurdly strong effect on the value of their guesses. (People with coincidentally high last-four-digits wrote much, much higher ones than people with coincidentally low last-four-digits, even though it's obvious they wouldn't have even thought twice about it. If I asked you to think about the last four digits of your social security number, what that happened to be would impact any other valuation you were making immediately after.
The mere mention of a number - any number - "anchors" psychologically in an absurdly strong way.
So in that sense, the statement: "I offered a fixed-price 'no win, no fee' rate" includes the literal mention (like the social security ending digits 0000) of "no fee" -- so it doesn't matter what the sentence is. The sentence could read "Obviously I wouldn't be able to do it for no fee" and it would anchor to $0, whereas, if you said, "I obviously wouldn't charge a hundred billion dollars" it will anchor it to a hundred billion dollars.
These effects are incredibly bizarre. I'm not an expert salesperson but I do know about them.
Is a good introductory article. Daniel Kahneman is the name most associated with this research, or at least reporting it, and he won a Nobel prize* in Economics in 2002 for his work.
* (the Nobel Memorial Prize in Economic Sciences by the Swedish National Bank)
FWIW the phrasing I use with clients is "fixed-price for successful completion of the following objectives" so it's a bit of a moot point.
I do think you're overstating the research though. Many studies of unconscious priming haven't been replicated, and psychology as a whole is very subject to publication bias. [1]
Anchoring is a real effect, and I'm a fan of Kahneman (especially prospect theory), but the evidence about "incidental" influences is very weak.
(the research I read about was way stronger than just statistically significant, or something like it. I would be pretty shocked if it failed to be replicated. It's a very strong effect.)
The phrasing you say you actually use isn't an anchor. But you can still try different ways of phrasing it!
Extremely subtle differences in phrasing can have huge effects on people's reactions. If people are not reacting reasonably, try a slightly different phrasing, as well as different offers :)
When I was freelance I noticed that some consultants got the big checks without question whereas others got nickled and dimed for the same work. I think the key is to be able to "talk business" with the business people. It's a skill to have. I didn't :-(
> Because a discount to them signifies a moral victory, or that they're not being taken advantage of, or they simply want to believe they're great negotiators or something like that. I don't get it, but I have seen it often enough for it not to be unusual.
Then why not raise your price to $99, and let them negotiate you down to... $35?
If you can get such a big discount, that's a red flag: the price was bogus, I'm being conned (or, more charitably, a communication error might have been made). It's typical for enterprise purchase of software or IT services, for example, to either discard or put in question offers that are quite below their competitors in the RFP.
But on the other hand, again, when dealing with enterprise purchases, the purchases department needs to demonstrate that they bring value to the table by lowering costs. So it is typical to make what you suggest and account for a commercial discount of 3-10%,depending on purchase size, etc.
You need to fight for it, but you are safe to grant it in the end.
This might happen even if you don't know about it, if your boss sets the prices and you can request a special discount for special clients.
Because most customers don't like, or don't know how, to negotiate (yes even B2B customers where you would think this is the norm). So if the initial price is too high, they won't even bother to talk to you. The conversation literally dies.
Alternatively, they know how to negotiate, or don't mind it, but given the bigger picture it's not worth their time to go back and forth through the intro emails -> demo conference call -> pricing negotiation loop with every company that has high prices, and they are faced with an information asymmetry as to which ones are worth it.
Oh, yes. When exploring a new domain, the "call us for pricing" people get put at the end of the line. We're not an enterprise, and we're not going to waste our time with sales small-talk before we've even seen what the product can do.
When I think of how much of my life sales people have wasted on meetings and calls and blah blah it makes me want to cry. Just tell me the goddamn price. I'll tell you if it's too much.
A bit of business advice my sister got for her hair salon recently was to double the prices overnight. They were skeptical but were out of options so they gave it a go. Now they have less customers but they can give they ones they do have more attention and a better experience and the ones they lost were the troublesome customers anyway, so now they make more money from less customers.
It was an interesting example of how it's best to not try and please everyone.
Well, much of the customer doubt has to do with companies promising things they can't deliver. The phrase "If it's too good to be true, then it probably is [too good to be true]." exists for a reason.
I live in the same world as you. My business has a proven model for digital publishers that generally increases their yield 2-4x yet they refuse to spend the percentage needed to make the deal happen. Sometimes pride can be so large...spend 5k to make 50k? No thanks..lol
I understand that I don't have the same insight into your customers as you do, but to give a counterpoint, I charge significantly higher than $5k for my services and my customers don't receive any tangible improvement to their revenue as a result. I have not found that they are incredulous about my rates, let alone due to pride. Maybe there's something other than pride at play here, such as market dynamics or your product?
Your customers' pride could be one reason why they refuse to spend that, but have you considered that this is an uncharitable perspective? Don't you think it could also be because they have honest reservations about your product or better alternatives for their business than that they are obstinately refusing to just hand over their money to make $50k?
I think it's much more likely that the situation is actually quite nuanced with competing incentives, priorities and perspectives on either side. An information asymmetry is not the same thing as irrationality.
As someone who has operated in the world of digital advertising, this may have more to do with the fact that so much bullshit has been slung at both advertisers and publishers that there is an incredible amount of skepticism about advertising products.
Have you had success overcoming that? I suspect a rational counter won't win over an irrational objection. But will an irrational plea (eg play to their ego) work?
Yes, I purposely choose colourful language. Github is an amazing product, in part because they had $66M to spend making it amazing. Think about all of our other favourite pieces of software, and many will have the same story. This results in the marketplace having unrealistic expectations for software quality when the market size won't sustain VC levels of investment.
Regarding your disbelief, you assume (like economists) that consumers are rational actors. They aren't. There are 2 reasons why the customer pushed back. One, they thought the price was unfair--e.g. "Hey MS Office costs me $5/mth, and your software which does less costs me several hundred a month, you charge too much."
Second, the customer is already earning a significant salary, so an extra $5,000 a year isn't meaningful for him. (Yeh, crazy isn't it). This is our first sales effort and we are learning how to position the product to overcome these objections--part of the problem was that we didn't anticipate push back and didn't properly position the product to avoid these concerns.
I don't assume that consumers are rational actors, at least not in the aggregate or binary sense that the term is usually used. Theories involving rational actors usually use the terminology in groups, whereas I'm talking about an individual customer and using rationality as more of a sliding scale with percentiles. In this case, it seemed incredible to me that someone would be so irrational on that scale.
However, you did clarify your example, which makes it easier to accept. Phrased this way, it seems as though a potential upside of $5,000 wasn't worth it for someone who is skeptical of your product and has free alternatives. Stated this way, I can understand how VCs cause market incentives that make your job more difficult.
Consumers are rational. They aren't unlimited in their ability to source and process information. We're not very good at understanding their behaviour.
Folks are trained to get many types of products for free. I've seen similar cases where businesses refuse to pay for things like licensed information that have a clear and obvious value.
Clear and obvious to who? What makes you believe this is not a Dunning-Kruger effect on your part? Do the customers have the same special insight you do?
Most importantly, is it more likely that you're not as well informed as you think you are, that you don't fully understand the competing priorities at play, or that the business is actually being stupid, as you say?
Thanks for the message board psychological analysis.
In the example that I was loosely referring to, and are not at liberty to discuss in further detail, companies must pay to be qualified to bid on a specific type of business.
Firms that license some specific information are far more likely (on the order of 50%) to successfully bid. This information is clearly disclosed to them when they get qualified.
So they make a voluntary, significant investment to participate in a process, and then fail to take a simple step that would make them far more likely to make money. I call that dumb, but perhaps I am in fact too incompetent to make that assessment.
Sorry, I don't mean to provide an armchair psychological insight here. I'm just trying to play devil's advocate. While in your specific case your position might be justified, I think there's value in pointing out that many misunderstandings about customer behavior are due to Dunning-Kruger on the part of people selling them things :)
> It was that conversation that made me realize how we've become accustomed to the quality and price of software that's been heavily subsidised by massive VC investments.
Not to mention open source, sponsored by big companies, universities and passionate individual contributors. E.g. try and sell a compiler, a JS framework or an IDE.
This is one of several reasons why the GPL is a great license for FLOSS. You can GPL-license your software and contribute to the community, while offering alternative commercial licenses to companies that want them.
If you use a totally-permissive BSD-style license, you're stuck trying to charge for a support contract or custom plugins or something.
I sold my software dual-licensed GPL, and a deal-breaker for me was how long it took companies to actually purchase. They had the software, used it, and so didn't have a compelling need to buy, right now.
Though they all did actually buy in the end, and there was enough income to live on, I found the uncertainty very distracting and not worth it.
What's stopping other companies from using your GPL software in their proprietary stuff without telling anyone? Not every company out there is a startup who needs to be sparkling clean to pass due diligence for the next round, acquisition or IPO. A lot of companies out there are perfectly fine with a little bit of cheating here and there — I would actually say that most of them are. Especially when you remember about the world outside of US.
It gives you a future market share via so many people using your software for free. They won't pay if it weren't free anyway, but would use a competing piece of software. That is, without the free (as in freedom) version, few would even consider paying for a commercial license.
Did you ever think why Microsoft is so lazy about enforcing the end-user Windows licenses on non-business customers? Maybe they want kids get used to to running Windows at home, and expect it in a work environment, and value this higher than the lost revenue from "pirates"?
Note how many people still happily run Win 7, and before that happily ran XP, and before that happily ran win2k — while being very reluctant to upgrade.
It's corporations that need upgrades and support. With corporations, I'm sure, MS is not lax and enforces the licensing policy.
Which is all fine and good when you have VC funding and can run at a loss for years, or are growing at a rate where you don't care about a few cheats using your product. But, for all those bootstrapped business' your argument falls flat.
~20 years ago Oracle handed out a stripped-down "personal edition" of Oracle Server, their then crown jewel, with basically no strings attached, just to get people on the bandwagon.
Maybe you're charging too little? Price is a signal of product value. The customer might be wary of getting an immediate 5x return on their $35 investment, thinking there is some trick in the value proposition. If your price matched their immediate return ($200?) then they might be more receptive because the value equation is balanced.
That's true. VC companies are killing a lot of otherwise viable businesses because they can undercut prices. Also, it seems that a lot of VC companies these days are not even trying to be real businesses as in taking in more money than they spend.
At that point just throw down the gauntlet and ask do you want that $165 or not? The price is irrelevant and the value is apparent. If not then move on. The guy's not being reasonable. You have to realize that consumers are insane. Treat them like mental patients.
It is funny that mention this: "paying GitHub a lot of money right now". Believe me: you are not paying as much as you should. Ask some people who were dev managers in 1990s how much was a single ClearCase license...
"Should" is an odd word to use. You're comparing two completely different markets. The only commonality between the two is software sales, otherwise the landscape, incumbents and products have changed significantly.
Beyond that, there is no "should." You price the product at what the market will bear.
Agreed. B2B still knows what software and support really cost, and they are willing to pay when it solves their needs. But, at the individual level people just don't realize it. Heck, look at all the free software your new Mac comes with.
That software is free because Apple has a strong incentive to develop a "platform" with which to sell their comparatively expensive hardware. In that context, I wouldn't say people don't realize that real software has a significant cost. That may be the case, but I'd sooner say the market values the software's complements (in this case, hardware, robust compatibility and a healthy development ecosystem) more than the software itself.
One perspective is that people are trained to be too cheap because of market incentives, but another perspective can be even well-informed consumers make a reasoned pricing decision that concludes with free or low cost software. And if you want to make a normative point, you can say that this is bad for small companies trying to make software for these consumers, but you can also say that consumers are benefiting more by purchasing the software's complements rather than the software itself.
You need two more price options. One for a little less and one for significantly more. Say $29, $35, and $99. Remove / add something to the other prices. People just want options. Give them some.
Oh, and provide a 10% discount of they buy the $99 version NOW. Offer ends soon. ;)
Good point, I never thought of applying that technique here, it always struck me as a no brainer decision. The reality is you need to hear a few objections to start understanding the mind of the prospect and how to counter their objections.
Do understand that when people object to price they are mostly ready to buy. By providing them with more than one pricing option you can get around the obstacle. The issue lies in making it expensive enough so that you dont get annoying cheap users. Make sure to remove support from the lowest priced option. :)
Email me if you want help on this. No BS or strings. Check profile.
It's for primary care physicians outside of the US. So, we are dealing with the following:
- An industry that has a slight disdain for maximizing profit (healthcare here is a public good)
- The physician in question is already running at 100%, so the extra workload to make an extra $5k/yr isn't worth it for him.
- Other docs in the clinic are all over our solution and are seeing the increase in their billings
So, this doc, and another in the clinic looked at the fee and said they'd rather not realize the extra revenue because they thought someone else should be paying the software fee (the someone else being the government that runs healthcare).
I had a recent conversation with a prospect and they took issue with the price of our software. Our app is in a specialized industry (ie. a smaller market). We charge a per use fee of $35. This fee enables our customer to immediately earn nearly $200 (a 5x return with no risk to them). Despite the significant benefit and profitability of using the app the prospect took issue with our price and referred to the cost of other apps.
It was that conversation that made me realize how we've become accustomed to the quality and price of software that's been heavily subsidized by massive VC investments.