Monday, June 22, 2015

microISV Profit and Growth

"Anyone can build market share and, if you set your prices low enough, you can get the whole damn market."

So says David Packard, the co-founder of HP, and the author of the book "The HP Way - How Bill Hewlett and I Built Our Company."

Profits, Packard explains, are a part of every successful business. HP manages employees, time, money, supplies, and raw materials. The company creates products and services. Packard describes HP's profit - the difference between what the company pays for these factors of manufacturing and the price that customers pay for the end-products - as the value that HP adds to the process. Profits are good things, Packard explains.

Encourage Sales, not Downloads

If Packard were advising software developers about how to turn a profit, I believe that he would encourage them to sell their software, and to put less emphasis on coaxing users to download their trial versions.

Every year, I talk with software developers who feel guilty charging customers "so much money" for their software. Since the software took them only a couple of months to create, these developers explain, it seems unfair to charge the going rate for their programs. And I think that it's this guilt about charging what might be seen as a lot of money that makes some microISVs cling to the try-before-you-buy method of selling software.

In my opinion, the purpose of most software developers' websites should be to sell software. Describe it honestly and accurately, and encourage prospects to buy it and not to try it first. Sure, there are some programs where it makes sense for your website visitors to try before they buy. But your prospects don't care how long it took you to develop your application. They only care how your software can help them solve their problem.

Plan B for most software developers should be to encourage prospects to download, install, and try the software. History has shown that only one or two percent of the people who download an application will buy it after they've given it a workout. That's why "buy now" should be your major marketing thrust, and "try now" should be your backup plan.

Informed Prospects are Ready to Buy

Running a successful press release campaign for your software is one way to drive home the benefits of encouraging the sale (versus encouraging the download). When a prospect finds your software website in a Google search, she visits your website with the notion that she might want to download the trial version of your application to see if it solves her problem. Unless your product page does a convincing job of encouraging her to buy your program without trying it first, it's likely that you're going to get a lot more downloads than immediate sales.

The prospect's mindset is very different when she visits your website after reading a magazine or newspaper article about your application. When she reads the editor's description of your software in a computer magazine's "What's New" column, she sees the publication's write-up as an endorsement for your program. An expert has recommended your application. This expert has put the reputation of his or her publication on that recommendation. So when your prospect arrives on your product page, she is already leaning heavily towards purchasing your software.

Sure, you could distract somebody who has read a press release about your program and who visits your website, credit card in hand and eager to buy. You might be able to convince them to take the time to install and try the trial version of your application before deciding whether to buy it. But doing this is a bad marketing decision. You would be walking away from a sale that would be easy to close.

I believe that you should treat all of your website visitors as if they have come to your site at the recommendation of an expert who has endorsed your software. Deliver an honest, upbeat description of the features - and more importantly, the benefits - of your application. And make all of your prospective customers comfortable about making the software purchase immediately.

Grow from Profits, not Loans

HP decided many years ago to pay for expansion out of current profits, David Packard explains, and not to borrow a lot of money. Although HP's first full year of business was 1939, the company didn't issue stock until 1957. One reason for going public was to be able to reward employees with shares of HP. Another reason was to acquire other companies by offering their owners HP stock in exchange for ownership of the other firm.

Packard laments Wall Street's focus on short-term profits. It's easy, Packard tells us, to show high short-term profits by cutting back on the essentials, such as new product design and research and development (R&D). Packard refused to play these games. He maintained R&D budgets at the eight to ten percent level.

Low Prices Don't Work

Packard advises us against offering products at a price that is too low to contribute significantly to our companies' profits. Often companies do this, with the intention of raising prices later. This strategy rarely works out, Packard tells us.

The author also advises us against offering prices that are too low, with the intention of getting a high market share. Market share is important, but maintaining profits is much more critical. To repeat Packard's warning, "If you set your prices low enough, you can get the whole damn market."

Set a target price that pays you a comfortable salary. Be sure that your price structure covers your medical insurance, pension plan, office rent, and utilities. And then create a marketing plan that lets you grow your company to meet these sales and profit goals.

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