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The Sales Volume Myth

>>>>>>>>>>>>>>>>>>>>>>>
While I'm sure most developers would love to see these changes, I am concerned some vendors will fear those changes or even be angry at me for mentioning them. However, if they are reading this I want them to know the iniatives we plan are not ones that would just lower the price of components by an order of magnitude but also ones that would increase the sales volume of components by two, three, or even four magnitudes. 

Compare selling 10,000 components at an average of US$500 each with selling one million components for $50 each. (I'll do the math: US$500,000 vs. US$50,000,000.) If you are a software vendor, which would you rather have?  And if you are a developer, wouldn't you prefer your US$500 buy you 10 components instead of just one?
>>>>>>>>>>>>>>>>>>>>

That is a quote from:

http://discuss.fogcreek.com/joelonsoftware/default.asp?cmd=show&ixPost=154594&ixReplies=5

Lower prices do not automatically equate to higher sales volume.  There are numerous other factors to take into consideration.  10,000 to 1 million ratio?  I think that is a bit much.

What initiatives would you take to increase sales from 10,000 to 1 million?  Each market has a certain size or capacity at each stage of the products life.  Increasing sales volume would mean getting on the phone and selling stuff which is not easy or launching a marketing campaign which would take time.

I agree with the following points from that thread:
- resellers are good for the software vendor simply because they give them exposure
- provide an outlet for those willing to purchase from them
- perhaps give a better discount.

Is there really a direct correlation between the price of a product and the volume sold? (Not that that is what Mike said because he didn't.) I just don't believe it's that simple.

db
Friday, June 25, 2004

Speaking of Software and Volumes without caveats is very misleading, for Software is non-perishable. More often thna not each item sold is a _new_ sale, not a replacement. Therefore 10K or 1M depends entirely on the target market of the product. No generalisations can be made across the Software Industry.

.
Friday, June 25, 2004

I think I'd be wary of a component that only cost $50, I know that a single support call could cost $50 to service so how are they going to stay in business at that price?

Tony Edgecombe
Friday, June 25, 2004

"Lower prices do not automatically equate to higher sales volume."

Exactly correct. It's called Price-Demand Elasticity. The idea that price affects demand.

Your product can EASILY be too cheap.  Customers might fear that, at that price, you'll be out of business soon and not able to support the product.  Or they might wonder "what's wrong with this product that they have to offer it so cheaply".

There will always be some customers who shop only on price. You do NOT want those customers.

I know this from experience.

Mr. Analogy
Friday, June 25, 2004

It sounds like BS to me.

If dropping the price by a factor of ten increased sales by a factor of 100, then how about selling at $5, you'd get 100,000,000 sales. Or, how about 50c a pop, then you'd sell 10 billion copies. Seems unlikely.

Of course, you hardly need a degree from LSE to know that in real life, things are a lot more complex than that.

There is also the problem of support. If you sell 100 times as much product you'll have (at least) 100 times as much support to manage.

Steve Jones (UK)
Friday, June 25, 2004

I would be willing to drop $50 on a component that would get my job done easier without struggling to get it reimbursed by the company. I will NOT spend $500 out of my own pocket for something, and at several companies I have worked for, it would take up to 12 months to get reimbursed for such an expenditure.

My "balk point" for random dev tools is $99. Below that price point, I don't need a lot of justification to buy it. It won't need to be perfect. And if it won't do what I thought I could do with it, well, its not a lot of cash (couple movies and a couple pizzas will get you there pretty fast). Above $99, I do research and only purchase things that have a more than 75% chance of doing what I need them to do. If its for the office, above $99 and they buy it. Almost all my shelfware ran $99 or less.

For more expensive software, you will find a massive gap between around $5k and $100k. Below about $5k, most managers can eventually get budgeted and sign off on the software. Above that, you usually need to get vp and maybe board level approval, so the sales reps make lots of plane trips to the potential client for dog and pony shows. This jacks up the end price to 6+ digits.

It is not a myth, you will find certain price points for your product that will seem like brick walls. Where sales will change by several orders of magnitude.

Peter
Friday, June 25, 2004

> I think I'd be wary of a component that only cost $50, I know that a single support call could cost $50 to service so how are they going to stay in business at that price?

Make the thing good enough that nobody needs to call for support.


Friday, June 25, 2004

GET OUT FROM UNDER THAT BRIDGE!!!

muppet from madebymonkeys.net
Friday, June 25, 2004

Who? Me?

<g>


Friday, June 25, 2004

don't forget that the cost per item to market that stuff is pretty tremendous.  Consider record labels as an example.  Their purpose is to sell a ton of records -- into the millions -- for a select few artists.  In order to do so, they spend hundreds of thousands on marketing campaigns for those records.  The net profit to the "developer" (artist) is a lot lower than if the artist were to independently produce, market and distribute those records.  If you are selling 1 million units, you also need a large company for support, etc.  Try handling a 1 million volume sale with a 10,000 unit team and you're gonna have 100 times more of everything (complaints, etc) than you can handle.

Devin
Friday, June 25, 2004

"Make the thing good enough that nobody needs to call for support. "

I keep writing idiot-proof software, but the world keeps creating bigger idiots.

<g>

Mr. Analogy
Friday, June 25, 2004

>I think I'd be wary of a component that only cost $50, I know that a single support call could cost $50 to service so how are they going to stay in business at that price?

This is tough. I would rather sell 10,000 copies of something at $50, then sell 1000 copies of something at $500?

Why? Well, if you are selling a $500 software package, you better have some decent support people working for you, because if I just spent $500 on something, I going to expect you to kiss me, and cook me dinner if I have a problem (oh…gee..my girl does that too!).

With a $500 product, you can afford good support, and likey even better marketing people. After all, it is a per unit cost that you have to figure the support on.

If I just spent $50 on something what kind support can I expect? Likely none!

So, you are MUNCH better off to sell the $50 guy, since your support costs will be MUCH lower.

However, a $50 expenditure does not represent much of a product, or a commitment, and thus you likely will NOT have a high renewal rate.

At $500 per copy/per seat, that is a SEROUS investment by any company. and if you are in this business for the long run, then you likey are better off selling the $500 guy…..

Albert D. Kallal
Edmonton, Alberta Canada
kallal@msn.com
http://www.attcanada.net/~kallal.msn

Albert D. Kallal
Friday, June 25, 2004

"If I just spent $50 on something what kind support can I expect? Likely none!

So, you are MUNCH better off to sell the $50 guy, since your support costs will be MUCH lower"

Just because it's REASONABLE for *you* (or *I*) to not expect much support on a $50 product, doesn't mean the customer won't expect it.


I think Joel already covered this pretty well when he talked about non-linear price-demand elasticity. I.e., There are times when a 5% increase in price ($499 to $501) can cause a 50% reduction in sales. E.g., if any purchase of $500 is a capital budge item versus "petty cash".

THAT is the most relevent concept here. And it varies by industry.

Mr. Analogy
Friday, June 25, 2004

I respectfully disagree with you Albert.

My compiler was around $500. They charge for each minute of support. There's 30 days free support with installation problems only and then, nothing. Updates to the next version are $300.

Now, I have some widgets that I have corresponded a lot with the developers asking for new features. Lots of back and forth. They tend to add the features I request and respond personally te each of my letters. Updates are free and the widget costs only $20.

Scott
Saturday, June 26, 2004

Consumers don't pay $500 for software, not even for Win XP + Office.

For the consumer market don't even look at companies that purportedly charge hundreds of dollars for their product. People either buy it bundled, pirated or use something else.

So there may well be a hundredfold difference in sales between software costing $50 and software costing $500.

Stephen Jones
Saturday, June 26, 2004

>My compiler was around $500. They charge for each minute of support. There's 30 days free support with installation problems only and then, nothing. Updates to the next version are $300.

>Updates are free and the widget costs only $20.

Sure, we would all love to buy all software for $20. Our industry just does not work that way.  The issue is not you purchasing software here. but selling and maintaining software.

I don’t know of anyone (personally) in the software industry that has made a lot money by selling  $50 package. (you might. but I don’t).  I sure they exist. but I never meet those people.

I certainly do know of people who make/made very good money in our industry, but they sure as the heck are not selling $50 packages.

The advent of the web certainly does make the $50 package possible. However, as a general rule, your support, marketing, accounting, and sales people that you need for a successful product normally can’t live off of a $50 sale.  You might sell 2000 copies, but that is only $100,000, and that is VERY little money these days in our business.

If you can use a web model to get some product sold, and use the web to keep support down low. then I guess the $50 idea might work.

However, I have never seen any company survive on such a low product price. (the exceptions being some OEM packaged, or pre-bundled software…which sold for $50 wholesale. but not retail. And, in most cases the OEM stuff occurred long after the product established it self).

Hum...your milage may vary on this one....

Albert D. Kallal
Edmonton, Alberta Canada
kallal@msn.com
http://www.attcanada.net/~kallal.msn

Albert D. Kallal
Saturday, June 26, 2004

I'm amused by the idea of someone willingly going into a market where one or two thousand sales is all they're expecting, yet they're still sure that this will be profitable. Why exactly are people afraid of having decent sales volumes? Sure, if you expect to have to personally hold the hand of every customer then it might be a worry, but real companies making actual profit just don't do that.

If you sell your widget for $20 it's very sensible to create an efficient system for feedback, feature requests and support, but intelligent people manage this so that they don't have to have an intimate and personal relationship with all of their customers. After you've made a couple of million dollars you can afford to hire someone to supervise your website discussion board while you go off and code another widget, and if you're not planning to run a profitable business then it doesn't really matter what your sales or support issues are.

I'm scared of success - hold me?
Sunday, June 27, 2004

>I don’t know of anyone (personally) in the software industry that has made a lot money by selling  $50 package. (you might. but I don’t).  I sure they exist. but I never meet those people.

How about game development companies? Games are software, after all. Rockstar made a killing with Grand Theft Auto...

Anonymous Coward
Monday, June 28, 2004

Wow!  Those are my words that started this long thread. Interestingly, I agree with almost all of the comments made, even those that challenge my words. 

However, the problem is "db" posted my words out-of-context. I doubt many if any of those who commentedread the entire context, including the post "db" referenced as well as all the posts on my blog. His quoting me out-of-context made my statements look rather foolish.  If I had not written them and read just what he quoted, I too would think the author was naive, foolish, stupid, or mad.

But there's a lot more context required to understand those statements, and in reality, the fault is partially mine because I didn't explain everything in detail.  (And don't plan on it yet, because doing so would expose strategic plans we're not ready to publicly present.)

Yes, I'm very aware of the concept of "price-elasticity." However that concept generally deals with changing only the price variable and keeping all other variables the same. My statement didn't say "If you lower the price the sales will increase." My statement said "the iniatives we plan...would increase the sales volume of components by two, three, or even four magnitudes." So I was talking about an initiative, not changing the price.  The initiatve, we believe, will have the effect of lowering prices and increasing volume. 

So the cause and effect is *not* "lower prices=>higher volume."  Instead it is "special initiative=>lower prices & higher volume."  A big difference.

To give an analogy, if in 1990 you were a venture capitalist and I came to you with a plan to launch an auction company with minimim transaction fees of less than 2% you would do a quick mental comparison to what you knew of existing auction companies, you'd immediately determine my plan had no merit, and you'd have laughed me out of your office: "Don't let the door hit me in the butt on the way out." 

Of course you all know I'm talking about eBay, one of the few really successful dotComs.  eBay changed the paradigm (which is, for example, what Pets.com *did-not* do!)

The problem with all the comments on this post are the comments take my words in the context of what exists today; what the commenters are familiar with.  Yes, given the current "paradigm", you are right.  Cheaper components won't significantly increase sales.  Cheap components can't be trusted. Price-elasticity means sales won't increase.  New sales vs. replacement sales means sales won't increase. Consumers fear poor quality from cheaper compoents.  Etc. etc.

But what I meant by my words was we have plans to, as eBay did for auctions, introduce a paradigm shift for developer components. That's what my words were saying. Paradigm shift.  Not lower price to increase volume. 

So please, don't take my words out of context. Don't evaluate the words assuming only price changes. Understand that my words require a paradigm shift, and without understanding that paradigm shift, debating my words is irrelevant.

I only wish we were ready to explain the paradigm shift, but we just are not yet ready.  But we are planning to be the catalyst for that paradigm shift. Only time will tell if we will be successful.

Respectfully,

-Mike Schinkel
President; Xtras.Net
www.xtras.net
mailto:mikes@xtras.com

P.S. db: this is twice you've taken my words out of context and by doing so misrepresented my posts. I'm not attacking you for it; the blogsphere is an imperfect medium, but it would be nice to at least know who you are. "db" doesn't tell me much.  Are you someone who honestly misread my words, or perchance are you someone who has who has a hidden agenda? A vendor who generally dislikes resellers? A competitor?  Or some other I hadn't contemplated?  Please, it would be nice to know who you are and your affliations.

Mike Schinkel
Tuesday, June 29, 2004

"So I was talking about an initiative, not changing the price.  The initiatve, we believe, will have the effect of lowering prices and increasing volume.  "


I'm a bit confused. YOU are selling some developer widget.  You're instituting an initiative that will raise sales volume. The price goes down as an effect of the increased volume, right?

Are you saying that lowering the prices does NOT affect sales volume?

If lowering prices does not affect sales volume, then why lower your prices?

Mr. Analogy
Tuesday, June 29, 2004

>> You're instituting an initiative that will raise sales volume. The price goes down as an effect of the increased volume, right?  Are you saying that lowering the prices does NOT affect sales volume? If lowering prices does not affect sales volume, then why lower your prices?

First, I didn't say lowering prices didn't affect sales volume.  I also didn't say that it did. I specifically avoided that issue because it is not directly relevent to our strategy. 

Instead, I contend you are thinking too simplistically. I didn't say we'd lower prices; Our initiatives will change the market dynamics which will have the effect of lowering prices although not across the board. That's a big difference from saying we will be lowering prices and having you ask me why we would do that.

There are many impediments to third party component development, usage, and purchase today. Our initiatives will modify or remove those impediments. That will result, in many cases, in lower prices components and in increased volume of components.  Please note, by the way, I'm always referring to components, not tools and utlities.  Our initiatives will likely only affect the dynamics of components in the marketplace.

For example, telephone long distance cost a lot more 10 and 20 years ago than it does today.  The long distance companies did not lower their prices to be nice; they lowered them of changes in the market, and because costs were reduced and competition demanded it.  Further, the lower cost made many uses of long distance viable that were not viable at the higher costs, which in turn increased overall consumption of long distance services. Our plans target similar changes for software development components, albeit on a much smaller scale than multi-trillion dollar global telecom. :)

Today probably less than 20% of developers purchase 3rd party components; there are many reasons why 100% do not, and the return they get on each dollar spent is not always high.  For >95% of developers to purchase 3rd party components, many things have to change. We plan to address those issues and be the catalyst for change.

In summary, comparing the subject of this thread as "db" presented it and our strategy is comparing apples and oranges.  More explicitly, there is little reason other than foolishness to debate the basis of our strategy because I haven't disclosed the details of our strategy! Debating a subject for which you only have a small percentage of the facts is purely a waste of everyone's time, don't you agree?  That said, I'll present the strategy on my blog as soon as I can.

Respectfully,

-Mike Schinkel
President; Xtras.Net
www.xtras.net
mailto:mikes@xtras.com

P.S. One topic I did not previously mention that *is* relevent to the subject of this thread as "db" presented it is price elasticity related to a good or service whose consumption drive value creation for a business.  For example, someone spending time calling their best friend long distance to talk about their day creates no additional financial value, only a cost for the caller.  However, a telephone sales center that can increase its sales when it offers callers toll-free access generates value from that expense.  If the sales center is selling a Gulfstream Jet then they would gladly pay for the prospective sales calls even at $10 a minute.  However, a company that sells $20 widgets over late night TV certainly can't afford to exist if long distance costs $10/minute, and hence that long distance would not be comsumed. But such a company could exist at some lower price. The margin on the sales generated compared to long distance expense defines when consumption becomes viable.  So if consumption of an item can increase sales of other items, the consumption of that item doesn't follow the same price elasticity curve that you were discussing above.  Instead, you are more apt to see it look like a shallow pyramid with a wide base; the lower the price, the greater the area of the cross-section of the pyramid which represents consumption.  I believe if in the future 3rd party component usage becomes more broadly viable consumption of 3rd party components will generate value and will follow the pyramid analogy I mention, not the classic price-elasticity curve. Of course without all the details of the strategy, it will be impossible to debate.  Please do me the favor and wait until we can make the details public.

P.P.S. Why does almost everyone else on this forum seem to hide behind a pseudonym?

P.P.P.S.  One final thing.  Ignoring your opinion on viability, wouldn't it be really nice if I am correct?

Mike Schinkel
Wednesday, June 30, 2004

>> I don’t know of anyone (personally) in the software industry that has made a lot money by selling  $50 package. (you might. but I don’t).  I sure they exist. but I never meet those people.

I certainly do know of people who make/made very good money in our industry, but they sure as the heck are not selling $50 packages.

The advent of the web certainly does make the $50 package possible. However, as a general rule, your support, marketing, accounting, and sales people that you need for a successful product normally can’t live off of a $50 sale.  <<

Gosh, you are living in your own little world.  Have you ever met anyone from MS?  Some examples are:

Microsoft (too many products to count)
AOL
Symantec
Intuit
Electronic Arts
Lucas Arts
and so many others.

SoftLetter shows that these folks are really the only ones making a profit.  I and most people I know regularly rule out products that are too expensive.

Your problem seems to be that your business model is sales person focused.  What price will make our sales people be able to make a living.  MS, Symantec, Intuit don't have sales people (at least not commissioned)

Gunnar Skogsholm
Thursday, July 01, 2004

>> Your problem seems to be that your business model is sales person focused.  What price will make our sales people be able to make a living.  MS, Symantec, Intuit don't have sales people (at least not commissioned)

Touche'

Mike Schinkel
Saturday, July 03, 2004

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