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Dear founder, have you got your contracts right?

Most probably a bad contract is at the heart of the Stayzilla (SZ) and Jigsaw Advertising (Jigsaw) dispute that’s a hot topic of discussion for the members of India’s fast growing startup ecosystem. Jigsaw supplied advertising related services, SZ did not pay. SZ announced intention to “reboot” and Jigsaw used its might to register cheating case against SZ. Cheating is a criminal offence as opposed to a payment dispute that routinely falls under civil law. I have raised several ethical dilemmas in this situation in my last post. Here I wish to focus on contracts and enforcing contracts.

Indeed “enforcing contracts” in India is an uphill fruitless endeavor. In the 2017 World Bank report on “Ease of Doing Business”, India ranks 172 out of 191 countries on “enforcing contracts”. A quick comparison with China (a frequent object of our obsession) on “enforcing contracts”, put things in stark contrast.

Dispute resolution time: India (47.3 months) vs. China (13.5 months)

Dispute resolution cost: India (40% of claim amt.) vs. China (15% of claim amt.) – though the amount varies by states in India

Quality of judicial processes index: India (9) vs. China (14.5) – higher number is better

Evidently, we are far from the frontier on this measure of doing business. India also ranks such low on other important measures like (number in bracket is India’s rank out of 191 countries reported) – paying taxes (172), trading across borders (143), and resolving insolvency (136).

Small startups in the initial stage of testing market to entering growth phase have little wherewithal to divert precious little resources to fight legal cases that proceed at snail’s pace and hog bulk of managerial and financial resources of a startup. While overhauling the justice delivery system is very long term project, the minimum startups can do is to create and govern contracts in a more deterministic manner.

Common problems with contracts

A mistake in a contract can undermine its legality and affect your ability to enforce it. The party more adversely affected by the mistake would almost always seek to repeal or cancel the contract. Overall, a problematic contract results in poor outcomes like – business delays and waste of resources.

Relying on an oral contract

Promises are part of the business life. But promises can be easily broken, such is the human nature. You put in superhuman effort to build your business so you would want to be assured that your business is protected against failed promises of your co-founders, employees, suppliers and partners. Only a written contract is enforceable under law. Writing a contract also forces you to think through issues that would instinctively not come to your mind.

Another side effect of not having a contract is the risk of losing whatever IP your company possess. Probably only valuable thing startup has in early stage is some form of IP. Consider the scenario – a few part-time founders without any written contract are burning mid-night oil to get a product on the market. Soon one of the founder changes mind about entrepreneurship or gets interested in some other idea. He or she decides to walk away – without assigning the rights to his work. You are stuck without the IP and literally without your company. I have seen this happen a few times and those startups just shut shop without even going to market. Without a contract, there is no negotiating ground or legal recourse.

Not capturing the negotiated terms in final contract

Negotiation is usually an iterative process with multiple revised proposals and discussions. So, when the final contract is in sight three things happen: One, even if there is lack of clarity on some point, that is allowed to linger hoping it will somehow go away. Two, in case of a missing term or incorrect data in last proposal, it is not corrected or rewritten and signed with the contract. Three, even when somethings are orally agreed they do find a place in final written contract. These “minor” indiscretions cause major pain when a contract dispute goes before a judge. One it is almost impossible to prove oral agreements in absence of concrete evidence. Two, in case of an essential missing term, the judge is likely to impose some “reasonable” terms that might be far from what one party had envisaged in the original contract.

Unclear contracts: contracts that do not spell out clearly –

what constitutes performance failure or a breach of contract?

what are the ways to terminate the contract for both the parties?

what will be the dispute resolution mechanisms (before you decide to file a legal suit)?

what happens if a startup is taken over or gets merged with another. Do the contracts get assigned to the new entity?

Creating a legal enforceable contract

What is a contract:

a contract is an agreement between at least two parties, each of which promises to do or not to do something.  Contracts can take the form of either written agreements or oral contracts, although some types of contracts must be in writing to be legally enforceable.  Additionally, parties often have trouble proving aspects of oral contracts, which makes them difficult to enforce. 

What a contract is NOT:
A handshake or verbal deal, non-binding Letter of Intent (LOI), non-binding Memorandum of Agreement (MOA) or Memorandum of Understanding (MOU), Terms and Conditions on the back of invoices without reference / incorporation, RFP’s or RFQ’s, Proposals, Schedules or Orders with no terms and conditions.

What is a basic enforceable contract:

At the most basic level, a contract requires a seller to make an offer to a buyer, acceptance of the terms by the seller, and consideration where each party gives up something of value. E.g., a seller usually gives up a good or a service and in return, a buyer usually gives up money. In addition to these elements, courts will also look at several other considerations when determining the enforceability of contracts, for example, mutual assent, capacity and consent and legality.

Mutual assent: Often called the “meeting of the minds,” mutual assent requires that both parties understand what the contract covers. The goods and / or services being contracted must be described unambiguously so there can be only one understanding in the minds of the two contracting parties.

Capacity and consent: Capacity requires that the parties in the contract be legally capable and competent enough to enter into the agreement.  For example, a mentally disabled individual cannot contract, and while minors can agree to a contract, in most cases they can void the contract before reaching the majority age. Consent means that both parties entered the contract freely and without duress or undue influence.

Legality: To be enforceable, a contract must cover legal activities and not violate public policy.  In other words, two parties cannot form a contract requiring one party to complete an illegal act nor can either party recover damages for breach of such a contract.

Other basic clauses in a contract:

Price, quantity, and delivery date

Payment terms, interest, and penalties for late payments

Warranties, remedies for defects, and returns

Indemnification, liability, and disclaimers

Lead-times and changes in orders

Governing law

Waivers

Know the Indian Contract Act of 1872

This act governs the enforcement of contracts in India.  If either party fails to perform their part of the contract, these laws provide the basis for enforcing contracts and providing damages to wronged parties. The act was passed by British Indian government in 1872. This law is based on British common law. It determines the circumstances in which promises made by the parties to a contract shall be legally binding and the enforcement of these rights and duties.

Or Consult a lawyer

If you are not well versed with the legal issues, drafting your business contract can be risky leading to much grief later. For most tech founders, law is like Greek and Latin – difficult to learn or understand. The law is made of multiple statues enacted by the legislature and is layered by the “case law” developed by the judicial system. It is complex. Therefore, it makes sense to get a lawyer to create legally enforceable templates for the different types of contracts.

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Startups – new problems of governance and ethics

On March 14,2017, Chennai police arrested an Indian startup founder and CEO on charges of defrauding a supplier of Rs.17.2 million. The available information revealed that the startup had not paid one of its suppliers for its advertising services for over 1-1/2 years. When the startup announced plans to shut down (CEO called it “rebooting”), the supplier filed a “criminal complaint” against the founder CEO as well as co-founder with Chennai Police. The police was still on the look out for the co-founder who appeared to have gone underground.

The news of arrest fueled by electronic media news and blogs spread like wildfire in the startup ecosystem. Most of the opinion and claims based on half-truths, blamed the supplier for the overkill. It was believed that supplier used its political and police connections to escalate the dispute from “civil” to “criminal” in nature thereby resulting in the immediate arrest of the startup CEO. The doubts were also raised on the legality of the arrest process in view of the person arrested being CEO of a “limited liability” business. The supplier’s camp had pointed out the startup was well funded having raised its “C” round of $13.5 million only in May 2016. It was believed the startup had money but was not paying its dues – amounting to intention to cheat.

More than a hundred Indian startup CEOs across India, including the biggest startup poster boys and unicorns petitioned India’s Home Minister. They submitted a jointly signed statement pointing to the impact of such arrests and asking for fair and speedy trial. They specially talked about the dampening effect on the morale of majority of startups who anyway operated in a “not very conducive” business environment – almost bordering on being hostile. A website (help-yogi.com) was setup where the well-wishers can show some love for the CEO.

Meanwhile, the arrested CEO had been twice denied bail while his co-founder is still missing. It appeared a long haul for the CEO as the law in India took its own sweet time to dispense justice, if at all. Meanwhile a few questions arise that we must find good answers to.

One, what was wrong with the startup actions if any? There was no documentary evidence suggesting the startup disputed payment because of any performance deficiency on part of supplier. The startup CEO had only three weeks before acknowledged availability of funds and his intention to use it in new avatar after current operations were shut down (referred to as “rebooting”). Were investor VCs aware of the problem (thru their periodic reviews) and advised the CEO on it? Do VCs have a role at all in guiding the investee on corporate governance or business ethics?

Two, was the police action beyond reproach? What guided them to register a “criminal case” where most of the times payment disputes fall under “civil law”. Was there undue influence on police to take such action?

Three, were supplier’s actions proper? Was it fair to use the contacts in government machinery (as alleged) to escalate the matter and get the CEO arrested? What can frustrated small suppliers do when payments are not made to them in time as agreed or are delayed forever? Does the lax justice delivery system in India justify supplier’s unconstitutional actions – like using local politician to mediate or indulge in laughable activity of sending across voodoo dolls (as alleged)?

Finally how can we create a better business environment within the startup ecosystem despite the business and legal environment that we know exists in India? Some suggestions have been made recently such as – a credit rating agency for startups, mandatory external supervisory boards for every startup (of certain size? Only the funded ones?) and more transparency and standardization in startup operations (employment conditions, shutting down ops, sexual harassment at workplace etc.)

If you have still not got it, the situation mentioned in this blog relates to Stayzilla and Jigsaw Advertising.

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Naming companies and products (part 1)

Recently, a high potential team of founders invited me to be their advisor on marketing strategy. Their product is a employee transport management system based on mobile App and SaaS backend, targeted at large organizations.

naming-companies-and-products-p1

I knew finding a great name was a daunting exercise. All the “real” names in English dictionary have already been trademarked. The names from animal kingdom, astronomy, astrological signs, mythical characters, all are gone. All names suggestive of product attributes and company heritage are already taken. Globally, over a hindered thousand new names are trademarked annually. That makes it hard to find a meaningful and memorable name today.

I did couple of brainstorming sessions and took a few rides together with the founders in buses and cars at peak times hoping to catch our emotions and thoughts during the commute and a Segway to an exciting name. We asked our family and friends and their friends hoping to catch a ray of hope. We also dipped into the customer research founders had done, to find words that described customer asks and aspirations. I also swam through the Greek and Sanskrit dictionaries and literature hoping to discover some esoteric word representing ancient god, speed, motion or a fun activity. Ultimately what helped was a name generator program that could generate 200-billion+ combination of eight lettered words of which it claimed 10 billion could be pronounced in English. So if you are looking for a great name for your new business, good luck to you. Sincerely. J

It is a question every entrepreneur must answer – how do you come up with a name that clicks? The first step is to know what a good name looks like.

Is the name really very important

What’s in a name? That which we call a rose by any other name would smell as sweet.  You guessed it right – this is a quote from Shakespeare. Shakespeare has been proven wrong many times over since then. For instance, ask beer and perfume makers. A name has plenty significance in the world of high tech products too. After all Facebook paid $8.5M to American Farm Bureau Federation in 2010 to acquire fb.com that was the sellers primary domain. Apple is rumored to have paid $1 million or thereabouts for iPhone.com in 2007. It is surprising Apple paid nothing for apple.com when it was registered on February 19, 1987. Well people hadn’t yet latched on to the idea of domain registration as a commercial product!

The point is not that a name has any disproportionate share in a business’s success. The number one software company of all times got a very average name in 1976 when Bill Gates chose it for his business. It was derived from MICROprocessor on which their SOFTware would run. There were a million “Micro somethings” around at that time, so this was a very poor and restrictive choice. But it did not stop the business from being a spectacular success.

The point is not that you can’t be successful with a bad name, but rather that a bad name can hurt you, and that there’s no reason to inflict this damage upon yourself when you can avoid it with only a few days’ worth of work.

After all, product or company naming is the first public act of branding. A product name contains important marketing communication components – corporate strategy, product concept and positioning. It communicates to the world outside as well as employees – “who you want to be”. So please pay some serious attention to the naming your product or company.

What makes a good name

A lot goes into making a name good.

For starters, a good name is easy to remember. That means the name is short, simple, easy to pronounce with no more than 2 to 3 syllables. Try remembering acetylsalicylic acid versus Bufferin. Names must also be pleasing to the ear. Even when reading, the mind translates the words into sounds. A name like Caress is as silky soft as the bath soap it represents. Imagine if eBay was named AuctionWeb or Google retained the original name  for its search engine – BackRub! What images does Pharmeazy create? Did I hear sleazy? And how about messy is Strmesy?

Two, a good name draws attention and arouses interest.  Being provocative is one way of getting attention, for example, Victoria’s Secret. Think of  a website named – Thankbunny.com – who is thanking whom? Will I meet Playboy bunny in there? Its is provocative and arouses interest. Similarly, names like Simtre, Vaave, Ecareibe, QUSTN draw attention, arouse interest but are either difficult to understand or have a very difficult spelling to remember.

Three, a good name distinguishes your product from the competitors’. Do not use a name if it can be confused with another of your products or a competitor’s product? Consider the following three products: Media Extender, Media Connect and Windows Connect Now. While the names are strikingly similar, the products are completely different, and are, respectively: a device to make Xbox function as a media center; a device to deliver PC-stored content to your stereo or TV and an architecture to simplify wireless home networking. “This is a recipe for confusion.”

Four, it should convey something real about the company or the product and support the product’s positioning. Wharton professor Karl T. Ulrich terms this quality as – name should be evocative of the things it names. It should generate strong images, memories, or feelings in the mind about the product. You could express what the company does or what the key product benefits are in the name. For example, “ERPNext” clearly conveys it’s a ERP product and the “Next” signifies innovation, future and so on. On the contrary, it is clearly a bad idea to name your product Tiny ERP; no one expects that planning their business’s entire operations is a task that can be handled by a “tiny” anything.  Finally, a name like “Planetsuperheroes” passes most of three tests so far except that it is perhaps a tad too long.

Five, can the name be trademarked? And even if it is, is the trademark defensible if challenged? If a word is already in use as a generic term, no amount of money spent takes it out of the generic category. Also, will the name infringe on a protected trademark? And even if you don’t think it does, are you ready to go to court and spend lots of money to prove it? The courts are tough on copycats. When Parfums International, a unit of Unilever Group, introduced Elizabeth Taylor’s Passion perfume in 1987, it was sued by Annick Goutal Inc., which made its own Passion fragrance. A New York judge ruled that Ms. Taylor’s product couldn’t be sold in 55 “first-tier” stores! In 2015, it was thought that Google infringed on BMW trademark rights by calling its new holding company Alphabet, the same name as a BMW subsidiary. Apparently they hadn’t as BMW has not filed a suit more than a year on. Closer home, Tata (Indigo car) has issued notice to Indigo airlines for name infringement. Often the trademark owner only starts making noise when the infringer has grown big and rich.

Six, if you have any plans of going global, you must check if the name translate into an inappropriate or obscene, repulsive or in anyway negative term in a foreign language? Couple of classic examples comes to mind – the Mercedes Benz China entry with a brand name Bensi that meant “rush to die.” Coors beer slogan “Turn It Loose,” when translated meant, “having diarrhea” in colloquial Spanish.

Reebok that picks up over 1000 new names every year for its products went horribly wrong in 1996 with a product name. Reebok named a $58 women’s running shoe “Incubus” after legal research found the name was not a registered trademark at the time. Unfortunately Reebok forgot to look up the dictionary. After shipping 53,000 pairs, Reebok learned from media that Incubus, according to medieval legend meant – a demon that has sex with sleeping women. The company issued apology but had to withdraw the product soon. To avoid such costly mistakes in future, Reebok hired a name consultant.

Seven, can the name be shrunk down to an inappropriate acronym? Does it lend itself to an undesirable pun? Merrill R. Chapman in his book “In Search of Stupidity” narrates an interesting incidence of a company selling accounting software. This company once introduced a reseller program whose name shrank to “CPR,” a most unfortunate name when selling to a market consisting of middle-aged sedentary males who are wondering if a major chestburster is in their future.

Eight, names should ideally be timeless  – be able to survive the life of a product or a company. You must decide how long term are you thinking. For example 20th Century Fox is kind of a misnomer in the 21st Century. Kentucky Fried Chicken had to rename to KFC when going global. But Yahoo!, Google, Oracle or ERPNext are timeless names.  So many companies had to make a costly change of their names after they became big or decided to go global.

Nine, a lesser consideration for the name should be how it would work on T-shirts, coffee mugs, bumper sticker and other marketing collateral.

Last but not the least, the name should be available as a domain for your website. You must own the domain name associated with your product, brand, or company name. This means that if your name is JohnDoe, you must own johndoe.com.

Not johndoe.net, not myjohndoe.com, not johndoe-xxx.xxx and  not johndoe.in. Being in India, you must grab .in name but always try to reserve .com domain. In some cases you can acquire a domain name that has been registered by someone else. But, honestly, this is rare for smaller companies. Maybe Apple can acquire iPhone.com for a million dollars. But, in most cases, you can’t do that. As a result, you are probably going to have to create a name that is fully available. In plain terms, you should only consider names that are either available for registration or that you are confident you can acquire for a reasonable price.

Rarely will a name do all these things equally well. For example, Amazon is a great name and does almost all these things, but does it generate strong images of online retail – hell, No. Similarly the word Starbucks by itself does not mean coffee. Should Jeff Bezos have called his company booksonline.com? No. Bezos had big ambitions for Internet retailing and it was right for him to pick a more general name with interesting and positive associations than to perfectly align his company name with his initial product strategy. The name Amazon has even allowed the company to extend its service offerings to information technology infrastructure.

With time and investment of marketing resources, a name can acquire meaning and associations, and usually grows in attractiveness. After all Starbucks did not mean coffee or generated any image of coffee but over the years it has become synonymous with coffee.

So much for now. If I happen to see some posts below I would publish part 2 that will cover naming process and some specific guidelines for naming in tech industry. I have taken liberty to comment on some of the existing product or company names. Those views are entirely mine.

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Uber – Didi Deal – an analysis

On August 1st Uber agreed to hand over its Chinese operations to Didi, in return for a 17.7% stake in the combined company’s equity and $1 billion Didi investment in Uber. Uber, though, will get only 5.9% of the voting rights in the new entity. Investors in Uber China, including Baidu, a big Chinese Internet firm, will get a 2.3% stake. Uber CEO Kalanick will serve on Didi’s board, and Wei, Didi’s boss, will join Uber’s board.

So why did Uber blink, particularly in a market that Kalanick hailed its biggest market globally just a year ago. It was arranging 1 million + rides per day in China, larger than the rest of the world excluding US. Within nine months after launching in Chengdu, Uber had 479 times the trips it had in New York after the same amount of time. Indeed the Uber’s three most popular cities – Guangzhou, Hangzhou, and Chengdu – were all in China.

Is the deal in the right direction? How does the deal impact private car services in other parts of the world? Comments and answers to questions are welcome.

A disclaimer: the data on private companies is difficult to come by. The data used in this post has been triangulated from different credible sources and in some place an intelligent guess based on the writer’s experiences.

Uber in China

Uber entered China in Feb 2014, with a soft launch in Shanghai and two other cities under the name Youbu – meaning “excellent step forward” in Chinese. A formal launch happened in Beijing in July 2014. Then, there were roughly 1.05 million taxis in China growing 2.5% per annum. But demand outstripped supply by a big factor. By varying accounts Uber had gained between 10% and 35% market share in private car services by July 2016, burning over $2 billion in the process.

Didi Kuaidi

Didi and Kuaidi were two taxi-hailing app companies promoted in 2012. They were backed two Chinese Internet titans, namely Alibaba and Tencent respectively. At time of Uber entry, they respectively owned 55% and 45% of smart-phone based taxi hailing market. All through to 2014, these two acquired smaller apps and engaged in promotion wars that cost collectively over $1bn.

Their investors decided to merge the two services in February 2015 to conserve cash and take on an aggressive Uber. All through 2015, Didi Kuaidi market share in private car services remained steady at around 80%. Their share in taxi hailing was 99%.

Strategy

Uber started small with offering UberBlack (high price private-car services) in Shanghai (the highest GDP city in China). By Oct 2014, it introduced People’s Uber a non-profit service where customer only paid minimal amount towards gas and tolls. This was a good way to get more Chinese consumers on the Uber app, in the hope that they will eventually start using its paid options. Over time they added rest of the products – UberX, UberXL and UberExec. They also added three special products – Tesla, Green Uber and Xiaoyou (two seater electronic car). Uber focused only on cities with population of 2 million or more. There were 250 such cities in China of which Uber reached 55 in July 2016.

Didi and Kuaidi started with taxi-hailing service in 2012. Unlike Uber’s matchmaking, their app asked users to enter pick-up and destination location and time. The request reached all drivers logged in and they fought for the order. The quickest response secured the order. The users could enter a tip during peak times to encourage drivers to take the order. In July 2014, Kuaidi launched Chauffer One to target online chauffer market. Didi integrated their app with WeChat payment in Jan 2014 helping it gain popularity among WeChat users (the most used mobile chat app in China). After the Feb 2015 merger, the combined Didi offered host of services beyond taxi hailing. These included – private car service, car-pooling, shuttle van and bus-hailing services. Its other product innovations included – matchmaking of drivers and passengers based on shared interests (fruitful journeys), deal with LinkedIn to let people join up their accounts on the two networks, tie up with several car companies including Mercedes and Audi to let passengers book test drives (Over 5 million customers have since taken test drives) and a special service for passengers with disabilities. Didi also started helping the high performing drivers get loans to buy new cars with its tie up with China Merchants Bank (CMB). These drivers otherwise had no credit history to approach a bank.

In short, Didi has been miles ahead of Uber on product innovation

Didi-Kuaidi started with taxi hailing, not chauffeur-driven / private car service, which helped it win over grumpy taxi drivers and local politicians. Uber faced taxi-drivers protest in several cities and twice their offices were raided by police in this connection. Significantly, anti-private car services protests were seen as anti-Uber while such services were also being offered by Didi-Kuaidi!

Didi gained extra points by being the first to integrate with WeChat Payment, an offering from its main backer and investor – Tencent. Uber followed suit but their WeChat link was often broken for no obvious reason.

Didi started investing in and building technology alliances with Uber enemies in other geographies to better fight Uber. Didi investments included – Ola cabs in India ($30mn – guestimate), Lyft Inc., in US ($100mn) and Grab Taxi in South East Asia ($350mn).

At the time of this writing, according to Bloomberg, Didi and SoftBank have almost clinched a deal to pour a further US$600 million into Singapore-headquartered Grab. Both companies are existing investors in Grab, as well as Indian counterpart Ola.

Growth and ambition

In July 2016, Didi offered taxi-rides in 400 cities and private car services like Ubers’ in 200 cities. Its taxi hailing service was arranging more than 4 million trips a day through its pool of 1.35 million drivers. Its private car service was doing over 1.5 million trips a day. In 2015, Didi arranged a total of 1.4 billion rides in China, more than Uber has done worldwide in its history. At the same time, Uber offered private car services in 55 cities planning to reach 120 cities by September 2016. A leaked Uber memo in the summer of 2015 revealed Uber arranging 1 million rides a day.

By multiple accounts, Uber probably had between 10% – 35% share of private car services business. Didi had 65% – 80% market share in this segment plus 99% share in taxi and bus hailing services.

This race was clearly marked with the scale of ambition and the speed of execution. Consider this for example – In December 2015, Uber was present in 21 cities planning to reach 120 cities (population over 2mn) in Sep 2016. At the same time Didi was present in 259 cities and was planning to reach 400 cities by February 2016 alone! Indeed at the time of merger, Didi was active in 400 cities while Uber was only in 55 cities. Didi had expanded at a furious pace and that meant stupendous flawless execution. And this execution was backed by a grand vision – “penetrate into all regions of China targeting 30 million trips daily over 10 million cars registered on its platform.

Funding

Both Uber and Didi were flush with funds to fight to win in this market. Didi had raised a total of $9.82bn from investors like Tencent, Alibaba, China’s sovereign wealth fund, CIC and notably $1bn from Apple. Uber had globally raised $11.46bn but its China operation that was a separate entity, had locally raised only about $3bn from Baidu and others.

As part of the deal, Didi is also investing $1 billion in Uber. Now Uber also has investment in these three taxi-hailing companies by virtue of its 17.7% stake in Didi. What does it mean for the taxi-hailing business in US, India and South East Asia?

Both the companies had burnt cash to attract more drivers and riders on their platform. So far Uber had matched Didi in the spend. But Didi had an advantage in the long run – it’s opponent had to balance its funds across several countries where it was fighting for share. It was perhaps unwise on Uber’s part to ignore their other territories in favour of China alone. Also, Uber was eyeing an IPO at this time and needed to clean their balance sheet.

Questions

  1. Has Uber made the right decision by selling off its China ops? It still has a 17.7% share in Didi! Why?
  2. Is private car services / taxi hailing a winner-takes-all business?
  3. With the cross holdings between Didi & Uber, Didi and Ola, Lyft & Grab what is the likely steady state scenario? What is the future of Ola, Lyft and Grab Taxi? Do you think in the end only Uber and Didi will remain through out the world?
  4. How does it augur for India e-commerce titans fight? Does Uber-Didi merger strategy will playout here too in form of a deal between Flipkart & Snapdeal or Amazon and either of the two Indian e-commerce brands? Isn’t that beneficial for investors instead of endlessly draining out cash?
  5. What are your lessons from this story?
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Satisfied customers – isn’t that we all want?

The other day on my regular Hyderabad- Bangalore flight I was reading this book titled Raving Fans by Ken Blanchard and Sheldon Bowles. The concepts in the book brought back memories of my experiences in building hardware and software products in a 30 year career. I also often deliver skills and tools for building “aha” products through my corporate workshops. There is a lot written about design and design thinking. But, in this blog I am sharing a proven product development process that often results in winning products and raving fans. Do leave a comment if you agree or disagree.

“Satisfied customers”, isn’t that we all want? Sure, Yes, – but what does a ‘satisfied’ customer really mean? What if your customers are only satisfied because their expectations are too low? Or the competitors are doing worse than you. These satisfied customers will switch the moment they find a better alternative.

What if they really just marked ‘5-5-5-5’ on the satisfaction survey because they were in a good mood that day or they just wanted to get through the survey quickly? Does a ‘good satisfaction’ rating really tell us how connected to the product they are? How excited about the product they are? You may fill out a survey after buying a gadget or software or a service and represent a ‘satisfied’ customer – but are you going to race out and tell all of your friends that they MUST go to this product or the service too?

If you are a small business that really wants to grow rapidly, you really must create raving fans – not just satisfied customers. Raving fans are so excited about the product and their experience that they want to tell stories, recommend the product to others. These are the folks who line up around the block to get their hands on a new product FIRST! They post long, detailed reviews about products on blogs and sites. They become big ‘Influencers’ for various products of your business. Each raving fan may bring 4 to 10 other customers and can produce exponential growth for your business. On the flip side – dissatisfied or disenfranchised customers can take customers away!

So, how do you create raving fans?

Before we go further we must bust two myths that perpetuate tech community. These are:

More features = happier customers. How many of you try squeezing in as many features as you can? A product built to satisfy everybody will not satisfy anybody. Do not spread your resources thin over a broad product vision. Instead, narrow the scope, narrow the product vision. Then delight a customer narrow segment within this narrow vision. You can repeat this process with other customer segments over time. The other customer segments might wait based on what they hear about your product from other raving fans. Or they may be ready to switch when you release product for them. Be wary about adding features to your product.

Clever technology leads to better customer experience. A vision of a perfect customer experience is rarely fulfilled with technical innovation alone. A clever product will fail to delight customer if even one thing does not work the way it is supposed to.

Five steps to raving fans

I have distilled five best practices to create Raving Fans. These practices are pro-active – they start from product visioning and cover the entire product life-cycle. I believe that the work done upstream has enormous effect on the downstream activities!!!! These are –

  • Develop a customer-centric vision
  • Establish key metrics to measure customer delight
  • Select a well-understood initial customer set to focus on
  • Create a regular rhythm of engagement early on
  • Structure customer feedback process for 3As

We now discuss these steps in detail.

Develop a customer-centric product vision

Product vision should be centered on the intersection of customer experience (through their eyes) and technological innovation – Not just how excellent a component or feature alone is! It’s also not just asking customers what they want or what their expectations are – it’s blending the two into this vision. Remember, customer experience is a function of their needs, values, views, attitudes. Model the feelings, emotions, behaviors to anticipate their reactions to your innovation.

Obviously, you can’t just ask customers what they want and build that – especially if you are building a never before innovation, things they never knew they wanted. But you can go observe them and listen to what they do not say. You can build customer empathy and feel their pain.

A common mistake every makes is – “I am the customer” or “I will put myself in my customer’s shoes”. With this approach only one guy has been successful – Steve Jobs. You aren’t Jobs, atleast yet. You are also not the typical end user of your product or service for a number of reasons – your values are different, your technical background knowledge is different, your attitude is different, your cultural context is different, your perception and knowledge of the tasks, problems, and scenarios is incomplete or skewed. For the same reason, your colleague or your VP is also not the customer.

In summary, you must drive your innovations from a customer perspective and ensure your business model and technology enhancements fit the vision of the customer’s great experience.

Establish key metrics to measure customer delight

Vision by itself is not enough.

Backup the vision with key metrics and customer-focused release criteria to measure if you are meeting and indeed exceeding your customer requirements and expectations. You must know this at every stage of the product development i.e., much before the product is shipped. Remember, customer perception of quality is very different from engineering quality that most tech entrepreneurs tend to focus on. If product does what the customer needs and is emotionally engaging, it’s high quality.

A good set of release criteria will include measures of functionality, experience and performance. These criteria must be benchmarked against best in class products and be traceable to the customer requirements. This means you will measure – does the functionality of the product meet the bar? does the user experience meet the bar? And does the product performance meet the bar?

You would also want to ensure coordination and buy-in across disciplines i.e., marketing, product planning, UX etc. You do this by involving all other disciplines from product visioning stage itself.

Select a well-understood initial customer set to focus on

It is very important to identify a set of customers you will depend on for product feedback apart. It is naïve to depend on only the common channels like loudly complaining customers, press reviewers and product support teams. These are often incomplete, insufficient, or inaccurate sources of user data. Consciously, methodically, methodologically create a model of the “end user” and gather data. Identify a right pool of customers for research, studies and early adoption programs. Customer Advisory Council (CAC), User Group (UG), Special Interest Group (SIG) serves such purposes. For example, CAC is a small, hand-selected group of customers that are willing to provide intimate customer feedback on product/service strategy and design issues. UGs and SIGs are volunteer driven groups whose members are most likely not affiliated with any specific company. They meet on a regular basis to discuss and share information on a variety of topics and can range in size from 5 to 1000+ members. The members of these groups are influencers and a direct and focused interaction with them can generate grass-root level feedback to improve your offerings.

Create a regular rhythm of engagement early on

If you involve customers early and often – and close the loop with them – then they feel you are actually taking action on their feedback. They feel that they have a stake in the development process – and that builds loyalty and trust. They feel a sense of relationship with the company that extends beyond the product. This sense generates feelings like –

“They really listened to me!” “I can’t wait to see what they do for me next.”
“I can connect with a community of people who care about the same things I do.”

Use a variety of tools for different phases of product development. For example –

  • Product planning phase – surveys, focus groups, customer visits
  • Product design phase – field trials, usability studies
  • Product stabilization – alpha and beta releases
  • Post release – customer councils, newsgroups, blogs, automated tools

Publish your blog atleast twice a weak. Talk about what is happening at your company or in your product. Interact with the customers who reply to your blogs

Structure customer feedback process for 3As

Customer feedback will come in from multiple sources and at multiple levels. All this feedback must be captured, analyzed, categorized and prioritized. You must make this feedback accessible and actionable. Some of the feedback will result in customer requirements and product features.

Therefore, you must build a central feedback repository where the feedback can be easily be found and have a process to convert feedback into requirements that are traceable. That means someone is accountable for the requirement.

The feedback should be characterized by three top 3 A’s: Accessible, Actionable and Accountable.

Key challenges

Finally, this article still leaves you with some challenging questions. Share your answers to the questions given below. If you look for deep dive please do not hesitate to contact the author!

Starting a new sprint or a milestone? How do you find and use customer data already collected before? Where do you go to get new customer data? How do we ensure you aren’t asking the same customer for the same feedback multiple times?

How do you validate vision, plans, designs, etc. – how do you select right people for feedback at different stage of the product development? What if you need quick customer feedback to inform a decision?

Should you entertain significant design change requests after the Beta?

What are the metrics of customer expectations that you must measure throughout development?

What are the chances that your product will meet customer expectations prior to release?

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India is a closed source community or am I missing something here?

Open source software has been a constant buzz among few of the iSPIRT volunteers over last few months. How does India rate on OSS contribution? Does OSS seriously matter in the success of a software / software services business? Is it important enough to build an OSS ecosystem for the India based startups?

My own perception has been that the OSS engagement in India is low and as a result the contribution is low. I have often wondered why has not a single Indian OSS product featured in the top 50 global lists. Why India has not given an OSS product, foundation or a community like the LINUX, Apache, Mozilla or Hadoop. Why has no Indian voluntary OSS community ever achieved critical mass? Why even there are no OSS services companies of the likes of Cloudera or Hortonworks from the mecca of IT services companies?

There were many other questions and I am sure you the reader also have some questions, assumptions and answers to share. So I talked to few leading OSS lights around besides doing a quick research at LinkedIn. I am sharing some insights and findings in this post with more to follow in the next post soon. I might be way off the mark here, so please have patience and share your views.

Some market stats

Global OSS acceptance by end-users has grown at a healthy pace. Blackduck’s 2015 Future of Open Source survey reports 78% of the respondents’ companies ran operations partly or completely on open source. As per the report, in 2-3 years, 88% of the companies are expected to increase their OSS contribution.

RedHat (Linux) has been the lone poster boy of OSS industry for a long time. Today it has revenues touching USD 2 billion and a market valuation of USD 14.5 billion. OSS has gained VC interest as reflected in growing VC funding in OSS space and rising valuations of OSS companies. Tracing back fifteen years, gross VC funding in OSS companies works out to roughly USD 7.5 billion; averaging USD 750 million annually in recent years. Recent OSS successes include (figures are revenues / valuation / funding raised) –

Cloudera (Hadoop):  $200M / $5B / $100 M

MongoDB:                  N.A. / $1.6B / $311M

Hortonworks:             $60M / $1.1B / N.A.

Global market size of OSS based products is estimated at about USD 50 billion. Though it seems improbable OSS market will any time soon reach the size of proprietary software (USD 50 billion vs. USD 320 billion in 2015), its double-digit growth rate (compared to 3%-5% for proprietary software) presents an attractive opportunity to tap into.

What does it all means for India and Indian OSS companies?

India and OSS

Gartner estimates that by 2017, about 90 per cent of Indian IT organizations will have open source software (OSS) embedded in their mission critical platforms. The user companies hope to lower TCO and increase ROI with OSS use. The industries with significant OSS adoption include education, banking, financial services and insurance and government. Education is the leader here – majority of public and private educational institutions using OSS for library automation, and several research organizations applying it to drug discovery space. Indian small or mid-size businesses use OSS as client facing service portals. The large IT companies such as Wipro, Infosys and Tech Mahindra are already using OSS to test software for clients.

The majority of Indian government offices are directing new initiatives that involve use of open-source software and solutions. Some of the prominent government initiatives include NRCFOSS (by DEITy), FOSSEE (at IIT Mumbai), BOSS (at CDAC) and whole lot of state government initiatives.

OSS contributors – Indian companies

As anywhere in the world, OSS engagement in India happens in two ways – (Paid) Employees at software product and services companies and IT employees in plethora of other businesses contribute OSS code either as their own product or to existing OSS projects like Linux, Hadoop etc. I am not including OSS contributions from the likes of IBMs in this study.

A lot of this contribution happens on repositories and forges like GitHub and Source Forge. It is heartening to note that registered users and projects from India on these destinations are steadily growing. For example InMobi contributed OSS code to Hadoop project and Flipkart has opened source of few of its projects including a more popular project phantom. In last couple of years, largest Indian OSS contributions (though tiny by global standards) came from ShepHertz, Hasgeek, Practo and Freshdesk. Code for India is another large volunteer based tech community that develops OSS solutions for Elections, City Governance, Women Safety, Education etc.

Overall, contribution from India is tiny compared to the top contributors across the globe and does not generate healthy interest from OSS communities around the globe. For example, the most popular Indian origin repository on GitHub has 232 stars placing it at rank 5376 on a list of 219,071 JavaScript projects.

Is it a good achievement? Can it be bettered? If yes how?

OSS – individual contributors

Then, a lot of individuals contribute to OSS project outside of their day-jobs. This is unpaid voluntary contribution driven by individual passion. Some leading lights in this category include – Hackerearth developer Sayan Chowdhury who is on Mozilla’s roster for contributions to Mozilla Kuma and Rust projects, Eucalyptus Systems’ Kushal Das who was nominated to Director of Python Software Foundation, Anand Chithipotu with big contribution to web.py, and Siddhesh Payarekar (Glibe). More recently, two developers getting into limelight are – Prakhar Shrivastav (102 repositories on Github with some having 1000 – 12000 stars), Karan Goel (113 repositories on Github with several having 500 – 8000 stars).

FOSS activities in India

FOSS related activities are mushrooming in India. For example, there are more than 150 Linux User Groups. Annual FOSS events on campuses and outside like OSI Days are growing. There is greater Indian participation in global FOSS events like Google Summer of Code, Code Jam, etc.

What drives low OSS contribution from India?

I asked a few OSS contributors around, Range of answers I got fell into three buckets – individual behaviors, employer policy and process, ecosystem issues.

Individual behaviors: Maslow’s hierarchy of needs seems to at play here. The respondents were unequivocal that Indian programmers write code for a living not for passion. “We focus on daily work and do not enjoy programming as a hobby.” Other factors that came out were – fear of being judged and ridiculed, poor communication skills resulting in lack of confidence and plain ignorance of OSS – What is Open Source? Can I even contribute? What are the legal issues?

Employer policy and processes: Other set of issues related to the employers. I found that programmers were motivated to contribute but the employer either did not encourage OSS contributions or were just confused about OSS policy and process. One respondent told us – “We would like to promote OSS contribution but we are hindered by the lack of a sophisticated OSS policy (as community participation requires a set of standard guidelines throughout the company).”

Another respondent told us – “We do it more on an adhoc basis and usually during low activity periods (which are rare).” An OSS evangelist reported – “I think developers are enthusiastic about it but the companies and managers do not focus on it. If they give enough time for developers to do OSS (initially it needs extra efforts and time but slowly developing like that becomes a habit), it should improve. “

Finally, it appears that IT services companies do not encourage open source contributions and elsewhere there was focus on exploiting OSS code rather than contributing back.

Ecosystem issues

The third major bucket of issues can be aptly labelled eco-system issues. These include educational and legal.

A common feedback across respondents was – “If India, like developed economies, too has strong IP Law and enforcement, we would see many software producers and consumers shift to OSS paradigm.” A feeling prevalent was that others consume OSS without giving credit and the law either does not protect of the legal process is lengthy and expensive.

Another important feedback was – lack of awareness of OSS licenses led to indecisiveness about OSS contribution even when the intention was all there.

A comment on the Government of India’s OSS policy said – “the policy is great but implementation leaves lot to be desired.”

Folks, I ask you if these issues sync with you. Please write back to take this conversation forward.

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Part 2: Emotionalizing the software products .. Uh…what?

The first step: build customer empathy

Microsoft built test tools in Visual Studio 2005 to address a virgin test market worth about USD 3 billion at the time. However, the product met with little success and did not create much excitement in the test community. A later in depth observational research of testers to see how they work—what’s their workflow, what tools did they use, what’s their contextual environment, revealed that more than 70% of the testers did manual testing. Most of the time they worked on one test case at a time. Their tools were manual – Microsoft word, excel, white board, paper. For many of these testers, Visual Studio became sort of a four letter word.  They would complain- why are you making me do this? You are making me think like a developer!

In contrast, the test tools in VS2005 were automation based API testing tools designed for specialist testers like Microsoft SDETs. They were optimized for complex testing that required setting up a suite, a plan, a configuration, and all these things that were super-flexible and powerful.  Test tools were like the Swiss army knife that could solve many problems many different ways. But to the average tester, it was impossible to get started and if one ever did, hard to use.

In short, majority of testers worked very different than the programmer testers within the company and elsewhere. It was really a case of lack of customer empathy. The team initially failed to recognize that testers outside could be entirely different beings from a Microsoft tester. After an expensive lapse, they identified a new tester persona named Ellen and released a test management environment for them in the form of Camano with VS 2010.

The cause of this lack of empathy is the curse of knowledge that software developer suffer from. They just know so much more about technology that they can’t see from an average real life users’ point of view. Microsoft software engineers did not understand majority of software testers. Possibilities of software engineers not understanding lay users are far higher.

It is important that the people behind technology products, as Tim brown, author of Change by Design, puts it, could see the world through the eyes of their customers, understand the world through their experiences and feel the world through their emotions. That is the essence of empathy.

Empathy is about knowing your customers deeply, in fact better than they know themselves. Product managers I meet recount how they are trying to do this through surveys, focus groups, usability studies, customer visits and conjoint analyses. But they are missing the point. All this data are meaningless without empathy.

So how can software developers factor in customer empathy in the software products?

One, change focus from feature driven, technology driven or competition driven product development to customer focused product development.  Features often creep into products because management wants it or competition has it or because it is technologically cool. Shun these practices totally and make all your product processes customer-centric.

Two, develop strong understanding of your customer and make them center-piece in all your engineering and product decisions.  Give face to those single word descriptions of customer segments. Develop personas. Put them across your office to remind developers who the customer is.

Develop customer insights beyond the obvious. Only then you have a chance to differentiate and be a winner. Use open questions and empathic listening when talking to customers. Do not stop at asking customers what they want. Customers often can’t articulate what their needs and wants are. They often learn to live with current reality thus killing all useful feedback they could give you. We have all seen people writing passwords on their palms, chaining their bicycles to the park bench, using all kinds of objects as door stoppers and so on. Such consumer needs become latent and never get surfaced in any questionnaire or interview.  Customers are too occupied with their current business to be able to paint great future scenarios. They are no experts to tell you what will be a successful product in the future. Go live with them (ethnography), observe them going about their tasks in their natural habitat. Use empathy map to capture what the people in observation said and did, your interpretation of what they thought and felt and inferences of what their pain points are and what they desire to gain.

Three, stop developing features. Start developing scenarios. Scenarios are short stories told from the customer’s point of view that explains their situation and what they want to achieve. Scenarios describe the journey to a happy ending. Scenarios help shift focus from technology and mere use cases to customer. Remember, human brains are hardwired to understand stories. If you can’t tell a story out loud and have it make sense, you’re probably missing something. Make scenarios the heart of your product. Don’t ship a product with a broken heart!

Four, develop and live by a set of clear user experience (UX) principles. These principles help you make decisions that deliver a product with a clear point of view. An example of experience principles from Windows 8 (details available on the web) includes – pride in craftsmanship, change is bad unless it is great, be fast and fluid, solve distractions not discoverability, reduce concepts to increase confidence, win or lose as one.

Five, develop clear scenario success metrics. Test your scenario to this metric. For example a metric could be –

1)     UX performance – did users successfully complete this scenario? How long did it take?

2)     User perception – were users excited, frustrated, satisfied or annoyed while completing the scenario?

3)     Functional test – does the scenario function as per specs?

Empathy approach to designing winning products has an underlying belief – it’s better to build a product that delights a small segment of users than to build one that targets everybody but doesn’t really nail it for any of them. There are countless examples of products like iPhone and OXO kitchen tools that are a roaring success with customer segments beyond what they were originally designed for.

Steve Jobs once said, “It is not the customer’s job to know what they want.” That’s absolutely right. It is yours.

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Emotionalizing the software products… uh…what?

I recently delivered a workshop on building winning products. The audience identified that it was important the customers loved a product in order for it to be a winner. It also came up that consumers increasingly want to buy things that thrill and delight in addition to simply doing what they were designed to do. Today, things around us from Gillette razors to Apple devices exude desirability and emotionally engage consumers. People look at their possessions as a means to provide them self-expression and extend their personality. They also crave for great experience in the journey of whatever problem they are trying to solve. They find the mere discreet functions and features unexciting.

The new focus on emotional experience is consistent with the psychological research that confirms that people value emotional experiences more than even the product functionality. Statements like this from users, “there is shortcoming in my iPhone, but still I love it”, are commonly heard now-a-days. Indeed, “Form follows function” has given was to the more emotion led approach to design: “Feeling follows form.”

Why build emotional connect

Technology people live in a rational world and they think the rest of the world too. This is however, far from truth. Emotions drive peoples’ attitudes and behaviors. Rational thought can lead customers to being interested in the product and be happy with tangible gains from its functionality. However, it is emotions that drive customers’ desire to own the product, pay any premium and recommend it to their friends. Emotional engagement promotes loyalty and revenue growth thru word-of-mouth. There is a proven ROI in emotionalizing software.

How does this impact software? Well the software is becoming an ever growing component of the plethora of devices and services that proliferate around at home, workplace and other places. This means software has enormous possibilities for creating emotional experiences for the consumers. It makes it imperative that software developers fulfill this consumer expectation.

How to build emotional connect and satisfaction

People think about and experience life through a set of deep rooted metaphors. The metaphors help them make sense of the plethora of experiences through these metaphoric lenses.  Emotional experiences happen thru the five senses – vision, hearing, smell, taste, and touch. Software products and services are abstract in nature. Unlike other products (devices, autos, homes etc.) they can mostly leverage only vision and hearing for the emotional experience.

Keeping the challenges in mind, here is a set of steps that the author found useful in this endeavor.

  1. Develop customer empathy to gain deeper understanding of the customer, their needs, wants, deep desires and values.
  2. Understand that people respond to feelings, remember stories, and take actions based on deep rooted metaphors. Therefore
    1. Identify metaphors people live by. Metaphors vary by culture. Metaphors change with time.
    2. Use metaphors to create the symbols, icons, colors, texts, workflows etc.in interaction design.
    3. Use storytelling techniques in internal and external product communication like product vision, requirements, specifications, prototypes, press releases, product positioning statements, tag lines, advertisements and documentation.
    4. Keep customers and their pain points and value props alive thru the product development where daily engineering and feature decisions can easily lead to overlooking who the customers were and what they wanted.
    5. During product development
      1. Personify user / customer during software development. Use personas.
      2. Build not features but complete scenarios of customer problem solving.
      3. While making engineering / business decisions constantly ask – will that persona like the change? Does the decision breaks down any end-to-end scenario?
      4. Post product development
        1. Create emotional connect at every touch point like sales transaction, support and upgrades.

We shall delve deeper into each of these steps in forthcoming blogs.

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Where is Dropbox headed?

Having started in September 2008, Dropbox today is a leading cloud storage provider (CSP). It has over a 100 million signed free users and about 4 million paid users (4% conversion rate as quoted often by Houston). Assuming the lowest payment tier (100GB at $99 per year), this translates into annual revenue of about $400 million. Based on Amazon S3 costing and estimates of Dropbox employee costs, the EBITDA works out to $250 million. Its costs are always going down and its revenues are always going up. The company is valued at $ 4 billion. Dropbox is making money hand over fist. Right? But consider this –

It now has more than ten competitors several with deep pockets e.g., Amazon CloudDrive, Apple iCloud, Google GoogleDrive, Microsoft Skydrive, Box, Spideroak, Ubuntu One, MediaFire, Mega.  Its other competitors, purely in enterprise space include HP Cloud Objects, Rackspace etc.

Dropbox offers the smallest free quota – 2GB plus referral bonus. All its competitors offer 5GB or more (Skydrive -7GB, MediaFire and Mega – 50 GB).

Dropbox pricing is probably the highest ($99 for 100GB). For same capacity, competitor prices are much lower –CloudDrive ($50), GoogleDrive ($60), Skydrive ($50). Box ($480), iCloud ($160). Spideroak ($100) have a higher pricing but have more powerful features (see below).

Dropbox is merely a folder service. Its competitors have other value-adds and lock-in mechanisms. For example, iCloud allows streaming of music, apps, books, and TV shows you purchase from the iTunes store, Google and Microsoft have GoogleDocs and Office WebApps respectively. Documents created through these apps do not count towards the drive quota. Box is designed more as a business-collaboration and work-flow solution that a CSP. SpiderOak is the only service that offers data encryption before your data hits their servers. Perhaps, acquisition of AudioGalaxy should enable Dropbox with music streaming feature.

The  giants like Apple, Google, Amazon and Microsoft see storage as a way to lure customers into their respective cloud and then “upsell” them on higher-level and more profitable services that they have in the portfolio. They have been aggressive in launching or responding to price cuts from competitors. Dropbox cannot win against these Goliaths in the theatre of feature and price wars.

The Dropbox differentiator was the near seamless experience backing up and syncing files to cloud on multiple platforms. That differentiator is rapidly evaporating with the competitors catching up. Moreover, what happens if all your files are already in the cloud for example music (iCloud, Spotify), Documents (GoogleDocs, Office 365), Pictures (Instagram) and so on. There are umpteen such scenarios that make Dropbox redundant.

I am sure Dropbox product managers are having sleepless nights. Do you have a product strategy and roadmap for Dropbox’s future?

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Stories are Better Than a Feature List

You’re at an event, and you’re ready. You know your product inside out. You know the competition. You know the licensing terms. The deals. The partners. The competition. Technical details. Market details. Detail details. Regulations. Strengths. Compatibilities. Your head is stuffed. Crammed, just when – A customer comes to you. “I’ve got sixty seconds. Why should I buy from you?”

You spent years learning and studying and now you’ve got 30 seconds. You choke on your own knowledge.  In this situation, has your strength, your deep product knowledge, actually become a weakness? What do you do? How do you convey so much information in such a small amount of time?  It’s these situations, when a 100-slide PowerPoint deck or a technical demonstration is not possible, when it is critical to turn to the oldest form of persuasive communication in the world – the story.

Your customers are being constantly bombarded by myriad of marketing messages as well as other communication – emails, blogs, and social media. How do you make them notice your message and remember it when making a decision? The answer again is a story. Stories are powerful. Stories propagate thru centuries without any media coverage and advertising dollars. We hear stories in childhood and we repeat them to our children. And the story goes on. Consider these two announcements from two of the biggest product and SaaS companies.

Microsoft’s Jan 21, 2007 announcement

As Microsoft continues to deliver innovations to its unified communication and collaboration platform – which includes Microsoft Exchange Server 2007, the 2007 Office system with Microsoft Office SharePoint Server 2007, and has solutions in the pipeline such as the next generation of Microsoft Office Communications Server – Microsoft’s industry partners find that business is booming.

Google’s Oct 11, 2006 announcement

Ever found yourself trading email attachments with several colleagues, trying to collaborate on a document, only to have someone chime in at the last moment with corrections to an outdated version?  Today, at the Office 2.0 Conference in San Francisco, Google launched a solution to these collaborative and document-management challenges: Google Docs & Spreadsheets

Which one do you think is easier to understand and remember? Which is stickier?  The Google announcement has elements of a story as suggested by Heath brothers in their book Made to Stick.

Technical people are horrible at telling stories. It is tough for them to move from listing technical features to telling stories. Here is one way forward – apply to your writing the SUCCES framework suggested by Heath brothers in their book Made to Stick. They say a sticky message is simple, has an element of unexpectedness, is concrete and complete, makes an emotional connect and is told like a story. I strongly recommend the reader to get hold of the book and practice what the brothers suggest.

Here’s another example from GE – look at their site.

Their lead story isn’t about the products they sell or the event they were at. At the core GE stands for innovation and they tell us about their innovations not by listing their innovations in a bulleted list with awards and partner logos attached, but by talking about their rich history, their leaders, their visions and their journey over time.  It’s a rich narrative and something we can all learn from – the products are there but it’s not their lead.

You need to create your story or others will create it for you. – What is the narrative for Apple, What about Google or eBay? What would your narrative be? Remember to make your customer a hero!

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SaaS Pricing – the role of customer value proposition

The trend of pure-play SaaS providers and on-premise software ISVs diversifying into SaaS is on the rise. SaaS revenue for global top 10 ISVs forms 40% of all software revenues. According to Gartner, the SaaS revenues will grow annually at 17.5% to form 24% of all software revenues in 2016. This would amount to USD 22.5 billion up from USD 14.5 billion in 2012. While SaaS makes a perfect business sense in the long term, in the short term, SaaS providers face unprofitable business for two or more years among other challenges in marketing and product management. SaaS has given birth to new ways of pricing like fixed-fee or usage based pricing, pay-as-you-go, freemium model and so on. Pricing is an important aspect of SaaS business.

I will be covering SaaS pricing through a series of blogs on topics like concept of value pricing, role of segmentation and tiers, pricing structure, metrics, managing pricing over product life cycle, competition and product positioning. I start with concepts of value and role of segmentation.

A Google search throws up ‘n’ number of SaaS pricing models. But success of any pricing model is always rooted in a sound value proposition of the offering. Cost plus pricing is common, seems financially prudent thing to do but is known to leave a lot of money on the table. Also remember, even when offered free the customers would not pick up your offering if they do not perceive value in it. The first step in pricing strategy is to ascertain value of your offering.

Demonstrate value of your offering

The economic and emotional values are the primary drivers of purchase decision. The economic value of your offering is has two components – price of the next best alternative and the value of what differentiates your offering from the next best. You have no control on the competitors’ price. Therefore differentiation is the way to go to provide better overall customer value and better price. Sometimes customers may not perceive the value. It is critical your marketing communication ensure what is important to customer, specially differentiated features and benefits come to the buyers’ notice. So develop your value proposition and communicate it clearly to the customers.

A simple equation for the value proposition is (Value = Benefits – Costs). For this, you must quantify the economic value of your products features together with the emotional and psychological value. One way to do this is to quantify impact of your offering on customers’ revenue, productivity, profitability and so on. Here is an example of computing economic value of a feature.

A midsize software product MNC in India was considering moving to Google Apps. Google Apps offer benefits to two entities in an organization – IT and end-user. The IT benefits include cost savings on licenses, IT infrastructure and operations and maintenance. The end user benefits include – 1) productivity gain due to improved email search, spam filtering, archiving and improved response times, 2) quicker issue resolution and decision making thru shared editing of documents and 3) improved response time to customers and partners. Let us see how we can calculate productivity gain from just one benefit, say, and faster email search. Assume –300 employees, 5 day workweek, 50 work weeks, average per hour employee cost of $10, average 1 hour email usage per day, and a 10% saving (estimate based on previous implementations). This translates into an annual productivity gain worth 300 x 1 x 5 x 50 x 0.1 x $10 = $75 K.  The total benefits (productivity gains + IT cost savings) for three years operations worked out at $81K, $111K and $123K. Total subscription costs in this period were $18,900 (300 x $63 per user) per year. There were initial costs for transitioning from legacy system, testing, pilot and training amounting to $5K.  The overall risk adjusted net present value of benefits (including several other benefits like archiving, SPAM filtering, threading, IM etc.) was $205K. The customer went ahead with the purchase.

Segment your customers

All customers do not have same needs, value perceptions and the willingness to pay. Targeting the whole population with one product and one price is not the way t best financial performance. It leads to leaving money on the table for some customers who are willing to pay higher and losing out another set of customers who can’t afford the price. Thankfully, the customers can be sub grouped or segmented based on certain similarities. Value based segmentation helps create pricing commensurate with the perceived value by those customer segments.

Segmentation requires creativity in addition to analysis. It must reflect your marketing strategy. For example, Zoho, Google Apps and Microsoft Office 365, compete in online document management area (word processor, spread sheet, presentations, email).  However, Zoho Docs views the market in three segments represented by personal, standard and premium licenses priced at $0, $3 and $5 per month per user. Office 365 has more complex view of the same market. It segments it into seven segments, namely small, midsize and enterprise business, education, government, professional and home with fourteen different licenses ($0 to $20 per month per user)! In contrast, Google Apps has just one offering at $5 per month per user. So, why does Microsoft has seven segments and fourteen price points? A closer study would reveal that the breadth and depth of features / functionality offered by Office 365 far outstrips Zoho docs and Google apps. It allows creation of diverse bundles of features and pitch them to different segments at price points that meet respective value perceptions. By doing this Microsoft is able to capture the students segments (low paying capacity) while maintaining premium pricing for the enterprise. Microsoft would lose both lot of money and a large chunk of market if they decided on just one segment with one price. Interestingly, it is possible to create segmentation and variable pricing without bundling different sets of features i.e., on an identical offering. For example, railways transports grains at much cheaper rates compared to manufactured consumer goods in the same wagon. There is very little difference in the inputs that go into transporting the two items. I have yet to see this in software or SaaS.

One more point in favour of segmentation is as follows. In a high fixed cost industry like software and SaaS, it is a good strategy to capture the large volume of customers in the long tail with a price that is just equal to the offering’s variable cost. This is good for revenue. Generally, more segments the better. The factors that limit number of segments are complexity and sales administration cost, smaller differentiation between the offering for adjacent segments and customer propensity to select the lower priced segment when differentiation is small.

I will close this blog with a quiz. Given below is the old pricing page of Serverdensity (http://www.serverdensity.com). Serverdensity is a provider of cloud based server monitoring. They have tiered pricing based on number of servers that a customer has. What is good, bad and ugly about this pricing?

Please look for the next blog on SaaS pricing metrics.

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To open source or not….

Ashok was perturbed. In Jan 2006, an eastern European company had taken his source code, made minor changes and started selling it under an alternate brand name at a reduced price. Ashok’s company Chartengo was a pioneer in Adobe Flash based charting software that helped users create charts for data visualization. Its charts were perceptibly superior to any available on the market. The company had five employees and revenues of $500,000 in 2006. It used to offer source code with its USD 99 developer version of the product. A growing business like Chartengo was sandwiched between free libraries on the Internet and large data visualization vendors (revenues > $100 million) on the other. In between it also had to content with few hundreds of competitors. The possibility of a vendor infringing on Chartengo IP in some distant corner of the globe was high.

Chartengo did not have a legal team so they contacted a firm that specialised in copyright infringements. The firm quoted $250,000 to file a suit but there would be additional fees for court appearances. besides the unaffordable legal fees, Ashok was apprehensive about the stance an eastern European court would take in this matter. He decided to forego the legal route. He talked to development team and few experts outside. A surprise suggestion with overwhelming majority was – make your product code open source. They said open source code will make it difficult for infringers to compete. Why should customers pay for a code that is open source from the original vendor? Ashok’s team of developers was thrilled with the idea of open sourcing their code. It would accelerate innovation and save them time developing everything themselves. They felt perhaps the customers would also be happy. They could also see an opportunity for higher revenues. The open source would probably draw more customers, especially those who were sceptic of dealing with a small company like Chartengo.

Ashok had so far found it the best strategy to protect its intellectual property. He believed innovation would only happen if it could be exploited for exclusive financial benefits of the innovator. How could he even think of handing over his crown jewels to the infringers in the marketplace? The thought of handing over his IP to these hackers and letting them enter their random untested code into it thus contaminating its pure quality was appalling to Ashok. He clearly saw his competitive advantage evaporating with opening his source code. Yet, at that time, open source was rising like a tsunami? Apart from individuals hacking into your code, well-funded companies were also doing so. There was passion about open source. Even customers were enamoured by open source culture. It was turning into a religion.

The question is – what should Ashok should do?

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Pricing dilemma

A year back I was involved with a leading mobile apps company on an issue related to product pricing. The company developed customized mobile apps for business. At the time it had a staff of 20 programmers and reasonably successful – having on its customer list several top global corporations like cola companies, few leading banks, advertising giants and others. It had revenues close to USD 1 million. The company had identified 20+ software functions (routines) that were commonly used in most mobile apps. They had put these together into a single library that programmers could access from a central repository when working on a mobile app project. Examples of such routines included memory management, real-time authentication, camera control, text messaging within the app and so on. Use of this central repository of frequently used routines had resulted in 30% saving in programmer time, standardization and uniform quality across projects, shorter time to market and finally the monetary benefit.

The company saw a window of opportunity externally. They knew the mobile app business was growing at a fast clip with app vendors mushrooming all over. They were also aware of the trend of end customers developing mission critical apps internally. Both these customer segments would see a value proposition in the library if the company offered it. The company was at a critical point – thinking how to breach the psychological revenue barrier of USD 1 million. It faced fierce competition that had brought down margins from 80% to 25% in just two years. They thought the library was a ticket to new profit stream and improved competitive position. They were debating how to price and market the product.

However this meant a sea-change in the way the company thought and worked. So far, they delivered single project as per known customer requirements to a single known customer at fixed price. They did their best to deliver within time and budget. They priced their services at cost plus margin. Any delay ate into their margin. Selling the tool externally would involve selling a generic product to external customers whose size and number was unknown and uncertain. They had a hunch but did not know for sure the external customers would really see value in the offering. For example a tribe of software programmers take pride in and get thrill from solving tough problems. They would not care for such a product. A few team members even felt that their competitors would also acquire the library thus diluting company’s competitive advantage in the market.

The company sought answers to several questions:

1. Should they sell the library externally at all?
2. Should they price it on cost plus basis or some other method e.g., value based pricing?
3. What should be the list price of the product?
4. What should be the license structure i.e., kind of licenses they should offer?

The company made a set of decisions. I will share those in the next post. Meanwhile, I invite you to share your suggestions on the questions facing the company.