offering pre-purchases

[Thomas Lord]

Well, of course I don't know what I'm doing but it seems
a reasonable experiment ....  

I wanted to put up a second project on my web site -- a second
example of the "pre-purchase model".    In the new description
of the product I tried to distill my answers to some of the
questions that Stephen.   I think that conversation was
helpful, at least in trying to articulate the offer more clearly.

The (disclaimer: commercial content that I (obviously) have
an interest in) page is:

   http://www.dasht-exp-1a.com/rx-rejuv/index.html

-t

[La Monte Henry Piggy Yarroll]

Thomas Lord wrote:

>
> Well, of course I don't know what I'm doing but it seems
> a reasonable experiment ....
> I wanted to put up a second project on my web site -- a second
> example of the "pre-purchase model".    In the new description
> of the product I tried to distill my answers to some of the
> questions that Stephen.   I think that conversation was
> helpful, at least in trying to articulate the offer more clearly.
>
> The (disclaimer: commercial content that I (obviously) have
> an interest in) page is:
>
>   http://www.dasht-exp-1a.com/rx-rejuv/index.html
>
> -t
>
>
>

I think I originally learned of this article here in FSB:

http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html

One interesting takeaway from the article is that there is almost no
successful software between $1000 and $75000. I don't think the numbers
have changed radically since the article was written.

The $5000 option in your experiment violates this recommendation. The
core problem is that prices above $1000 force you into more expensive
sign-off processes which generally require a more active sales process.

[Stephen J. Turnbull]

La Monte Henry Piggy Yarroll writes:

 > The $5000 option in your experiment violates this recommendation. The
 > core problem is that prices above $1000 force you into more expensive
 > sign-off processes which generally require a more active sales process.

Tom's already recognized that (in a different context).  What would
you suggest here?

[Thomas Lord]

Stephen J. Turnbull wrote:

> La Monte Henry Piggy Yarroll writes:
>
>  > The $5000 option in your experiment violates this recommendation. The
>  > core problem is that prices above $1000 force you into more expensive
>  > sign-off processes which generally require a more active sales process.
>
> Tom's already recognized that (in a different context).  What would
> you suggest here?
>
>
>  

My pricing for pre-purchases has three tiers:

  $175 - individual
  $499 - corporate, basic
  $5,000 - corporate, premium

Customers can mix and match and buy more than one
at a time so, really, a customer sets their own price.

There are three intentions behind naming specific
prices.   One is to signal to customers some hints
about what *I* think is a fair price.   Another is to
create specific invoice-able items at levels that
fit typical authorization procedures.  The third is
to give potential customers feedback about the strength
of the economic signal they send, relative to what
other customers might send.

-t

[simo-2]

On Mon, 2007-10-08 at 14:43 -0700, Thomas Lord wrote:

> My pricing for pre-purchases has three tiers:
>
>   $175 - individual
>   $499 - corporate, basic
>   $5,000 - corporate, premium
>
> Customers can mix and match and buy more than one
> at a time so, really, a customer sets their own price.
>
> There are three intentions behind naming specific
> prices.   One is to signal to customers some hints
> about what *I* think is a fair price.   Another is to
> create specific invoice-able items at levels that
> fit typical authorization procedures.  The third is
> to give potential customers feedback about the strength
> of the economic signal they send, relative to what
> other customers might send.

This really resembles just a patronage/donations system.
Corporations from time to time like to invest money in this way, but
they usually also like to do that with non-profit organizations as that
has implications Tax-wise.
While it is certainly a good thing to be able to help the accounting
system of a corporation, the problem here is that you are basically just
asking them to trust you
Managers have hard time to justify an expense in such cases.
It can be a somewhat easier if you are making some promise about the
outcome but making such promises is usually very tricky and risky.

Simo.

[Thomas Lord]

simo wrote:


> Corporations from time to time like to invest money in this way, but
> they usually also like to do that with non-profit organizations as that
> has implications Tax-wise.
>  


The famous ones, such as Mozilla Foundation and OSDL, are there
to house and to create a membership consortium around well-established
open source projects.   That is, the patrons are making sure that
incremental/evolutionary development continues, and that the patrons
are getting to sit around a table and talk about their concerns with
the developers.    NPOs impose a lot of overhead and transaction
costs -- it's worth it in cases like Mozilla and the kernel because
there are so many stakeholders and the stakes are so high.  (Does
Red Hat care if the person maintaining "ls" works for Novell?
Probably not so much.   Would Red Hat care if Novell had
exclusive control over the main kernel lines?  Yeah, that'd be
unstable.   OSDL helps foreclose those kinds of games.)


So, pre-purchases are similar in some ways.   Customers (or
patrons, if you prefer) are, in much the same way, gathering to
form a consortium.   They get to inform future development.
This is a less formal gathering.  There aren't meetings (unless
it turns out we want some), voting, charters, etc.   This
is an exploratory gathering -- to discover whether, true to
the claims of the seller, there are product opportunities being
exposed/created by this line of research.

Pre-purchases are different from NPO patronage in two important
ways:   First,  the funding *need* is smaller.   That is, the next steps in
the projects I'm selecting for pre-purchases are only modestly
expensive: it is work I can do myself if I have enough revenue
to cover my family needs.   Perhaps the projects will grow,
slightly, before I'm done with them but, generally, I would find
it hard to spend an OSDL-size budget on these projects, anytime soon.

Second, the funding *incentive* is smaller.  Because less depends upon
my projects in the present (e.g., I'm not holding up the next release
of RHEL), stability of funding is less important to my customers.
OSDL, one  presumes, spends some of their patronage provisioning redundant
web hosting and formulating continuity of operations plans for
various scenarios.  I don't have those kinds of costs to pass on to
customers.

An NPO structure would, therefore, add unneeded overhead
and impose awkward legal barriers.   Whatever customers saved
on their taxes, they would surely be losing to those additional costs.





> While it is certainly a good thing to be able to help the accounting
> system of a corporation, the problem here is that you are basically just
> asking them to trust you
> Managers have hard time to justify an expense in such cases.
> It can be a somewhat easier if you are making some promise about the
> outcome but making such promises is usually very tricky and risky.
>  

No, customers need to trust themselves.

One should buy a pre-purchase if, in one's own judgement, there
is something to be learned from the announced starting point -- something
to be gained by further exploration.

At the conclusion of the event -- when a future release is announced
to satisfy the pre-purchase contract -- the customer ought to ask
a series of questions:

1. Did I learn anything worth knowing?
    Satisfaction.

2.  Is there more to learn from this new starting point?
    Repetition.

3. How can I apply what I have learned?
    Benefit.

-t

[Ben Tilly]

On 10/8/07, Thomas Lord <lord@...> wrote:

> Stephen J. Turnbull wrote:
> > La Monte Henry Piggy Yarroll writes:
> >
> >  > The $5000 option in your experiment violates this recommendation. The
> >  > core problem is that prices above $1000 force you into more expensive
> >  > sign-off processes which generally require a more active sales process.
> >
> > Tom's already recognized that (in a different context).  What would
> > you suggest here?
>
> My pricing for pre-purchases has three tiers:
>
>   $175 - individual
>   $499 - corporate, basic
>   $5,000 - corporate, premium

[...]

You haven't addressed the fact that the $5,000 figure violates the
recommendation to not price software between $1,000 and $75,0000.  If
you believe what Joel Spolsky wrote, at most organizations you've just
guaranteed that they can't choose to buy the premium corporate
version.

The problem is simple.  Once a purchase gets too big, it needs a
signoff from higher up in the organization.  Convincing those people
is a lot harder than it is to convince people who can make smaller
purchases.  That requires a more active sales effort.  If you're only
making $5,000 a sale, you can't afford the cost of making a successful
sale.

Cheers,
Ben

[Michael R. Bernstein]

On Mon, 2007-10-08 at 14:32 -0400, La Monte Henry Piggy Yarroll wrote:
> >
> I think I originally learned of this article here in FSB:
>
> http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html
>
> One interesting takeaway from the article is that there is almost no
> successful software between $1000 and $75000. I don't think the numbers
> have changed radically since the article was written.

The gap itself hasn't changed much, but software-as-a-service offerings
do typically scale smoothly through that pricing gap (assumption: the
numbers are a roughly annual cost) and as a consequence have been
filling that niche.

- Michael

[Thomas Lord]

Ben Tilly wrote:
> You haven't addressed the fact that the $5,000 figure violates the
> recommendation to not price software between $1,000 and $75,0000.  If
> you believe what Joel Spolsky wrote, at most organizations you've just
> guaranteed that they can't choose to buy the premium corporate
> version.

> The problem is simple.  Once a purchase gets too big, it needs a
> signoff from higher up in the organization.  Convincing those people
> is a lot harder than it is to convince people who can make smaller
> purchases.  That requires a more active sales effort.  If you're only
> making $5,000 a sale, you can't afford the cost of making a successful
> sale.
>
>  


A solution is simple, too:  buy premium pre-purchases in lots of 25.   I
don't
mean buy 25 releases ahead.  I mean buy  25 pre-purchases of the next
major release.


-t

[Thomas Lord]

Michael R. Bernstein wrote:
> The gap itself hasn't changed much, but software-as-a-service offerings
> do typically scale smoothly through that pricing gap (assumption: the
> numbers are a roughly annual cost) and as a consequence have been
> filling that niche.
>  

Oh, excellent point.   The "gap" numbers are annual prices.   Pre-purchases
are not.  So there is some apple's and oranges there.

-t

[Don Marti]

begin Michael R. Bernstein quotation of Mon, Oct 08, 2007 at 04:24:26PM -0700:

> On Mon, 2007-10-08 at 14:32 -0400, La Monte Henry Piggy Yarroll wrote:
> > >
> > I think I originally learned of this article here in FSB:
> >
> > http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html
> >
> > One interesting takeaway from the article is that there is almost no
> > successful software between $1000 and $75000. I don't think the numbers
> > have changed radically since the article was written.
>
> The gap itself hasn't changed much, but software-as-a-service offerings
> do typically scale smoothly through that pricing gap (assumption: the
> numbers are a roughly annual cost) and as a consequence have been
> filling that niche.

And Joel Spolsky is talking about proprietary software
-- the transaction costs for open source can be lower.

  http://www.linuxworld.com/news/2007/081607-matt-asay-interview.html

But if the software doesn't actually exist yet, can
you really take advantage of the lower costs to sell
SaaS or open source -- or will cost of sales actually
be higher because it's all about something that has
to be told and not shown?

--
Don Marti                    
http://zgp.org/~dmarti/
dmarti@...

[Santiago Gala-2]

El mar, 09-10-2007 a las 05:58 +0900, Stephen J. Turnbull escribió:
> La Monte Henry Piggy Yarroll writes:
>
>  > The $5000 option in your experiment violates this recommendation. The
>  > core problem is that prices above $1000 force you into more expensive
>  > sign-off processes which generally require a more active sales process.
>
> Tom's already recognized that (in a different context).  What would
> you suggest here?
>

Not really a suggestion. In my experience, it is usually difficult to
get into part time agreements for strategic consultancy, companies want
to have you sitting in a table there, always available. In my career as
a consultant I tend to end up being a contractor in a company and then
another, etc.

This could be related with such a barrier, as I can't efficiently
"serve" more than, say, three such customers at a time, which means I
should ask them amounts in the "more expensive sign-off" area, and this
leads them naturally to ask more from me (once I have been hired part
time), which leads to the contract sliding into a full time contractor
position, which I really hate, and is unstable in itself. :)

It takes a very strong effort to maintain two/three such contracts going
on at the same time.

Regards
Santiago

[La Monte Henry Piggy Yarroll]

Michael R. Bernstein wrote:

> On Mon, 2007-10-08 at 14:32 -0400, La Monte Henry Piggy Yarroll wrote:
>  
>> I think I originally learned of this article here in FSB:
>>
>> http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html
>>
>> One interesting takeaway from the article is that there is almost no
>> successful software between $1000 and $75000. I don't think the numbers
>> have changed radically since the article was written.
>>    
>
> The gap itself hasn't changed much, but software-as-a-service offerings
> do typically scale smoothly through that pricing gap (assumption: the
> numbers are a roughly annual cost) and as a consequence have been
> filling that niche.
>
> - Michael
>  

How does that work bureaucratically? Don't the same sign-off limits
still constrain you into an expensive sales task? You do get some
reduced sales cost because you can count on renewals on SaaS. I would
expect a third price node somewhere between $1000 and $75000, probably
on the high end.

[Ben Tilly]

On 10/8/07, Michael R. Bernstein <michael@...> wrote:

> On Mon, 2007-10-08 at 14:32 -0400, La Monte Henry Piggy Yarroll wrote:
> > >
> > I think I originally learned of this article here in FSB:
> >
> > http://www.joelonsoftware.com/articles/CamelsandRubberDuckies.html
> >
> > One interesting takeaway from the article is that there is almost no
> > successful software between $1000 and $75000. I don't think the numbers
> > have changed radically since the article was written.
>
> The gap itself hasn't changed much, but software-as-a-service offerings
> do typically scale smoothly through that pricing gap (assumption: the
> numbers are a roughly annual cost) and as a consequence have been
> filling that niche.

You also find per seat licensing costs that fit in that gap.  Of
course the companies involved would like to sell enough seats to an
organization to put them over $75,000...

Cheers,
Ben

[Stephen J. Turnbull]

Don Marti writes:

 > And Joel Spolsky is talking about proprietary software
 > -- the transaction costs for open source can be lower.
 >
 >   http://www.linuxworld.com/news/2007/081607-matt-asay-interview.html

Nah.  Joel Spolsky is talking about *expensive* software -- the
transactions costs for inexpensive software can be lower.

Marketing costs aren't transactions costs.  Asay's main point is that
marketing costs for free software are lower, because the software
speaks for itself and does so accurately.  You don't have to buy
advertising and commission bad white papers on projected cost savings
or service improvements, that are going to be much less convincing
than a trial install and hands-on play.  He doesn't actually talk at
all about transactions costs (those that are associated with actually
landing a sale) that I saw, except in the trust factor that went with
moving from a partially proprietary licensing model to GPL-all-the-way.

Your point is correct; transactions costs are going to be *higher* for
pre-purchases precisely because you have to trust the developer to
actually put in the effort, and the product is not available for
evaluation, both driving risk way up.

One further issue that occurs to me, one that Joel discusses but Tom
misses, is discounting.  Not only is delivery of "pre-purchased"
software is uncertain, reducing the value, but this is compounded by
the fact that it's in the future, which also reduces the value, while
payments are up front.  No accountant is going to approve that.

[Thomas Lord]

Stephen J. Turnbull wrote:
> One further issue that occurs to me, one that Joel discusses but Tom
> misses, is discounting.  Not only is delivery of "pre-purchased"
> software is uncertain, reducing the value, but this is compounded by
> the fact that it's in the future, which also reduces the value, while
> payments are up front.  No accountant is going to approve that.
>
>  


The delivery of a hypothetical release is in the future, certainly,
but the customer relationship commences immediately upon
purchase.   For example, if I get a phone call or an email from
a customer, that's different than if I get one from someone else.

So, the value is certain and begins immediately upon purchase.

That has been my first customer's experience, at least.

-t

[Don Marti]

begin Stephen J. Turnbull quotation of Wed, Oct 10, 2007 at 05:35:23PM +0900:

> Don Marti writes:
>
>  > And Joel Spolsky is talking about proprietary software
>  > -- the transaction costs for open source can be lower.
>  >
>  >   http://www.linuxworld.com/news/2007/081607-matt-asay-interview.html
>
> Nah.  Joel Spolsky is talking about *expensive* software -- the
> transactions costs for inexpensive software can be lower.
>
> Marketing costs aren't transactions costs.  Asay's main point is that
> marketing costs for free software are lower, because the software
> speaks for itself and does so accurately.  You don't have to buy
> advertising and commission bad white papers on projected cost savings
> or service improvements, that are going to be much less convincing
> than a trial install and hands-on play.  He doesn't actually talk at
> all about transactions costs (those that are associated with actually
> landing a sale) that I saw, except in the trust factor that went with
> moving from a partially proprietary licensing model to GPL-all-the-way.

There is some stuff in the Matt interview on the
actual sales cycle: first, it's shorter: three
months instead of 9-18 months, and second, the sales
reps don't have to "knock on doors" or deal with
unqualified leads.  The sales force can be carnivores
instead of herbivores -- closing deals with customers
who know what they want, quickly, instead of chewing
through lots of low-quality leads.

(On a long-term level, much of marketing costs are
transaction costs, because they're the costs of
gathering information on what the customer wants and
what you can sell.  Making the customer's IT staff
do that for you on a wiki can be cheaper than hiring
your own $70 haircut marketing people to do it.)

> One further issue that occurs to me, one that Joel discusses but Tom
> misses, is discounting.  Not only is delivery of "pre-purchased"
> software is uncertain, reducing the value, but this is compounded by
> the fact that it's in the future, which also reduces the value, while
> payments are up front.  No accountant is going to approve that.

You could just do a prediction market on will the
project accomplish some goal -- but we had that
thread already.

--
Don Marti                    
http://zgp.org/~dmarti/
dmarti@...

[Stephen J. Turnbull]

Thomas Lord writes:

 > Stephen J. Turnbull wrote:
 > > One further issue that occurs to me, one that Joel discusses but Tom
 > > misses, is discounting.  Not only is delivery of "pre-purchased"
 > > software is uncertain, reducing the value, but this is compounded by
 > > the fact that it's in the future, which also reduces the value, while
 > > payments are up front.  No accountant is going to approve that.

 > The delivery of a hypothetical release is in the future, certainly,
 > but the customer relationship commences immediately upon
 > purchase.   For example, if I get a phone call or an email from
 > a customer, that's different than if I get one from someone else.
 >
 > So, the value is certain and begins immediately upon purchase.
 >
 > That has been my first customer's experience, at least.

I don't doubt it (well, I do have strong reservations about the
*extremely* loose way you use the words "certain" and "immediate", I'd
almost think you were quoting from a marketroid white paper ;-).  But
does it scale?  Linear extrapolation from a sample of one is simply an
exercise in wishful thinking, especially with a coefficient of "1.000".

Ie, *that* customer relationship is currently effectively that of an
exclusive contractor, because there's only one.  As Santiago Gala
points out, it only takes two, at most three, before they start
competing with each other for your attention.  At that point the value
degrades.  "When" and "how much" are both uncertain, and therefore the
value is uncertain.

I'm sorry, Tom, but you just don't seem to get it.  What you are
currently doing is a hobby that occasionally returns a few bucks.  You
can afford to give each of your only customer the kind of attention
that a gal with $100 million to invest gets from her personal banker.

To turn that activity into a business, even a "lifestyle business",
you need to scale it and smooth it.  Both will impact your customer
negatively, and at rather small scales and moderate degrees of
smoothing.

[Stephen J. Turnbull]

Don Marti writes:

 > There is some stuff in the Matt interview on the
 > actual sales cycle: first, it's shorter: three
 > months instead of 9-18 months, and second, the sales
 > reps don't have to "knock on doors" or deal with
 > unqualified leads.

He's not talking about $75,000 software, though, is he?  Joel makes
exactly the same kind of comparison for his inexpensive proprietary
software against the expensive proprietary software.  I put it to you
that Matt is not seeing the effect of his software being open source;
he's seeing the effect of it being relatively inexpensive.

 > (On a long-term level, much of marketing costs are
 > transaction costs, because they're the costs of
 > gathering information on what the customer wants and
 > what you can sell.

Sigh, I guess that definition is common enough, but it really hinders
communication because it becomes hard to talk about "pure" marketing.

 > You could just do a prediction market on will the project
 > accomplish some goal -- but we had that thread already.

No, you can't.  First, Tom is barred from trading in the usual way in
that market, it's insider trading.  Even if there's no legal
restriction, it would kill his rep.

Second, both buying and selling suck from his point of view.  The
market is going to equilibrate at everybody else's estimate of the
probability that Tom is actually going to satisfy the prepurchase
contract.  Tom, being the hacker extraordinaire, knows that the price
is too low; he's definitely going to deliver.  So he wants to buy, not
sell.  But the point of prepurchase is smoothing income, he's hungry
*now*, he can't afford to speculate.  He's also poor; suppose he has a
life crisis and doesn't deliver?  Then he spent his prepurchase income
in the prediction market, has a rep for nondelivery, and no prediction
market payoff.

[Don Marti]

begin Stephen J. Turnbull quotation of Thu, Oct 11, 2007 at 09:12:15AM +0900:

> Don Marti writes:
>
>  > There is some stuff in the Matt interview on the
>  > actual sales cycle: first, it's shorter: three
>  > months instead of 9-18 months, and second, the sales
>  > reps don't have to "knock on doors" or deal with
>  > unqualified leads.
>
> He's not talking about $75,000 software, though, is he?  Joel makes
> exactly the same kind of comparison for his inexpensive proprietary
> software against the expensive proprietary software.  I put it to you
> that Matt is not seeing the effect of his software being open source;
> he's seeing the effect of it being relatively inexpensive.

The Alfresco prices are still in the five digits,
though, well over Joel's pricing dead zone.

>  > (On a long-term level, much of marketing costs are
>  > transaction costs, because they're the costs of
>  > gathering information on what the customer wants and
>  > what you can sell.
>
> Sigh, I guess that definition is common enough, but it really hinders
> communication because it becomes hard to talk about "pure" marketing.

What's a better definition of marketing, and
what do you call the rest of what the "Marketing
Department" does?  I'd be happy to split up the
vague term "marketing" into separate terms for (1)
deciding what to make and what to charge for it and
(2) communicating about it with a view to persuading
people to buy it.

>  > You could just do a prediction market on will the project
>  > accomplish some goal -- but we had that thread already.
>
> No, you can't.  First, Tom is barred from trading in the usual way in
> that market, it's insider trading.  Even if there's no legal
> restriction, it would kill his rep.

Your "insider trading" here is a victimless crime
if all particpants know that researchers are playing
the market.

By that definition, me growing a bushel of corn in
my back yard without telling anyone would be "insider
trading" on the corn market.  I can understand if you
want to define something as unethical -- I won't try
to argue per-copy licensed software to GNUistas, or
treyf to people who keep Kosher, or interest-bearing
investments to halal banks.  But the existence of
people who define a business model as unethical
doesn't prevent others from agreeing to do that kind
of deal.

> Second, both buying and selling suck from his point of view.  The
> market is going to equilibrate at everybody else's estimate of the
> probability that Tom is actually going to satisfy the prepurchase
> contract.  Tom, being the hacker extraordinaire, knows that the price
> is too low; he's definitely going to deliver.  So he wants to buy, not
> sell.  But the point of prepurchase is smoothing income, he's hungry
> *now*, he can't afford to speculate.  He's also poor; suppose he has a
> life crisis and doesn't deliver?  Then he spent his prepurchase income
> in the prediction market, has a rep for nondelivery, and no prediction
> market payoff.

A researcher who needs living expenses or money to
cover research costs could form an LLC with silent
partners who would share in the trading gains if any,
and agree to pay the researcher a salary and/or cover
the lab budget.

Sean Park talks about "risk quarks" -- unbundling all
kinds of transactions to let people trade separately
on different kinds of risks, and reaggregate the
"quarks" into other tradeable investments.  What Tom
Bell calls a "SPEX" is one possible quark that lets
you trade on the risk of whether a given technology
will exist independently of the fortunes of a given
company being able to make money on it.


--
Don Marti                    
http://zgp.org/~dmarti/
dmarti@...