Creating Intellectual Property & Projects

Creating intellectual property (IP) is the key for success in technology industry. While this statement is taken as to the heart and is preached like a Bible, but not all companies follow it to the core. Even the greatest technology gaints - Cisco, Microsoft, Oracle, GE, EMC, Intel, have pockets of IP inefficiency - where several million dollars are spent on R&D projects which does not produce enough IP.

It is not that people in those projects did not work or were not creative. Engineers who work on R&D projects are inherently creative (though few would admit to be creative), but people in these projects are worried about operational issues such as deadlines, features, project costs, staffing, talent management etc and they ignore protection of intellectual property that they created or they have failed to create substantial IP.

Projects that have spent several million dollars and spread over an year must product substantial IP. If not there is an IP inefficiency in the project, and the project must have an IP audit to identify & protect IP.

Projects that have consumed so much resources must have solved a major problem and therefore the project team has created IP in form of solutions, and that IP must be protected. The other way to look at things is to review the IP created or used in the project and ensure that there has not been any inadvertent violation of other companies/peoples IP. Often times engineers search the Internet looking for similiar solutions and could have copied a patented design. If such a violation had taken place, the company is at risk for all legal liabilities emerging from the IP litigation.

Role of management

In a typical R&D project there will be several managers: engineering manager, project manager, product manager etc. I would recommend that the managers sit down with key stake holders at the very begining of the project and ask the questions:

• What major problem is this project solving?
• What competitive advantage we get with this project?
• What are the opportunities for IP creation exists in this project?
• Can we create white papers based on the solutions we are implementing?
• How do we protect the IP rights once the product/solution is released?

Asking these questions before the project starts ensures that all managers and stakeholders are made aware of the IP being created and the need to protect the IP. Once there is a general awareness of the IP involved in the project, it is a good practice to review the answers & questions periodically to see the progress and take steps to protect the IP.

Asking those questions & having answers to them will help in a big way to create & protect intellectual properties - which is vital to gain competitive advantage in the market and enhance shareholder value.

Entreprenurship - Always create customer references

My friend is an entrepreneur and he quit his day job at Accenture to start Purple Frame. As a startup, it is always an uphill climb to get customers in B2B world. With hard work, every startup gets a few customers in the initial days - many of these customers are also startups.

Being a startup is not easy when it comes to sales as customers do not want to risk with a new vendor. So one has to rely on contacts/friends to get that elusive first order. Once the initial orders get exhausted, the next ones are even tougher to get, and at this stage one needs to use different marketing techniques such as referrals, customer endorsements, white papers etc.

As a seller it is important to understand buyers psychology. All buyers want to feel safe & secure before placing the first order, feel comfortable during the subsequent orders, and lower costs in the long run. Once the buyer priorities are understood, buyers can take advantage of it. Buyers feel safe if they know the supplier is reliable. The importance of safety in the minds of the buyers was played upon by established players - "You wont get fired for buying IBM". Persons who make the purchase decision for the company are employees and for employees job security is important. As Robert T Kiosaki, author of Rich Dad, Poor Dad, puts it "employees feel safe when they have a good paying job with benefits."

Buyers are often very reluctant to buy from unknown or new vendors. This poses the first big challenge to any startup as buyers are reluctant to do business with a new player. So the first task of the seller is to make the buyer feel safe & secure while buying from a new vendor. For established companies, approaching a new client is relatively easy. As the seller has the brand name and company reputation behind him, and he only has to deal with educating the buyer about the new company and the buying process to make the buyer feel comfortable buying from a new firm.

For a startup, the problem is more acute - as he has to deal with the twin challenges of making the buyer feel safe, secure and comfortable in order to compete with an established players.

So what should entrepreneurs do?
Entrepreneurs have to overcome this challenge to succeed in business. There are two ways:
1. Sell to a niche market and avoid competition
2. Make customers feel comfortable buying from them.

Selling to a niche market or a Blue Ocean strategy is preferred route for most startups, unfortunately the market size is also small in the niche segment. So when the market grows larger, big players jump in to spoil the party. As Geoffrey A. Moore puts it in his book - "Crossing the chasm", entrepreneurs must concentrate on the early adapters first, and then comes the chasm between early adapters & majority markets where majority of startup fail to cross over.

Companies that cross over from the niche early adapter market to the majority market are the ones who have successfully addressed the buyer needs in the majority market - i.e., have learnt how to make customers feel comfortable while buying from them.

How to make customers feel comfortable?

First, understand buyers psychology. The first need of the customer is to feel safe while buying from a new vendor, and then feel comfortable while buying. So when a vendor approaches the buyer with solid credentials & referrals (from a known/trusted source) customer will feel safe to order from a new vendor.

Corporate buyers want to feel safe and secure before buying from new vendors. The best way to make the buyers feel safe & comfortable is to approach them through referrals from people whom they know and trust.

I have always noted that satisfied customers are often willing to give references to others.
Satisfied customers willing to serve as references for your new prospects. For a startup, getting successful referrals makes a big difference between winning & losing the sale. It is therefore very important to build a system in place to get referrals, follow up in referrals and maintain the referrals.

There are six steps involved in implementing a successful referral system as part of marketing process:

1. Ask for referrals
2. Set proper expectations
3. Appreciate customer referrals
4. Avoid overuse of referrals
5. Stay in touch with customers
6. Build a referral champion

Step-1: Ask for referrals

Satisfied customers are often willing to give referrals - only if you ask for it. So make it a point to ask for referrals during the final stages of the sales process. Ideally you must pander to the customer ego and let customer talk about his/her expertise & experience in using your product. If necessary help the customer with references - work with customer to setup a meeting with a referred party etc. Satisfied customers are often eager to refer other potential customers to you. So ask for references & ask your customer's permission before you contact the referrals.

Step-2: Set proper expectations

Once you have asked for reference, make it a point to set what you expect from him/her. Please inform the customer on how you plan to use the references. i.e., do you plan to use the references in your web site, or do you intend to use it in marketing campaign, how do yo plan to approach the referred prospects etc.

If you want your customer to talk to his referral or other prospects, let the customer know in advance & set his expectations accordingly.

Also learn & understand the customer company's policies on references. Some companies need explicit approvals for its employees to give referrals. If there is process in place at the customer site, then respect the process & set expectations accordingly.

Step-3: Appreciate customer references

As a startup (and in all businesses), it is very important to keep the customer happy even after the sale. When you are asking for references, then it is even more important to keep the customer happy after the sale. Customers who give references will feel better when you really appreciate their references. Appreciation can be as simple as calling him/her up and thanking for his/her references which helped you in your venture, or giving a simple gift (please follow the laws/rules on receiving gifts at your customer company) etc.

In one case, the customer was asked to come for an all expenses paid trip to Florida and attend a conference where your product was being showcased.

Step-4: Avoid customer burnout

It is good to ask for references but don't over do it. Set a limit on how many references you can ask from any customer. Ideally 2-6 is a good number, but asking for more than 6 references will surely burnout your customer that he may stop buying from you.

Step-5: Stay in touch with customers

Customers who have given you business are customers for life. So keep in touch with the customer on continual basis even if they do not respond or communicate back. For example, if there was a new product launch, invite all your old customers. Send any news item which is of relevance to your product & of customer benefit, keep customer posted on your progress - by sending them a summary of your annual financial statements etc.

Keeping in constant touch with customers will help in getting new orders or getting new referrals. In today's world, you can use social networking sites such as linkedin, facebook etc to keep in constant touch.

Step-6: Groom & Build customer champion

Customers who give you good references can be groomed into becoming your customer champion. For example, offering free samples of the new product before it is released in the market, offer training on use/benefits of new products, Invite customer to new product launches, or invite customer to speak in conferences, invite customers to co-author white papers etc. In this process ensure that the customer learns more about your products and your company.
Actively seek feedback & other inputs from your customer champions. Incorporate their ideas/suggestions in the next version of the product/services.

Having customer champions is the best approach to marketing. Your prospects are more receptive to the messages coming from your customer than the same message coming from your sales team. So make a plan to groom & build customer champions

Closing Thoughts

Customer references is the best way to lower the resistance to buying from a new vendor. It also helps to build a solid sales pipeline and lower your marketing costs. Having a formalized process to handle customer referrals is a must - else it will just slip between the cracks. Once you have acquired the customer, treat the customer with the total value of customer in mind. Having a customer champions will help you win big deals. If you do not have customer champions then treat it like a red flag - an early warning of things going wrong.
Startups often lack a formal marketing program, so the onus of developing the customer referrals falls on sales & company leadership. Use the referral program wisely & it will give you rich dividends.

Dealing with Customer Enhancement Requests

As a product manager, I often get my usual share of product enhancement request (ER) from customers - usually from the lead customers. In my company we have built an excellent process to document these enhancement requests & all ERs get duly documented and reviewed periodically to develop the Product Requirement Document (PRD).

Good thing about this process is that if we have missed a big functionality in the product, we have a feedback mechanism for customers to request those features and functionalites in the next release. So if it is major functionality - say for example Metro Ethernet or support for BGLP protocol etc, these ERs will get rolled into the PRD and customers will get those features they requested. However, the process has one flaw - minor enhancements which are "nice-to-have" gets dropped out almost every time we drawup the PRD, these Priority-3 requirements will never get built and customer will never get it.

These "nice-to-have" features may not mean much to the product functionality, but implementing this can have big impact on customer satisfaction & customer retention.

I call this as a problem as a hole in product management process. The impact of not doing such "nice-to-have" features is not much in terms of revenue, but it can have a substantial impact on customer satisfaction & customer retention.

Just imagine as a user you made certain requests for new features in MS Outlook and Microsoft delivered it - would be pleased about it? I bet you would be. And if someone from Microsoft calls you up personally and tells you that the feature that you had requested is now available in the latest release of MS Outlook, I bet you will go for the upgrade. Not only that, in such cases, you will remain a loyal customer of Microsoft and may become a evangelist for Outlook as well.

I heard a similar story about Mahindra Scorpio SUV, the owner had given several recommendation for improving the vehicle, and Mahindra implemented those features in the next years model. Now that person never gets tired of promoting Scorpio to all people he could meet.

I have done my inquiry & research with other product managers and found that this problem of "Nice-to-have" priority-3 features is almost universal in the software world. So I decided to find ways to solve it - and there are several ways to solve it. In this article, I have documented three practical methods to solve this problem.

1. Every product release must have 4-5 "Nice-to-have" features.
Since the problem in product development phase is that engineering tends to ignore the priority-3 requirements, make a few of those "Nice-to-have" features mandatory. Product management should classify all the "Nice-to-have" ERs based on customer/market segment importance and then make 4-5 "nice-to-have" & easy-to-do features mandatory in the PRD. This way, few of the requests will be fulfilled.

Do not implement these "nice-to-have" features if it takes substantial engineering efforts or costs.

2. Use the patch release to add small features.

All products will go through minor enhancements/upgrades every year/quarter/month. In the software world, these minor releases can be a monthly release. So every time there is minor release being planned, add 1-2 "nice-to-have" features in everyone of the minor releases.

3. Co-create with customers

This is the era of Open-Innovation, customers are often willing to join hands with the vendor to develop the product. Take advantage of this, and in the early stage of product development, involve the customer to invest engineering resources to develop the feature which the customer wants.

Co-Creation is not for all features or customers. One must exercise caution in choosing co-creation ventures. Ideally, choose your most loyal customer or the lead customer who is really committed to your product. Ask customer to commit time, money, & resources for the project, and once all the commitments are met, go ahead with execution.

Ideally choose features that are important to that customer and that require substantial investments for co-creation projects. In the process negotiate to implement the new feature in ways that helps all other customers as well - avoid getting into a "custom solution" trap where the new feature helps only one customer while it breaks other customers.

Product management should take the lead role of coordinating & negotiating with the customer for the co-development project.

In software world, there are several interesting options for implementing new features. One other way to co-develop the feature with the customer is to provide a product development kit - i.e, a set of tools to the customer so that customer can develop the feature they want themselves and then share that development with the product vendor.

Take the example of iPhone or Facebook. Facebook encourages its customers to develop Facebook apps. Facebook opened up the APIs and software interfaces for third party development and now customers can develop their own applications for Facebook.
When properly implemented, co-creating strategy is the surest way to keep your product relevant to customers & lower the cost of product development at the same time. A customer who has committed to the product by developing certain features in it will never abandon the product.

Closing Thoughts

Product management owes to respond to customer for every product enhancement request. Yet in most organization, many of these ERs which get classified as "Nice-to-have" features get routinely dumped, and product management loses face to answer the customer - this in the long run erodes customer loyalty and can even lead to customer loss. So the solution is to develop the product development process in such a way that these "nice-to-have" features get implemented without costing much. There will be few ERs that require big investments - so choose them carefully and ask the customer if they are interested in co-development of those features. Co-creating, co-invention, co-development are surefire techniques to increase customer loyalty. Co-creation, co-development also places additional burden in product management & project management and if a proper contract is not done, it can open invitation for legal problems. Co-development is not for everybody, it requires a solid legal agreements, customer commitments and solid project planning, project coordination for successful implementation. So chose your co-development projects carefully.

Also see:

Customer as Co-Innovator

How to be more creative?

"Innovation is the key to survival of any business"

The above statement holds an universal truth and must be treated on par with the 10 commandments, and almost all people with whom I discussed this agree with it. Yet when I ask the question to engineers "Are you a creative person?" Most of them answer negatively.

In today's world engineers will loose most of their creative abilities mainly due to the mundane nature of the tasks they do at work - essentially solve problems or build things. Their daily work does not require any creative thinking for 95% of the problems and it would be handled by routine procedures/plans. And when a new challenge emerges - there will be a major problem.

I have observed that for any new challenge that comes up, the answer to that problem will be first identified by a new college graduate or someone below the age of 25. However the idea coming from such an young person will not be fully baked to the taste of senior management - and is most likely to be dismissed. It will take someone in middle management or a senior engineer to polish the original idea, package it neatly and present it once again to senior management for "approval". But in all this process the organization will effectively try to kill any creative spirit of the young engineer.

So how does one retain their creativity while working for a big corporation?

Being creative in life is the key to being creative at work, so forget about all the crazy things that happen at work place and try to keep your creative skills alive. I offer few points/ideas on how one can remain creative always:

1. Meet & talk to one new person every week.
   
2. Avoid watching TV, instead find other forms of entertainment which requires active participation.
   
3. Learn to relax & do nothing for 30 min everyday. It is important to give your mind a break.
   
4. Read books on diverse subjects. The more diverse range of books you read the better. For example if you are an engineer, read books on physcology or history or economics or health.
   
5. Expose yourself to a wide variety of art - be it music, dance, paintings, sculpture etc. Go to watch plays, art exhibitions, art galleries etc., and just relax & enjoy.
   
6. Travel to different places. Travel may not necessarily be travel to exotic locales, even travel within the city to places where you have not been before will help. For example, I would travel to city market in the early morning to see the scale of wholesale trade, or go to pottery road & see how potters work, or go to the industrial area etc. If possible travel to historical places and learn the history of that place.
   
7. Try your hand in any creative arts - be it painting, music, photography, writing poetry/short stories etc.
   
8. Change your daily schedule. If you normally come to office at 9 AM, try coming in at 7 AM or 11 AM. Just commuting at a different time of the day will change your perspectives.

Managing Innovation & Product Management

As a product manager I have been driving innovation in my business group. Innovation is key for survival in software industry - where companies have to innovate or perish. In order to win in this brutally competitive industry, one needs to innovate faster, cheaper than the competition and most importantly implement the innovative ideas in the right way to win in the market place.

All this implies that in order to win, organization will need: A highly creative workforce which can come up with lots of creative ideas, architects who can translate creative ideas into innovation, and designers who can implement the innovative ideas in ways that delight the customers. This concept can be visualized as follows:

Ideas for all great products start with customer needs/wants. At the early stage of innovation - encourage ideas from all concerned people, especially from customers/users. This is the creative thinking part in the innovation chain.

In software business, innovation is the key to survival - but innovation does not guarantee success. Innovative companies can merely survive - but success is reserved for those who can design great products.

To illustrate this consider the case of WordStar & MS Word. Back in late 1980's WordStar was the leading word processor software, it led in innovations and had several useful features - but lost out on design. While Microsoft concentrated its efforts on ease of printing, user interface, and integration with office automation tools such as Visual Basic for user customization. In the end the customers opted for MS Word & Office. WordStar eventually perished when it stopped innovating.

Another example is that of Yahoo Inc. Yahoo started as a web search services by organizing Web into a directory. It was a breakthrough idea at that time. Eventually Yahoo expanded into various other web services and continued to grow exponentially. Yahoo continued to innovate with new offerings - My Yahoo, Yahoo Maps, Yahoo Finance, Yahoo Answers, Yahoo Mail, Yahoo Photos, etc. As time progressed, competition emerged in form of Google. Google was an innovation super engine, but Google also had an edge over Yahoo in terms of design. Google was a skillful follower of market leaders - but Google excelled in design. Google's search engine could give the same results as Yahoo in most cases - but Google presented it in a user friendly format to gain early market acceptance of its search engine. Soon Google's design of web crawling and web indexing technology - which is product of its design gained an edge over Yahoo and along with it Google won a huge market share. Today when comparing both Yahoo & Google search technologies, both the products are almost identical in terms of innovation - but it was the design/implementation which made the final difference.

Importance of Design

Software design plays a critical part in the success or failure of the product. Design is the phase where innovative ideas are translated into real useful functions for the end user. Today Added, Apple, Google & Microsoft are market leaders in their respective areas. These companies are also leaders of innovation - but most importantly they are leaders of design.

So what is design?

The term "Design" in general stands for several things depending on the context. In the world of software "Design" stands for:

1. Usability of the product: This often means functions & features


2. Ease of use - i.e., how easy it is to use the product


3. Value for Money - how much does it cost to buy & use the product


4. Timeliness - Does the software meet all my needs today?

Design of a product is always complex and involves tradeoffs. The four aspects of design are usually contradicting - i.e., one can improve one aspect of the design but at the cost of deteriorating another aspect of design. For example adding more functions and features makes the product expensive, delayed release to market and in most cases deteriorating the ease of use.

Getting the right mix of all the four components is the key to good design.

It is the job of the product management to control & drive the four parameters of design. Product management has to deal with all the contradictions of design & get the product out in time to ensure the success of the product.

The four components of design are contradictory and getting it right involves lots of conflict resolution.

Innovation Today for Competitive Advantage

There was a time when companies had sprawling R&D departments which focused on innovation & invention. Companies such as IBM, GE, Du Pont, Johnson & Johnson, P&G, Philips had established research labs with multi-billion dollar budgets. R&D was responsible for developing new products and the company manufactured & sold only those products that was developed by their R&D departments.

Developing new products through this process was slow & risky. So with the advent of globalization, innovation is now no longer the sole responsibility of R&D departments. The new economic forces are shaping how companies approach towards innovation.

As a product manager, I see a constant need innovate & keep the products relevant in the market place. There are four major trends that are shaping innovation today - and shaping products. It is prudent to take advantage of these trends to gain competitive advantage.
Successful developing new products requires mastery over four aspects of design:

1. Functions & features of the product.


2. Ease of use - i.e., how easy it is to use the product


3. Value for Money - how much does it cost to buy & use the product


4. Timeliness - Does the product meet all my needs today?
   

R&D departments may not have all the expertise to master all the four aspects of design. While R&D is good at developing functions and features of the product, R&D often falls short when it comes to the other three aspects of design.

In today's competitive age, companies cannot afford to invest huge sums of money on R&D and take a chance in the market place. Shareholders are demanding higher returns on the R&D investments - and that translates to minimizing risks in new product development. It is the role of product management to develop strategies to minimize this risks. As a result, product managers are at the fore front of the new trend in product development.

The four major trends shaping innovation are:

1. Outside-In Innovation
2. Cross Functional Innovation teams
3. War Games
4. Social Networking & Web 2.0

1. Outside - In Innovation

In the new paradigm, innovation is no longer the sole responsibility of the R&D group. In the current times, companies are inviting customers to help their innovation efforts. Customers often have several ideas/suggestions on how to improve the current product. Initially, this process starts as taking inputs/suggestions from customers to improve current products, and as the level of comfort and maturity improves, customers become partners in development - where customers provide design details and take part in testing the new product. At the next level, companies invite customers to become partners in a co-development of the product - especially when it comes to developing new products. Co-Development reduces the risk as there is already a committed customer for the product.

2. Innovation needs cross functional teams

R&D departments may not have all the expertise to master all the four aspects of design. While R&D is good at developing functions and features of the product, R&D often falls short when it comes to the other three aspects of design - This is where cross-functional teams add value to product design & development.

Having members from finance, sales, customer support giving inputs to new product development is the first level of developing cross functional teams. To be very effective, the cross functional team must be involved in all stages of product development.
One example is designing a new product with product serviceability in mind. This helps customer support teams carry out routine service & repairs with ease & thus enable faster turn around on customer complaints. In software world we call it as "Design for Debug". Having specific product features which can explicitly tell the customer/customer support the nature of the problem will help in a quicker time to resolution. A faster turnaround will enhance customer satisfaction.

Having an accountant review the product design and development will help in maintaining the cost of development under control and also reduce the cost of manufacturing/servicing the product, this translates to higher profits and lower risks. Accountants also help in developing pricing model for the product & thus one can achieve the optimum price for the product. (Often times companies get the pricing wrong See: )

3. War Games
War games are often used in business operations to develop Business continuity plans in case of contingencies. Marketing teams also use war games to develop response strategies to competitors discounts. Similarly war games can be used in new product development.
The best way to use war games as tool for product development is to have the entire product development team - i.e., cross functional team for a 2-3 day brain storming session and ask them to develop ideas for:

a. How can we develop a new product that will make our current product obsolete?
b. Face the 10X challenge:
How can we sell a similar product at 1/10th of the current price?
How can we make our product 10 times more effecient/faster than today?
c. What the competitor product will be 5 years from now?
d. What if Scenarios:
What if our raw material costs increases exponentially?
What if our partner (supply chain) goes out of business?

One can frame the questions based on the industry, and ask such pointed questions to the team and let the team brainstorm for ideas. Capture those ideas as creative ideas as inputs for innovation prospects.
This exercise must be done regularly - atleast once a year and this helps in developing new products & getting a radical ideas for product development.

4. Social Networking & Web 2.0

New product development cannot be done in isolation. Innovation has always occurred in areas where there was talent and a cluster of similar industries - Detroit for Automotive, Silicon Valley for electronics & software etc. This cluster provided several advantages in terms of ideas, talent, feedback, etc

With the advent of Web 2.0 technologies it is possible for members in product development team to interact with others and solve complex problems - without divulging secrets. Social Networking sites allows users to interact with each other and with product development groups to get instant feedback. Engineers can understand customer perspective and develop better products.

As a product manager, I use the social network to interact with users, customers & other product managers to understand different perspectives & this helps me develop better products.

Today several companies use Wiki's & Blogs for company employees & customers in different groups to interact. This platform helps accelerate new product development.

Closing thoughts

In today's hyper competitive age innovation management requires a newer approach. Product managers need to drive innovation to keep their product relevant to the times - by controlling all four aspects of product design: Functions & features, Usability, cost, & timeliness - and to do that product managers must embrace the four trends of innovation: Outside-In Innovation, Cross functional teams, War Games & Social networking. Product managers must drive this change in the organization.

Entrepreneurship - Start with a conviction

I have interacted with entrepreneurs in many areas - most of them own a business, few of them are corporate entrepreneurs. Most of these entrepreneurs were successful - in terms of getting a ROI higher than bank deposits. But I could see very few leaders in their market category. To illustrate this, let me take up a simple example of a food court. In any food court, there will be multiple food vendors - but there will be few dominant players, many of them will be successful & profitable and there will be a few who are struggling to keep their shops open.

The story is the same in all the sectors, in all places (with a few exceptions of monopoly markets). Take for example of Internet Search engine business: There is one leader - Google, few successful players - Microsoft, Yahoo & few strugglers - Ask.com, cuil.com etc.
In my observation of things, I found few simple truths. Winners have a stronger conviction to be the best in the market place, Winners follow the customer & winners focus on ROI. The ones that can do all the three will be the market leader.

I have seen few entrepreneurs who started with a very strong conviction of being the very best in the market & have steadyfast held that conviction. Many entrepreneurs often start with the notion that "the market opportunity is big and I am here to make a few bucks" or "Let us release this product in the market and see how customers react/adapt to it." or "We need to counter the competition else we are doomed".

When it comes to product positioning - I have seen entrepreneurs behave differently. Very few of them start with a customer centric mindset and are determined to understand customer requirements and deliver for it. But a vast majority start with saying "Here's what I think the customer wants." While few others start with saying "This is my product offering - let the customer adapt to it."

Pricing is a key differentiator between the winners & losers. Winners price the product to the value it provides to the customer & then builds a business model around that selling price, while survivors price the product based on margins, while losers have got the value proposition all worng.

In the end when results are seen the differences between the winners and the rest is clear.

Closing Thoughts

Entrepreneurs who start with a strong conviction to be the best in the market, follow the customer requirements, and deliver value to the customer (without comprmising on ROI) will emerge as the winner.

Product Management Strategies - Reva Electric Car

Recently Reva Electric Car Company announced a joint ventire with GM to make electric cars. Under the plan GM will sell all electric version of Chervolet Spark in India & abroad. Under this agreement, Reva will provide the electric systems & GM will provide the automotive platform and market the cars through GM sales network of dealers.

If everything goes through as per plan - i.e., gets approval from GM headquaters in the US, then this will be a very significant victory for Reva Electric company. Though Reva electric cars have been around in Bangalore for last 10 years ( and my wife happens to own one), Reva has seen limited success in Indian markets. This tie-up with GM will give a major boost to Reva in terms of customer acceptance for its technology.
The current agreement sounds like a fair agreement between GM & Reva, but in the immediate term Reva emerges as the biggest winner. An endorsement from GM will propel Reva into the minds & hearts of potential customers who will no longer question Reva's technology & viability, instead people will now look forward to buying cars made by Reva.
Thirsty and odd years ago, IBM made a similar endorsment on Personal Computers - by releasing IBM PC running on Microsoft DOS, and that decision was the turning point in Microsoft's history, the entire world woke up that day and took notice of Microsoft & personal computers.
Can Reva do the same in the automotive world? Can GM take Reva's electric motor technology global? Only time can answer to such questions. But in the mean time, I just want to applaud the product strategy of Reva electric car. It was a brilliant move to associate with a bankrupt GM. GM's troubles in the US market will prevent it from taking full advantage of electric car technologies, and in all likely hood GM will fail to develop its own electric car technology that is suited for emerging markets - thus providing a clear road for Reva to cruise ahead.

Branding Enterprise Software

Every thing that is sold & bought has a name - there are no exceptions. Few of those names become brands only when the name can raise above the product it represents and becomes the key for the customer to remember the product. If the customer can only remember the product and not the name of that product, then the product becomes a commodity and there is no brand name.

In the world of enterprise software, a lot of the products are unique or highly specialized - yet many of them do not have a brand name - the product has name but the name has not become a brand name. There are thousands of such products which just have a name but the names have not elevated to the status of a brand name.

Branding a product goes way beyond naming the product. A Brand represents a promise to the customer, a vision of the producer (manufacturer), belief & perceptions of the customer, mission for the employees and the very soul of the organization. In short a brand has strong implications on every person who comes in contact with the product: Customers, employees & owners.

In the consumer products world, everyone understands the importance of branding - but the same level of priority/importance is missing in enterprise software world. To illustrate this point, here is a pop quiz: "Can you name ten enterprise software brands?" (Name the product and not the company). As you are reading this blog, I am sure that you would have found some difficulty in naming ten product brands. I tried this pop quiz in my company & most engineers who are developing enterprise software failed to come up with five names. (worse still, many could not name five products from the business group they were working for).

All this points to a simple fact that branding in the world of enterprise software has a long way to go and there is tremendous competitive advantage to be gained by being the first to brand a product in a particular market segment.

Why brand Enterprise Software?

The most common reason for companies not to brand their product is: We are the only players in this segment or we are in the top three vendors in this segment or we are the market leaders in this segment. Other common statement is "Customers who buy Enterprise software do not buy the product based on the name, the real purchase decision is made on in depth analysis of the product functionality Vs requirements... etc."

I agree that every customer will do their due diligence before buying the product, but product branding goes beyond the customer's buying decision. Branding a product is lot more important than just influencing the buying decision.

Branding an enterprise software or any Business-to-business products has an impact on the buying decision. Research has shown that the purchase decisions have direct impact on human emotions. People who have suffered brain damage to their emotion controlling areas were not capable of making decisions. In an another study done by Waldemar Pfoerstch for IBM, it was found that conservative IT decision makers consistently identified emotional brand attributes as determining factors during a purchase. Of course the product has to meet all the performance criteria. So when people have to choose between products that met all the rational criteria, the emotional factors were pivotal for the purchase decisions.

Branding a product is therefore essential to gain competitive advantage.

Branding Triangle

Product Branding has serious emotional impact on a wide range of people - employees, customers, and collaborators ( suppliers, partners, etc.)



Branding triangle is a visual representation of the impact of branding on various stakeholders. Branding has a powerful impact on all the stakeholders. Let is examine the impact of branding on each of the stake holders.

Customers

Customers are essential for any business. When customers buy a product, the emotions which the brand invokes plays a crucial role in the purchase process. To understand the impact of branding, one needs to understand the buying process. In the B2B world, there are three types of buying situations:

1. Straight Re-buy


2. Modified Re-buy


3. First time purchase

Straight Re-buy:
This is the most common and accounts for more than 50% of the customer expenses on enterprise software. Companies routinely buy additional licenses, renew license agreements, pay annual maintenance fees etc. Here the customer's emotional involvement is low and the customer is satisfied with the product and wishes to continue buying & using the product.
If the customer is buying a branded product - say Oracle Database or SAP R/3 or Microsoft Office or Adobe Acrobat Professional, then the customer/buyer internally builds a relationship with the vendor with each purchase. The relationship is purely emotional in the minds of the buyer - and the buyer feels good for using/recommending/buying into the well known brand.
If the buyer/customer/user is experiencing a positive emotion during the purchase- i.e. feeling good about it, then the company's effort to brand the product is paying off. With a stronger brand name, vendors can extract a little premium in terms of price.

Modified Re-Buy:

In case of modified re-buy, the customer still has a strong need for the product/service but the customer would like to explore other alternatives. In short the customer is not fully satisfied with the current offerings and is looking for a change - either change in the vendor or change in the prices.

In a modified re-buy situation, having a strong brand name helps in a big way. Company can retain the customer by changing the pricing or payment options or offering add-ons at a lower price. In the world of enterprise software, the actual selling price differs greatly from the list price. So offering a discount in the selling price or offering a waive off on the annual maintenance fees or offering additional products at a discount can be done effectively without affecting the brand value as the terms of the sale are usually confidential.

In case the customer is looking to replace a non-branded product, then strong brands have a distinct upper hand as the stronger brand name can help the key decision makers minds and thus influence the sale. In the world of enterprise software, this is very common especially when it comes to cutting edge technologies. Often times a startup would have developed a new product and would won several customers, and then a major player would enter the same market with their offerings which is backed by a big brand name. So in case of a modified re-buy, the bigger brand wins. For example, take the world of Network operating systems. Novell Netware was the original inventor and market leader, but when Microsoft entered the race with Windows NT, Netware lost its market share rapidly. Another example is that of WindRiver systems - maker of RTOS (Real Time Operating Systems). Wind River was the early innovator and market leader in RTOS, but as embedded Linux gained popularity, Wind River lost out - and was eventually acquired by Intel.

First Time purchase:

World of business is ever changing and there is always a new need to be met. Company starts out with requirement gathering/analysis and comes up with a wish list. Vendors will now have to match their product/service against the wish list. In such situations, the product which meets all the requirements has the upper hand. But in reality it will not be possible to meet all the requirements, so under such situation, the customer is facing uncertainty and is running a risk.

In such cases, having a strong brand name helps. Customers are often more comfortable dealing with established vendors - particularly if they already have a business relationship in place. So having a strong brand name will help in pushing a sale. Also is possible to influence the customer requirement analysis such that the situation is favorable to the big brand vendor.

In the world of Enterprise software, companies such as IBM, HP, EMC, Oracle can influence the customer's requirement to be favorable to them and in cases where there are major gaps between the customer requirements and the product offerings, the vendor can offer consulting or professional services to fill in the gaps in the product functionality.

Handling the Buying Center

Strong brand names can help the vendor go beyond the product capabilities. Purchase decisions are often vetted by senior executives who run a "Buying Center". A buying center is a team of people who manage the buying process. Typical buying center consists of the following players: Initiators, Users, Influencers, Gate keepers, Decision makers or approvers, & Buyers.
The buying center consists of so many players who may not have full understanding of the product - but if the product has a reputed brand name, they are unlikely to dig in deep and investigate the product before buying. People in the buying center are not the power users and therefore can be easily influenced by the brand name.

A pop quiz: If you were to make a choice of buying Opsware or Voyance Control - and you are aware that both the products are more or less equal, which one will you choose?

I am sure that this will be a tough question to answer - for any person who is not familiar with network management systems. So if I were to rephrase the question as:If you were to make a choice of buying HP OpenView Opsware or Voyance Control - and you are aware that both the products are more or less equal, which one will you choose?

Now, you can clearly see the advantage of having a strong brand name. HP being a leader in computer industry and OpenView being a market leader in Network Management Software, the decision would be lot more easier for any person who is not familiar with network management systems.

Partners

In the B2B world no single product can exist without having a need for adjoining product to provide the complete solution. Often times to win in the market place it is vital to have good and strong partners. The company's ability to attract a strong partner is greatly influenced by the brand name.

Enterprise software product companies need distributors, Value added resellers, channel partners, system integrators etc. While there are well established players in each category of partners, getting them to sign-up with you company will not be easy unless you have a significant market share or a strong brand name.

Just as an example, Microsoft is calling for third party development partners for its Dynamics ERP tools. If the word goes out that Microsoft is looking for partners, then there will be a huge list of companies eagerly waiting to partner with Microsoft - and that gives Microsoft an upper hand in choosing the right kind of business partners. On the other hand if Ramco systems were to call for partners for its ERP solution, the list of willing businesses will be very small.

Now just think that if you are a small company developing a niche software - then what is the possibility of getting companies such as IBM Global services or Accenture or EDS to partner with you? This partnership will be very tough to start off with - unless you have an established brand name like EMC or Cisco or Brocade.

Employees

Branding has a huge impact on employees. The product brand messaging has several deep impacts for employees. The brand message often serves as aspirational value for employees - has several benefits:

1) Employees understand what the brand stands for? and What it promises?
2) Employees connect with the brand and then help deliver on the brand promise.
3) Employees choose to work for company as they believe in the brand & its value.
4) Employees who believe in the brand value will become brand ambassadors & promote the brand.
5) Employee brand ambassadors will attract other high quality talent into the organization.
Winning brands consistently win two crucial moments of truth:

The first moment of truth occurs when customers buy the product after having evaluated all other offerings of the competition. The second moment occurs when they use the product and the brand and feel the product has delivered as promised in the brand messaging.

Employees play a big role in delivering on the brand promise. Therefore branding to employees is critical to ensure that employees understand what the brand stands for & what it promises. Only when employees understand the brand promise, they will work towards fulfilling the promise to the customer. Once employees fully believe in the brand promise and deliver on it, employees will feel a sense of belonging with the company - this in turn increases their work dedication & loyalty.

Once employees start delivering on the brand promise, they tend to act like brand ambassadors - promoting the brand in all possible channels/occasions. Such employees also market the brand and the company to their friends/contacts and help in attracting high quality talent into the organization as well.

If employees do not understand what the brand stands for or what it promises, then it will have adverse effect on the brand & the product. If employees do not understand the brand message, they do now know what they are working for and that will eventually lead to bad customer experience - which will erode brand value.

For example, SAP R/3 has built a great brand name within the SAP AG organization - and almost every SAP employee I have met could not resist talking about their great product, but I cannot say the same for employees from several other ERP companies. The same can be said about Intel (where I once worked). Intel employees are one of the strongest supporters of Intel brand and they take pride in their products.

Closing Thoughts

Branding is essential for all products - be it consumer products or enterprise products. While the needs of branding consumer products are well understood and practiced, the branding of enterprise products are often neglected - this is more so in enterprise software segments where products are positioned as solutions to customer's needs. Enterprise software companies tend to spend a great deal of time & energy to sell a solution and ignore the branding aspects.

Branding enterprise products has several benefits - apart from increasing sales. The company's ability to influence partners and employees is vital for success in the long term - and ignoring the product branding will relegate the product into a commodity - thus leading to lower profits and shareholder returns.

Brand management for enterprise software products and services represents a unique and effective opportunity for establishing enduring, competitive advantages.

Dealing with recession

The current economic recession in the US is into its third quarter and the effects are now being felt on the street - even in India. In the recent past, I have come across several "How to" books on dealing with recession or tough economic times, but the best lessons are the ones learnt on the ground. In this blog, I will describe one case study of a small business dealing with these tough economic times:

The case of Little Paramount Hotel

Little Paramount Hotel is a small restaurant located right next to my office. The office complex where I work is occupied by IBM, Cisco & EMC - all IT companies which are severely affected by the US recession. These companies have taken steps to deal with recession - mainly by pay cuts and layoffs. The impact of pay cuts and layoffs on the employees has been severe, and naturally employees reacted to the changed situation by cutting back on discretionary spending - which included eating out at restaurants.

Little Paramount's restaurant business got seriously affected and the number of customers visiting the restaurant for lunch dropped drastically. I guess that the loss in revenue for the restaurant was about 30%-40%, and the trickle down effect of the recession could now be seen in full force on the hotel employees as well.

Small businesses have an advantage in such tight situations - provided they have a cash hoard. In case of Little Paramount hotel, the owner reacted to the changed situation in a way - that is described in all the leading business books.

He first decided to invest in changing the interiors. This was a bold decision - given the prospect of lower revenues in the pipeline. The interiors of the restaurant was redone to give it a more modern look and it was designed to attract casual customers who might walk in. Little Paramount Hotel is located on a very busy road and opposite to a bus stand. The new interiors was designed to give the restaurant a new and a clean look - which is essential to attract any customer who might be walking around searching for food.

The next move by the owner of the restaurant was the real winner.

Little Paramount restaurant created a new value menu - a whole meal with prices ranging from Rs. 35 to Rs. 60 - as a standard offering. The food items in the new menu was not new to the restaurant. The old menu items were repackaged into value menu and was offered at a different price point. At these prices, the restaurant did not lower the price on the food, but it offered the same food in a fixed meal options instead of the earlier "al carte".

The impact of these steps was immediate. Little Paramount Hotel was once again a busy place at the lunch hour. The restaurant got back its customer base and the business is thriving. Although, I would guess that the total revenue for the hotel may not have reached its pre-recession peak, but the hotel stopped the slide in revenues and also managed to win back customers. Customers are now happy with the value meals, enjoy the new interiors and appreciate the fast service. I guess that in a few months, the hotel would have regained its earlier pre-ression revenue numbers and also show a modest growth. This is a classic example of how business should cope during tough economic times.

On the other hand, the IT companies I mentioned earlier - IBM, Cisco, & EMC are still reeling under recession, and stranger still, is that a small business is better able to cope with the recession and emerge from it stronger, while the big businesses are still struggling.

Lessons Learnt

Just by studying the experience of Little Paramount Hotel, one can learn some of the key aspects of dealing with recession. The lessons can be summarized as:

1. Recession is part of the business cycle, so be prepared for it. In good times save cash and maintain a healthy cash hoard. Little Paramount Hotel was able to invest in a recession mainly because of its cash reserves. This investment was vital for the recovery of the business and investments in the time of recession will help business to emerge stronger from the recession.

2. Invest and build your business during the recession. Recession affects all businesses - but the weaker ones will not be able to invest and thus when the economy recovers they will not be able to compete effectively. On the other hand, companies that invest during a recession will emerge stronger and will be more competitive when the recession ends. Another way to look at a recession is - A recession is a mechanism to weed out the weaker businesses.

3. Optimize every aspect of your operations for minimal cost structure. Cash is the king in all business - big or small. During the time of recession, it is prudent to revisit all aspects of the business operations and weed out inefficiencies and wastage's. Optimize the business operations to free up cash. Little Paramount Hotel optimized its menu to serve select items and faster turnaround of customers at the table - this means lower inventories, efficient kitchen operations and lesser man power requirements.

4. Repackage your product offerings to provide value to customers. Recessions do not come unannounced. There are always leading economic indicators of a possible recession, so one must keep an active watch for a possible recession. When a recession really sets in, customers tend to react to the changed economic landscape by changing their buying habits. Business leaders should closely observe the changes in buying behaviors and tailor the offerings to meet the new buying habits. In case of Little Paramount Hotel, menu was changed to accommodate a lower priced offerings - so that customers will still be able to reduce their expenses and still patronize the restaurant.

5. Do not lose your customer base. Customers are valuable assets to the business. Once a customer is lost during a recession - then the customer is lost of good. Given the cost of acquiring a new customer, it is always cheaper to retain an existing customer than acquiring a new customer. Therefore, it is essential to retain customers - even if it means less revenue during tough economic times. Eventually, the economy will improve and sales revenue will increase. There are no simple or straight forward way to retain customers - other than to provide greater value to customers. i.e, repackage/reprice/reposition your product during recessions so that you don't lose your existing customer base.

Closing Thoughts

Recessions are cyclical events in the business life cycle, therefore one needs to be prepared for a recession before it happens. Once in a recession, business leaders should act on the changed reality. There are no avoiding techniques in the long run. Acknowledge the recession and make organizational adjustments accordingly to deal with the new reality - and do it quickly. Develop a determination to win and work hard for it, and the business will emerge stronger from the recession.

Leadership - Improving Your Staff's Self-Confidence

A good leader is the one who has a high level of self confidence and has an infectious habit of raising self-confidence of this team. Only when the team is confident about its skills & talents, it can perform consistently at high levels.
Last week, I just took out my team for a lunch. The team lunch was a token on my appreciation of the hard work done by the team and the goals accomplished by this team. The team had achieved great progress last year in handling customer issues, and reduced the total number of outstanding customer issues by whopping 73% from January 2008 to Dec 2008. At this team lunch we celebrated the success & vowed to improve on the track record. The team spent sometime looking back at their own accomplishment and that builds their self-confidence. At that time, I made a point to write down a few pointers on how to motivate the team and keep up the self-confidence of the team.
Given today’s grim economic outlook and falling sales, it is very important to maintain a healthy dose of self-confidence. One need not be CXO level leader to really inspire; even a team leader can do miracles to the team morale and self-confidence. Raising self-confidence has several rewards to the individual, the leader & the team.

• Self-Confident people get more respect from everyone. This in turn increases team morale.
• Self-Confident people are prudent risk takers. Risk taking in crucial in the business world. While self-confident people tend to take reasonable risks and avoid excessive risks.
• Self-Confident people are decisive by nature. Once people have confidence in their skills & abilities, they can take quick decisions for themselves instead of dithering around.
• Self-Confident people take up new initiatives for the benefit of the team & the individual. People who are confident often will not wait for orders, instead they will take the initiative to do the right thing.

Having a team with high self-confidence levels is a great feeling, but the leader must be prudent to avoid over-confidence and arrogance. The leader must make people perceive their abilities accurately and then assign tasks/challenges that they can handle.

How to build Self-Confidence?

So how does one really build self-confidence in the team?
When a leader is assigned to a team, one of his first tasks is to know the capabilities of the team members accurately and then he must accept it as it stands. Take San Antonio Spurs as an example, the team has certain members who perform consistently above the rest – Tim Duncan & Tony Parker. But there are members of the team who can play in spurts: Manu Ginobili, Michael Finley, and then there are other good players but they are definitely not in the same league as Tim Duncan.

As a coach or the team leader, your first task is to know each team member’s capability and accept it as a base line. There may be scope for improving each individual performance, but that needs to be carefully worked on.

Accepting the person’s capability as is, sends the signal that the member is a part of the team and reassures him/her of their place in the team.

Each member needs some reassurance from time to time. Do not constantly compare one member against the other – this might bring a short term gain, but will eventually destroy the team chemistry.

Instead of criticizing, use praising for the good work done. Always use positive reinforcement approach. Praise good work instantly & in public. But criticize in private – good constructive criticism is always needed – but ensure that it is not personal and is done in private.

Good team sprit & confidence also needs appreciations. Individuals & the team must receive appreciation from leaders & others. It is the leaders responsibility to seek out appreciation from persons benefited by his team and ensure that the team & the individual gets the well deserved appreciation.

Once a team starts to perform, it must be constantly be encouraged to reach new heights. A constant encouragement is needed to sustain the morale and self-confidence. Typically, once a team or even a team member is made aware of his/their capabilities, they would like to improve on it. Therefore a leader should create adequate opportunities for the team/individual to improve. Ideally, one should come up with a development plan to help each individual improve and reach a new level. Such a constant encouragement to improve will do wonders to the team performance.

Closing Thoughts
Leaders play myriad roles, keeping up the morale & self-confidence is one of them. The team which keeps it head held high even during tough times is more likely to perform better than the rest. The process of building self-confidence is a very rewarding one, the process invariably also increases the self-confidence & morale of the leaders as well, so it is time well invested.

Leadership during Tough Times – Cash & Customers

Business Guru Ram Charan in his latest book “Leadership in the Era of Economic Uncertainty: The New Rules for Getting the Right Things Done in Difficult Times” has extolled the importance of cash & cash management during tough economic times.

Apart from Cash, there is one more key component for success during tough times – customers. Put together, I call it “Focus on Cash & Customers as the key to success”.

Cash is king. No doubt about it. Without customers, there will be no cash and without cash, company will die. Thus the mantra ““Focus on Cash & Customers as the key to success”.

Many companies have lost their entrepreneurial sprit

All businesses are stated by entrepreneurs who have a definite idea of meeting the customer needs and know how to make money by doing so. Entrepreneurs always have their minds & hearts set on creating customer satisfaction profitably. As a startups the founders know the importance of cash and they tend to have a maniacal focus on cash.

As the company grows, the need for capital increase, which forces the company to seek outside investments. The new investors have different objectives than the original entrepreneurs. Thus slowly the founders make way for professional management. Thus with growth, companies tend to lose its entrepreneurial shine. Focus on customer gets replaced by focus on Wall Street. Focus on cash gets replaced by focus on EPS.

During tough economic times, companies that have a close connection to customers are the ones that survive and those companies that can focus on cash and the customer will thrive.

To illustrate take a look at some of the struggling companies today: Nortel, Mervyn’s & Motorola. If these companies were to disappear tomorrow, not many would shed a tear. For most customers, these vendors have become irrelevant. This is a real case of losing customer focus and thus stumbling for a big fall.

On the other hand look at Apple, Intel, Wal-Mart, & Costco. These companies have lots of loyal customers and customers feel the need for these vendors.

Basics of Business

To understand the importance of Cash & customers, one need not go to fancy B-school. Even running a corner coffee shop will teach this basic lesson.

Years ago, I knew a businessman whose nickname was “Cash”. He ran a small business (roughly ~$1-2 million) of supplying computer parts/peripherals in Bangalore. Given this of business, most of the sales was on credit – thus putting an enormous strain on this working capital. As I knew him well, he shared his thoughts on the business. At all points of time, he exactly knew his cash position, his cash requirements for the week, and the expected cash flow for the week. He also knew which customer owed him how much and when to approach the customer for the cash. His maniacal focus on cash led to the nick name “Cash”.

In today’s Wall Street driven companies, I have not seen such an entrepreneurial focus either on customers or cash. Managers in these large companies are more focused on process (rather than customer interests), managers are driven by different sets of expectations – net sales, product development, efficient operations etc. Thus losing focus on the basics of business.

Even in my current organization, I once asked for financial data regarding my product line. I wanted to know the income from sales and the net costs associated with the product. In most large organizations such data is hard to come by. Similarly in my company also the data was either not available or the process based bureaucracy prevents such data being shared. Therefore as a product manager, I cannot exactly say how profitable is my product? Instead I have to rely on an educated guess. Given such an environment, it is hard to make information based decisions.

In one situation I have seen a complete breakdown of customer focus. Customer on one hand wanted a new version of the software released with a set of features, but since we do not have the financial information to make a decision, we negotiated to a smaller set of requirements based on the engineering resources we were willing to deploy. The account manager who is responsible for the sale was interested in seeing the product release as a milestone and not the features/customer needs. Corporate businesses have developed tones of management mumbo-jumbo to mask the internal failures and show a failure as a success. In the bigger scheme of things, a large fortune-500 company lost focus on the customer thus antagonizing the customer.

Large companies can afford to lose a customer once a while and still prosper as new customers are added continuously. BUT during tough times adding new customers becomes tricky and thus losing existing customers can quickly snowball into a disaster. So chasing short term revenue at the cost of long term customer relationship will only lead to failure.

Closing thoughts

Economic recession is merely an indication of changing times which causes hardships. It is vital to keep focus on the basics of business at all times – even more so during tough times. This even means disregarding the advice from the Wall Street when necessary. Costco resisted the demands to increase its prices when commodities price soared in mid-2008, thus earning customer loyalty instead of focusing on quarterly results.

The best way to survive and thrive during tough economic times is to build an entrepreneurial culture which encourages managers to focus on cash & customers, and then allowing them to make decisions. Managers & leaders from various departments are perfectly capable of making the right decision if they have the right guidance and information.
Always remember that it is the customer who provides the vital cash needed for the company’s survival, so focus on the customer such that your cash position is comfortable.

Surviving Tough Times – Master the art of Pricing

Today, Jan 14th 2009, Nortel Networks filed for chapter-11 bankruptcy protection, Google announced a small lay-off, and the bad news on the economic front continues. This recession is nothing different than the past ones, surviving tough times takes lot more business prudence and guts.

Companies that survive such tough times are the ones that are still relevant to their customers and are the ones that still provide value to customers. Where “Value” is defined by the goods/service provided for a fee – which the customer considers as value. To be more precise, the price of the sale – determines value.

Companies typically tend to make two major mistakes when it comes to pricing:

1. Over-pricing the product.
2. Under-pricing the product

In both cases, the results can be devastating – if the mistakes are continued for a long period of time.

In this article, let us examine the case of two technology titans that are suffering today due to pricing mistakes.

Case of Over-pricing
Companies such as Nortel Networks stumbled in 2001 – when the tech bubble burst, and since then they still haven’t got their pricing strategy right. Customers feel that Nortel’s prices are too expensive and are shopping for alternatives from Huawei, Cisco, & other vendors.

Nortel Networks sold networking & telecom equipment for a long time, and over the period, it developed several proprietary technologies which enabled it to sell at a premium price, but as IP networks became pervasive, the technology advantage of Nortel stated to erode. But Nortel had built an expensive base and the company refused to embrace IP technology wholeheartedly. As a result, the cost structure at Nortel was high – which in turn forced Nortel to sell at a higher price – and that ultimately eroded the customer value.

Case of Under-Pricing
SUN Microsystems is another struggling company today – which is expected to file for chapter-11 bankruptcy protection soon. The company suffers from twin pricing problems: Over pricing on their server products and under pricing on their software offerings. Sun mainstay is their proprietary servers based on its UltraSPARC® processors and Solaris® Operating systems. Initially when these servers were introduced 20 years ago, they had a huge performance lead over the competition and customers loved its products. During the heights of the DOT.com bubble, SUN servers were so pervasive that SUN called itself as the DOT “.” in the “DOT.Com”. With the advent of Linux & powerful Intel processors, the technological advantage enjoyed by SUN began to disappear and soon customers came to realize that they can replace the expensive SUB servers with cheap Lunix-Intel based machines. Thus SUN started to lose its value proposition.

If losing the server value proposition was bad, SUN committed blunders by creating JAVA – a free to use software. JAVA was created by SUN, but it could run on any hardware platforms including Intel server platform and was free. Customers loved the “free” concept and started developing JAVA based applications for Intel platforms – which resulted in zero revenues for SUN. Adding more to this blunder SUN opened its Solaris OS to Intel platforms – for “Free”. This allowed small time vendors to create powerful servers based on Intel/AMD processors and with Solaris OS. All this meant that SUN will not make any money from this. Lastly to rub salt on its self-inflected wounds. SUN decided to buy MySQL for ~$1 billion, thus throwing valuable cash in exchange for a non-revenue generating product.

On the software side of its business, SUN was leaving lots of money on the table. On one hand SUN was spending money to develop & maintain this software and was getting very little in return. Thus under pricing its offerings to a point where it was suicidal.

Art of Pricing

Every businessman – including the roadside food vendor knows about pricing his wares, but few really master the art of pricing. Pricing is very complex because value is very subjective and is solely determined by the customer. As a result most business are guilt of either over pricing or under pricing ( mostly under pricing & leaving money on the table).

In a large complex business, pricing is often so opaque that hardly anyone in the organization can really justify the price. So people resort to cost plus margin based pricing, which is easy to understand – but has almost no bearing on the value delivered to the customer.

Leaving Money on the Table

Probably the biggest mistake one does when it comes to pricing is leaving money on the table – i.e., providing freebies to the customer. The next common mistake is to under price or offer unnecessary discounts by wrongly packaging & thus under pricing the offering.

I do not claim myself to be a master of pricing, but I do know the basics of price theory. I can also confess to the mistakes of leaving money on the table.

The most common reason why companies leave money on the table is “Customer service” or perceived customer value by offering free services. This mistake often happens with large customers. Companies are so enamored with such large customers, that they are willing to offer several freebies in the hope of keeping the customer happy. This practice in turn makes the customer even more demanding and that can soon turn into a death spiral if things are not brought under control.

Surprisingly, there is a very easy way to control this problem – Say “Yes – we can offer that (service/product additions) for a fee”. Customers tend to push the supplier as much as possible and they will push till the point the vendor says he will have to charge for it.

Under pricing

Under pricing occurs when the vendor is willing to sell a product/service at a price point below what the customer is willing to pay. For example, the customer is willing to pay $100 for a product, but the vendor has marked the price as $75. In such cases, the customer appreciates the discount provided and quickly grabs the product. Such pricing errors are quite common in everyday business – especially when it comes to intangible services.

Couple of years ago, I happened to meet an entrepreneur – Shankar Subramaniam who runs a consulting/training firm called NineDots. Within the first few meetings, I became clear to me that Shankar was under pricing his services. We then looked at the service offering and repackaged/re-branded it as results driven consulting services. This simple exercise helped him raise the fees by almost 3x!

How to catch pricing errors?

Pricing errors happen in almost all businesses and is often difficult to catch small errors. But big mistakes such as Over pricing or heavy discounting is easy to catch - via accounting data.

If a product/service is over priced, then the demand for the product/service drops at a rate disproportional to the industry standards, thus indicating over pricing error. Folks at Nortel know that the demand for their products is falling or their market share is falling. Customers were opting for Huawei or Cisco equipment. Even the investors knew it and punished the stock price, yet the management could do little.

In small businesses, entrepreneurs know by instinct that when demand drops disproportionately, they need to lower the prices. But in very large businesses – things are not that easy – but that does not mean that it can’t be done.

In case of under pricing error, the demand raises rapidly and to a point that it can overwhelm the company. But entrepreneurs know that when demand increases beyond a point, they have to raise prices. The easiest way to catch such pricing errors is to do a basic Du-Pont analysis for your business line & compare it with that of the nearest competitor. Simply stated if your ROI (return on Investment) is lower than that of the competition, then there is a pricing error. Du-Pont analysis helps in determining if the errors exist, but it does not tell much on correcting it, so it is a good starting point.

Multi-Part pricing & Dynamic Pricing

Thanks to world of computers, today companies can run sophisticated pricing models which allows dynamic pricing. Sabre Systems developed by American Airlines allows AA to reprice tickets every 6 minutes based on the demand & capacity. Similarly there is complex software for pricing for retail clothing, commodities etc. This system of dynamic pricing allows little pricing errors.

Multi-Part pricing is another way to reduce pricing errors. Multi-part pricing allows for pricing at different levels: One price for product acquisition, another price for maintenance and another price for service etc. Gillette is a very good example of multi-part pricing. Gillette sells razors at a discount and makes money on the blades. Similarly HP sells printers at a very low price (sometimes at a loss) and makes money on the cartages. Similarly Oracle, SAP etc have developed multi-part pricing for their products.

Closing thoughts

Pricing is an art. Of the 4 P’s of marketing, Price is the most complex. To get the right price almost requires the 5th P – Prayer. If you are in business, then spend great amount of time on regular basis to determine if you have got the right pricing.

My marketing professor once told me “As a marketer, your best friend must be an accountant” This lesson is not to be forgotten – so if you are involved in making pricing decisions, then befriend the accountant and go through the valuable accounting data to come up with your pricing analysis, and from that analysis develop your selling price.

In tough economic times, it is vital to get the pricing right. Correct pricing and aligning the operation costs with the price becomes the key for success in these tough times. Take this opportunity to revisit your pricing and cost structures so that you can emerge out of this recession stronger and better than your competition.