olivergajek

So today we learn that Evernote is starting a stand-alone Chinese incarnation. More info here. 

This is packaged as a way to deliver a faster experience to the Chinese user. The “great Chinese firewall” by any other name.  CEO Phil Libin:

The most common request we get from our Chinese users is to make Evernote faster, more reliable and better integrated with the rest of the Chinese Internet. Due to poor network connectivity between the US and China, there’s only one way to definitively fix the problem: have a separate service in China. That’s what we built.

This is a smart move for many reasons:

They are actively preempting the likely scenario of a Chinese clone.

Using a separate brand will protect the existing brand from the usual concerns about cosying up to the Chinese government and their potentially problematic interpretation of data privacy. 

Even more importantly this is an important part of the growth strategy of a “new style” software company. In the olden days (think Microsoft or, if you can remember that far back, Lotus) all the creative energy of the company went into developing more and more features for your product to make it richer for the sophisticated buyer. For a product like Evernote this is not an option, however. They may have maxed out on features already. So the primary options available for growth are platform (think Dropbox) and/or entering adjacent markets. And this is one hell of an adjacent market.

Some interesting discussion yesterday around the new European Angels Fund from the EIF. More information here.

First impression: A great idea. Instead of looking at companies and individual investments they look at the business angel. If they like you then there’s a framework agreement and they match your investments. All of them, no cherry-picking allowed.

That seems like a huge advantage in terms of speed and aligning investor interests over other governmental co-investment programs where the co-investor needs to perform due diligence on the individual investment. 

And apparently significant echo with a large number of “surprisingly qualified” candidates applying for inclusion in the program. So far so good.

But it’s not clear that this is for every investor.

On the the one hand you might have a “drive-by” business angel doing lots of transactions, keeping a relative distance from the company (possibly because they invested as part of a syndicate), and moving on to the next transaction. Their motives for EAF involvement could very well be to make more cash available and thereby have more capital available until the next round. Possibly keeping some of their cash to participate in the next round. That seems to make sense.

On the other hand you might have the “hands-on” angel doing a  much smaller number of transactions, but investing significant time and effort in the day-to-day business of the company. Let’s say 1-2 days a week and more in case of need or crisis. This type of angel will want a special price for their shares that acknowledges the unique contribution they are making. You may even argue that their investment is not so much a cash infusion but the mechanism for capturing the value that is being created by the “hands-on” angel. In this case the unique valuation required by the angel would then also be extended to the EAF co-investor. That does not make much sense. If more cash is needed it would be smarter to look for additional hands-on help to join the investment round. 

Just found this great post by David Skok on the previous post’s topic of pricing power for early sales. He calls it multi-axis pricing. Must-read. I especially like his comments on “emotional willingness to pay”.

There is a very significant difference in the willingness to pay amongst various customer types. Car manufacturers have known this for a long time, and usually include a highly profitable model at the top of their range that appeals to the non-price conscious buyer, who likes to feel that they have bought the very best.  Take a look at the Mercedes Benz S-Class as an example: The base model S550 starts at $94k, but for those that aren’t price sensitive, they sell an S600 version for $160k, or an S65 AMG version for $211k.

Several discussions with entrepreneurs in the last weeks about product pricing. Both for consumer and SME offerings the price pressure is huge, similar products brought to market by startups with high amount of capital are given away for free or for very little.

And, at least for a certain category of product/market (more later on “zero-gravity” business models), affordable pricing is a key to rapid market adoption. So people spend a lot of time thinking about how to price for easy uptake and viral growth. That all makes sense. What we now have is the price list for steady-state. 

The challenge: This price list is really low. And all of a sudden it becomes impossible to understand how the business will make any money before it has thousands of customers. And now we are stuck.

The solution: You don’t use that price list to make your first sales. Your first sales are all about:

• Customer validation: There are dogs and they eat the dog food and they pay for it. Repeatedly and gladly.
• Path to Ramen Profitability: Trying to ramp up some revenues so you can fund your hopefully very minimal cost base. More on the virtues of ramen profitability here.
• Extracting maximum margin contribution from each customer interaction: If you want to become ramen profitable you have to get as much money out of as few customer transactions as possible. The bigger the transaction the better. At the same time you cannot be too picky about who you accept as a customer, so the goal is to get the most from every customer, which may be a lot for some and not so much for others. No matter, as soon as you have extracted all of it.

The key instrument for this is a long and complicated price list. Think Oracle database licenses. Better yet, study pricing for products such as Salesforce CRM. Ideally you have multi-dimensional price drivers, e.g.

• Number of seats. Possibly different kinds of seats (e.g. heavy vs. light, internal vs. external, etc.)
• Different modules, e.g. CRM+SFA+Helpdesk+etc. etc.
• Different editions, e.g. Basic vs. Professional vs. Platinum

This price list is your secret weapon for constructing custom deals where you sell more or less the same product to one customer for price X, and to another for something very different from X. And where both you and the customers feel that this has been a fair and reasonable transaction. Remember, your goal is to:

• Take all of the captive budget
• Be comfortable when customers meet and compare prices. They must feel that their own offer has been logical and fair.

Use this price list for your first phase of customer interactions. Switch to the zero-gravity price list at a much later date. And sweeten the transition for your installed base via special promotions if you can. If you cannot then relaunch your product under another name…