Ian Landsman is Starting From Scratch, March 18, 2006:
Beat Open Source Competitors by Raising Your Price
If you're in the market for a powerful and user friendly Help Desk solution, please take a look at my company's flagship product HelpSpot.Sparked by comments in this JOS discussion, I thought I'd relay my thoughts on how you compete with open source competition.
First let me summarize the normal arguments:
1. Companies want support (not just forums, but actual support with phone numbers)
2. Companies don't want to rely on part time developers who have no obligation to work on the product
3. In theory OS gives the customer power to change the code. In practice they lack the skill and/or desire to do so.
OK that's great and I agree with all of it. But that's not how you beat open source competitors. That's not how you stand and fight in a market saturated by open source competition. You need a strategy which leverages the above. Be prepared, I'm about to blow your mind.....
Money is not that important to many people
Yes it's true!!! I'm not making this up. What is important to them are problems. Problems which cost them far more time/money than a software license.
Take that statement and combine it with the knowledge of the downsides of open source applications. The only logical thing for you to do is raise the price of your software. I see people all the time talk about lowering their prices because of open source competition. That's exactly the wrong thing to do.
The thing those people are missing is the psychology of purchasing software. If you lower the price you're narrowing the gap between your software and the open source software. Not just the gap in price but also in perception. You're making it easier for customers to jump to open source. Why?
Because if you lower your price to $20, it's now a very small leap to $0. Customers start to think things like: "This probably isn't much better than the open source product because it's so cheap", "This software can't be offering anything much better than the open source alternative", "How are these guys going to stay in business only charging $20?"
You need to raise your price and get customers thinking like this: "$200 a license? This must be a lot better than the open source product", "come to think of it that open source website did seem a bit thrown together", "I bet these guys have Aeron chairs and plush offices in Silicon Valley. Nice to know they'll be around long after I've left this stinking job"
You get the idea. Instead of devaluing your brand by lowering the price you need to emphasis your brand as premium. Price helps you do this. It's not the only thing, but it goes a long way. Most programmers don't think this is true but you're wrong. A high price implies quality, that's just the way it is.
A high price also gives your business customers some cover. Again, you think business managers want to go into their bosses and say they got something for free. Not true! Mangers want to cover their asses. You don't cover your ass by using a free tool with no (formal) support. You cover it by buying expensive tools that have boatloads of support.
I'm not saying you have to be the most expensive product around, but just resist the temptation to lower your price. You're competing on many levels with open source applications and a low price in many ways is the least important factor.
Discussion
I have given this a lot of thought the last couple of months and it is a very interesting topic indeed. I have a product aimed towards companies doing software development in the mobile business (SMS services and so on). My conclusion for my own product was that I was going to keep my main product closed source and the tools used by developers to integrate the main product in their own applications open source.
So it is kind of a mixed open/closed source model.
I don't know yet how this is going to work out, since I am still about to release the tools mentioned, but I hope it'll make my product a bit more interesting.
Created by Mads on 03.18.2006 11:03 pm
Ian, I think this is a great post and I completely agree with you on the pricing issue, but I wouldn't be too quick to discard the "conventional wisdom", either. Lots of OSS comes as a tarball with a very technically-oriented README file and that's about all you get for documentation. Commercial software can win customers just by providing an effortless installer, for non-technical folks and for technical folks who have better things to spend brainpower on than installing a utility.
I've seen very little OSS with a polished interface that shows a obvious focus on usability. (Firefox is a notable exception, though.) It seems to me that most OSS is created by programmers who are interested in the technical aspects of development, but because they aren't selling the software for real money, the softer issues are often neglected. And I would venture it's often these softer issues that are more important to the average buyer.
Created by Jesse Smith on 03.18.2006 11:03 pm
Your argument is pretty good if I want to sell to corporations. But what if I want to sell to end-users?
Also, some companies embrace OSS. They think that OSS gives them a guarantee that the software will be around even if the developer of the software calls it quits.
I think your analysis has a point, but it's simplistic. Many things depend on other elements of the niche you are competing on.
And because of open source, many niches become bad for business.
Created by Rico on 03.18.2006 11:03 pm
Thanks Ian. You are probably the first subscriber 
Thanks for the info on the ATOM feed. I am using the RubyOnRails typo blog software, so that may have a bug in it. Thanks for pointing that out.
Tom
Created by Tom Davies on 03.18.2006 11:03 pm
Huh, that would be an interesting link 
Also I subscribed to your blog, looking forward to reading what you're up to. One note, your ATOM feed seems to be messed up but the RSS works perfect.
Created by Ian on 03.18.2006 11:03 pm
Ian, great post. I agree, setting a price too low can actually hurt your business. A while back there was an article on Snort, the intrusion testing software, where the founder said his potential customers were coming back and saying they would love to buy Snort but the price was too low! I believe they were large enterprise customers that had specific budgets set for that kind of purchase and Snort was initially priced at a small fraction of that. They actually told him to raise the price and they would buy it. It would be helpful to have a link to this, but I can't seem to find one
Tom
Created by Tom Davies on 03.18.2006 11:03 pm
I agree, both regarding software and steak.
Created by Ben Bryant on 03.18.2006 11:03 pm
Indeed, that steak example is very good!
Created by Dimitris Giannitsaros on 03.18.2006 11:03 pm
I LOVE the steak example Des!!!
Created by Ian on 03.18.2006 11:03 pm
[...] Ian Landsman writes that the way to beat open source competitors is by increasing the price. He says that money is not that important to many people. That goes with my belief that I mentioned in one of my old post, while I was talking about offshoring: If you are offshoring just for saving costs, you are only shooting yourself in the foot. Cost cut is really an attractive proposition but quality and domain expertise has to be considered before that. [...]
Created by Ashish Kumar - Tekriti Software on 03.18.2006 11:03 pm
I agree with you entirely. Price directly influences perception of quality. There is economic theory that backs this up too.
I find the easiest way to explain this is to ask someone would they eat a $2 steak, most people say no. If its only 2 dollars, its probably disgusting, otherwise they would charge more for it, right?
Created by Des Traynor on 03.18.2006 11:03 pm
+ 10 to Jesse.
As an IT professional, I have better things to do than figuring out how to install or start using an application!
This is THE drawback that keeps OSS from becoming something real in a professional environment, together with the integration issues.
-----
Created by Sevenoaks on 03.18.2006 11:03 pm