Device Apps Provide ISVs and Their Hardware Partners with a Compelling Method of Maximizing Recurring Revenue Models

Apps provide ISVs and their hardware partners with a powerful method of closely coupling durable and non durable components of what we have referred to as a “razorblade” product development strategy. With computing systems effectively locked down, as they are for smart phones and tablets, which are, effectively, closed systems that run on a reduced instruction set computing (RISC) set of features, vendors have located a compelling method of producing revenue from durable and non durable components of these systems. In fact, Apps that are specific to operating systems (OSs) are entirely comparable to the coffee pods that are required for a single brew coffee system marketed by Green Mountain Coffee Roasters, Inc — Keurig®. We think that the companies producing these products are after the same level of enormous profitability that this product from Green Mountain Coffee Roasters, Inc. has produced.

Of course, not all market participants are proceeding with the same level of methodical dedication to a profit objective. Consider, for example, Google’s Android system. In fact, as Darcy Travlos pointed out in an article published on August 22, 2012 on the Forbes web site, Five Reasons Why Google Android versus Apple iOS Market Share Numbers Don’t Matter, “Google gives away its Android operating system in order to have real estate on mobile devices and, therefore, ubiquity is critical for Google to deliver ads. On the other hand, Apple makes money on every iPhone and iPad it sells, even before an ad is delivered to the device” (quoted from Ms. Travlos’ article, for which we have provided a link). In fact, as Ms. Travlos so aptly concludes, Google’s purpose for engaging in this smart phone market with, effectively, a closely coupled App component, has much more to do with expanding the application of its click ad electronic promotion product to a new market place, than it does with extract profit from both ends of a razorblade product marketing strategy. Again, as Ms. Travlos points out, Apple’s intentions are quite another matter. In fact, Apple is realizing enormous revenue from the sale of the durable component, while tightly managing participation in the App marketplace.

In fact, Apple has innovated this razorblade product model. We think that Apple is using the non durable component — Apps — to drive more sales of iPads and iPhones, which amount to the durable component of these products. As the Apps attract more users, more iPads and iPhones will have to be purchased by new customers. As well, compelling Apps will require that customers continue using these smart phone and tablet devices. We think, further, that Microsoft® has studied all of this very closely. Stay tuned as they try to apply the same principles to legacy office computing as they roll out Windows® 8 and Office® 8, which will both have their own App stores.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Cloud Computing and Software as a Service are Examples of Computing Products that Conform to Razorblade Product Design

Cloud computing and software as a service (SaaS) offers amount to examples of our notion of “razorblade” product design applied to office automation and information technology (IT) markets. For both of these types of products, the durable component of the system amounts to the computer hardware, networks and web browser software required for participation in the offer. The non durable component usually amounts to nothing more than time, which dictates the rate at which the customer must pay to maintain the benefits delivered by these products.

It is important to recognize that, broadly speaking, the durable and non durable components of these offers can be decoupled. In other words, a cloud services provider, or an enterprise IT ISV with an SaaS offer, may end up with no revenue, whatsoever, from sales of the durable component of the system. Nevertheless, durable components in the form of computers, networks and web browsers are still required for use of these products. Some participants in these markets, for example, Dell and/or HP, have attempted to capture the durable revenue component, but, generally speaking, this added benefit has alluded them.

Something of an exception to this rule, in our opinion, is the Office 365 offer from Microsoft®. In fact, Microsoft owns the largest segment of the operating system market for its cloud service as the result of the near universal usage of Windows®. But the way Microsoft captures the durable component revenue portion of the Office 365 product does not conform to our “razorblade” product model. The durable component revenue is indirectly paid to Microsoft by its OEM partners, and not from the actual end customers of Office 365.

As we mentioned above, the non durable component of most cloud and/or SaaS offers amounts to no more than time. We think this component, which usually amounts to a monthly subscription model, is actually a weakness of these products. In our experience, customers will require cloud and SaaS vendors to provide new content in order to ensure reliable, long term subscription to services. Therefore, if IT ISVs are to successfully use cloud and SaaS products to drive recurring revenue, then business planning for these products should include the cost of regular development of new features for offers. Therefore the operating expense (OPEX) portion of cost of goods sold will be comparatively higher than products that align more precisely with our “razorblade” model. In fact, examples of IT products that constitute a better articulation of a durable and non durable component mix are already available as we will illustrate in the next post to this blog.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Green Mountain Coffee Roaster has a Real Money Maker in the Keurig Single Cup System

In our opinion, the Keurig® Single Cup Coffee System, which is owned by Green Mountain Coffee Roasters, Inc. is an example of “razorblade” product development. This consumer item conforms to the dictate that any product in our “razorblade” product category incorporate both durable and non durable components. The Keurig® brewing systems is the durable component of the product, while the Keurig® “Pods” amount to the non durable component of the system, which must be periodically replenished by the user.

This hybrid combination of durable and non durable components has, evidently, generated an enormous amount of revenue. As Oliver Strand wrote in an article With Coffee, the Price of Individualism Can Be High on February 7, 2012 in the Dining & Wine Section of the New York Times web site, the actual price, per pound of coffee, paid by users of this brewing systems who opt for certain brands of coffee pods for Keurig, amounts to $51.00, or over 4 times what one of our staff members pays for fresh roasted Sumatra coffee from a local grocer. A 400 percent markup beyond top grocer pricing for comparable non durable items is nothing to sneer at, especially when one considers the reach of this product in terms of customers and the frequency at which replenishment is required.

It is no wonder, then, that “razorblade” product design is something of a holy grail for product marketers. An especially precious feature of any example of this type of product design is the need that customers almost universally experience to replenish the non durable component of the product. In fact, the need to replenish amounts to a core driver of a recurring revenue component to these products. Of course, any product that includes a solid recurring revenue component is highly prized. In fact, operational expenses (OPEX) will be dramatically lower for these products. Existing customers who are effectively “hooked” on replenishing non durable components do not require further sales efforts. Neither do these customers require much in the way of additional marketing (though the history of the Keurig® system does include a substantial amount of follow-on marketing cost, which accompanied Green Mountain Coffee Roaster, Inc’s ambitious expansion of the pod coffee options for the system, as well as its attempts to introduce additional durable components in the form of new brewing systems).

Given the lucrative revenue qualities of “razorblade” product design, enterprise IT ISVs (and their computing hardware partners) have searched for a method to incorporate the same type of product in their offers. We think that cloud computing and the App store feature of mobile computing devices are two examples of these efforts. We will talk a bit about cloud and Apps in the next couple of posts to this blog.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


A Further Word on Why We Think Enterprise IT ISVs Ought to Build Products with a Minimal Feature Set

We published a post or two to this blog, recently, on the topic of why it makes sense for product marketers at enterprise IT ISVs to focus, entirely, on equipping products with no more than a minimum set of requested features. As part of our presentation on this topic we recounted our opinion as to how the approach of both businesses that constitute “Wintel” computing, namely, Microsoft® and Intel®, which amounted to exploiting a complex instruction set computing (CISC) method, actually exposed them to competitors who have now better served the market with so-called smart devices that actually operated on a substantially reduced set of capabilities. In fact, in our opinion, the App phenomenon is actually a bridge that developers can use to build processes on anything that will run, nevertheless, on reduced instruction set computing (RISC) devices, including tables, and smart phones.

There is nothing new about our position. In fact, most business schools espouse the same type of “lean” approach to product design. What is worth repeating about this approach, in light of our recent collaboration with an esteemed client, Rehmani Consulting, Inc. on the design of an enterprise IT computing product that has recently won an award from a major publication in our client’s market, is that a disciplined approach to this minimal product design method can produce opportunities for follow-on products, which can keep revenue flowing far beyond an otherwise normal product life cycle.

We like to refer to this approach as the “razorblade” strategy. This strategy can be summarized with a quick reference to manufacturers of men’s shaving equipment. In fact, the revenues these manufacturers receive from sales of the non durable components of men’s shaving systems (namely razor blades, disposable razors with non replaceable blades, and shaving aids like shaving cream) far outweigh the revenue they receive from sale of the durable component, meaning the razor, itself. After all, these non durable components have a limited life span. Periodically users must replenish their supply of these components, which usually costs them precisely the same price each time.

In fact, we are keen on product marketing that can leverage a “razorblade” strategy. Another plus for this approach is that it affords manufacturers the capability of producing products that scale, based upon customer requirements. In other words, the same product “chassis” can be used to service a wide range of customer requirements. Building new solutions at a higher level upon a uniform chassis is, of course, less expensive, which should lead to greater profitability.

In the next post we will look at two examples of a “razorblade” strategy.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Teleprospecting can be Successfully Used Within a Product Development Program to Identify High Probability Opportunities

One of our clients, Rehmani Consulting, Inc. has been awarded the bronze prize for SharePoint product of the year, 2012, by Windows IT Pro magazine. Our client’s product that won this award, VisualSP is a help system for Microsoft® SharePoint® 2010. We provide Rehmani Consulting, Inc. with teleprospecting services as part of our sales and marketing offer. Teleprospecting provided highly useful information about market requirements for this type of help system, which were incorporated into the design of the feature set for this product.

It is currently a widely accepted precept of product marketing for information technology (IT) products, services and integrated solutions, that building products based upon market requirements makes a lot of sense. In fact, IT product development has matured far beyond the obsessive approach of the early 1980s, best characterized by the notion of entrepeneurs building “solutions without problems.” Now, the two leading tenets for IT product marketers are to

  1. build products that offer merely the minimum set of features requested by a significant portion of a market, and
  2. to maintain conversations with representative contacts within markets on topics that can produce useful indication of future product requirements

When social media are used in conjunction with a judicious application of teleprospecting, then highly valuable information can be collected, which, in turn, can be used to put together the type of successful product that Rehmani Consulting, Inc. achieved with VisualSP.

We need to note that we have implemented a wide open approach to teleprospecting for this client. The primary objective of this type of telephone contact is to collect impressions from contacts on topics relevant to a computing environment (in this case where SharePoint® provides the computing foundation). We have found that discussions on these topics can produce information that may be suitable (depending on a client’s objectives) for inclusion in a features plan for a product like VisualSP. As we discussed the results of our work with our client, some of the key features of the help system took shape. We do not see how our client could have identified the features included with the VisualSP without access to the kind of candid market opinion that we collected through our telephone calls.

Of course, we need to note that the type of marketplace sampling effort we have undertaken with teleprospecting methods for this client is far removed from the type of telephone sales approach that usually typifies lots of telephone outreach campaigns to prospects. Telephone sales is usually very much focused on prospecting for customers. In order to achieve the type of results that we obtained from this teleprospecting effort, we needed to carefully scrutinize ancillary information that generally has little to do with sales prospecting, but lots to do with truly attending to candid statements of marketplace sentiment.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Dell Q3 FY 2013 Results Point to a Need for Better Management of Its Business Transformation

We sat through a webcast of Q3 FY 2013 conference call for Dell. Our rationale for spending the time required to attend this earnings presentation was simple. We are investors in Dell. As well, we are largely focused on realities and potential trends in IT computing for enterprise businesses and comparably sized organizations in the public and/or private sectors. Regardless of Dell’s present condition, the company is, nevertheless, a major factor in our area of focus, and, therefore, worth our attention.

It is hard for us to believe, but nevertheless true (per this report), that Dell embarked on its effort to transform itself into an “end to end” solution for enterprise markets four years ago. Brian T. Gladden, SVP and CIO makes mention of this fact at the start of this webcast presentation of the Q3 results. Gladden also notes that this “end to end” product produced approximately $4.8 Billion in earnings for the quarter, which, by any standard, is a considerable amount of money. But the composite growth rate, at a mere 3%, in our opinion, is much more indicative of a stable, mature business, than a growth vehicle. Further, the fact that the leading group of products in this complex set of solutions (in terms of revenue generation), namely hardware servers and network equipment, are simply the foundation for Dell’s growing set of offers at the application layer (principally Quest Software) says to us that enterprise IT spending on software is largely at a standstill, at least for Dell.

Mr. Gladden noted that total company revenue was down 11% year over year, but still within the range management forecasted in August, 2012 (albeit at the low end of that range). Gross margin, at 22% declined 60 basis points, from Q2 fy 2013. We think that some of this decline in gross margin can be attributed to what we have written about elsewhere in this blog, namely, the phenomenon whereby IT software is trending, from the customer, demand, perspective, to mere commodity. Profitability was shored up by careful management of operational expenses (OPEX). Nevertheless, earnings per share amounted to a 28% reduction below Q2 fy 2013.

Sales of network hardware grew by 40%, which is impressive. Mr. Gladden noted that Dell launched its “Active Infrastructure Converged Offering” in this quarter. This offer includes hardware, software and services components ” . . . under a common design architecture . . .” (quoted from Dell’s webcast, which can be accessed from the Dell website, for which a link has been provided above). He characterized the market forces driving this offering as a need for “simpler” solutions.

Per Mr. Gladden, the drop of 3% in sales of storage solution resulted in revenue that fell below management’s expectations. Nevertheless, he characterized this drop as more the result of weaker market demand than any competitive factors.

Our conclusion from this section of the Dell webcast is that enterprise IT spending on data center, on premise solutions is on hold, at least for the class of solutions offered by this vendor. Further, and with specific reference to Dell, itself, we think that the fact that hardware components — namely servers and network devices — remain key revenue drivers, despite 4 years of transition, indicates some management difficulty with regards to truly transforming this business.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Sales Cycle for Enterprise IT Purchases for Calendar Q4 in 2012 is Slower than Usual

We are witnessing a slower pace for enterprise IT sales in the fourth quarter of 2012 than we would have expected earlier this year. We think that a constellation of factors, including:

    Macro events in the United States, which include the so-called “fiscal cliff”, and the concern that enterprise business appears to have about the series of mandatory steps that will have to be taken to ensure full compliance with the universal healthcare act of 2011 (which moves forward, decisively in 2013)
  • Evolution of the office computing hardware device paradigm from PCs and laptops to smaller, lighter, less energy intensive tablets, ultrabooks and smart phones, and, finally,
  • lackluster overall business performance as the result of slower purchasing on the part of international customers in Europe and emerging markets

have contributed to this purchasing slow down.

Of course, if we are accurate, then publicly traded ISVs like Dell, HP and even Microsoft and Oracle, will likely report results below analyst expectations when March, 2013 rolls around.

The question for enterprise ISVs becomes how to manage this type of slow down. We strongly advocate eschewing any finger pointing at sales for poor performance. In fact, most of the conditions driving the type of slow down that we are witnessing have little, if anything to do with sales techniques. If anything, the type of purchasing climate that we are witnessing should prod enterprise IT ISVs to take steps to insulate sales teams that are performing to expectation from the type of hit that would otherwise occur as the result of these environmental conditions.

We are not calling for bonuses to be paid out when revenue falls below expectation. Rather, we are calling on sales management to carefully evaluate sales team performance and provide encouragement, where it makes sense, to ensure that talented individuals are not lost to competitors. In fact, we are entirely confident that present conditions will eventually improve; therefore, top performers will be needed as opportunities re-emerge. If top performers can presently be identified within sales teams, it makes sense to take the steps to retain them. It is common knowledge that the cost of replacing top performers is much higher than the cost of taking the steps required to retain them on staff. Why waste precious cash in an effort to replace talent that should have been kept on board?

From a product management perspective, it may make sense for enterprise IT ISVs to produce very low cost (and even no cost) versions of products to keep the process of seeding major account opportunities moving forward. After all, when macro factors improve (as they most certainly will), enterprise customers committed to a platform will likely pay to extend usage. The key for ISVs is obtaining their commitment> If resources are such that a quarter or two of slower progress can be tolerated, then it makes sense to continue winning commitment, even with “freeware”.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Smaller Form Factor Tablets, Ultrabooks and Laptops are Here to Stay

We just returned to our offices from the Microsoft SharePoint Conference, 2012. This annual conference was held in Las Vegas, NV at the Mandalay Bay Convention Center. Attending this conference afforded us an opportunity to observe, first hand, the pervasive extent to which very small form factor ultrabooks, and tablets have penetrated the mobile work force for enterprise business.

Of course, it makes sense for these mobile workers to opt for smaller devices. After all, who wants to struggle with a bulky laptop and A/C Charger? These two devices, alone, can weigh over 5 lbs. When one adds in the weight of promotional materials, and other mobile worker essentials, the load can amount to 10 lbs or more. Carrying this weight disproportionately (meaning over one sholder) can result in severe back strain. Therefore, opting for an ultrabook that can weigh 2 lbs less than traditional lap top alternatives makes a lot of sense.

When lots of mobile enterprise knowledge workers arrive at this same conclusion, it becomes an issue for businesses like Dell. In contrast to Apple, Dell had to substantially revamp its laptop product line very quickly, and, in all likelihood, at considerable expense to come up with a product like the XPS 10, which carries a competitive $499.00 price tag to the Apple iPad with Retina Display. Naturally, the task of thoroughly renovating a product line like the Dell Laptop line required a substantial amount of capital and human effort. Perhaps more of this same type of “catch up” cost runs through the type of poor business quarter that Dell just reported, which caught us largely by surprise.

We plan to wade through this quarterly return from Dell, in detail, shortly. We will publish thoughts on the impact of Dell’s results on likely trends over the next near term on enterprise IT software sales, as we come to our own conclusions. Nevertheless, the point we are after is that the kind of wholesale migration over to lighter, more portable computing devices, by enterprise mobile workers, in large numbers, represents a second order shift in office automation with lots of likely impact on computing standards, going forward.

Getting back to our SharePoint conference attendance, we saw lots of iPad tablets and ultrabooks everywhere. Further, we had several discussions with technical architects about their own preferences for mobile computing. What we heard, consistently, was that flash (SSD) drives are preferred as the fastest way to boot O/S, not to mention the quickest entry point to comfortable mobile computing with light weight devices with manageable shape.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Early Stage Enterprise IT ISVs can plan on a Single Role for Head of Sales and Marketing

Enterprise IT ISvs can plan on combining responsibilities for marketing (including product marketing and marketing communications), and sales into one leadership position. In fact, it makes complete to implement this staffing strategy. The facts are that it is critically important that product marketing, communications, lead generation and sales move, almost in lock step through this early stage of growth. There is no better way to respect this requirement than to select one leader for both of these business functions.

The individual selected for this role should have first hand experience with all four sets of responsibilities. Individuals who can demonstrate past successful roles as a pitchman are usually worth consideration.

What’s special about a pitchman is that this type of sales person is very comfortable delivering presentations. Of course, marketing communications is all about branding, presentation and audience. Therefore, a pitchman who is adept at delivering presentations may also be comfortable producing them. If a sales person is identified who meets these criteria, then management should move quickly to interview and determine whether or not there is a fit, as this type of hiring opportunity seldom arises.

It is important to keep in mind that there are many types of presentations that can be suitable for pitchmen. An ability to produce high level presentations — meaning those presentations that communicate concepts, and, even, methodologies to business users who make purchase decisions — represents a skill that should be highly prized.

A hire for the position of head of sales and marketing must also be able to demonstrate an ability to deal with data for the purpose of performance analysis, etc. Usually an Excel whiz who can write macros and produce charts makes a good hire for this role.

Finally, a successful leader for these functions should be able to demonstrate past success managing teams of subordinates. Certainly, at an early stage a head of sales and marketing will be called on, personally, to at least contribute to closing business, if not close the deal him or herself. Nevertheless, as the business grows a head of sales will likely add additional staff; therefore, a good choice for the position is an individual who can demonstrate at least 10 years prior experience in this type of leadership role.

We do not advise bringing an individual into this role who may be a very strong individual contributor, but has little, if any experience leading teams. The rewards that motivate an individual contributor will not likely motivate a team leader, and vice versa.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved


Enterprise IT ISVs Must Anticipate Requests for On Premises Demonstration Software for Proof of Concept

There is little to no likelihood that enterprise sales prospects will proceed on an important purchase without testing solutions. A proof of concept phase will be required in order to demonstrate that a planned software purchase will deliver the value to the organization that the product champions assume will be the case. Few line of business (LOB) managers, or heads of enterprise IT organizations will take the risk of championing unproven solutions. Accordingly, ISVs selling these products must plan on proceeding through a proof of concept phase with demonstration software.

Early stage businesses with promising products can take the risk of engaging with enterprise market prospects without presuming that a proof of concept phase will be required. However, it is advised to simply assume that a mandatory demonstration will be required before purchases will proceed. Planning on this step will insulate ISVs from learning the same lesson the hard way, which will likely include more development expense crafting demonstration software from production applications.

If sales are planned correctly, then the proof of concept phase (demonstration) will occur as a natural progression as vendor and future customer collaborate on a solution that will deliver substantial value to the latter and enviable win to the former. We are very grateful to Jeff Thull who has very clearly describes this process in his book, “Mastering the Complex Sale”.

An unexpected benefit, as Jeff Thull makes clear in his book, is that the proof of concept phase may be largely unique to a specific software solution. This fact constitutes a formidable barrier to entry that an ISV’s competitors will need to overcome in order to win the business.

Therefore, it makes sense for ISVs to welcome opportunities to proceed to a proof of concept for specific sales opportunities. In fact an invitation to proceed to a proof of concept phase indicates that an opportunity is maturing and should proceed to a purchase post successful completion of this phase.

ISVs should have demonstration software available that can be installed on premise to ensure that enterprise IT organizations can evaluate solutions within their data centers. Even pure cloud applications should be available for this type of review, usually as a managed service run on a corporate Intranet. As we mentioned at the opening of this post, neglecting this step as software is developed will only result in unplanned expenses later on as a first enterprise prospect, inevitably, asks for a demonstration copy of a solution.

© IMB Enterprises, Inc. & Ira Michael Blonder, 2012 All Rights Reserved