

Ask YC: Competitor flying under us... - theyoungceo

DISCLAIMER: This is kinda long, but if you take the time to read it I will buy you a karma lollipop.<p>I remember distinctly reading one of PG's maxims: Never let anybody fly underneath you. And we never have.<p>We are a low cost provider of a hotly demanded product that appeals to public/overnment clients. These particular entities usually pay anywhere between $100K and $20M to have this type of system installed, and can pay ongoing fees anywhere from $500 a month to $500K a year, depending on the size of the organization being outfitted. Suffice it to say that there is a huge market for this product...many many of these organizations all dying to have the product. We have done well with well over $500K in revenue in &#60;2 years, no funding, and a win in a big name startup contest that netted us $100K in cash and prizes out of 250 entrants we competed against.<p>There are about 6 competitors in the space now. 2 of them are the rolls royce variety -- they don't do any contracts under $1M, have several contracts over $30M, and are public companies or owned by public companies.....they do big government only where the big federal money is, no smaller fish. We aren't really big enough to compete with these fish right now which is fine...we're hot on their tail right now and are very close to taking business away from them.<p>Two of them are in the middle....been around for 4-5 years, dabble in both big government and small government, both products fairly lackluster and way overpriced. Nonetheless, they are much cheaper than the rolls royces, so they have a smattering of clients that went with them for lack of better option over the years. We have consistently kicked the crap out of them multiple times; neither has ever beat us since we entered the market. We are way beyond them in features and way under them in price, and their customers hate them and call us all the time to switch. Lets call them the Mercedes of the world. They are the least threatening of the bunch.<p>The last two are "startups" and I use the term loosely. One of these startups scored several "prestigious" contracts before we were around, with a reallllly limited product. They were a little less than the Mercedes variety in price, but IMHO distinctly inferior in features to the Mercedes offering, which was distinctly inferior compared to us. We have had no problem beating them, but occasionally they good a get looking over because they're cheap(er) than Mercedes, but still way more than us.<p>Now to the issue at hand: the last startup. In this case we have a cornered animal. One man show, has one really small client and is barely a larvae. We knew about him, but never expected to have to take him seriously, because other clients never did and the government rarely goes with early stage startups for anything. The product is really obviously homemade, has zero features other than what we consider the one, basic, bare minimum feature of the product space.<p>We are at least a third of the way to closing up a large string of smaller government agencies that are associated with each other....we have 3 of them and there are only a few more left. One of the entities in this group is different from all the others in that they draw their funding from an atypical source and are a really ramshackle operation. They are extremely price sensitive. Their folks really love our system, and are totally sold. One thing though: they draw their funding from another department that doesn't give a crap about features, track record, quality or anything, only price. This department also doesn't have to deal with consequences of an inferior system -- they are really just Mom and Dad writing a check for junior to go play with, and are limiting him severely in his allowance. We gave them our standard pricing (which has little margin) and they welched and said semi-finally they are going with the little guy. There are HUGE risks with this because he is remote to them and we are local, and this is an on-site support type of product. We are also universes away in features and they know and are not happy about it. They are aware and objecting to the funding folks, but the funding department just doesn't care. They seem to have come about 75% of the way to a decision to not go with us.<p>So the dilemma is this: I can meet their price with little margin, and it's not a big deal, we'll still make money on the up-front but we'll make a lot less than usual on ongoing (not a problem). However, considering how closely associated potential clients X Y and Z are to this client, who are also very close to closing a deal, they might enforce the lowest available pricing on us later in the game due to us giving in on this one and really screw us. I don't think our friend the competitor has a prayer at matching us on features to X Y and Z (who are better funded and more demanding), but considering we might give this client steeply discounted pricing to beat the little guy, they might require it from us. If we don't though, it might give Junior just enough cash flow and exposure to not die, which we sure don't want to happen.<p>So, what to do! Ask follow up questions and I will try to answer.
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SwellJoe
You're reading way too much into one piece of advice. The whole "eating from
the bottom" thing is a time honored tradition in the computer industry. IBM
mainframes were eaten from the bottom by Digital systems, which were eaten
from the bottom by Data General mini-computers, which were eaten from the
bottom by PCs, which will be eaten from the bottom by mobile devices.

But, your problem is not a paradigm shift that alters the competitive
landscape. Your problem is a competitor with unsustainable pricing. Don't play
that game. It's foolish and you'll lose more customers than you win by playing
it. You'll also dig yourself an early grave (figuratively, and possibly
literally, if you take your business too seriously).

Ignore your foolish competitor. Build better products, charge the right price
for them (you may still be too cheap), and keep working. The low-priced
competitor will continue to lowball his bids, and will eventually get a
reputation for under-serving and over-promising. In a year or two, you'll have
a chance to re-bid the same customers you lose this year. And the customer
won't be so interested in getting the product cheaply.

~~~
josefresco
OR, the smaller competitor will deliver a much smaller and simpler product for
less money and build a solid reputation as a high value low cost provider
who's not over pricing their software just because they're working for the
"government" which is known to have deep pockets and understand little about
what they're buying.

~~~
SwellJoe
"OR, the smaller competitor will deliver a much smaller and simpler product
for less money and build a solid reputation as a high value low cost provider
who's not over pricing their software"

That's only possible if there has been a paradigm shift that the original
poster has not identified. He's stated a few times that his company is
operating on thin margins. I'm gonna give him the benefit of the doubt and
assume he's running an efficient shop.

I don't believe that leaves room for a "low cost" competitor at the bottom.
And, unless it's a commodity, it wouldn't matter anyway. People who do these
kinds of acquisitions make a check list...the product that checks off the most
items on the list, and brings in a reasonable bid vs. all of the other
bidders, gets the contract. It's not like consumer markets.

I still suspect the OP is charging too little, if his product is good, because
being the low cost provider in just about any market is not a good place to
be. Margins are thin, customer satisfaction is low (think eMachines and
Packard Bell vs. Apple and ThinkPad) and you can't make enough to push forward
on the projects that'll help you grow and provide better services.

~~~
skmurphy
_I don't believe that leaves room for a "low cost" competitor at the bottom._

This is precisely the thinking that leads to getting disrupted by a different
business model.

~~~
SwellJoe
"This is precisely the thinking that leads to getting disrupted by a different
business model."

Please re-read my whole comment (and the one above it). I've explicitly
discussed paradigm shifts that change the shape of the industry. A "different
business model" is obviously one such type of shift. But given the description
of the situation, I don't believe the OP is in such a moment in the history of
his industry.

~~~
skmurphy
I did, it's just that I agree with josefresco's comment, or at least see that
scenario as more likely. We have different interpretations of the same
information. My other point is the firms that get disrupted always see the
alternative as less attractive.

~~~
SwellJoe
If that's the case, we can't save his company. If he's being blindsided by a
significantly different way of doing business, and one that undercuts his
already razor thin margins by a large amount, then his company is already dead
and just doesn't know it yet.

That could be the case, of course. So, you're right, we are just taking a
different view of the provided data.

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mailanay
Let this deal go. The company, I was working earlier, had a habit of signing
on every customer that knocked their door. In the long run, it created a lot
of problems to support those customers (at a very low margin or at a loss),
just to maintain the reputation of "not leaving the customers cold" in the
marketplace.

Letting this deal go, might also send a strong message to X, Y, Z potential
customers, that you are offering much more than the cheapest solution and are
willing to walk away.

~~~
astrec
Sage advice.

If you do decide to pursue this deal try and take the hit on the upfront and
not the ongoings.

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theyoungceo
OK guys. I have to admit that I was planning on meeting the price and driving
down to the customer site this morning to hand deliver it, but upon
reconsideration with several advisors including the great ones here, I'm not
going to do it. We do have the best product in the market at a very fair price
by all measures, and our success shows that. The client in question has
already admitted that he knows the funding people are making a mistake and
they are probably going to eat it, so I'm going to emphasize the differences
and let them stew in their own decision. We are all but guaranteed to win in
three other sister entities to this one, and if we have to let one go to hold
our line then that's life.

I owe you all some karma lollipops, they will arrive overnight tomorrow.

~~~
m0nty
Just make sure you walk away graciously and make it clear you'll still be
there when you're needed. Keep sending them your newsletter or other promo
material with details of your latest features, case studies of other satisfied
customers, testimonials, etc. If these people are digging a hole for
themselves, make sure you're the guy who has the rope ready when it starts
filling with water ;) These guys could end up being one of your most loyal
customers ever, if you save their asses later. Good luck.

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MaysonL
Can you easily downsize your product to where it's substantially less than
what X, Y, and Z will want, but more than what one-man Joe is offering? This
would also give you the possible future opportunity of selling more features
as add-ons.

~~~
theyoungceo
We are looking into a different product line that has reduced features for a
different type of application in the same vein, but when that option was posed
to our decision maker he said he wanted all our functionality and wasn't too
interested in a stripped down product....

~~~
SwellJoe
I bet he'd also like a pony, and Christmas twice a year.

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petercooper
Be honest with this potential client. Don't act or sound bitter or jealous at
all. Totally accept their decision but just point out that if they need you at
all in the future, you're just at the end of the phone.

If your competitor is as inferior as you say, those agencies might come back
to you for advice on how to "fix" the problem caused by the competitor. Then
you can charge more and still look helpful.

This happens a lot in other industries and I have personally benefited from it
myself. You get to look good, charge more, and providing service to a customer
that was previously shafted is easier than one demanding perfection from day
one.

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dcminter
I have no advice, but this worries me:

"The product [...], has zero features other than what we consider the one,
basic, bare minimum feature of the product space."

That sounds like a well targeted product to me, however you feel about it.
Could you produce an economy version of your existing application that only
had that feature? Then you would be in a good position to upsell later on.
Even if the time scales make it impractical for this bid, it might be useful
if you come up against this guy again later.

~~~
TrevorJ
depends on how you define features. For instance if you say that a firewall
has a single feature of keeping your network safe then maybe not, but in
reality, there are lots of sub-features involved in that that may not be
irreducibly complex.

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fdschoeneman
A couple of short pieces of advice. This is a tactical sales problem, not one
of strategy or positioning. It sounds like your strategy is just fine. Do your
best to at least slow down his decision cycle (keep him from making a bad
decision for his organization) which prevents your low-flying competitor from
early success. You can do this by offering a very limited version of your
product for him to review that matches your competitors features, or ask to
delay the decision until you've had a chance to show your product to other
stakeholders. There's some chance the buyer is simply using the other company
as a negotiation tool to get your price down.

In which case, ignore it. Find the customers who see their problem clearly,
and why your specific solution takes care of their needs better than anything
else, an concentrate your efforts on them.

Also, if you haven't read SPIN Selling by Neil Rackham, consider doing so when
you get some time.

Good luck!

~~~
skmurphy
Not enough data to determine if it's a tactical problem or a strategic
problem. It would be interesting to hear the "tiny startup competitor's"
perspective. They sound a lot like the early cisco. If the poster can't find a
feature/benefit that segments the market away from this low cost provider so
that his feature set no longer qualifies, it's not clear what stops them from
taking this win and continuing to prosper at his expense.

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iamelgringo
You'll never win with a price buyer. You can cotton to his needs, but they
won't stop until the price is free.

It sounds like you are selling to enterprise and/or government. The normal
rules about being the low cost provider don't apply like they would in the
consumer market. Joe Spolsky has some interesting tidbits on that one. Every
time they increased Fogbuz's, their sales went up as well. There's an aura of
price==quality in enterprise software. Instead of offering a product with less
features for a cut-rate price, introduce a deluxe version with a couple extra
features and double the price. You might be surprised.

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kashif
Here is what I would do. I would take the contract at a lower price and ensure
that the other guy is history. This is good because

1\. It breaks the competition's back. And leaves no room for him to claim
territory in the future.

2\. With the one man competitor dead you can start increasing prices, clearly
in your market there is room for higher pricing. And spend your energy on
tackling the rolls-royce and whatever other car you got going there..

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josefresco
"I can meet their price with little margin, and it's not a big deal, we'll
still make money on the up-front but we'll make a lot less than usual on
ongoing (not a problem)"

Industries with a high enough profit margin that they can still make good
money even with discounting heavily are doomed for extinction, and replacement
by someone smaller, younger and hungrier. Good luck and enjoy your success
while it lasts.

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skmurphy
No one ever went broke selling at a profit. If you let this smaller competitor
win he now has a bona fide win against you he can cite the next time you run
up against him. If X, Y, and Z are close they will also be influenced by the
win. The government buys on price, something to bear in mind if you want to
continue to play in that market.

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wehriam
Perhaps you could lower the initial price, raise the support contact cost, and
add a sunset clause. This may appeal to those in charge of funding (who you
mention are absent anyway) by shifting dollars around. More diligent clients
would see this is not necessarily an attractive alternative and opt for your
more traditional pricing model.

~~~
trevelyan
If the product and price are reasonable, he should stick to his original
pricing. People who need the service will come around as long as it is not
terribly expensive, and you avoid perception problems if you change your price
wildly.

The reason to be concerned about the competitor offering a cheaper product is
if: (1) it will turn into a better product, or (2) it works _differently_
enough to make your business model or product obsolete. Unless either of those
conditions are met, this guy should focus on growing his own business rather
than trying to crush someone else.

~~~
wehriam
This seems like a low-end disruptive innovation. Neither 1 or 2 have to be
true for the upstart to become a problem. I don't advocate over-allocating
resources towards a competitor who may or may not be a threat. But submitter
is already losing business. It may be time to be aggressive.

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heyadayo
Sell this customer a crippled version of your software. Just make it slightly
better than your competitor. This 1) Provides a clear future sale when this
customer wants to upgrade, and 2) Allows you to sell at your standard rate to
X, Y, and Z.

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maxklein
Drop the price sensitive people. Those guys suck up your time and make the
entire business no longer fun. The guys with money are always there for follow
ups, upgrades and so on.

