New venture outsourcing blog

On my recent holiday trip, I noticed a strange thing- the tariff paid by hotel customers was based not on how they booked and which plan they booked under but by which country they belonged to. While I paid a lower tariff in Indian Rupee, most of the other guests, mostly non-Indians, had to shell out as much as 50% more for the same room. The logic goes like this- any foreigner, who is visiting India and wants to stay at a good hotel, must be reasonably well off. Moreover, they must be willing to pay what they will pay for a good hotel in any part of the world. While it sounds like a rip off, most hotels in India are overflowing with foreign travelers paying a higher tariff. It’s a classic case of what economists call price discrimination. 

Many pharmaceutical and publishing companies follow the same rule when they price their drugs or books differently in different countries. For example, a paper back version of most academic books in India costs significantly less than the same version in US. Since the company is able to recover most of the fixed costs from the higher priced markets, they are able to sell profitably even at the reduced process in other markets. This allows them to capture a share of the market that would, otherwise, would have been lost. 

What keeps it going is the inability of the product or service to leak back – buyers of cheaper versions not being able to resell into the higher priced market. Does your product or service lend itself to such discrimination? Are you currently able to maximize your revenue and profits through price discrimination? I can almost see 95% of the readers shaking their heads- it does not apply to me. I can’t do it. 

Think harder- think of new markets that you have not even thought of serving. If you are currently profitable and your variable costs are low enough, I am sure you can find another market. In the next post, we will see real world example of such opportunities. 

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We field a lot of inquiries about e-commerce specifically in seting-up a solution and optimizing an existing system.

Two recent (3/24/07) articles in the Business Technology section of the Wall Street Journal shed some light on this.

Elizabeth Holmes questions the need for a website. Of 500 small businesses surveyed, 57% in the services sector don’t have a website, 39% in retail, and 67% in Construction. The primary reasons given for not being online include costs of time and money. The question to be asked isn’t “can i afford to be online” but rather “can I afford not to be online” especially if your customers, competitors, partners, and investors are. Getting a website online, or setting up an e-commerce solution to start seling doesn’t have to be a large project requiring extensive capital investements. This can be done very economically with extremely good results. Even the bakery owner on the main street can benefit from a well thought out internet presence - 20 years ago what business would have said “I don’t need to be in the phone book, an unlsted number will be just fine”

Kelly Spors, on the same page of the same issue, under the Small Talk column, answers a question we often receive: “How can I set up a low-cost e-commerce solution (i.e. I want to start selling online)”. The best option is hiring a professional that specializes in small or new businesses and has the flexibility to grow as your venture does. The right partner will be able to increase your sales while increasing the conversion of site visitors to customers and increasing overall site traffic. If an entrepreneur is really set on bootstrapping and eager to do it herself, here are few suggestions:

Yahoo Merchant Solutions - for your domain name, some basic templates, a customer shopping cart, and many other features.

Go Daddy Group -again, for a domain name, hosting service, site-building, and a basic shopping cart

Both services are similar and are competitors. There are many others worth exploring including offerings by Siteground, Google, and others.

I think Ms. Spors and I agree that these are good starting points, not long term solutions as these generally lack originality, integration, or customizability your venture may require.

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A company that is ubiquitous in the blogoshpere made an an interesting announcement today. Technorati named Sandy Roberston to its board of directors…

So what?

Well Mr. Robertson is not only an active technology investor (not a shock for a funded company) and a seasoned financing expert (leading the IPO of AOL, Sun, and others) but most notably, he his Francisco Partners is a technology buyout fund. We’re left to speculate what this means for the future of Technorati? And what of the interesting relationship with Google?

Its pretty well known that Technorati is looking for a new CEO – what would you look for in the first non-founder CEO?

Ability to build partnerships?

Secure funding?

IPO?

Continue to Innovate:

Technorati Top Tags

or stay the course?

It will be interesting to follow this story and the shaping of this company…

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Two news items related to our work:

1) Wall Street Journal columnist Pui-Wing Tam writes about small businesses utilizing outsourcing:

“For many small businesses outsourcing tech not only reduces the headaches of managing complex technology, but also pares costs.”

We’ve been doing this very successfully for our clients, the drastically increased flexibility our firm provides has been particularly valuable - one such interaction is featured below:

2) Freshnews highlighted Inventure Global’s work for one of our promising clients. BrightCloud (with Inventure Global) is developing a highly complex software product that will change the way we look at web filitering.

Stay tuned, we’ll be featuring more clients, more successes, and more good work…

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We’re delighted to be featured in the latest edition of the Carnival of the Capitalists blog round-up. An excellent post by Chris Harris is part of this weeks CotC:

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A group of Harvard Business School (HBS) professors have recently published a research (http://hbswk.hbs.edu/item/4834.html) which suggests that Microsoft benefits from piracy in its fight against Linux. They argue that there are two types of pirates- those who will never buy Windows because its expensive and those who would have bought Windows use piracy because it is available. The first type of pirates are beneficial because they restrict the spread of Linux and are the sort of users who would have switched to Linux in the absence of piracy. The authors claim that their mathematical model proves that if there are enough number of the pirates of the first type, the value to Windows network is high enough for Microsoft to price Windows profitably and maintain the market share. The conclusion is that piracy is a very effective price discrimination option for Microsoft. Linux, on the other hand, has only one price point- zero- since its free. Any Linux vendor for the end user market will find it extremely tough to make any money since there is no way for them to make money. Even worse, people won’t use Linux even when its free because the larger installed base of Windows makes it more attractive compared to Linux. MS can also simply lower the price of windows to a point where it becomes unattractive to switch to Linux. The only way Linux can push Windows out is if some strategic backers (read governments in emerging markets and firms like IBM and Sun) back it.

While it sounds crazy, it may have major implications for software firms. If you are a new software firm challenging an established leader, you need to think hard and long about your marketing and pricing strategy. How are you going to price discriminate? Can the incumbent price discriminate better than you? Can you line up strategic buyers who can help you get established?

Answers to these and other, related questions can go a long way in helping you decide how to go about selling your software.

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Starting a new business is about offering your customers a new choice. Maybe your widget is faster, uses less energy, costs half as much, or maybe it’s easier to buy because it’s closer. Therefore, studying how people make choices is a big part of microeconomics, and it should matter to you. The trick with studying choices is that there’s a lot of psychology involved. In fact, often the psychology of how a decision is made trumps the objective merits of the product or service. Anyone who sells a general commodity product or service knows what I’m talking about (think insurance, air travel, and rental cars).

Consider this comprehensive study of 84 speed dating sessions in the UK by Michèle Belot and Marco Francesconi, Can Anyone Be “The” One? Evidence on Mate Selection from Speed Dating, which found that (unsurprisingly) people evaluating dates in 3 minutes rely heavily on certain easily observable physical attributes. Both men & women prefer their partner be young. Women like tall men, and men prefer thin women. No surprises so far.
The preferences for these prospective dates accounted for around 30%-40% (for males) and 45% (for females). The bulk of what matters - was the pool of potential partners in each “round.” Thus, it seems that being a desirable person improves your chances of being picked after a 3 minute date, but being more desirable than your competition in the same room you’re in matters more!
There was a very consistent theme that men & women would both select the same percentage of partners in any given around, regardless of the “attractiveness” of that group. Reinforcing the theory that people tend to compare alternatives they have in front of them much better than they can compare alternatives over longer periods of time or distance.

What are the implications of this for your business?

Most businesses try to avoid becoming a commodity by changing their offerings fundamentally to avoid direct comparison with the competition. This can be expensive & time consuming. Perhaps all that’s required is to change the way you sell it - to make your product or serve the big fish in a much smaller pond. Some examples where businesses have changed the context in which they sold their products are:

• Companies selling high margin warranties after selling you a low-margin product. Once you’ve bought the TV for a rock bottom price at the store, they have the opportunity to basically be the only ones selling you a warranty on that TV because you can’t buy a BestBuy warranty for a TV you bought at CircuitCity!
• Grocery stores often separate their organic foods from their nonorganic (and much cheaper) alternatives so that they require significantly more diligence to compare to each other. Moreover, the organic tomatoes are often next to even more expensive items which makes them “seem cheap” in that context.
• Autorepair places tend to charge less for standard services (say lube & break jobs) than they do when you take it in for a more customized service because once you’ve taken your car there - you’re only deciding whether to do the work or not - it’s less likely that you’re going to drive out of there and see who can do the custom job for cheaper.

Maybe your business can benefit from considering the context of your sales and/or marketing a little more?

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Recently, I was discussing the idea of management with a new friend.  I made a comment about my general inability in the management department and that I had made myself a goal to create a career track which didn’t require being focused on facilitating the day to day work of others.  The trick, I conceded, is to create this career track and still hope to feel about as accomplished and recognized as your peers who do decide to aim for the corner office (even if you don’t get there).

Being a world class manager in his own right, he presented what I would consider an excellent argument for why management matters.  As I heard it, the argument goes something like this:

A group of people acting as a “factory” (producing goods or services) are intrinsically productive yet pretty inefficient, so by applying even a little management you can “wring out” a good deal of productivity.  Contrast this with “bright ideas” which do nothing on their own.  Generally quite a few more people end up having to pour a lot of sweat, blood, and tears into turning that bright idea into to something a customer can buy. 

Thus, as a group, these “doers” can negotiate a larger slice of the pie, since the “bright idea” can’t sell itself to customers (even at a loss). 

Now, this is a pretty compelling argument, and it explains a lot of things that we observe in the real world.  After a couple days of kicking this around in my head, something occurred to me:

Doesn’t the same argument apply to capital providers?

It sure seems to me that “bright ideas” and capital are both enabling forces, through which work can achieve economic results.  Neither can achieve economic results on its own, but if you “just add labor,” and even better the management of that labor, you can achieve bigger and better things.

The more I think about it, the less of a difference I see.

Maybe the difference is as simple as: the capital providers are just better negotiators?!
 

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For local blog readers - were looking forward to attending the next San Diego Venture Group event; we hope to see you at what promises to be an excellent event put on by a great local  organization:

Special Headliner: Dr. Vinton G. Cerf
Chief Internet Evangelist, Google 

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