Subject: Revenue and business models
From: DV Henkel-Wallace <gumby@henkel-wallace.org>
Date: Mon, 12 Jun 2006 20:29:54 -0700

Thanks guys for speculating for what I might or might not have said.   
I have a moment to speak for myself.

First of all: how you want to run your business or how you want to  
keep your books doesn't matter a whit -- to your customer.  She cares  
about the same things you do -- or ought to:
  - cash flow
  - keeping the lights on
  - what her customers want
  - how to get it to him
  - how to keep the competition at bay.

So sure, you're thinking of various cool things, licensing models,  
whatever else.  Maybe your customer thinks about this stuff in her  
spare time.  But it ain't likely.  So perhaps it's time to stop  
pissing around about the morality of patents or some magnitude 10^-6  
aspect of some licensing model.

Here's how things look like to your customer (here I use a device  
manufacturer since that's the example on the table, but this  
generalises):

> From: <busy-entrepreneur@newco.com>
> To:  <advice-to-the-lovelorn@henkel-wallace.org>
>
> Dear Gumby:
>
> I'm making a fuel-cell-powered pocket lipstick dispenser that I  
> imagine will sell 1MM units at $100 each (retail).  My parts cost  
> is already something like $25, which really leaves me about $10  
> profit since at best, and only for the first six months.
>
> My distributor will pay me $55 each but of course he pays slowly.   
> After four months he'll try to lower the retail price and want me  
> to eat less as well.  And of course I will have to eat some, if not  
> all of the risk if the product doesn't sell -- I'm unlikely to be  
> paid until _he_ is paid.
>
> Of course I love my customer (the wholesaler) so I know he will  
> have to pay for slotting fees to the retailer, some (or all,  
> depending no segment) of which I'll have to eat.  The retailer will  
> may demand packaging changes or something else after I've already  
> committed to tooling and preordered some inventory which I will now  
> have to scrap.  I have to pay my parts suppliers up front because  
> with only a million units total volume I'm small potatoes to him.
>
> Oh and that $5 is gross profit has to pay salaries, development on  
> the next generation etc.

How much the crap discussed on this list appears above?

She continues,

> So now this little company FSco (a funny name, don't you think?) is  
> going to supply me with the web server used to control my .  They  
> want $300K.  That's $.30 per unit if I make my sales target!   
> Worse, it's $300K up front.  My accountant tells me I have to  
> capitalize it, but since it's a  tooling cost all that cash will go  
> out the door before I see dollar one of revenue.  And so if revenue  
> comes in slowly I might not have enough money to pay my staff.
>
> On the other hand Frobco down the street tells me that they will  
> provide me a web server for $100K of customization and then $.28  
> per unit.  If I'm willing to go up to $.36/unit they'll do the  
> tooling for free.  Since the bank charges a little company like me  
> 15% interest, Frobco's a lot cheaper.  Maybe I can push on them to  
> lower their price later when my customer lowers the price he's  
> paying me.
>
> I am planning to go with Frobco, but I'd like to have more cash in  
> my pocket at the end of the day (plus the FSco salesperson's kinda  
> cute too).
>
> Please, can you contact FSco and convince them try to understand my  
> problem?  Or do you know a place I can get FSco's product for less?
>
> Signed,
>
> the-future-Wilhemina-Gates
> busy-entrepreneur@newco.com
>
> PS: I heard about his Open Source stuff that I hear can save you  
> money.  My engineers currently use Linux which works great right  
> out of the box.  But do you think we should switch to that Open  
> Source stuff?  I hear it's the coming thing.

So you guys on this list can whinge about how I might or might not be  
proposing royalties, but that's how the world looks On The Other Side  
of The Table.

Meanwhile, I'm going to have dinner.  I hope this message is worth  
the time it took to write.

-g