Subject: Re: Revenue and business models
From: Thomas Lord <lord@emf.net>
Date: Mon, 12 Jun 2006 22:14:32 -0700

Do you prefer Gumby or Mr. Henkel-Wallace?

Given that your customer is making an easily measured
number of physical gadgets, why wouldn't you offer a
contract that says:

   The price is $350K, payable in installments.

   It's $100K up front, the rest due over N months.

   However, included in this is a warranty which you
   must accept or we don't have a deal.

   Our liability under this warranty is limited to $250K.

   We guarantee you will sell X units a month for Y months
   starting from your first sale but no later than date Z.

    Our liability under this warranty is calculated as a linear
    function of the number of units you actually sell in a given
    time period and the only way you can collect our liability
    is by not making installment payments in the full amount.
    In other words, if you sell 500K units in the time we both
    thought you might sell 1M?  Then you only owe us $125K
    instead of $250K.

Now you have (a) perfect preservation of software freedoms;
(b) the exact same short-term pricing model as your proprietary
competitor;  (c) you give up long-tail licensing profits (or
ridiculous windfall profits) in exchange for being an easier buy
compared to proprietary competitors; (d) comparable but not
identical risk management to your proprietary competitors.

Oh... yeah, I was supposed to send this to you privately or else
go become a billionaire.   Sorry -- too busy filling out
the paperwork for chapter 7.

-t



DV Henkel-Wallace wrote:
> 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
>
>