Subject: Re: Irrational customers?
From: "Stephen J. Turnbull" <turnbull@sk.tsukuba.ac.jp>
Date: Wed, 16 Feb 2000 13:16:56 +0900 (JST)

>>>>> "Ben" == Ben Tilly <Ben_Tilly@trepp.com> writes:

    Ben> Brian Bartholomew writes:

    Brian> For years I've been championing a business model whereby
    Brian> software vendors use simple accounting, reveal their profit
    Brian> margins, and compete on price and value.  Now I'm wondering if
    Brian> that model is realistic to sell to *any* non-trivial group of
    Brian> customers.

    Ben> Why should a customer care what you made in profit?  They
    Ben> care about what they expect to get and what they expect to
    Ben> pay.  The rest is irrelevant.

<IRONY DEGREE="painful">
Of course as an economist I must agree.
</IRONY>

Unfortunately, reality is otherwise.  In fact, customers do care about
your profits if you tell them.

People really do care about "getting ripped off", ie not getting their
fair share of the operating surplus.  This is why people think paying
$10,000 per year for an AIDS drug that keeps them living for the year
is a "rip-off": it only costs about $100 to make in the factory, plus
a couple hundred more to amortize testing and product-specific R&D.
They don't care about the billions paid to develop products that don't
make it to testing, let alone pharmacies.  "That ain't workin', that's
the way to do it, you just play your guitar on the MTV" as Mark
Knopfler sings.  Best bet is not to tell them....

Brian, I've never liked any aspect of your business model.  With the
obvious exception, but "competing on price and value" is what
everybody, except the most brazen of Daniel arap Moi's buddies, claims
to do.

Reporting profit margins?  You're asking to be called a rip-off.
Shit, man, _you_ call others "rip-offs" all the time.  It's really
none of the customer's business, and it distracts him from what really
matters: what _he_ pays and what _he_ gets.

"Simple accounting" is cheating your customers.  It means they pay
more (of your) corporate income tax than they need to, you're not
reducing costs as much as possible.  And overhead allocation is just
plain not simple.  Sorry about that.

"Compete on price"?  Then providing accounts to your customers is
irrelevant.  I'm confused.  Or maybe you are?

"Compete on value"?  Who decides what value is?  _The customer doesn't
really know until he pays and demands service._  So the supplier
_must_ tell him.  That's what honest marketing is about.  Of course
there's also dishonest marketing, and the distinction is extremely
hard to draw at the margin.

Some marketing is obviously dishonest; but Microsoft, to choose the
salient example, rarely stoops that low.  It's dangerous, you can get
sued and lose reputation if you tell lots of outright lies.  Note how
quickly they got caught when they started lying to the court.  They
are not accomplished liars; they are superb marketers, who pick those
parts of the truth that fit their beliefs and needs.

Just like you do.  Just like we all do.  (Not that Microsoft marketers
don't have more elastic standards than those of us on FSB, but that
just means we make fewer embarrassing mistakes in truth selection, and
with luck those that we make are less embarrassing and need less
actual lying to cover up.  But we all make those mistakes.)

And before you trot out that old "the _whole_ truth" saw, remember
that most people have neither the need nor the patience to listen to
the whole truth.  Eg, in the case of software, "knowing the whole
truth" means studying the source, right?  So you advocate that
marketing should mean taking out full-page ads in the San Jose Mercury
News Technology Section in which you publish the whole source to your
product, do I get that right?

Finally, you sell business models to _investors_; to customers, you
sell _product_.

    Brian> Ah, experimental evidence.  Recently I've been trying to scare
    Brian> up some programming work involving EMC, a Linux-based machine
[...]

    Brian> EMC is based on real-time Linux, and the install process is
    Brian> ugly.  To a non-computer-hobbyist, it's a major stumbling
    Brian> block.  I proposed a "Brain-Dead Install" cd with as much stuff
    Brian> pre-integrated as possible, to sell 100 copies at $20/each.  I

$2000 _gross_?  Man, I give that much to my church every month.  Half
will go to pay your tax accountant.  Why not just do it and call it
charity?

    Brian> received 15 solid customer leads at a price of $20.  When
    Brian> people started reading the rest of my post, wherein I talked
    Brian> about the rate I was earning to do this and proposing to do
    Brian> more work at this rate, the momentum stopped.  It was the same
    Brian> old "you should volunteer your time for our needs" attitude.

The same attitude that you are yourself a leading exponent of, as far
as I can tell from your posts.

    Brian> But yet, these same users still buy highly-proprietary packages
    Brian> that are, as far as I can tell, a much worse deal -- but the
    Brian> costs are hidden.

    Brian> Are the customers that irrational?

Yes.  (Some of them.)

    Brian> Are the customers rational and I'm not appreciating how?

Yes.  (This is not news.)

    Brian> Should I give up and give them what they want, software on
    Brian> terms I wouldn't want to buy it on?

Not if those terms involve fraud on your part.  Otherwise, yes.

When I go out to buy a pair of basketball shoes, I demand that they
fit well and can be worn for at least a year.  (Used to be 6 months,
but I've slowed down in my old age.)  But I don't see why people who
can't dribble a basketball, to whom those shoes are a fashion
accessory, should demand those same things.  They don't even need to
know....

    Brian> Where are the customers who understand TANSTAAFL, and prefer to
    Brian> shop smart?

In business.  Hobbyists are generally more interested in bells and
whistles, and in hanging out with people who share rather than exploit
them.

The problem with your proposal, Brian, is that it smells like one of
those "professional fundraisers" that comes in, runs a charity funding
drive, and takes 90% of the proceeds.  I don't see anything wrong with
you trying to make money off your hobby.  And given the cost structure
in the industry, 90% of gross sales is a fair share for labor,
management, and intellectual capital.  But you can either be a
business, or a hobbyist.  Not both.

After you've been in business for a while, you can probably recover
your hobbyist credentials with most of your fellow hobbyists.  But
you'll need to do a good job on price and value, _and_ make some
charitable contributions beyond that.

    Brian> Is there some secret group of capitalists hidden off in
    Brian> a mountain valley somewhere, who I would rather sell to? 
    Brian> :-)

No.  Capitalists don't share your ideals, and you clearly care that
those you do business with share them.

-- 
University of Tsukuba                Tennodai 1-1-1 Tsukuba 305-8573 JAPAN
Institute of Policy and Planning Sciences       Tel/fax: +81 (298) 53-5091
_________________  _________________  _________________  _________________
What are those straight lines for?  "XEmacs rules."