• http://twitter.com/markturansky Mark Turansky

    Why not start out with Company B but continue to grow your product, improve its quality (so as to decrease support costs), and gradually devolve it away from boutique towards generic and turnkey (Company A)?

    Company B can use ongoing cash flows to build the product that turns them into Company A, because the sunk costs of development are behind them.    This only works, of course, if the market is large enough to support a Company A.

    This approach also requires a maniacal focus on quality because the support costs for Company A are certainly going to be higher than Company B. 

    • http://blog.asmartbear.com Jason Cohen

      You’re assuming B is boutique as opposed to just high-end.  And that B’s costs are “behind them” while A is still having to develop new stuff.

      Support costs for expensive products are often not due to low quality, but complexity of use and deployment.

      It’s also not generally true that support costs for Company A are higher.  CloudFlare has 100’s of 1000’s of customers, many paying, and have 4 tech support people, for example.

      • http://twitter.com/markturansky Mark Turansky

        I suppose I will see about the complexity of use and deployment because I am currently developing software for Company B but with hopes of becoming Company A!  At least, with a tiered pricing model so that I can attract more customers at the lower price point but with the same features developed for the higher end customers.  I understand your point and it is well taken.

        My argument about quality is that 4 tech support folks cannot handle hundreds of thousands of customers if the product was mission critical to the customer yet buggy or required constant data fixes or the like.  A generic product of high quality can scale to huge numbers because the support team is dealing with fallout at a massive scale.The team I’m working with is small and we a) can’t piss off our premium customers with a crappy product, so quality matters and b) if we want to scale beyond premium customers, we can’t be buried in support work from a crappy product.Either way, quality matters to both Company A and Company B, but I imagine handling fallout and errors at the small scale of B is easier than the large scale of A.

    • Guillaume Pernette

      I’m on a B company and working hard to turn it out on a A company (with a different product). The revenues from B feed the whole team and we have some spare time to work for the A.

  • http://www.digitalocean.com/ Moisey Uretsky

    I have experience with both A and B and I can say that a B company you end up with too much of your revenue tied to a small percentage of customers. It’s very unlikely that they will all be paying $1,000/mo, as time goes on those larger customers become larger.

    Eventually company B will have 30-60% of its revenue tied to 2-5 of its customers, which means that if anything happens to any of those customers it can very quickly swing the company from profits to losses.

    With the Company A you are insulated from that because all of your revenue is split across so many users that any of them leaving doesn’t create any noticeable effect (Assuming the product doesn’t suck and people leave in droves).

    The other thing is that if you don’t have the rolodex or you have exhausted it getting customers at a higher price point is always harder so it’s very unlikely that growth will be sustainable or predictable, while getting customers at lower price point creates more predictable growth.

    Additionally word of mouth works better for smaller accounts because the people that switch to  you have a very low barrier to entry, they dont have to switch large enterprises over. With the higher cost product you are servicing larger customers that may already use another product and even if yours is better the cost of switching for them can be quite high, again reducing the likelihood of them switching.

    Also as mentioned it’s alot faster and easier to gauge how quickly company A will grow because it requires so many more users to generate the same amount of money which means that customer acquisition should be natural and have a very predictable pattern. While with company B you might go a month without getting a single new customer.

    It’s best to be an A company and grow your product and feature set overtime to allow to larger and larger customers to transition to you. Then you get the best of both worlds over time.

    I’d always go with an A company, its faster to build, its faster to test, and it’s quicker to see if you have real traction.

    If the product costs $1,000 that means it’s more expensive to build so it will take you much longer to develop it, test it, and acquire the first few customers.

    • http://blog.asmartbear.com Jason Cohen

      I generally agree, except having build both kind of companies, it’s just not true that B necessarily has 3 customers representing 30% of revenue.  Smart Bear had no such customer or even small number of customers, yet our average initial transaction price was $12,000.

      Also although company B often has initially higher overhead, it’s possible that with large price points comes large margins, and in particular large absolute dollars of bottom-line profit.  Again, Smart Bear was that way.

      WP Engine is more like A, although since our customers range from $29/mo to $10,000/mo, we are in fact a blended model.  Even so, it’s not true that 5 customers represent even 10% of our monthly revenue, so it appears (so far!) that “a bit of both” is working out in our case.

    • Pat

      “If the product costs $1,000 that means it’s more expensive to build so it will take you much longer to develop it, test it, and acquire the first few customers.”

      Maybe, maybe not.  A $1000 loudspeaker doesn’t take 100 times as long to develop and test than a $10 loudspeaker (hmm, does such a thing even exist?).  For the most part, more expensive speakers are simply assembled from more expensive parts.  (I think it would actually be a fantastically hard engineering problem to design a decent $10 loudspeaker!  There’s a huge potential market awaiting you if you can do it, though.)

      Anyway, this hypothetical was about monthly income, so it’s a service, not a product.  Are there services that cost $1000 a month but don’t take long to develop or test?  Probably.  Perhaps renting expensive equipment to companies, like cars or very large digital projectors or something.  Again, the components (i.e., cars) are expensive (compared to, say, a coffee machine rental service), but it’s not necessarily that much more complex to run a business around them.

      I agree that “A” is a better model ($1000 is a lousy price point: too high for almost any consumers, too small to justify salesmen for corporate accounts), but I think that “B” is feasible if you have cash that you’re willing to trade for time.

      • http://www.digitalocean.com/ Moisey Uretsky

        There are some A companies that can start off with a large profit margin and perhaps a short time to develop, but the open market will correct that rather quickly. Competitors will see this company making money and move in. If in fact it was short to develop they can immediately compete on a lower price point to get customers and the price will be driven down. 

        At the end of the day the cost of production, whether it be time, materials, etc, ultimately dictates a large portion of the price, otherwise a high margin will attract many competitors. 

        That’s why overtime most industries and products become commodities because the cheaper alternatives improve in quality and are offered at a lower price and the company that start off with a higher margin will have to adjust their prices to stay competitive.

        The only other scenario is to have a niche market that is so small and tiny that it really does go unnoticed, but in that case the ultimate growth of the company is limited so while it can be even extremely profitable it won’t grow beyond a certain point.

        In part its the innovators dilemma. Taking the specific example of a $1000 speaker and a competitor that manages to make a decent speaker for $10. The $10 speaker will sell and attract a lot of revenue because there are more people will to spend $10 for a decent speaker. Overtime this company will improve its product, because as mentioned sometimes the simple things really are the hardest to get right. As the $10 speaker improves in quality some of the purchasers of the $1000 speaker will convert down to the cheaper product, especially with that large of a price difference. Overtime the $1000 speaker will become irrelevant. 

        Either way it’s an interesting discussion. For me personally I would prefer a company that sells the $10 units and has users that may need to purchase more than 1. In that case you are still selling a small product but can have a customer base where some customers can pay $1000, $10000, because of the higher quantity. 

  • Pablo

    You aem to have ommited one big potential risk of B. if one or more customers leave, the impact on revenue is much larger. If you lose a few $10 customers, you don’t feel it. This is the kind of company i want.

    • http://twitter.com/jordanvisco Jordan Visco

      On the flip side… if you gain one more $10 customer as A, you don’t feel it. If you gain one more $1000 customer as B it makes a big difference.

  • http://twitter.com/sattler360 Michael Sattler

    Company A all the way. One of the trends not mentioned is the fact that the operational cost of supporting customers should always fall, from a variety of technological and process efficiencies. So if you can make $1 on every $10 customer today, you should be able to make $2 tomorrow.When I started in the website hosting industry, experts told us that it made more sense to find a few “elephants” than to go after lots of  “squirrels.” Twelve years later, the shared/managed space is booming, and companies that can profitably support millions of squirrels are raking it in.

  • http://www.innovativedisruption.com thinkdisruptive

    The fundamental, and most serious flaw with company B thinking is that in the long term, there is no long term. With a small number of clients, especially compared with a company in the same business who has a large number of clients, you are at huge risk of customer defection, if for no other reason than price. More importantly though, customers are generally aware when there is an almost-as-good product for an order or two or magnitude lower price, and they’re also aware of who has the biggest market share. Both of these bode ill for company B.

    Moreover, when the market changes (and it always does) or you are faced with a disruptive newcomer, company B has no chance — one or two customer losses and they’re toast — whereas company A has a base that will tell them about developing trends and requirements, and to sell upgrades/add-ons to. A $10/month add-on sold to 10-15% of the customer base (not an unreasonable expectation in the first year) means 10-15% growth in monthly recurring revenue without growing the customer base. The likelihood that company B could sell a $1000/month upgrade to one of their 10 customers without losing any in the year is a total crapshoot. So, company A can defend their position, and has a reasonable expectation of surviving at least 5-10 years, whereas company B will be lucky to survive more than a couple of years, and will always feel vulnerable (that doesn’t sound like a fun small company to me) to a single shot across the bow striking its target.

    So, the very reason that an entrepreneur may prefer to work in a small lifestyle business because it’s more fun is a fallacy, unless the solution on offer is supporting a tiny niche that no one else is likely to be interested in targeting, or for which a cheaper alternative will be “good enough”.

    The two ebook articles have no relevance to this, because both of them are one-time purchases, and even between them, it’s impossible to compare because the books had different content, different perceived value, different promotion/visibility strategies, etc. — there was not a direct comparison of two different ways of selling the same product, and one was not a substitute for the other, sold to the same target audience. In other words, even if they were offered at the same price via the same promotion strategy, the likely demand for the two products was different, so making more money by selling a lot fewer copies isn’t proof that this was a better approach. I’d also hazard that Sacha sold a lot more services and has more continuing traffic to his site because he sold a lot more books — i.e. he got huge marketing value, far in excess of the $2,000 difference in total sales.

  • http://matthewritter.net Matt Ritter

    Great analysis!  Two responses:

    1) On what order of magnitude can an A-style business owner expect to optimize their funnel and support?  The quote:

    “If the cost of customer acquisition is 10x the monthly revenue or monthly revenue is 1/100th of where it should be to sustain the operations of the company, then the argument of “it gets better over time” doesn’t work”  

    Makes sense as an outer bound, but I’m curious how you’d draw the (admittedly fuzzy) line

    2) I just wanted to explicitly connect your boiled down conclusion to the common “Rich Versus King” dilemma, as outlined by N. Wasserman:
    http://web.mit.edu/iandeseminar/Papers/Fall2006/Wasserman.pdf
    And addressed by J. Cohen:
    http://blog.asmartbear.com/rich-vs-king-sold-company.html 

  • http://twitter.com/JosephPutnam Joseph Putnam

    I think it totally depends on the company that is being started. If it’s a service company, 10 customers that pay $1,000 is much easier to manage than 1,000 customers that pay $10. Yes, I understand those numbers were based on widgets, but the point is that the type of business makes a big difference for this, especially when the acquisition cost of new customers is very high.

    With all things being equal, I prefer the premium model over discount. I’d rather be Nordstrom than Wal-Mart, and I’d rather be Apple than Dell. Yes, all of them are very large and very successful businesses, but I’d rather be in the business of providing premium products than playing price wars that make my product a commodity.

    That’s my two cents.

  • Max

    Ok, there seems to be a lot of support for company A… However, you forget that larger clients take MUCH longer in a decision-making process, making them far more ‘sticky’ than small customers.

    Example: the university I teach at bought an eLearning product 10 years ago that was already bad to begin with. Now, finally, and over a decade and hundreds of meetings later, they’re switching to another product.

    Needless to say that the eLearning company made several 100k each year out of this university (and they had tied in many more of these slow-acting, dinosaur-like clients).

    On the flip side, it’s super easy for small customers to change their mind and leave. Heck, they don’t need to go through 50 committees first!

    So I argue that due to the smaller opportunity cost, it may be far quicker to lose 500 out of your 1,000 customers (company A) than 1 out of your 10 (company B).

    • http://twitter.com/markturansky Mark Turansky

      I think that depends more on the mission criticality of the product than the price.

      For example, we use Unfuddle for ticket tracking and integrated source control.  It is inexpensive and easy to use.  They even provide a data dump for all tickets, commits, etc. for our entire project history.  Despite this, the switching costs are high as it would significantly disrupt our entire organization.  I can’t imagine a product so significantly better to overcome the switching costs.  It certainly wouldn’t be on price.

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  • Dale Ting

    Hi Jason, very timely dicsussion! We set the price point for the BBQ smoker (breezebbq.comm) I’m marketing much higher than the nearest competitor. We decided to go with the Company B route. Time will tell if it’s the right move, but by setting the price point this high 1. We won’t be losing money on each sale, 2. We differentiate ourselves from our competition, and 3. We can demonstrate to a potential buyer that our customers see this as a high value product. 

    • http://blog.asmartbear.com Jason Cohen

      You have a niche product and the idea is it’s the best, and you guys are the best.  A high price tag is consistent.

  • jeteye

    This is an EASY one…I ask any salesman who works for me one question:

    If you could sell $100 million and make $10 million dollars, or sell $2 million and make $1 million dollars what would you do?

    Needless to say 90% of the people answer the $100..which is the wrong answer? Why? Because it is about the Return or Effort and Profit..not VOLUME!

  • http://twitter.com/chadimoglou Chad Coronato

    Make for the millions, live with the masses.  Make for the masses, live with the millions.

    • Wei Yang

       You’re saying the exact same thing in your verses. I think the correct quote is:

      Sell to the classes, live with the masses.
      Sell to the masses, live with the classes.

      • http://twitter.com/chadimoglou Chad Coronato

         I like that one better!

  • Patrick Smacchia

    This post is based on the assumption that it must be A or (exclusive) B (and this is indeed true for young startup). However over the time, when the product gets mature enough, a company should strive to be A and B. Talking of licensed seats, a large client company can afford hundreds or even thousands of seat as long as the product ROI is worth it, while a small client company might need just one or few seats. My business started being an A, and hopefully after like 3 years of A, it started being as well a B.

    Also, concerning the support of A, my experience is that we always kept it pretty low by:
    1) invested a lot in live and embedded documentation, by never left a client question not turned into a piece of embedded documentation at the right location
    2) fix all reported bugs asap

  • Tim

    Great article.

    Contention (Sales/profit) = Higher/lower or less/more.
    The variation that you’re doing this for investment reasons (i.e. outside investment) is worthy of separate consideration because
    a) some people shoot just for that
    b) many people, don’t. For them this might be their passion and the best idea they’ll every have, so, I think this variable muddies the waters.

    On the surface, B is better when not using numbers. I’d MUCH prefer to support and own a business like this.

    When however you introduce the actual numbers, you change the equation for the plain fact that $1000 is a lot of money. Many SAAS products aren’t even close to that for “power” users.

    So, my thoughts are that when you have 10 x $1000 accounts you are very sensitive to lost customers.

    True, a $1000/month investment by a customer means you’re providing extraordinary ROI for them, there are no (worthy) competitors, or a combination of both.  By dint of this you have probably have really good lock in and loyalty.

    Even in a recession, you’re probably going to retain your customers as they themselves probably aren’t too price sensitive and/or you’re providing huge value.

    A price signal like that (assuming profitability) almost guarantees competition into the space.  Of course that means you should keep innovating of course to ensure market leadership.

    Looking at the low price, you are much less sensitive to lost customers and at that level you’re really looking to minimise support, have huge automation, not connect with customers directly etc.

    It’s a great article, and I’m inclined to choose B, but boy you’d want to have a kick butt product at that level. Not considering prices, but looking at orders of magnitude difference, e.g. $5 V $50 V $500, then for me, B stands up to scrutiny, assuming you want to continue to run the business.

    If your goal is to BLOW UP and cash out, make it free.

  • http://www.fasciagraphics.co.uk/ Derekdonnelly

    The maths is interesting but sometimes, as you say it boils down to what the individual who started the company feels comfortable with. A friend of mine has his own B style company but also owns a large chunk of an A style. He really is getting the best of both worlds!

  • http://www.microsourcing.com/ MicroSourcing

    While Company B looks like it’s more profitable because of the amount that its few clients are willing to spend, it’s also at higher risk because the disappearance of one customer could translate to a larger loss of profit.

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  • http://www.salesprocessengineering.net Justin Roff-Marsh

    The greater the price you charge, the greater the incentive for others to enter the market and compete with you — using the easiest promotional tactic of all!

    This is why the US chose to give away GPS for free.

    If your high prices convince a competitor to invest the necessary start-up costs then once he’s in your market, those start-up costs are sunk — meaning he’ll compete with you on a marginal basis from that point on.

    If you can be profitable at $10 and you sell your product for $1000, you’d better have huge barriers to entry to protect you from this. Few organizations do.

    Justin

  • http://www.thewebcitizen.com Ilias Chelidonis

    Hey Jason, i would go for higher priced products sold to fewer number of customers. My experience says that low priced products attract (most of the times) customers who think they can own the world with $5, very demanding, usually abusing the service and more likely to switch to other alternatives very fast. Whereas, customers who pay more tend to have a better undrestanding that quality comes with price, easier to handle that they just want their job to be done.

    As you clearly said, it all depends what your vision is and how you want to position your business. Not to forget that operating costs are different in both cases.

    I would go for option A if i had a product with low running costs e.g Hootsuite but with B if i had a product that provides high added value e.g Hubspot.

  • http://www.facebook.com/vprelovac Vladimir Prelovac

    I prefer the company B model for one main reason – support.

    Support is about the only thing that isn’t scalable (even outsourcing to India isn’t scalable by definition). Having fewer customers allows you to have very small support staff.

    Another benefit is that you as a CEO have more time to spend directly talking to your customers.

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  • Brian Johnson

    I’m having to consider this debate for a startup bootstrap I am working on. The market is limited, but is willing to pay a premium for good service. For me A sounds more appealing because it sounds more exciting. However, B sounds like I could really dig in and offer something specialized for a small group of needy customers. I could feel pretty good about myself pulling that off.

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  • http://stackoverflow.com/users/260080/marco-demaio Marco Demaio

    Jason, I finally found the
    time to reply to this article, I’m really surprised about the
    conclusion you make:

    “If you want
    happiness and fulfillment from a small company, strive for B; if you
    want to maximize growth, influence, and financial value, strive for
    A.”

    But it’s actually the
    exact opposite.

    – Company B sells websites
    at 1000$ each to 30 noisy customers, that are always more and more
    demanding and less and less willing to pay.

    – Company A sell domains
    and emails at 20$ each to 1500 customers.

    They both make 30.000 $ in
    revenue per year!

    But the owner of company B
    has no life, customers calling in asking for the impossible and
    thinking that he asks always for too much money. And the poor owner
    is so afraid to loose his puny numbers of customers that is always
    there kissing their …

    While the owner of company
    A can do what he really enjoys most, he continuously improves its own
    software to better manage thousands of customers (orders, invoces,
    tickets, newsletted…) , and if one of the customers is too noisy
    and calls in complaining too much for no reasons, the owner can
    always answer to him: “Well, well, we are probably not a good
    choice for you, here is your 20$ refund and I wish you a nice day!”

    • http://blog.asmartbear.com Jason Cohen

      Why are you assuming the 30 customers are demanding and about to quit and the 1500 customers are placid?

      In fact, there’s always a small set of vocal customers (both happy and unhappy) at any time — out of those 1500 you will have plenty to keep you occupied.

      On the high end, it’s also very common for people to buy the tool and barely use it and never call.  This isn’t the ideal for your business because they’re not engaged; it’s also very easy money as anyone in the enterprise space will tell you.

      If you’re making the point that angry, demanding customers who are on the verge of cancellation is not fun, and happy customers who don’t need anything in particular from you is fun, then I suppose I agree.  :-)

  • http://www.venturehuntli.com Christopher Erckert

    Great breakdown Jason and I think the wrap up says it all. I feel most people fall victim to trying to do both, when they only have the resources to do one.

  • http://www.itarsenal.com/ Rob

    I love this discussion for it’s intelligence and perspective.

    Company B seems like more hands on to manage, and likely more linked to a small teams particular presence and skills, where Company A you’re forced to build documentation and your system to allow more automation and flow without needing “Jimmy showing up to work today” but you have to be near perfect or your users can flair up at any moment if something goes wrong.

    It’s a tough call honestly. I’m an IT manager, I don’t look forward to being tightly linked to my users and systems, I’d like to feel that I can get away and free myself and Company B seems more appealing to me for that. A user comes, a user goes, I know the system can handle it and I can “tinker” with the marketing, or add a feature and it may provide big results.

    If a user “goes” with Company B, it’s a big deal, but you probably know exactly why, and what to do next time.

    I’m testing both in my small fledgling online business endeavor in the forms of monthly ongoing service that’s higher priced vs. information products with an over arching theme.

  • Nalonline78

    I started a consulting business in 2011 and had this very choice to make. I have searched for answers that was not very easy to find, however because I saw my self operating in a small market I decided to do both.I would call this option C, l devised products and services that would take advantage of either option, this certainly is not easy but I continue to work at it and I think with proper planning it the way to go for small businesses operating in small markets. Thank you for your insight and I would love a reply.

    • http://www.salesprocessengineering.net Justin Roff-Marsh

      I think it’s worth reflecting on the lifecycle of the product too.  Over the years we have moved from pure consulting to consulting as a managed service (subscription model — lower fee but no fixed term) and ultimately may end up as a software company (SAAS) with consulting as an add-on.
      It’s a little like riding a wave, lag too much and you get eaten by organizations that ‘commoditize’ your product before you do; and get too far ahead of yourself and there’s simply no market to sell to.

    • http://blog.asmartbear.com Jason Cohen

      At WP Engine we’re also taking your route C.  We have many customers paying $29/mo and some paying >$5000/mo.

      I think that can work — it’s certainly working for us.  As with most things in startups, you can do almost anything you want as long as you’re AWARE of the tradeoffs you’re making or consequences you’ll have to deal with.  In this case, an example is the heterogeneity of the customer base which might make support or marketing more difficult.

      • Nalonline78

        My challenge has been the deployment of resources. The customers at option A, expects competitive prices and instant point of sale solutions, while customers at B, demands my undivided attention and time. Providing solutions for both markets is a strategy but must thoroughly be thought out before committing. As my business began to pick-up I could see the challenges mentioned prior ahead. I would conclude that while targeting a smaller pool but high yield customers would lead to fast and quiet growth it come with the risk of just as fast decline if fallen out of favour with just a few customers. Option A looks to be more resilient once market share is carved out however staying on the pulse of what the market is looking for is necessary to stay competing.

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  • ds9n

    If a product cost same for A and B, then B is overpriced.
    If B provides more support and quality, then the price is reasonable.
    So both options are workable depends on what you provides in detail.

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  • Kezic

    Wy not both?

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