Winning on Product, not on Price
iamvictorio.us
iamvictorio.us
(a) Being able to compete on price means you have to be really hard-nosed about optimizing every part of your operations to stay lean. Good relationships with suppliers and competent execution of your strategy are paramount -- think Walmart.
(b) Competing on product means you have to be able to blow away your competition. It's easier the smaller your niche is. It's often about having a talented designer -- Steve Jobs, Shigeru Miyamoto, Notch -- together with a support team.
A lot of software is easier to compete on product, because (1) the zero-marginal-cost structure of the industry means that competing on price is a race to the bottom that will ultimately be won by open source, and (2) a lot of software is specialized.
Companies that win in (a) tend to be driven by business types who are good at the stuff they teach in MBA school. Companies that win in (b) tend to be driven by creative types and have a culture where the creatives' vision is the core competency, and the business side is seen as more of a support role. The good news for bootstrap-stage startups is, if you're in category (b), your business chops don't matter as much; the product can make up for a lot, if it's good enough.
So if your team is thin on business talent but has a ton of technical talent, you should use strategy (b). The reverse should use strategy (a) in theory, but in practice is rare among startups; business types who are good at what they do tend to pull down very good compensation, and mostly hang around companies that can afford it. Of course, if you're in YC or funded, you may have access to business-knowledgeable people; but getting to that point usually means you already have a great product and a lot of technical talent.
The lesson here can be even taken further. Most things that look like $0 actually have hidden costs. Nothing's free in this world.
The problem with open source is that there is little short term incentive to the developer. But with time I believe Open Source will be a strong option for many areas like what Khan Academy or One Laptop per Child is for education. So don't discount it!
For any significant software investment the total cost involves: initial purchase price; hardware; installation and (data) migration; integration with existing (or new) systems; ongoing support and maintenance; training and retraining.
In a lot of cases the latter dominate the initial cost.
But open source has a free market of maintenance industry, instead of a monopoly, which pushes prices down in general.
Think about health care, and nutrition, in my opinion the two biggest problem the world is facing. Innovation in those spaces can mean achieving the same at extremely low prices so every can have access to proper medecine, treatment, and food.
Apple's iPad is a great example where they got the cost of making a tablet (though arguably were the first real tablet) to an incredibly low price and have delivered the best and cheapest product on the market at the time. That said, look at Amazon's Kindle which is radically cheaper now a few years later. I suspect not many people would buy it over the iPad if it weren't so cheap. That's a great advantage for Amazon for selling but I think it says a lot about Apple that it can charge such a premium for its product that really anyone else should be able to make from the same core components.
I was really struck by this phenomena when I asked the day of the iPhone 5 announcement if a co-founder (who isn't an apple fan boy) if he was going to buy the new iphone. He said yes. I asked if he had seen the price yet or read all the new specs. He replied no. How many companies can convince you to buy a product you haven't tried or heard the price for? I doubt anyone would say the same thing of Samsung or Amazon products. Apple definitely puts out the best product and experience if you measure it from that perspective.
The flip side to this is that the iPhone's lost its marketshare to Android devices largely because of price initially. It gave competitors a chance to exist in the market and cater to a huge market that Apple largely ignored. Lower pricing(with average product at best) gave competitors like Samsung an entry into the market and today, it's given them a shot to actually compete on product.
I think it is a dangerous strategy for Apple in the long-term. There are price-sensitive nations where Apple is barely known and its competitors(such as Samsung) are dominating in a market Apple had a huge headstart in.
Something similar happened with Apple and Windows.
My point being, every time Apple innovates significantly it throws away a lot of consumer good-will, because it has to rebrand everything. So far the strength of the overall Apple brand has kept this strategy together, but after a few more mis-steps like iOS 6 people might start hesitating before they instinctively 'buy Apple'.
Apple wins in profits because it keeps more per unit (including the App Store cut), even at then same retail price for competitors with the same BoM. Like Coke does.
to be clear, you have to differentiate by being better. just being different doesn't count. (I'm looking at you, phone manufacturers)
The allusion to the whole product is a big deal, too, because this is how that value is perceived your customers. Getting the core functionality right is a big piece of the puzzle, but I have often been amazed how much importance customers place on other things like a less painful sales process, service, support, training, etc. Building a coherent package across several of these dimensions can be a great way to differentiate in a crowded market and avoid the slippery slope of discounts.
That said, most people do it wrong, when they attempt to do it cheaper. This might make a false impression about that pricing is the problem, were actually the people doing it, are what's wrong.