The key to making money: Charge for your product

I loved this presentation by David Heinemeier Hansson of 37Signals. His topic? How to make money as an online software company.

His verdict? Charge for your product, but be careful whom you charge.

Chris Anderson elaborates on this theme:

37Signal's secret is not to target consumers (who don't like to pay) or big companies (that's a crowded space). Instead, they target the "Fortune 5 Million"--small companies with specific needs that are underserved...

It's interesting how closely some of Heinemeier Hansson's ideas map to the commercial open-source world, in which charging for one's value is, as Roberto Galoppini suggests, not always straightforward.

Why? Because proprietary vendors have long conditioned customers to expect to get charged for the wrong things or, at least, to expect to get charged too much for the right things. Larry Augustin suggests, in response to a post of mine, that "one of the things companies using an open-source model need to do is make sure they get paid for up-front costs up-front." Easier said than done.

As Larry summarizes, enterprises have been conditioned to expect their vendors to dump all the risk of a software decision on themselves. They try to "get back" at the vendors by writing punitive terms into license agreements (e.g., acceptance periods that make revenue recognition difficult), requiring the vendor to jump through demos and pilot hoops upfront at the vendor's cost, and more.

Hopefully, as enterprises come to invest more trust in the open-source vendors, some of these practices will fade and the process for selling software services will level out. In the meantime, however, Heinemeier Hansson has it right: you need to charge for your product, and usually whom you charge is much more important than what you charge.

[rcardona2k]

This is really spot-on! Especially "Charge for your product, but be careful whom you charge.". I've been both an enteprise developer and a shareware author, and I've been berated so badly for a $5 piece of software compared to the 100's of K the companies I've worked for charged enterprises. You can make great friends in many camps by doing the right thing and charging appropriately or giving the right thing away. It's a matter of knowing when and to whom. Offering free software for too long sometimes encourages some bad behavior and attracts freeloaders. OTOH, new concepts should almost always be free.

[jamesurquhart]

Another recent post that is related this subject is from Christopher Keene, titled "Startup reality check: launching versus landing". The key quote: "Here's the difference: it only takes a demo to launch a product, it takes a business model to land a customer."

As someone who has worked for both startups that have launched, and those that have landed, I can't think of a better way to explain it.

[The_Decider]

"Because proprietary vendors have long conditioned customers to expect to get charged for the wrong things or, at least, to expect to get charged too much for the right things."

That is exactly right!

Last winter I was advising a group that wanted to relight a HP network. When they tried the first time they gave all the control to Cisco, who gave them "a great deal" except to upgrade to what they claimed the routers and switches initially supported, they would need to buy an entire new line. Not surprising from a crappy company like Cisco, but the kicker is to this day that group still doesn't think they got ripped off.

Proprietary vendors have indeed conditioned businessman to take it with a smile and want to come back for more.