Tag Archives: Product manager

To OEM or not, that is the question

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Rick was the CEO of a startup. His company had a very promising product. He was selling to enterprises (B2B product) for which he needed every helping hand he could get. In November of 2015, he got an opportunity to be an OEM (Original Equipment Manufacturer) for a much larger company (Company A). He was very excited at the prospect. After all, this prospect would bring him additional 40,000 sales people from the new company, and had all the global customers he would not have been able to reach on his own.

 

But this also meant ensuing troubles that cost him a lot of time/money/resources. Was it worth it, you may ask ? Troubles started right on Day 1:

  1. Building a business case : It took  him several meetings and a few months of scheduling/re-scheduling to accommodate calendars of the people (Product Managers, Directors) at company A. Once they approved of the product, a business case needed to be built for General Manager and other executives of company A. Not only he had to submit the technical/marketing collateral to build such a case but had to support the entire team by answering questions around business, market, customers, legal, technical support, competition whenever he was asked for it. A lot of work as a pre-requisite to the actual OEM !
  2. Margins, Profits, and SKUs: He had to compromise at a 70-30 share. Of any deal Company A would keep 70% and he would get only 30% of the deal. Still, a good deal, he thought. But when he worked out the numbers, he would not make much unless they did around 8 deals (with some combination of small, medium and large-sized deals) per year together. Company A had a 2-month long SKU creation process. That means, he had to wait for 2-months just for his product was available in the ordering catalog of company A. Not a big deal he thought, as he was planning to use this time to get some deals.
  3. Selling, selling and selling: Over the next few months, many prospects came. Whenever they came, Rick’s team was asked to chip in for every meeting explaining the product, traveling to customers’ site for joint presentations, filling in RFPs/RFQs, submit new collateral as needed, develop additional use cases and related collateral. The demands from company A were endless. The prospects stood tall and were progressing step-by-step in the sales funnel, but none of them converted for months.
  4. And a win after all! : Finally after 18 months of the processes and selling spiral, he got a win. The winning deal had his product with another company’s product, product revenues split 50-50 between them and Rick ended with a mere $1.2 million for the deal.

By this time he had 70% of his team working for this company, he had lost focus on other customers, his sales people had churned out, he had almost run out of money, most of his development and support staff was supporting the only customer that came from Company A. It was also harder to pull out of this deal due to the legal complexities.

Would Rick have done better on his own, without going in as OEM ?

What are your thoughts ?

The magic of subscription pricing

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A few months ago, one of our proposals got rejected because of our pricing. It was on the higher side for this client that was based in Asia. We had proposed a lump-sum payment (aka as perpetual pricing in the Product Management lingo!) for our product license.

The client did not have much room in it’s budget in this year and the next. Our proposal definitely offered a good ROI (Return on Investment) for the customer. But because of their limited budget, the client found our pricing very high.

Upon further probing we found out that the client was keen to consider this as OpEx (Operating Expense). As you may know, the operating expense is the monthly/annual expense that consists of items like salaries, internet and other routine expenses. On the other hand, CapEx or capital expenditure carries a big price tag upfront and with one-time payment. The CapEx typically include assets like computers, furniture, real-estate etc.

Now after our proposal was rejected, we started working on revising it to take it back to the customer. The silver lining here was that client had liked our product. We just needed to work within the client’s budget. Besides this, we also knew that the client was open to Opex pricing.

Here is what we did. Have a look at the following chart. The overall price is around $1.2 million dollars. In the first proposal, the entire amount is being charged upfront and the customer gets to use the product for its lifetime. In the second chart, we split the entire amount into multi-year payments so that the customer starts with a much smaller investment. This is the subscription or the pay-as-you-go pricing as the customer is paying as they go on using our product.

Year 2017 2018 2019 2020
Software License Price (Total) $1,240,000 $0 $0 $0

Table 1 : Perpetual or One-time Pricing

Year 2017 2018 2019 2020
Software License Price (Total) $310,000 $310,000 $310,000 $310,000

Table 2 : Subscription or Pay-as-you-go Pricing

 

In Table 2 above,  as it starts with much lower pricing, it is much more affordable. This offers a much lower point of entry aligned with the client’s budget. This subscription pricing will open up opportunities with customers who have tight budgets, in markets where lower price is key for winning.
Subscription pricing has always been a norm with B2C products. Think about your cable TV, your phone, or the Internet or the video service subscription fees. But with B2B, it is getting more popular now.
There are certain things that one needs to think through before offering a subscription pricing :
  • Revenue Recognition: The revenue recognition from subscription pricing happens periodically. So if the deal is for two years, then only 1/24th portion of the overall revenue gets recognized every month. This is the hardest part of offering a subscription pricing on your product. You and your management need to be comfortable with recognizing only a part of the entire revenue throughout the subscription period.
  • SKUs/Part numbers for subscription: Your ordering tools need to reflect the subscription pricing. The older SKUs/Part numbers will not work with the new subscription pricing. Subscription pricing should reflect the product ID and the period of the subscription. For example, if Apple is offering a two year subscription on its iCloud, the SKU should be along the lines of “iCloud – 2YR”. Without this clear demarcation, a lot of confusion can happen when other teams like operations and finance (that are working closely with you) are pulled into the approval/sales process. Also at larger companies, getting these support teams (Finance/Operations) to release the subscription SKUs is a big challenge for a Product Manager, if the organization has been only offering perpetual SKUs till now.
  • Technical Support: One of the smartest ways to limit the usage of your product beyond the subscription, is to offer product support for the duration of the subscription. For this reason, the subscription SKUs come in handy as they help the support team to quickly validate whether the support should still be offered. Once the subscription period is over, then you can cut back on the product support so that customers will not be able to get technical support, upgrades or updates on their product.

So as you can see apart from the lower entry point, subscription pricing also offers other benefits. But as a product manager you need to understand that it brings its own complexities and processes that you need to be aware of.