Carrai is Managing Director of Ventures for the Morino
Group and Special Advisor for General Atlantic Partners,
one of the world’s most respected technology
investment firms. He has a long history in the
technology business, including stints as President and
CEO of McCabe & Associates, a provider of
applications development products, and President &
CEO of S&R Systems, a software integration company.
Before that, he was Vice President and General Manager
at Legent Corporation, responsible for the future of
some 100 products, large and small, in the company’s
$200 million systems management business unit. In
addition, he sits on the boards of several technology
companies and teaches business courses at George
Product Strategy with
August of 2001, Phil Carrai appeared as a guest expert on
product strategy in Netpreneur’s
group, an email list where technology entrepreneurs exchange
ideas, questions and answers about growing their businesses.
Questions ranged over a variety of topics, from pricing to
international licensing to marketing to college professors.
Selected postings are recapped here, edited for focus, length
We’ve heard people say that among the “lessons” of the
dot.com bubble was that many companies got funded that really
didn’t have products you could build a future on. Is that
Phil Carrai (PC):
There’s no question that many companies were simply playing
the momentum of a market that was craving anything “dot.com,”
regardless of the underlying economics of the idea. While
I’m not sure it’s relevant to revisit the Internet bubble
companies, it is important to understand the real technical
and economic issues of any company so management and investors
don’t repeat the past. For instance, one core question that
many do not ask is whether the idea or product is tactical or
Netpreneur: What’s the difference?
By a strategic product I mean a broader solution, something
that touches many people within a customer’s organization,
often across departments. Strategic products frequently cause
the customer to change their organizational processes; for
example an eCommerce application that may lead a company to
change the way they do pricing. That’s good because once you
get the sale, it erects high barriers to change and can help
pull you into deals you might not otherwise have been a part
of. Strategic products are almost always higher-priced
solutions, and they often have add-on potential, either with
associated products or services. On the down side, the cost of
sales for a strategic product is almost always higher, with
longer, more complex sales cycles and more people involved in
Tactical products, on the other hand, have a much more
specific and clearly-defined objective, such as disk
compression or managing your bookmarks. They have quicker and
more demonstrable return on investment (ROI), require little
or no process changes, and affect fewer people in an
organization. Tactical products have lower prices (regardless
of their inherent value), are easier to replace, and the sale
usually occurs lower in the organization. Sales cycles are
shorter, and you usually have more channel options available.
In this sense, consumer products are always tactical products,
regardless of how critical the solution is to the individual.
Which ones are investors more interested in, strategic or
Well, the answer is both, although individual VCs may have
their own preferences.
Almost all investors are interested in truly strategic
solutions. If you’re selling a tactical product, the issues
will be whether or not there is the potential for future
growth, either in related products for the same marketplace,
add-ons, similar niches in adjacent markets, etc. How big is
the idea? How leverageable is it? How big is the market? These
are not just questions for investors, you have to answer them
for yourself if you expect to have any success bringing your
idea to market and growing into a sustainable company
(assuming that’s your goal, of course).
While it may not matter to investors whether yours is a
strategic or tactical product (assuming they like the idea)
they do care very, very much about whether you
understand the difference, whether you understand the market,
and whether you’ve constructed (or thought about) the
infrastructure required to execute. Do you really have a sense
of who buys it, why, and how to reach them, or have you simply
collected a bunch of numbers from analyst reports? If you say
that you’re selling into a vertical market, like telcos for
example, do you know how much they really spend on similar
solutions? Is it an available or an addressable market? Are
you really just a piece of a larger solution, and how do you
fit into the overall value chain? The next big interest area,
of course, is: What’s your competitive advantage?
What are some of the most common questions you see people
failing to answer about their product strategies, either from
the development or the marketing side?
it’s often the most basic ones, like: Is the offering
vertical or horizontal?
Applications tend to be vertical within an industry or
department; infrastructure tends to be horizontal, running
across departments or industries. Will the customer view the
solution as driving revenue or avoiding cost? How much does
the customer process need to change to derive value from your
product? How long will it take them to recognize the value,
and how many people will be affected? The answers to questions
like these will affect everything from your product features
to future release schedule, from pricing to channel selection.
Take channel selection for a B2B product, for example.
How many departments are involved in the decision? Does
purchasing occur as part of another decision, or is it tied to
a specific offering? Is there actually money in the budget, or
will it have to be approved separately? These may seem like
highly tactical questions, but they are all factors that
determine how much you can rely upon direct versus non-direct
channels. Options that seem promising on the surface, like
telesales, VARs, resellers or the Web, may not really be
effective for your marketplace.
I'd appreciate your insights on establishing pricing in an
early adopter market. Our challenge is to establish pricing
that encourages early adoption and limits excessive
discounting, while at the same time generating profitable
revenues. Pricing in an early-adopter market, particularly in
the mobile market is difficult to arrive at through research
since comparables are not always available and the
first-to-market companies will, at best, only help you
determine what hasn't worked.
Pricing is often the most difficult component of the "go
to market" package, especially in early adopter markets.
That’s because, while you can generally test positioning,
packaging, distribution, etc. in some limited fashion through
alpha or beta stages, pricing can be incredibly elusive.
You must first define your solution and market exactly,
ranging from large, Fortune 500 customers who use it as
infrastructure for other applications, all the way down to a
consumer-oriented product purchased through a telecom company
(such as ringtones or even tickets). Next, define what will
constitute success for you. In the enterprise space, 50 large
customers over six months would be a grand slam; in the
consumer world, it might be 500,000 users and 5,000,000
Next, you must define what adoption really means
for you. Is it purchase? Usage? Usage at a certain rate? Usage
within a certain segment, demographic, or application?
Expansion within a given customer? And so on. Then detail what
will be the biggest inhibitor, such as hardware/handset
technology, ease of use, degree of difficulty on installation,
etc. Note that it probably won't be price outright, but price
might be a way to lessen the inhibitor.
As an intermediary step, check to see if your success
definition matches the basic market parameters. It’s amazing
how many times I see business plans that will look at available
market (that is, the total potential spending) instead of accessible
market (the actual spending on a solution or similar
solution). As a result, they need a huge percentage of
accessible market to meet expectations.
Finally, I believe strongly in analogy. That is, most
consumers and business users will seek to equate a new product
in a new space with a known product that is positioned
similarly to yours. You can use this to your advantage,
especially in the consumer end. I'd take a look at identifying
the most successful programs within related early adopter
spaces and see if there's a similar play to your offering. An
example from the telco area is that while people will spend
lots of time on overall plans, coverages, etc., they will not
hesitate to spend 75˘ to $1.50 on a directory assistance
call, call waiting, or call forwarding.
Most importantly (and my bias), perhaps the one thing
the dot.com bubble taught us, is that the answer for rapid
adoption with a resultant sustainable business is NOT to give
it away. People do not value free items, since there's not the
normal personal/psychological commitment that takes place
during a purchase.
In the consumer market, the pattern usually is to charge early
adopters a lot, because they are the least price sensitive. If
you market to small businesses, on the other hand, such as
dentist offices or restaurants, you probably have to offer a
free trial period. These folks hate to see their costs go up
until they have proven that they can get value from it.
If you market to large organizations, charge as much as
you can as early as you can. Your cost of sale will be
tremendous. What they most value is research. They will spend
a lot of time evaluating your product. Try to charge them for
that, rather than getting sucked into endless presentations
and meetings. Come up with a consulting concept related to the
product and charge for the "readiness assessment" or
Finally, Phil's point about positioning your product
relative to a known product is worth repeating. You almost
never want to say that your product is "innovative"
or "has no competitors." Position it as competing
with something they already buy or as something they wish they
could buy but cannot afford. For example, one netpreneur I
know positions his product as "a poor man's SAP."
Businesses that cannot afford SAP but want some of the
functionality get that message immediately. (Arnold Kling
is the author of Under
the Radar: Starting Your Net Business Without Venture Capital.)
Arnold's point on large enterprise/corporate sales is right
on. In many respects, pricing for the enterprise space inverts
for the early adopters. That is, the ones to jump first
generally will pay more as they have the biggest demand, the
most sophisticated infrastructure and technical staff, and
receive the highest value (assuming the product/solution is on
target, of course). Correspondingly, your cost to win and
maintain the relationship will be significant, and something
you must consider when constructing your business model and
As you move along the adoption curve, customers tend to
become more price sensitive. That’s driven not only by
budget, but, also, and perhaps more importantly, by their lack
of infrastructure and scale. That’s because, to them, it
translates into a higher overall cost (to supply the
infrastructure) and a decrease in value (scale). The tricky
part is that, at some point, incremental demand flattens,
leaving the high-middle to middle-market for other players
with different value propositions (such as “poor man's
SAP”) which address the issue of required infrastructure,
customization, and scale. At the high-end it seems to be
around 700-1500 customers for very successful products
For those in the high-end, Fortune 2000, enterprise
market, here's something to ponder. Pick a successful company
and consider their installed base of unique customers by
product. You'll likely be surprised at the limited reach of
products focused at the high end, which means you'd better
drive a tremendous amount of value for each customer.
My company is developing an online educational software
product targeting initial users in a very specific niche. One
way for us to gain credibility for this product will be to
have it used in a meaningful way by university professors,
then enlist their support through testimonials, papers, etc.
What are the most effective strategies for a small company
like us to get these kinds of early users?
PC: I'll make a couple
assumptions: that the product is used by professors as either
a teaching aide or for eLearning, and that it requires content
or courseware developed by the professor.
Given those assumptions, my take is that the product
will be viewed more strategically by your customers than
perhaps you realize. Specifically, you're asking the professor
to take existing content, probably to add or change
components, encode the content into your offering, then change
the way a course or component of a course is taught. Remember,
while you might look at your product as an interesting
productivity tool that you're offering for "free" to
beta users, but a professor will look at how the product fits
within his or her workflow process. Unless you help them solve
that problem, you'll get lots of interest, but little use.
My recommendation would be to outline the entire
process which your product would be a part of, define exactly
how your product would be/should be used, determine the amount
of work/rework required by the professor, then create a plan
to both minimize the process and work/rework impact. Focus far
more on what's required by them (hopefully minimal) than on
the benefits of the product (hopefully obvious, and probably
not the stumbling block).
In all of this, remember that the more you require a
change in teaching process, it will be proportionally more
difficult to get early users and the more one-on-one, direct
selling and support you'll need to do.
I have two questions. First, in your experience, do successful
companies tend to stick to the blueprints they defined in
their early days characterizing their idea of sustainable
competitive advantages? Second, in the past, many competitive
choke points, such as control of a patent or customer access,
were premised on information asymmetries that, in a
manufacturing-era economy, could give a firm competitive
advantage for decades. Today, in an economy suffused with
information, those asymmetries and related choke points still
arise, but may last for just a few years, perhaps only months.
What do you look for in new technology or service that
translates to sustainable competitive advantage?
start my answer to both questions with my take on competitive
advantages, which is that, in the long term (whatever long
term is), no initial advantage is sustaining. What a unique,
differentiating position might provide is a platform upon
which you can build the next unique, differentiated position.
That said, generally I've found that the earlier the
stage the greater the delta between what you thought was going
to be the path and what the path actually is. What's more
interesting to me in early stage efforts is the thought and
detail that goes into the blueprint, because I believe that
one can change course during execution far easier when you
know why and where you've deviated from plan.
To your second question, the simple answer is that
something that solves a significant problem in a unique way
generally provides advantage for some period of time. More
specifically, I do believe that if the solution required a
significant amount of intellectual capital, a
"breakthrough" in thinking on a problem, a
significant amount of work by a number of smart people, or
development by an individual(s) who have spent years in a
space thinking about a problem area, you will generally have
something that can't be easily replicated. Conversely, if it
took two people three months to code, well . . .
In terms of how sustainable (perhaps a better word is
“sticky”) the solution is within organizations, I've
generally found that products that have longer implementation
cycles, touch more people within the organization, and require
more customization (or coding), are generally viewed as
strategic, and generally stick around an organization for
company provides custom solutions for global research and
knowledge management needs. We were established at the
suggestion of a key executive of a top European management
consulting firm, and have received a lot of guidance in the
form of insight into their information needs and those of
their top-tier customers. We've established an international
network of correspondents to perform customized business
research and passed a test to determine that we can provide
quality results, however, our client is very busy, and
decisions are very slow. While we don't want to upset our
client we're considering testing the waters in the DC area to
see if other major organizations with international interests
would be interested in our services. Do you have any
suggestions as to how we can best go forward?
In this environment, I'd absolutely look for another 3-5
companies that have similar needs and requirements, with the
hope that at least a couple could become "anchor
tenants" for your service. In terms of zeroing in on
clients, I'd do both an inside-out and outside-in analysis to
better define who to approach.
From an inside-out perspective, I'd look internally at
identifying the base need which drove the formation of the
company -- what specifically you have in terms of delivery,
knowledge network, process, expertise, etc. Then, outline why
(again specifically) your initial client is happy with what
you've done to date. Finally, define who within the client (by
functional area, level, etc.) would use, recommend, and/or buy
From an outside-in perspective, I'd then map the
marketplace for companies that have a similar texture as your
lead client and approach those you think are the best fit.
Focusing in a geographic region is very good.
We've been talking to a firm that has ties to some large
companies overseas to represent our technology for licensing.
We were introduced to this firm from a pretty good source and
my understanding is that they have a solid track record. They
do not take any upfront fees to represent us, instead, they
take a cut of any deals we form with the companies they
introduced to us. They also want warrants for our company
equal to some amount of the money we would get from such
deals, and exclusivity for the countries they have connections
in for 18 months. Since they don't take any upfront fees,
they're obviously very picky about who they represent. The
companies they would sign up for us would localize the
technology's English parts to their own language, at no fee to
us. What is a typical percentage given to these types of
"agent" companies for such deals and are there any
things we should watch out for?
My experience with licensing has been limited to the
enterprise space, so please take these comments within that
Many organizations provide distribution capabilities
outside the country of origin for a commission ranging between
40-60% of the license fee. Included for the fee is marketing
within the country, some small amount of localization (usually
very small), first line phone support, etc. Generally, there's
exclusivity within a particular region or country, but, along
with the exclusivity, there is a commitment to revenue levels
(12 month targets) that, if missed, will result either in a
loss of exclusivity or a termination of the agreement. With
such agreements, there's usually a ramp provision built into
the first year of revenue levels, as well as a cure provision
which allows the distributor to continue exclusivity if
certain criteria are met. As an aside, I've never negotiated
warrants on distribution agreements, but I know that many do.
In judging your potential channel, I'd investigate the
Do they represent other technology/software
Do they know your marketplace?
How many sales representatives do they have?
How many technical sales representatives do
they have and will any be dedicated to your product?
What is the quota of those sales
representatives and what percentage of that quota will be your
What is their planned marketing spend for
your product, by country?
How will they handle first level support?
Second level support?
If consulting is required for implementation,
who will do it?
What revenue levels are they willing to
commit to, by country?
How will they expect to work with you?
What's important to remember is that any distribution
partner/organization must be viewed and managed like a sales
organization, only they don't report to you. If you want a
successful relationship you'll have to put energy toward
training and supporting your partner.
Think long and hard before you take the leap. I've had
great, terrible, and mediocre distribution partners, and the
common thread throughout the terrible ones was that I thought
they had a couple great contacts that I could secure for zero
Bowers: Ours is a
young company, with a new technology product, two full time
employees and several customer prospects. We also have the
impending need to grow our engineering team, more aggressively
pursue new customers, and, in general, take the company to the
next level. We are interviewing operational/managerial
professionals as potential COOs, but my question is whether
this the right time to take on a high cost employee?
How do we take steps to ensure we are not hiring too early?
I've always relied on the old school thinking that categorizes
the stage in a company’s life as:
startup, little or no revenue
early stage, $2-$8 million in revenue
expansion, $5-$20 million in revenue
growth or IPO, $20 million plus in revenue
We then look to the types of people who would best lead
the company through each stage to the next with the hope of
deferring the senior positions until you're either late in the
early stage or beginning expansion. There are many reasons for
this, but the biggest is the that person you want to expand
organizational capacity (distribution, service, marketing,
etc.) is not necessarily the person you want to help slog it
out through the early stages where you're driving to meetings
instead of flying and staying three people to a hotel room to
save money. At your stage, I'd really challenge your need for
a COO -- or any senior operations or management talent -- -at
least until you've got paying customers. Instead, hire folks
to help in the trenches. If you truly believe you need a
stronger operations background, instead of a COO, think about
someone who either can run the technical side (development and
services) or the sales/marketing side, depending on your area
of greatest need.
Bowers: What are
your feelings regarding young companies that take on debt? We
are looking into taking on a line of credit that, if all goes
well, will allow us to deliver a whole product to enough
customers and revenue to roughly break even. If we would like
to take in outside capital later to accelerate expansion,
would the presence of debt be a hindrance in the process?
If the debt is small, say under $1 million for a software
company, and line-of-credit-oriented, it’s generally not a
problem. Before you take on a line of credit, however, think
carefully about a couple of questions. What are you securing
the debt with, receivables or personal assets? Also, what are
the call provisions? It’s generally a demand note, meaning
the bank can call at any time.
Remember, banks are not VCs. They do not take
substantial risk, and, as one banking friend told me, would be
more than willing to lend you money when you don't need it.
The real answer is that the bank needs to secure against an
asset that has terminal value, and software that can't be sold
has little terminal value. If you can secure debt and have a
known financing situation, such as receivables or contracts
requiring payment, and you just need the money earlier, banks
are great ways to help manage. If, however, you're looking for
help to finish a product without known cash flow to pay the
debt, proceed with extreme caution.