Wednesday, November 19, 2008

Some Interactions Are Only Indirectly Profitable

I met with Ari Zilka from Terracotta Technologies yesterday in their offices in San Francisco for a follow-up meeting from a series of meetings I had had with Ari and our sales representative over the course of the past year. My interaction with Terracotta has largely been one of "This technology really is a game-changer; I just have to find my personal game that it changes," and I've been working with Ari ever since on the first entrance path for Terracotta into my company's infrastructure.

Ari's a busy guy. He's a founder and CTO of a software startup, and having been there, I know how difficult it is for him to devote time to anyone. And I've now had three meetings with him over the course of about 9 months. And my employer has not given them a single dollar as of yet, and there's no guarantee that even if we end up rolling into production on top of Terracotta, that my employer will stump up cash to them for an open source technology (FTR, this is the company that inspired the original Open Source Cookies post). This is probably a frustrating situation for the sales guy, because sales guys have numbers and targets and need to make money, and the sales guy needs to dole out his fraction of Ari's time in the way that's going to maximize his commission. I'm clearly not that as of yet. And yet there I was for the third time.


What's the rationale for his wasting yet more time talking to me?

Having discussed some similar issues with Laura Khalil from Atlassian yesterday when I met with her earlier in the day (more on that meeting anon), I think things started to gel in a more concrete way, because they face these problems as well from a non-Open Source perspective.

The rationale here is that some interactions are only indirectly profitable, but the indirect benefits potentially vastly outweigh the direct ones. So you pursue them anyway if you're an open company; a closed company won't.

Traditional Sales Model
Consider the traditional Enterprise Software (deal supporting direct sales force, or > $100k licensing) sales model:
  1. Company sends out feelers to vendors
  2. Vendors send representatives
  3. Company goes ahead with due diligence/POC with one or more vendors
  4. Company starts negotiations
  5. Deal is signed
  6. All vendors move on
In this model, you have a discrete lifecycle of a particular sale, and most players are only around for the sale; after the cash changes hands, you're into support land, which is at least partially an insurance business. The company projects to the vendors its rough budget, the vendors determine how to maximize their portion of the budget and whether the deal is even worth pursuing. Knowledge is largely gained by the customers interacting directly with the vendors, or maybe checking with some research firms.

Note here that the vendors themselves pull out of the conversation the moment they realize that they don't want the particular deal: it's too small, they're not the right solution, whatever. Then they go back to their closed external appearance, and go back into information embargo. If they can't make a sale, why waste anybody's time on the interaction?

I think any company that thinks this way and is trying to sell to technologists is going to fail and fail hard. And I think split open/closed source companies are best suited to be able to leverage this.

I'm A Bad Customer
For any commercial software company, from a sales perspective, my employer is not their ideal customer. We're not that big for a financial services company (our parent company is, but we have our own technology stack and purchasing departments). We don't buy way more than we need. We don't like shelfware. We like best-of-breed, and don't buy whole software stacks (we will never buy a Service Oriented Architecture Solution). Our technologists are massively involved in sales decisions, even when it's really a business-facing application. We constantly evaluate software in build-vs-buy mentality (and we as a culture like writing software). We're small fry, and we're an expensive (from the vendor's perspective) sale.

But, that being said, we probably are a good candidate for a sale that influences others. We are passionate about technology. We have lots of technical contacts (friends, ex-coworkers) with people at much larger companies. We have people who are involved with lots of online technical communities. We have people who do open source work in their spare time. We have people who blog, both positively and negatively. We go to user groups. We engage vendors constantly on product improvements. We take betas and alphas and developer cuts all the time.

That means that ultimately getting us on your side (even when we don't give you a single dollar in revenue) ends up influencing a lot more people than even a single larger sale would.

So when you look at the overall picture, it starts to make sense for Ari to spend time talking with me, even without a Big Ticket Sale right in front of him. And I think that would be true of any open source technology.

Turn Indirect Profit To Direct Revenue
If you're selling anything commercial having to do with an open source product, I think you'll find that a significant proportion of your most technically savvy users are ones who will never pay you anything. They're working at home; they're in academia; they're smart but working for a poor company; they come from a less developed country. They're a massive source of improvements and knowledge and they get passionate about what they're doing, but they're not going to pay you. But they're a pretty good reason why you'll eventually get revenue from other people: they may go work for a bigger/richer company, or one which prefers Buy in Build-vs-Buy; they talk with the world constantly about what they're doing; they speak at conferences and write books and make your platform far more compelling than it otherwise would be. And so if you want to be successful, you view supporting them and interacting with them as indirectly profitable: no revenue comes from it, but it increases the profit potential of your ecosystem dramatically.

So where's the relevance with Atlassian here? They're not open source. They sell software. How have they leveraged these principles to end up with Laura wasting her time meeting with me?
  • They give away licenses all the time. You're open source? Free license (this is how I originally found out about Jira way back in the day). You're working for a non-profit? Free license. You just want to use it for your own personal stuff? Free license. This builds a passionate ecosystem and doesn't stop you extracting revenue from companies that will pay you.
  • They work with open source programmers. They have a plug-in ecosystem that they actively nurture, and many of those people are doing it open source. Those same passionate people making their ecosystem more attractive and more conducive to extracting revenue from others.
  • They engage their customers. Laura knew I'd blog about at least part of what we talked about (that's how she found me in the first place). That increases the sum knowledge that the world has about Atlassian products, and makes for free marketing.
  • They differentiate their customers. Some customers are a lot of dumb money, and some customers are a small amount of smart money. I'd like to think my firm is more of the latter, given the amount of time we devote to trying in any way to help make the products we use better.
If you're familiar with the classical Tactical/Strategic Sale quadrant, there are a whole host of people who are so tactically worthless sales wise that they're going to give you nothing. But strategically they're useful. Pursue them.

If you're a technology company and you're trying to play the old closed-information game, the every-interaction-must-be-profitable game, the "no you can't have the manuals unless you're a customer" game, the "no you can't download our whitepapers from a email address" game, you're losing out a lot. Engage people who are only indirectly profitable and you'll find more that are directly profitable.
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