Archive for December 23, 2010

If Money Doesn’t Change Hands, You Can’t Call a User a Customer.

Written by Sean Murphy. Posted in 3 Early Customer Stage, skmurphy

Here is another excerpt from my September interview with Gabriel Weinberg. This one focuses on why payment and testimonials are so important to differentiate users from actual customers.

yegg: So you are OK with a lower price for the first few customers, but you do want some money changing hands?

skmurphy: Yes, yes we do, typically a nominal amount that doesn’t trigger the need for budget escalation or other kinds of negotiations. And, we are talking about the very first few customers. We are more looking for success stories.

Where we start to negotiate much harder on price is where they say you can’t talk about this, we are not going to give a testimonial, and we are not going to act as a reference. The payment we are really looking for on the first couple has more to do with the ability to do test cases, testimonials, and work with them as a partner for at least a year or two to really understand the impact of what we’ve got.

yegg: Why insist on price at all then?

skmurphy: If money doesn’t change hands, you can’t call them a customer. Now, money changes hands maybe four steps or five steps in. You are trying to first get their attention, their time, get their feedback, and get data. You are asking for them to provide you an evaluation or a benchmark, maybe they do a pilot project–at that point then we start talking about money and testimonials. This is once they’ve actually seen that operate in their environment, which looks very different from a standard sales process.

yegg: This only applies for the first few customers?

skmurphy: Right, for the first half a dozen or so. And there can be a lot of work to find them. We work with a team that has a very innovative technology, and we must have talked to twenty people. It was a chip design application, and a bunch of them looked at us and said, you know this seems really interesting, but we have no use for this whatsoever. But the founders had come out of a chip design background and were confident many firms had the problem and more would over time. Sometimes it takes two or three dozen conversations to even figure out who you should really talk to and who really has the problem.

yegg: How low is too low for the price?

skmurphy: That depends on the company. In general, the lowest level of signing authority is typically $500 or $1,000.

yegg: You’d be comfortable going that low?

skmurphy: Oh absolutely. For a first customer who will use a new technology in production and give us ongoing feedback we have accepted $1,000 for a first license.

yegg: And these customers are also acting as references for you?

skmurphy: Yes, and we negotiate that much more carefully. The money is important in the sense that it’s not zero because that means it goes through a purchasing process, and it’s unambiguous that we can call them a customer, as opposed to my friend at XYZ Company evaluated it–that’s not that useful.

yegg: How do you go about negotiating the terms of the testimonial piece?

skmurphy: We’ll offer them very explicit options in writing, not a contract, but a kind of a set of talking points or an English language description of would you feel comfortable taking at least one call a month, would you be willing to allow us to write a blog post about this, would you be willing to let us release a press release about this? There are about seven levels or eight levels of endorsement that you can seek, and you find the level that they are able and willing to do.

A lot of times the problem is in larger companies, the people you are talking to are constrained in what they can do publicly. They may say, for example, I am happy to talk to three people a month, but I can’t do anything in public. And that’s typically workable. Sometimes you can get them to do a technical paper at a conference, or you can go to a specialty workshop or a niche technology discussion group here they can talk about it. That can be as useful as a press release in the early market.

yegg: And they are willing to do this because they feel they are getting a very good deal?

skmurphy: Yes, they are typically gaining some kind of significant competitive advantage, and they believe they are early in a technology cycle where the startup will continue to invest and develop for several years to come, so they are going to see increasing returns.

Now, if you sell more copies, those copies may go at higher prices, and as you proliferate in larger firms, things look different. I think where people get hung up is it’s a huge thing to get people’s attention, to actually get their data, to have them give you a real evaluation of what’s wrong with what you are doing, and to actually solve some kind of production problem using that technology.

We’ve been at this now seven years. I think maybe once after a pilot project, we weren’t able to close the deal. I mean where the pilot project was successful. Obviously sometimes, not everything new works, but for the most part in the B2B side if you can make a pilot project work, you can move things forward.

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