While asking for a letter of intent may seem like a useful shortcut to assessing prospect intent, it normally causes many more problems than it solves.
Q: I am in conversations with a startup about evaluating their product and they have asked if our company would provide a pre-sale letter of intent. What has your experience been with this approach?
A: The process of getting even a non-binding letter of intent (LOI) signed is often as onerous as pushing a real PO through. So you generate all of the visibility/scrutiny of a PO without the evidence from a successful trial. If the startup won’t accept your commitment to help get the product purchased if it passes your evaluation an alternative to consider if they insist on an LOI is to generate a real PO for an evaluation license or trial where that payment is credited toward a full purchase or license. There you can argue that you are covering his costs to support your evaluation but it’s not a commitment to make a full purchase.
There are different considerations that depend upon:
- it’s software as a service (SaaS): this is the simplest and will typically not require any involvement of IT or purchasing for a free evaluation.
- it’s a hardware or physical product: if you do the evaluation at the vendor’s facility this is still fairly easy, but it you want to bring it on-site you will likely need paperwork.
- the product requires consumables: who pays for what.
- it’s on premises software: again you will need involvement from facilities or IT to get it installed.
- it’s an information product: the product cannot be retrieved so it’s normally a sample chapter or partial access.
- it’s a service or a product with a significant service component: this often has a higher cost for the vendor, you will normally see some kind of evaluation purchase order and a related statement of work.
Obviously some solutions combine one or more aspects. Even in the simpler cases it’s a good idea to outline your evaluation criteria, outline a schedule for evaluation, and define in advance what constitutes an interesting (may be able to justify a purchase) and a compelling outcome (should be able to justify a purchase.
Letter of Intent Rarely an Effective Shortcut
I think Patrick Vlaskovits has two blog posts that have influenced startups to explore this as an option:
- Seller Beware: Customers Have Their Own Agenda (2009) He offers he offers a form of an LOI that looks like a Statement of Work or Project plan. It’s also true that buyers should beware that sellers have their own agenda. For early sales I have found that startups that focus on creating value for their customers (not just getting a purchase order) tend to do much better.
- Distribution and Pricing Hypothesis where he references a post by Manu Kumar on Revenue Development.
In my experience you are better to work on a real PO after an evaluation, and pay for (or charge for) the evaluation if either party is questioning the other’s commitment to the process.
Pricing–and price negotiations–are an integral part of product development and the sales process. I think Manu Kumar is mistaken to break them out into a category separate from product and customer development: it seems to me to be counter-productive and leads the problem of developing something that people want for users who are unable to secure budget.
The deeper problem startups face is not securing the first purchase order much less a “one dollar PO” or “zero dollar PO” or a non-binding letter of intent. It’s establishing an ongoing business relationship with a customer that is predicated on delivering value and getting paid for it.