The Paradise of Software Companies

The purpose of this paper is to encourage entrepreneurs, who are interested in entering a new venture and develop a product in the software field as well as founders and directors in existing software companies, who are coping with rather difficult sales challenges in general and international sales in particular – and show them the bright side.

Some of the following complaints by many software companies may sound familiar to you:

• The potential customers show no initial interest in the product
• The customer does not understand or makes no effort to understand what the product does, its function in the organization and its benefits.
• The customer is trapped in outdated concepts and finds it hard to accept a solution with another or innovative approach.
• It is difficult to demonstrate the advantages of a product, which is not physical, until it actually works at the customer’s organization
• The customers are wrong to think that the solution capabilities are already integrated into their ERP or into any other existing system in the organization.
• The competitors are much larger and so are their marketing budgets
• The competitors reduce prices
• Absence of references at the target country
• The need and the costs of developments and adjustments to a variety of operation systems and to updating versions.
• Customers seeking integration into existing systems but are not willing to pay for it.
• Repeated requests for carrying out POC or a pilot instead of closing the big and final contract.
• The customer conditions the purchase on the company’s opening an office at the country of destination.

All these complaints are valid and should not be underestimated. Handling them is carried out both on the marketing strategy level and on the tactical level combined with various B2B international marketing tactics. However, these will not be discussed in this article.

The purpose of this paper is to show the positive side of companies, entrepreneurs and directors engaging in software products, as opposed to companies with physical and tangible products. While companies with tangible products still suffer from some of the aforementioned difficulties, there are still additional difficulties and restrictions affecting directly or indirectly the sales process, which the software companies are not familiar with.

• Inventory. Companies manufacturing physical products always have a major concern: the inventory issue. Manufacturing their products for inventory, to promote anticipated demand costs a lot of money. Alternatively, if one manufactures only on an order basis, then the manufacturing and delivery to the end-customer may take too long – and the customers may not agree to wait and consequently will not order. Furthermore, companies of physical products are required to maintain warehouses and run them, including storage facilities, special equipment and even complex designated software for warehouse management. In addition, there is constant concern of thefts – both in the company itself and at the transportation stage. Software companies know nothing about inventory, storage and theft of products and are free of this concern.

• Logistics – Physical products must be transported: from the company to the port, from there to the port of the target market and from there to the distribution centers or to the end-customer. This requires a lot of handling, designated personnel and many expenses related to logistics. Among others, negotiation with the customer or the distributor on the terms of sale is required, where the product will be supplied (for instance, ex works), who is responsible for the transportation and the product and from which stage, insurances, engagement with the shipping companies, customs etc. This is a “headache” that software companies are not familiar with. All this compared to a simple login in a SaaS based product or remote installation on a local server – this is the major “logistics” in software companies.

• Product returns – Managers of physical products companies have an additional “nightmare” – the return of products by customers or distributors. If the product is defective or the customer is not satisfied, he may return it and not pay for it or demand its replacement. This means heavy financial damage to the company, since a physical product has variable production costs, which in case of product return, will never be covered.

• Payment – The method of payment is very sensitive and risky in companies of physical products. On the one hand, the manufacturer desires to receive payment in advance, since it has manufactured a product with a certain cost and cannot risk the product reaching the customer without paying for it. Furthermore, when the customer is overseas, collection difficulties are even bigger. On the other hand, the customer fears, certainly if it concerns international trade, that if it pays in advance, the product will not be shipped to it, particularly when the supplier is unknown or new. For this purpose, complex mechanisms for international payments have been developed, such as documentary credit and more. In fact, payment to software companies is also a sensitive and not straightforward issue, however if the customer did not pay there is generally no direct damage of loss of production cost and raw materials that have been purchased. In addition, a software company may, in cases where the customer has not paid in advance, not extend the license validity or even block access to the account on the cloud. The collection issue is by far easier in software products.

• To sell what yet does not exist. In a physical product, what is generally sold is a product in its existing version. Product improvements take time and a customer will not be easily temped to believe promises that the product he will receive in fact will exceed the one presented to him at the time of sale. On the other hand, in software, within reasonable limits of course, one may suggest, already at the sales stage, higher functionalities and capabilities than the existing one assuming that a new version is already under development or that within a short time it will be possible to bridge the gap and complete the required developments. In sales of software, it is easier to harness the product’s road map to the present sale.

• Flexibility in prices. Companies with physical products can hardly reduce the product price under its manufacturing cost since this will lead to immediate loss. Too big price reduction or even delivering products for free is not necessarily a desirable practice in the long run, though sometime there is need for it at the penetration stages to a new market or a first agreement with a big customer. In such cases, the software companies have a greater flexibility to offer a product at cheap prices or even for free, whether for a trial period or at a limited number of licenses or an edition with limited functionalities. Freemium models are acceptable in the software field and there are diverse methods for transferring to a payment model after the customer has experienced the product. The damage at the bottom line is minimal compared to a physical product that is supplied for free and in fact, the entire business model of a software company, and certainly those in the SaaS model, may rely on this sales method. This does not exist in physical products where there is a marginal cost for the manufacturing of each unit.

• Product trials. What could be better than convincing a customer to purchase an excellent product than to experience it? In sales of physical products, the only way to see the product or to experience it is to go to the shop (particularly in sales of consumer products), wait for the sales representative to arrive and show the product or send a sample via a courier or some transport service. In software, the product may be presented and accessed on a computer, whether by remote installation performed by the company, by the user himself or by logging in to a web system. This, without shipments, logistics and waiting time. In addition, there is no distance between the advertising media, where the customer was exposed to the product and the product consumption media – both will generally be on the computer monitor, a tablet or a mobile phone. In software, the distance between the product advertising, experiencing it and even buying it – is sometime measured by single clicks.

• Support – With physical products, ensuring local support factors at the target market and shipment of spare parts are an operation in itself, which requires setting up a local support infrastructure. In software, even if there are many cases in which the customer prefers local support at the target market provided by a local staff speaking the customer’s language, at least technically, there is a possibility, in most cases, of providing support remotely by company staff, which knows better than any local support partner the product and how to respond to malfunctions without the need to travel to the customer.

• Outsourcing – Software companies can contract and outsource relatively easily the development services of software development companies, in order to reinforce their development capabilities or meet schedules. This is a method, which enables greater flexibility (there is no need to recruit or dismiss employees) as well as to maintain the lean workforce structure. All this compared to manufacturing plants, where increasing the manufacturing capacity means money investment and waiting for new employee recruitment and their training or new machines and manufacturing lines, which by the time these enter the manufacturing, the nature of the demand may change. 

• Open Code. Software companies may receive almost for free open code software components,  instead of developing them by themselves. In physical products, such an “arrangement” does not exist and it is not possible to obtain free “raw materials”. 

• Conducting business in English. Quite often, in software companies, the contact during the sale stage is with IT, technology and innovation departments. With these bodies, even if this is not the ideal scenario, it is possible in many cases to communicate in English, and there is no absolute necessity to have a command of the local language. This opens many options to begin sale and demonstration processes compared to many other physical products, which are of a lower innovation level and the decision-makers are less likely to be fluent in the English language.

• Quality human capital – which is not obvious and is benefited by software companies.

It is clear that also your competitors, other software companies, benefit from all these advantages however it is nonetheless encouraging to acknowledge from time to time the fact that you have chosen the right field.

As someone who has worked with and in companies of physical products, I can only conclude that the software companies are relatively living in a business paradise, worth appreciating.

Would you like to add your suggestions to more advantages of software companies? We will be glad to hear your opinion.