Sunday, July 11, 2010

Do The Math – The Essentials in Successful Software Promotions

This article will be presented as part of the Software Industry Conference on Friday July 16th at 10:15am.

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Your inbox, letterbox and perhaps half the planet is flooded by promotional discounts. We’ve all seen the flyers, discounts, coupons and advertizing in all forms of media that give discount after discount, money off and money back, free giveaways and free products if you buy now.

Coupon clipping is back. After dipping in the boom years of the 90s retail stores like Wal-Mart are reporting 11% rises in coupon use since 2007. New websites like and are making it easier to find and redeem promotional coupons as the shift from paper cutouts in magazines goes to digital copy and paste. It’s easy to see why, with a global recession consumers are looking to any cost-cutting measure that they can find.

So why is it that small independent software houses seem reticent to run promotions? Often when developers turn to marketing their products it’s hard, emotionally, to slash the price of something you’ve toiled over. Running a promotion is often perceived by software developers as somehow cheapening the product. There’s also the commonly held view that “I simply can’t afford to discount my software.” Profit margins in small software houses can be slim, so it’s understandable, but do the numbers back up these gut reactions?

The answer to this question has to stem from looking at the numbers, or “Doing the Math”. An independent software developer might have a yearly profit margin of 10%. They might reason that if their product retails for $30, and they drop the price to $15 then there is no way that they can make any real profit as their yearly profit margin is so slim, and the most they could ever discount their product would be $3, or that 10% of profit margin that we have to play with.

Let’s run the numbers another way on this same scenario. Let’s take the yearly expenditure of the software vendor and divide it into some manageable chunks.

· Website Hosting and Hardware

· Supplies, Travel, Entertainment

· Advertising, Online and Off

· Marketing and Networking

· Research and Development

· Bug Fixing

· Licensing and Legal

· Customer Support

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We might determine that Research and Development is where the most time is spent, whereas the most money is spent on Supplies, Travel and Entertainment and Website Hosting and Hardware.

It’s also important to consider that time equals money; yes you can put a price on your time! It shouldn’t be too hard to determine a reasonable hourly rate for your work within your company, just subtract the yearly fixed costs and yearly profit from your yearly revenue and that money is payroll. You can even work out a realistic hourly rate that you make, a useful project in itself.

So after a little back-of-an-envelope math you might determine some rough percentages as to where the time/money in your company is going. It might look something like this:

· 10% - Website Hosting and Hardware

· 15% - Supplies, Travel, Entertainment

· 7% - Advertising, Online and Off

· 5% - Marketing and Networking

· 40% - Research and Development

· 5 % - Bug Fixing

· 3 % - Licensing and Legal

· 15% - Customer Support

What we now need to do is determine where our fixed costs in our company lie, and where the variable costs are. Another way of phrasing this same question would be: If, starting tomorrow, we were to magically start selling ten times the amount that we are today which of these percentages would increase and which would stay the same. So let’s take a look.

In our dream scenario where we’re getting ten times the sales starting tomorrow by doing nothing at all we’re going to get ten times the traffic to our website. Taking a look at our hosting plan we’re in pretty good shape, we don’t need to spring for any new hardware, but as we’re good technologists we’ve planned for these kind of spikes. Now if this traffic continues we may want to get some faster boxes in there, but that’s all nice to have, we’ll consider Website Hosting and Hardware a fixed cost.

Supplies, Entertainment and Travel is even easier to determine as fixed cost. We might need a few more pens to keep track of all those sales coming in, but noting extravagant.

In our small company we have some long standing Google Ad-Word campaigns that bring in traffic, and we occasionally run a print ad in ASPects and a few specialist magazines. Again these costs are fixed, we’re simply paying for website traffic and in our magical mythical scenario these costs won’t increase.

Marketing and Networking at events such as the Software Industry Conference is undoubtedly important, but again it’s not linked in any way to sales. We’re not going to have to spend more, although we might be getting some more interesting leads from the increased traffic we don’t actually have to pursue them, so let’s assume this is fixed too.

Research and Development (R&D) is where the bulk of our time is spent working on new versions of the software, beta testing, creating new products, and essentially writing the code. It’s crucially important to realize that the bulk of this time does not relate to sales. Yes it relates to having better products that will sell more, but it does not in any way relate to how the existing product sells in the marketplace today. R&D is about tomorrow’s sales, not today’s.

When it comes to Bug Fixing as much as we want to pretend that our application is bug free we know it isn’t. More sales is going to mean more bugs coming in. Probably not by a factor of ten, but there will be some. We’ll put this as a variable cost.

Licensing and Legal is a small percentage, but for our application we use a few software components that we need to pay for, and as we’re selling more these licenses will go up, so that’s a variable cost too.

Last of all is Customer Support. It should be pretty easy to see that there’s a one-to-one relationship from sales to customer support. If our sales are going up ten times, then customer support time and costs are going up by ten as we get a slew of lost serial numbers and confused customers who don’t know how to download a zip file.

So after we’ve taken a look at our company we can determine that Bug Fixing, Licensing and Legal and Customer Support are the variable costs, and pretty much everything else is fixed. Adding up our estimates, we can determine that 23% of the costs are per-unit. If we step back for a moment and take a look at other industries we can appreciate how small this number really is. Software has zero manufacturing costs compared to physical good. We don’t have to deal with distribution costs either. By the mere fact that we’re digital means that our per-unit costs are vastly lower than most other industries.

When it comes to promotions what we’re doing is adding to our existing sales by promoting to people who might not normally purchase. We’re going to assume that we’re doing a limited time promotion and it won’t affect our baseline of yearly sales. We’re also going to be promoting to a different set of users, the impulse buyers and bargain hunters, rather than the more considered product seekers that purchase today. Because we’ve done the math on our company we know that these additional sales can actually be at 23% of the standard price in order to break even. We’ve decided to be really aggressive and offer a 75% discount giving us a slim 2% profit margin. This thinking is vastly different from the thinking that lead us to believe that we could only discount by 10% earlier.

The mechanics of running the promotion is going to take longer than this article allows however there are several key points to hit when creating an impulse buy promotion.

· Have an Awesome product - well hopefully we have that covered already!

· Make it easy – there’s nothing like an elaborate shopping cart process to lose an impulse buy.

· Have an ‘Act Now’ price – at 75% off we sure do have it.

· Time Limited or Never Again – Force the issue with a countdown. If they don’t act now they won’t ever get the chance.

· Make them Trust the Promotion – Partner with a reputable company, make it professional and be transparent, a phone number goes a long way.

· Get the word out – Email your current customers and ask them to pass on the sweet deal, and utilize every social network and forum site out there.

· Make it Fun – People enjoy a cute promotion so get creative and get people talking about it.

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