Saturday, 5 September 2009

First to Market or Best in Market?

I was chatting with a friend yesterday about the pressure to be first to market with software products. I started to think about how you could quantify the benefit - or cost - of pushing something out the door early to make sure you're first out there.

Basically, there are gains to be made when you're without competition:
First to market profit = no. of deals x price x gross margin
Here, we're assuming that the number of deals is independent of your ability to sell: we'll say it's simply the number of customers wanting to buy.

Once competition enters the marketplace, there are further gains to be made, but they are dependent on your market share (of course now less than 100%):
"Normal" profit = no. of deals x market share x price x gross margin
Now, there's more going on in this simple equation than meets the eye, so we have to ask what we can control in these equations?

First off, there's price. Now I don't know that much about marketing, but I do know that you generally get what you pay for, so the best product can usually be sold for the highest price. How do we make sure we have the best product? By putting in the effort and taking the time, which is likely to be at odds with the first to market strategy we often encounter!

Second, we can control our gross margin. Once a software product is shipping, it's not 100% as some people might think, as software needs maintaining and supporting. And guess what, software that's rushed costs more to maintain and support!

The last thing we can control is market share, and this is extremely sensitive to the quality of the software product we're selling: again, an annoying, buggy product doesn't give your sales team the best chance of dominating.

So, what does this all add up to? (Sorry multiply). Well it's probably impossible to substitute real numbers into these equations, but that's not really my point: the point is simply that there is a relationship between the potential benefits before and after a brief period of being a monopoly, and that this is effected considerably by the quality of a software product. The brief period of profitability enjoyed after getting buggy, difficult software out before anyone else can be abruptly ended by a late arriving competitor product that is easier to use and crashes less.

So, which do you want? 100% market share for 1 year or 70% market share for life?

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