17 5 / 2013
When marketing your (startup’s) product, it’s really important to understand whether the department that will be paying for the cost of your product fits into a cost-center vs. a profit-center portion of their budget.
In other words, does your product primarily save your customer time & money (cost-centers), or primarily generate more revenue for them (profit-centers).
Looking back at products in these segments, the barriers to sale are actually quite different. Cost-center savings oriented products, like product management tools, ERP, etc, generally need to be 10x more cost-effective than the products they compete against, because switching costs are generally high (because of re-training, for example). However, Profit-center increasing oriented products generally only have to be 1% better than the products they compete against; more revenue is easy to measure, and usually switching costs are low.
This generally means that sales cycles are also much shorter for profit-center increasing products, because every customer is willing to try. On the other hand, the barriers to entry are much lower for competing products, so innovation has to keep an incredibly fast pace.
Real life example: Groupon’s sales cycles were incredibly short, and revenues grew like a weed; but they couldn’t keep up the innovation required. Conversely, Square’s sales cycles are comparatively long; but it’s going to be hard to unseat them.
Lesson: understand what mode you’re in. If you’re a cost-center, raise enough money to survive longer sales cycles. If you’re a profit-center, setup the product to allow revenues to grow like a weed, but keep the whole company incredibly agile, so when your product has to change, the organization can keep up.