Searching for the Moon

Shannon Clark's rambles and conversations on food, geeks, San Francisco and occasionally economics

Advice for the modern entrepreneur – passion, discretion and pricing

Posted by shannonclark on October 6, 2006

I started JigZaw Inc (http://www.jigzaw.com – site’s broken, will fix soon) in early 2000, incorporating it in May of 2000 (just in time for the crash). Since then JigZaw has gone through many changes, I’ve also started a non-profit MeshForum (http://www.meshforum.org), run a couple of conferences, held/helped with lots of other events, and met/worked with numerous entrepreneurs (and moved from Chicago to San Francisco). JigZaw was (is) funded out of my own and friend/family’s investments, while we considered additional angel/vc rounds we have not yet raised any money through those means, nor does it look likely in the immediate future.

This post is intended to outline what I would do/use/leverage today were I starting a new company or project. It is the first post in a series of unknown length, I welcome comments, suggestions, alternatives and counter arguments. In addition to the links and resources I directly link to, I’m indebted to the many entrepreneurs and writers I know and follow.

My assumptions

You have an idea. Perhaps some initial thoughts on how to go from idea to something. You have, at least some, of the skills that will be required and/or you have the nucleus of a small team to work with to make your idea happen.

Your idea involves technology and, most likely, the Internet (or similar networks such as mobile). If not, much though not all of my suggestions would still hold true – even a new café or retail store should both leverage useful technology and give some thought to how to use the Internet well.

My focus

I am a geek, I’ve been using computers since the 3rd grade, when among other things I would do the flowcharting homework my mom assigned to the students in the college course on computer programming she taught at a nearby junior college. I’ve been on the Internet, running my own server, since 1991. I know, at least enough to get in trouble, over 10 programming languages and I’ve adminstered servers both Windows, Linux, Unix, and others for nearly two decades. My consulting, however, is generally at the intersection of technology and business – I’m hired to help run projects, to analyze existing technology, to brainstorm new strategies and approaches, to identify vendors, to analyze investments (or possible investments), to offer new and alternative approaches to business – many of which involve the appropriate use of technology.

While for much of the past decade+ of my professional career I have used Unix and Open Source, I have also worked with many Windows and other proprietary projects and tools, my approach is to focus first on the business needs, next on the resources, skills and constraints and only then to match up the appropriate technologies – whether internal or external, open source or proprietary.

Getting start – from idea to the next phases

When you first have an idea your thinking goes something like this “This will be great we do a few simple things, launch, everyone loves us, we start buying our own private islands” Okay, there are many variations on those thoughts and not everyone focuses on a big eventual payday – for some simply “everyone loves us” is reward enough. (or “we change the world” which should, after all, be a pretty good reward – assuming you like the changes).

But all too often entrepreneurs focus on the what – on the technology and ignore the underlying business. This is not always a bad approach, without something it is hard to progress and especially early on you are wise to get it working before you dwell too much on the impact of GAAP accounting etc. But it is a delicate balancing act – far too many companies, including some which have raised funds and employ (or were founded) by friends of mine have powerful, cool technology, but little if any mapping of that technology to real business opportunities. At the other extreme, there are an increasing number of “technology” (web 2.0, new media, insert your own catch phrase here) companies that are not, actually, tech firms – but are rather new(ish) versions of media/entertainment properties. Certainly you can make a lot of money entertaining people – but the blurring of the industries does give rise to confusion.

So what should an entrepreneur do?

Start by trying to answer this question:

“What do you care passionately about? Which people? Problems? Industries? Are you going to be as passionate about this for the next decade? Longer?”

Then – with that passion – what needs to be there that you can address? Both in the fantasy future (“search the world’s information” – Google’s mission) and in the immediate term (i.e. real users, preferably real income generated, in the next 3 months or sooner)

For most people, to achieve these passionate goals will take a team – what role will you play? What roles do you need to fill?

I’d encourage you to think not in terms of job titles (CFO, CIO, Director of Sales) but to think in terms that arise out of what you will be working on, who you will be working for (besides yourselves) and what has to happen to both keep the lights on and deliver. If you are naturally introverted, most businesses will need some public faces and outgoing types to interact with the rest of the world – to build the relationships that generate income. Someone has to dot all the i’s and cross all the t’s, get bills paid on time, collect money, allocate scarce resources and find creative ways to get what is needed. Ideas have to be implemented and often that takes a variety of skills – whether you are making a film or building a new piece of software/web service.

With the beginnings of your team coming together, and with much thought given to what you are passionate about – next start to think about what you can do now – and where you want to be in the future. Here is one initial major “fork” to think through.

The fork – are you discretionary or critical?

I am writing a book (well first a book proposal, then a book) on economics from a network perspective. As I analyze the economic network around an entity one question I ask is whether the entity (person, company, organization) is a discretionary path or a critical path.

You can think of a “firm” as being an entity through which value from many other entities (physical goods as well as work and intellectual efforts) are pulled together and made available to others. For the firm to succeed and prosper the costs over time have to be less (or at least equal) to the value generate and made available to the firm.

If you are part of a critical process then you works and the value you provide is part of how other entities, in turn, make money and suceed – i.e. if you supply parts to a car company they make money by adding value on top of your parts. Likewise, if you sell that car company software in the long term they should be able to make more money by having and using your software than if they did not use it (or else it is unlikely that other companies will keep buying your services).

On the other hand, if you provide something that is discretionary what you offer is nice for others to have and use, but is not part of how they, in turn, generate value. Over a long term it may occasionally help them (by sparking a good idea) but the choice of whether or not to use your service is not based on, in turn, generating value, but based on something else. Often you are offering entertainment but many other types of firms have a strong discretionary component to their offerings – the extra, non-tangible elements to the good or service.

It is worth noting that a vital aspect for many businesses is learning for whom they are part of this critical path, and for whom they are discretionary, the balance between these two elements of a business can be the path to financial success. Ebay for example serves millions of people as a source for their (mostly) discretionary purchase – their collections, music, books, clothing, etc. However for the hundreds of thousands, perhaps millions of sellers Ebay has rapidly grown into a critical business partner for those firms, one who delivers services and an audience of buyers in exchange for a percentage of each sale – a global, always on mirror of the landlords of large shopping malls.

For the entrepreneur this is a process that will not stop, the balancing act of who pays the bills vs. who the business was built to serve. The successfull entreprenuer will find creative ways to shift value from one set of parties to the firm and to a larger network around the firm.

If you are building software, and you want to sell either that software directly OR services built on top of that software, it is vital that you truly understand what value (if any) the software delivers. If the answer is “indirect” or “it is fun” then, though you have packaged it in technical terms, you are participating solidly on the discretionary side of spending. You can (and many have) still make a lot of money for yourself and the firm, but you have to bear in mind the differences as you price your offerings and as you create the business structures.

Advantages and Disadvantages of each aspect of business

If your firm delivers direct value, that is, if via the services or goods you provide others directly make money, then as they grow you can grow with them, to the limit of their capacity to, in turn, create value and sell what they do with your goods and services. For many businesses this is effectively very, very large, nearly no matter what your product if Target or WalMart determines that they can sell them for more than you charge them, they will buy a large quantity of the good (or service) from you and repeat until buyer’s change their purchase patterns.

Thus an advantage is that you can experience growth directly with you partners and when you are small you can grow to a proportion of each partner in line with the percentage of value your offerings offer them (i.e. if your firm offers a part of a car that is 10% of Ford’s business, and your part is 10 % of the car, you could grow to be just under 1% of the size of Ford – which is indeed very large, if somewhat unrealistic for most startups).

The disadvantage is that your pricing will be constrained not just by any individual partner’s capacity to make money off your goods or services but by the network of your partner’s. To an extent you will try to offer customized products and services to each partner so as to capture the best percentage of the value your goods and services offer that partner, but especially given the increased transparency of the Internet and given the flow of information, in practice you will be constrained to the LOWEST price a significant partner will pay (assuming that you turn down partners who offer only to pay low prices and only purchase at a low level, very likely the cost of manging them combined with the impact on prices to other partners makes turning down that business the better step much of the time)

In contrast while there is indeed very intense competitive pricing for many aspects of the “discretionary” markets, there is also a much wider range of options and approaches around price. Your prices are not determined by partner’s requirements (if they are you likely have aspects of your business that are no longer fully discretionary – DVD sales have become a critical part of the sales of many stores on and offline, while the prices certain fans may pay for certain content are very fluid, the businesses involved such as WalMart dictate that wholesale prices be structured in certain ways and that retail prices in other ways).

But assuming that you have more direct contact with the purchasers of your goods or services you have a variety of approaches to how you price those services.

As a consultant while I like to think that I offer services that are ‘critical path” and highly valuable for my clients, in many cases the decision to hire me is a discretionary one, an investment in having more perspectives, new approaches, deeper analysis, but except in a very few cases my services will not directly in turn generate revenues for my clients (some lawyers who have used me for expert witness services may have marked up my time as might the occasional firm for whom I sub-contact on a given project, but generally it is rare). Thus I can set my prices and in no small part my price is a signal to the buyers of my services of the value they will be getting (i.e. if I still sold my time as I did when I first entered the consulting field then a day of my time wouldn’t buy a nice dinner for two at a good restaurant – now an hour of my time should buy a very good meal for two, plus wine and tip with money left for the valet).

beer price photo by CoryPina - http://www.flickr.com/photos/corypina/Pricing will send a signal and reflect not just where buyers will place you, but how you as a firm view the market. If you price services around the cost of a beer (as my friend Ethan Zuckerman discussed at his presentation at PopTech 2004 that successful Internet Cafes priced an hour of use at the local price for a beer – i.e. at the amount available locally for regular discretionary spending) then you view what you are offering as being an alternative to buying another beer at a bar. (photo from CoryPina)
That, in turn, probably means you are looking to sell a lot of something to a large number of people, and very probably sell to many of them on a regular basis (yes, Starbucks fits this model exactly, down to the selling of brain altering substances).

For technology comparisons here the pricing of individual games and ringtones on cell phones is one immediate comparison. Others are many newer hosting offers (down to <$7/mth or less than the price of some beers in big cities) The special (but common) case of services being offered online for “free” I will address in more detail both below and in future posts.
A different, but also viable approach is to price at very high premium, targeting a smaller audience (though it can often still e quite significant – i.e. see the fashion industry) at a price point that will not be compared to a beer but more like to fine dining or much more. This strategy, applied to technology,

Technology comparisons here would be some games and game consoles (though many of these are adopting pricing models closer to the high volume, low per unit model). Many major pieces of software are, or at least claim to be, tools used by the buyers to in turn make money (SAP, Photoshop, Visual Studio).

And then there is “Free”. Don’t get me wrong, I’m a huge fan of Free, both as a user and as a business advisor, but the key is to both realize when what you are delivering is not really “free” – i.e. when value is exchanged but in ways other than directly financial. For example all the “free” users of Google, when they click through on Google Ads are very directly generating revenues for Google. And through their use of the search engine (and when they do not click through) they are helping Google refine the algorithms.

But more on that in future posts…

One Response to “Advice for the modern entrepreneur – passion, discretion and pricing”

  1. […] Passion shouldn’t be the 1st question…it should be among a number of idealist & realistic questions. “What do you care […]

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