Its the end of the year in software. Oracle’s fiscal year ends May 31st, and today lots of deals will get done, many of them with a gun to the customer’s head.
I don’t like that system: customers hate it, its bad for vendor-customer relationships, and I believe in the long term its very bad for software vendors. The first two points are obvious, so let me talk a little bit about why I think its bad for software vendors.
Besides the damage it causes to customer relationships, I think the typical approach to selling software is bad for two simple reasons:
- It doesn’t do a very good job of actually making the deals predictable
- To the extend that it does work, it promotes big up-front deals, which I think are bad for both parties
Why doesn’t it work? I think there are three main reasons it doesn’t work:
- Customers don’t believe the threat of higher prices after the end of the quarter
- Customers have learned to game the system
- The “external” motivation of the discount crowds out the “intrinsic” motivation of getting things done and living up to your word
Far too often, I’ve seen the price which was offered as “this quarter only” be re-offered again the next quarter, then dropped at the end of the next quarter. Further, smart customers know the only way to know they have the best possible price is to see if the vendor will walk away from a lower price at quarter end. So the customers wind up deliberately pushing deals past the end of the period just to see how the vendor will react.
If that’s not enough, there’s quite a bit of economic and psychological research that shows that “external” (eg, monetary) incentives reduce “intrinsic” motivation. If you want your kids to love playing violin, don’t bribe them to play it. The same thing applies to blood donation. In software purchasing, I think customers have quite a bit of motivation to get the deal done apart from the discounts:
- To have it behind them, decision made and move on
- To have access to the software/support they’re buying sooner rather than later
- To live up to any commitments about timeframe they may have made in the sales cycle
The first two motivations are incremental in nature: one day of delay has relatively little impact, so purchases are often delayed again and again. The third is should function in concert with the discounts to tie deals to the specified period but is undermined significantly by discounts being offered – see Frey and Jegen’s paper on Motivation Crowding Theory
if you’re interested in the academic research on the topic.
What would work better? I believe a system focused on enhancing the intrinsic motivation to live up to commitments made would be more collaborative and potentially more effective. What would that include?
- Sales reps who modeled the behavior of living up to commitments in the decision cycle
- A collaborative approach to designing the decision cycle which lets the customer feel that they are in control of the process
- Without being hokey (I’ve seen really stupid “integrity contracts” introduced by sales reps) an explicit conversation about the importance of keeping commitments around purchase timeframe
I hope over time we’ll build a system like this at 10gen and it will result in both better customer relationships and more predictable revenue than our peers.
Now, why don’t I like big up-front deals?
- They create “lumpy” revenue streams and, since they’re often signed in the waning hours of the quarter, they make forecasting difficult
- The big lumps of revenue become an addiction. Next quarter has to be better than the last, so once you’ve done a megadeal, you’d better find a way to do two next quarter and three the quarter after that; meanwhile, you have no follow-on revenue from those customers, increasing your dependence on new big deals
- They promote the “drive-by” sale, where the vendor takes all the customer’s money in one big transaction and ceases to care about the customer who represents no future business
It’s common to have the majority of revenue come in during the last week, but I remember one quarter with a previous employer where the majority of the quarter’s revenue came in during the last evening of the quarter. While the outcome was good, it was one of the more stressful evenings of my career and not one I’d like to repeat.
All of this came together in a funny way for me this month. There was one large deal where I didn’t extend the price past the end of the month. High-pressure sales tactic? Hardly – it was a big up-front deal that I didn’t really like, but I’d okayed it so we had to honor it through the end of the month. I hope that when we return to the negotiating table, the new deal will be structured in a way which better aligns our incentives with our customers, even if it means a smaller deal now.
I know I am in the minority in software, but I believe there is a better way and we are on a journey to find it.