Why economics of scarcity cant work for software startups

August 30, 2007 8:20 pm 0 comments

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Following from the last post — Scarcity is a good resource to build and protect. Companies often invest a lot of time to build walled-gardens around whatever provides scarcity in their business models. They dont like challengers attacking that moat.

But the question is — when is it a really dumb idea to play scarcity?

I think its when you’re a software application vendor or startup in the new economy building general-purpose tools. Here’s why:

1- Nothing in technology is scarce anymore

Unless you’re making your own hardware and OS and languages, most likely whatever you create will be a combination of GUI elements such as text, images, boxes, buttons and more.

Its a really dumb idea to try to build scarcity around that — “we’ll patent this and anyone whose application also has text, images, icons, buttons is a competitor in our space”. That’s never going to happen and they will never be able to prove a thing in court.

Even if you’re not doing that, software applications in themselves aren’t scare either — as Douglas Crockford said in a seminar (paraphrased) “We’ve already hit the threshold of good-enoughness. People wont buy from you because they dont have any more unfulfilled needs, and because they have a huge amount of options”

You might be a startup working on a niche idea or a big idea, but nothing that you will do is going to protect someone else from technology anyway.

That’s also why it doesn’t make any sense to measure your ability to differentiate from the competition based on features alone (“Its another YouTube but with <fill in the blank>”). If you’re thinking this way, may I suggest you kill your product already?

2- Go-it-alone business models are suicide

This isn’t much new but the idea has been around for a year or so now. The gap between the castles of the software giants like Microsoft, IBM, Oracle, SAP etc and your squeaky trojan horse is so large that thinking about taking them on in your terms is a laughable thought.

What is more reasonable to think about is how your software can be associated with a distinct philosophy.

That seems vague, but let me explain. If you cannot address, attract or retain anyone from a “traditional enterprise software” space, you may be able to build your own little castle and moat based on a different culture.

Apple did this in their early years by building a culture around creative professionals, and now they’ve built an “it just works” culture around the iMacs.

37 Signals have created a sub-culture of people who believe that fresh, clean applications with “intentionally fewer features” can help you do more.

Suite 2.0 — spearheaded by Intel — is a collection of companies that are experts in their individual areas, but they all want to attract customers who want to believe the story that “2.0 products can support enterprise collaboration”.

So you can either have a product/market/price/features/relationships mix that lets you sell a particular product in the traditional enterprise product space, or could otherwise create a semi-mass-market around a philosophy that you stand for.

Since both of those are difficult, your best bet is to seek opportunities to work together with one another (abundance) rather than only seek to grow yourself by building a moat around yourself.

3- Customers dont buy software because of scarcity in software.

Again, there is scarcity of any type of software application, and customers know it. With exeptions to certain types of enterprise products (e.g. I’m selling something for $500k because the nearest competitor is $7MM), for the most part your customers are not going to care about you based on your product alone.

If your business model is to gather up a lot of “free” users who dont actually use your app very frequently after playing around with it — that’s one thing. But as soon as you’re going to ask someone to pay for you, you’d better start thinking of building scarcity on relationships, friendliness, openness, customer care and customer support.

No one cares about your product, they care about how you’re planning to take care of them.

Conclusions

I will just leave it at three for now. The thesis here is that Software company CEOs need to lighten up and be more open to meeting others and seeking opportunities to work together to compete with the big guns, rather than seeking opportunities to compete with each other on petty product features.

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