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This is regarding a SAAS based software product I am about to launch. One of the key innovation of this product is automation of a human process, this automation is built on top of an expensive commercial software engine. So far all the testing is done using free trial license and it is very successful. I am about to file a patent for this invention as well.

For the go-live, it seems I have two options:

  1. Buy this commercial software $34K+ and lose all the money if concept is a failure
  2. Hire a operational team to do this job manually, once we reach a good customer base then switch to this commercial engine to automate the process.

So far I am leaning towards option 2 but I am struggling to come up with a communication strategy for our customers. Option 2. may sound like my customers are outsourcing their manual work to us but this is a temporary phase and eventually I will purchase the software depending on the success.

Any advise is highly appreciated.

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I think all these answers are immensely helpful and touched various aspects of the problems such as privacy, labour costs etc. Many thanks. onstartup rocks! – user6133 Jan 28 '11 at 15:12

6 Answers

up vote 2 down vote accepted

Not sure where you are, which matters for my answer. Assuming you're in the States, then --

"Hire a operational team to do this job manually," -- You're not likely to be able to hire a team for less then $34k. Let's assume minimum wage. With taxes, fees, etc. you're not going to get very many people for very long at all for $34k and that assumes that you can have just another minimum wager run your team.

The premise of option 2 is saving money and when it comes to wages and benefits $34k is nothing. So you're proposing that you get completely bottom rung workers (all you can get for $34k) to be the "first impression" for your customers of your company to save a few bucks in case you fail.

Don't neglect that if the concept fails, you lose all of the money put into it either way. The key isn't to hedge against failure, it's to determine what will increase the chance of success and do that. A sub-optimal service won't increase your chance of success here.

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I agree with you, I think all these answers are immensely helpful. Each one of the answers touched various aspects of the problems such as privacy, labour costs etc. I will go with 1 and 2 bothy :) – user6133 Jan 28 '11 at 15:05
I think all these answers are immensely helpful and touched various aspects of the problems such as privacy, labour costs etc. I think this advise is best of all. Many thanks. onstartup rocks! – user6133 Jan 28 '11 at 15:11
up vote 1 down vote

Talk to the software vendor (is it K2 or SharePoint)?

I have a piece of software that I'm working on that has a similar issue. I talked to the regional sales rep about it because it doesn't really fit in their licensing model and it was looking like it was going to make my software very, very expensive. After talking with him, I was able to work out a deal where we'd become a vendor for the software (making money on the sales we made), and be able to offer discounted licenses to our customers while we ramped the business up. As well for hosted versions (which fall outside of their normal licensing scheme) he was able to come up with a "per instance" pricing scheme that was reasonable for us and would allow us to ramp up without a huge capital hit for the license at the start. They wanted US to be successful, so they worked with us because it would make them successful.

This is a huge deal that a lot of companies don't think about. They base their system around some large, expensive third party tool/component and then find they can't sell the total engagement price.

We were developing a product that sits on SharePoint a few years back. While we were working on it, we got a SharePoint installation consulting engagement. The total engagement was $200,000. Unfortunately, $150,000 of that went to Microsoft for licensing and to Dell for hardware. We only got $50,000 of the total project. At that point we stopped development using SharePoint as our only platform because the reality is only the largest clients would be able to make such a large hardware and software investment (assuming they hadn't already installed SharePoint). We wouldn't be able to go after the smaller companies (our software at the time required Portal, not WSS/SharePoint Foundation).

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I agree with you to speak to software vendors, in my case I got a deal of 60% of the original price for trying out for 3-4 months and if I am successful then I can go ahead and buy the license by paying the remaining price. very bad deal and this is the reason for contemplating option 2. – user6133 Jan 25 '11 at 15:19
40% off is a bad deal? What do you plan to charge your customers for the first 4 months? – Russell Steen Jan 28 '11 at 5:39
up vote 0 down vote

I would go with option 2 as well. The cool thing about that is that by choosing option 2 you are not eliminating option 1. It would also help you validate your idea without having to spend much money up front.

Good luck!

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Yep, exactly, I would like to validate my idea before investing. But I am NOT sure what is the best way I can communicate to my customers about how we automate this? Should I tell them that we are doing it manually for now and then switch to automation later or use some other language? As always, I indebted to onstartup community. – user6133 Jan 25 '11 at 15:23
up vote 0 down vote

I think option 2 is a good choice. Perhaps you don't need to explain what's happening behind the scenes at all? Customers normally care about the results and benefits they can get out of your product, not how you achieve them. So unless there are data privacy issues, it shouldn't matter whether the processing is done by people or software.

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The software license is a capital expenditure. Look at it using an ROI / risk analysis point of view.

Go with 2. Maybe you can outsource it instead of hiring full time employee(s). When you're at the point where the ROI for the 34K software is good enough and there is a minimal risk, go for it.

Let's say that initially, it will cost you few hundred $ a month for option 1. This is because you have few clients/customers yet. After six months, you have increased you client base considerably, and you expect it to grow even more. You are now spending $1.5K a month. Time for option 1.

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up vote 0 down vote

If the software is MS SQL Server, Exchange or Sharepoint etc go talk to hosting companies like rackspace, iland etc (there are many of them). There is a special Microsoft partner program for hosting companies so that they can include many Microsoft applications with their hosting services for a low monthly fee. The break even point may be 24 or 36 months but it lets you get started now with a price model that matches your revenue.

Or, if the software is from another vendor ask around and see if you can find a hosting company that offers it.

Plus, every major vendor is trying some sort of cloud concept to sell their software, you might be able to find a way in from that angle.

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