Most ISVs, Microsoft included, are very focused on technology issues.  What are the features in the latest version of our product?  What features do we have that the competition doesn’t?  Are we faster?  Is our user interface easier to use?

When I graduated from college and started working as a programmer at Lotus, I was convinced that the market for software was a technology-based meritocracy, and that whoever built the best software would win.  Developers, I thought, held the keys to the kingdom.  Build it and they will come.

It did not take very long, however, for me to realize that I was wrong.  That wasn’t how it worked.  How did I know this?  Because I was losing miserably to Microsoft.  I worked on Lotus SmartSuite, which was a direct competitor to Microsoft Office.  Our products were, in my opinion, better products.  They were more stable.  They had more features (including some that were extremely useful – like the ability to create chapters in documents, and tab through those chapters).  And our suite cost less than $100, as compared to Office’s $500 and up per copy. By everything I understood about how the software market ought to work, we should have won.  Yet we didn’t – we lost.

I can’t stand not understanding why something that affects me is happening.  So I decided, after about two years as a professional developer, that I was going to figure out what it was that really mattered if it wasn’t technology.

My first suspect was sales, and so I spent a couple of years in technical sales roles in small ISVs, and eventually figured out that sales simply didn’t scale. Every sale was hard and expensive.  It never got easier, and it never got less expensive.  We couldn’t afford to buy the services of enough sales people to make a significant difference.

The sales people pointed the finger at marketing.  That seemed believable.  But when I moved into marketing I discovered that the set of marketing communications activities we were engaged in simply didn’t get enough traction to move the needle.

About this time, it occurred to me that perhaps if I wanted to understand success, it might be sensible to understand a company that was successful.  (I’d already developed a pretty good understanding of companies that were unsuccessful.)  So I did the obvious thing, and came to Microsoft.  Here’s what I learned at Microsoft: marketing is part of the difference.  But an area that doesn’t even have a name at most companies is a bigger deal.

When we sit down to discuss our strategy around some particular product, a big part of what we discuss in the early stages is, “How will it be easier for us to make money when the 1000th customer is buying this than it was when the first customer was?”  This is a really important question, and in my experience, many software vendors not only don't know the answer, but don't know that they should be asking the question.  (Certainly I didn't think of it in my pre-Microsoft days, even though it would have been incredibly helpful.)

Let’s take a look at some possible answers to this question.

How is it easier to sell the thousandth copy of Microsoft Word than it was to sell the first copy?  For the first copy, I have to sell based on product features head-to-head with the competition, which can only happen once I can get your attention, correctly figure out what information you need, and provide a compelling comparison.  (That is, I can tell you from experience, a lot of work.)  But one interesting thing about word processors is that people exchange documents with each other.  Once you reach a critical mass of adoption—once a potential customer knows that the people they want to exchange documents with are all using Microsoft Word—then the ease of document exchange combined with the availability of informal help in figuring out how to use the product provide both a set of benefits that override simple feature comparisons and a way that product awareness happens without Microsoft needing to do anything directly.

Network effect, then, is one possible answer to the business strategy question.  (It’s one of the big reasons WordPro lost to Word all those years ago.)  The key here is to identify a strategy that has a point of critical mass of adoption – and then bootstrap to that point.  This trategy is obviously not unique to Microsoft; Macromedia Flash, Adobe Acrobat, Napster, and QuickBooks are all other examples of this strategy in action.  (The coupling of a free reader with a for-profit writer seems especially popular recently.)  If you are a small software company, it makes sense to try to create a dynamic for your business that works in this way if you can, rather than going the more traditional sales brute-force method.  I mean, it’s all good and well to put an enormous amount of effort into selling every copy of your product if you’re Oracle and can charge tens of thousands of dollars per sale, but how many companies can afford that kind of investment in their sales force?

Other ISV business-related information can be found at Microsoft's Partner Program Business Builder content; it's also the case that Eric Sink has some very interesting information in his MSDN column and on his site.  I also talked some about positioning and messaging in an earlier post to this blog.