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Joel on Software

News

by Joel Spolsky
Tuesday, October 26, 2004

Ipswitch's IMail customers seem to be in open revolt over a new pricing scheme. IMail is a popular email server for Windows-based servers. Ipswitch is a normally smart company in Massachusetts. This story will be interesting to follow for anyone making pricing decisions about software and trying to move upmarket.

Disclosure: We use IMail for email at Fog Creek Software. The only reason we were using IMail is for historical reasons, when we only wanted to have one public-facing server, and it had to be Windows so it could run FogBugz. Now that FogBugz is available for Linux, and, more importantly, we can afford to run as many servers as we want, IMail is a lot less compelling than Postfix or qmail, which are free.

Now, on to Ipswitch's new price strategy. Clearly, management was drooling over the Exchange/Notes market and wondered why Microsoft was getting so much more money for Exchange than they were getting for IMail, and they probably misunderstood the reason. What they were thinking was, "oh, Exchange has all these other collaboration features besides email. Let's add some collaboration features and then we can charge as much as Exchange. In fact if we even go halfway towards the price of Exchange and be an even better value than Exchange. Mo' money, mo' money, mo' money!"

First mistake: they underestimated how much more Microsoft can charge for the same junk simply because Microsoft is the market leader. In MBA terms, Microsoft can capture a larger portion of the consumer surplus because they're the true market leader, a "safe" choice, and they have a worldwide sales force about 200 times larger than the entire staff of Ipswitch. These are people who spend every minute of every day explaining to customers why Exchange is great even if it isn't. Second, Ipswitch misunderstood that Microsoft is in the market for Large Corporate Email Systems and Ipswitch is in the market for small-medium ISPs and smaller businesses without dedicated IT staffs. These are two different markets with very different willingnesses to pay.

The second mistake was a fundamental pricing blunder of misframing the value equation. The price of software has very little to do with cost, and everything to do with perceived value. The classic book about pricing is Nagle and Holden's The Strategy and Tactics of Pricing: A Guide to Profitable Decision Making, a book which is offered in hardback and paperback, with the paperback sold at a higher price than the hardback in a brilliant pricing strategy (Thomas Nagle practices what he preaches). And one interesting point in this book is that customers perception of value is always based on comparisons to some baseline. IPSwitch was hoping their ISP customers, who have never remotely considered using Exchange due to the extremely high per-user cost, would compare their new price to Exchange, but of course, what they really compared it to was the price of the old version of their product, with which it compared very unfavorably.

By the way, if you're wondering what a good example of this strategy is, look at the four editions of Microsoft Visual Studio. There's a super expensive "Enterprise Architect" edition at the top of the line that hardly anyone ever buys; it's only there to make the other prices look reasonable by comparison. Consumers don't really know how to judge the value of software so well, so they grope around for nearby products to use as baselines. Pricing 101 says you give them something really expensive to think about so your product seems cheaper by comparison and thus a better value.

If Ipswitch really wanted to compete against Exchange and Notes, first of all, they shouldn't be competing on price in that market, because IPSwitch does not have any inherent price advantage. In fact Microsoft probably has the price advantage in that market because they can distribute development costs over so many more customers and they already have a sunk cost of a huge marketing force. Never compete on price when you don't have a price advantage. If you're the small company, you don't have the price advantage.

And secondly, Ipswitch shouldn't be abandoning their existing market to chase after an elusive new market in which they're going head-on against Microsoft and IBM (Lotus Notes). They can't win that way. There's a Will and Grace episode that proves it.

My sources inform me that this was a decision made by the MBAs in the company over the strong objections of the developers. It's ironic that the MBAs don't even get the basic MBA stuff right; this is entirely a bad move for reasons that business school graduates should be able to figure out without understanding the technology at all.


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About the author.

I’m Joel Spolsky, co-founder of Fog Creek Software, a New York company that proves that you can treat programmers well and still be highly profitable. Programmers get private offices, free lunch, and work 40 hours a week. Customers only pay for software if they’re delighted. We make Trello, which lets you organize anything, together, FogBugz, enlightened issue tracking software for bug tracking, and Kiln, which provides distributed version control and code reviews. I’m also the co-founder and CEO of Stack Exchange. More about me.

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