When we launched more than six months ago we did it with a clear goal in mind: provide the better keyless access system for our customers. In order to do this we focused on having a great product, but we also worked to emphasize the experience surrounding it. To that end, we worked to build a strong and trusted installation network and a new approach to the way our customers paid for the service.
Since the first sale, we've gathered tons of feedback from our installers, distribution partners and, of course, from our customers. Now we are in a position to say it: we were wrong about our pricing strategy. But we weren't wrong in a way that it made no sense what we did. On paper it made all the sense in the world, everybody won on paper: the customer, the distributor, the installer and us. It turns out though, when you put all the pieces together and understand a little bit the dynamics of the market, the whole model collapses. So, we are here to explain what we've learned: why we were wrong and what we've done to fix it.
Despite we wanted to blur the lines between them, we clearly run two separate business units that are build independently, but work together shaping the whole iomando experience. On one side we have a hardware device that we install next to the door in order to manage and control it. And on the other, we have the software side, the mobile app.
This distinction matters because those are diametrically opposed business that we tried to bundle together in order to facilitate the understanding of the overall product. We had our reasons to do that, but to be fair (this was our fault, too) we got a little scared by our investors and advisors. They were deeply concerned about the scalability of the hardware side of the business, therefore they "encouraged" us to hide it as much as we could.
Because of that we thought that the service would be more attractive if we sold the idea of "access experience" instead of "a piece of hardware attached to your door". The idea of paying for an action sounded like more goal oriented than paying for a piece of electronics and a piece of software.
So we tied all together and treated everything as a SAAS, that was billed annually to the customer. This way the hardware was rented to the customer for the time they had contracted the service. If for any reason, the customer wanted to stop using the product we can still get the hardware back and re-use it in another place as long as it was current. In a bullet list, this is why we thought that was a good idea.
- The customer perceived us as a service, not a product that she had to buy.
- We detached the installation from the customer, an authorized partner from our network would handle it.
- We had absolute control over the hardware since we owned it at every stage.
- Every customer would run on the latest version of the hardware as well, if a new version comes out, we replace it at no additional cost.
- The last one implies less complexity and fragmentation across the platform, therefore, money being saved on development.
What really happened
We faced two major problems. The first and most important was that our deals with installers and distributors weren't closing as fast as we expected. And the second was that a lot of customers had a hard time understanding our proposition and they didn't fully understand what they were paying for.
The first problem was worrisome, because this network was the fuel that propelled our growth among small and mid-sized customers. We couldn't afford a sales team to chase this kind of customers, because they were extremely granulated.
We wanted to establish a revenue-share with those distributors and keep sharing it every year the customer was enrolled with the service. We assumed that this model would incentivize the distributor to close as much deals as he could and to keep the customer happy as long as they were paying. But it didn't work. It didn't work because we assumed we lived in a empty environment where we were the only players. But we couldn't be more wrong. The truth was that our service interacted with other players that were already in place and that created some unresolvable tensions.
- Distributors already had a business: we were naive enough to go to the distributor thinking that they will live up thanks to our service. We designed the revenue model with the assumption that they would be fully (and only) devoted to our product.
- Distributors were used to "business as usual": that meant "I buy at x, then I sell at x+margin" the classic markup approach. But because our full-SaaS business model meant that the first year we might lose money on a single customer, the markup in absolute terms was little money.
- Distributors don't want a long term relation with someone they never heard of (and that makes sense): it would be like marrying the first person you just saw across the street. We lay out our strategy as if we were to be around for the next 25 years. We were confident that would be the case, but others outside the company were not.
In short, we thought we were going to save their business with an absolute new way of doing things from a company that was created a few months ago. You put it like this and wonder how we even tried with such strategy...
How we Fixed it
The strategy clearly wasn't working. Distributors passed because we didn't fit in their way to do business and that was blocking our way to small customers and therefore, our ability to grow and scale.
So after hundreds of wiped boards and meetings with distributors, we've come up with a clever approach that brings together the best of both worlds. We've explicitly separated our business units, both hardware and software.
Now, we directly sell our hardware to distributors. It has a price and they sell it to the customers with a markup and an installation cost. No more leasing. The customer buys the hardware, so she owns it. Therefore, on this side of the business we drive a classic >30% markup business that is paid up front and finances almost all the manufacturing costs and operations. Before that, the cost of the hardware was bundled on the subscription and we lost money on every single sale, hoping the LTV of the customer would account for that in the future.
This makes the distributors happy because they can run business as usual, their margins are higher in absolute terms and the customer acquires something and it feels like she is paying for atoms, not bits.
But on top of that, with every sale distributors close, we tie the customer back with a SAAS that provides the access control features. We make it everything plug and play and transparent to both the installer and the customer. So the moment the installation takes place, our device connects to the internet and awaits to be activated by the customer. She only has to go to our activation portal, introduce the serial number and the number of licenses and it is already working.
This makes customers happy because the fee is lower (we can afford that because we have plenty of margin here since the solution runs entirely on software) and the setup is really easy.
But it also makes us happier than anybody because we transformed a SAAS model, into a double edged business with 1/ an up-front revenue from the hardware that provides a stream of money to sustain manufacturing expenses, and 2/ a SAAS revenue from the software that brings scale and long term profits.