Kathryn Kranen on rational pricing
In the stock market, rational investors are always looking for the best possible price for an entry point. Those who participate in a value style of investing will be well aware of the teaching on Benjamin Graham who spoke at length about value and price and how these two are not the same thing. He talked about Mister Market, that is irrational and that the price of a company can go up and down completely independently of the inherent value of the company. A smart investor waits for Mr. Market to put something on sale and then snaps it up. So how does this relate to EDA? Most of the time not at all, and that is a problem.
In the last of the four vision talks at DAC this year, Kathryn Kranen, CEO of Jasper Design Automation talked about innovation in the large EDA companies. She talked about the advances related to the latest process technologies, but she also chose to talk about one strange innovation, the subscription licensing model. While important, I believe that Kathryn herself may have contributed an even more important business model: find the point at which price and value equate for supplier and client. Let me explain a little.
The true cost of an EDA tool is not the initial development cost. When someone buys a tool, they expect it to be there for them in the future. Transition costs to a new tool are often higher than the cost of the tool itself. If an EDA tool is sold for initial cost, then future support and advances in the tool must be paid for by the next set of buyers. If this is the way things are established, then a great Ponzi scheme is built until there can’t possibly be enough buyers to pay for the support costs. Alternatively the price goes up. Did the initial tool purchasers get a bargain? Sure they did and all of the buyers after them basically have to subsidize their purchase. The pricing was not rational. I have heard of tools being sold for 90% discounts from list. Maybe list price was too high to start with, but I can’t believe that the guilty EDA company will make any money from 10% of list.
Kathryn has always held steadfastly to only selling at a price that is good for customers and good for Jasper. She understands the fully loaded cost of the tool. That sets the minimum amount for which she will part with a copy of the tool. It includes the tool itself, maintenance, support, training – everything necessary to make the customer successful with the tool. If a company comes to her wanting a sale price, she will probably walk away. She wants them to have done a proper analysis of the value of the tool to them. If they believe it only provides a bargain basement value, then no deal is done. She wants a customer who is committed to the tool and the company and will not settle for anything less.
Many years ago I know of people who scoffed at Jasper saying that their tool required an AE in the box, and maybe it was true, but that AE made sure the customer was successful and that made them come back year after year, satisfied and in many cases wanting more. In my book, that is a true business innovation. Maybe it has to be attributed to someone else, but in my book, Kathryn was the one who made a company out of standing behind it. Only when value and price match will a sale be done.Does your company know the true value that tools provide and use that in price negotiations or is it just unknowledgeable buyers that attempt to drive the price down?
Brian Bailey – keeping you covered
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