The problem with cheap

I find Wal-Mart fascinating. Wal-Mart is a near perfect example of Clayton Christensen’s “Innovator’s Dilemma,” in many ways. The very things that have made it spectacularly successful are also causing its stuttered growth, as BusinessWeek captures in this illuminating article.

…[Wal-Mart’s] fundamental business problem is that selling for less no longer confers the overwhelming business advantage it once did. Low prices still define the chain’s appeal to its best customers, the 45 million mostly low-income Americans who shop its stores frequently and broadly. But the collective purchasing power of the “loyalists,” as Wal-Mart calls them, has shriveled in recent years as hourly wages have stagnated and the cost of housing and energy have soared.

Even if this pool of low-income “loyalists” were flush with cash, Wal-Mart still has to struggle with competitors who are also happy to compete on price:

While Wal-Mart vies with a plethora of born-again rivals for the trade of middle-income Americans, it also must contend on the low end of the income spectrum with convenience and dollar-store chains and with such “hard discounters” as Germany’s Aldi Group. These no-frills rivals are challenging Wal-Mart’s hold over budget-minded shoppers by underpricing it on many staples.

So, what should Wal-Mart do? “Innovate!!!” scream the hordes of financial analysts. “Be more like Target!!!” scream others. But the fact is, “cheap” is in Wal-Mart’s blood and you don’t magically become a different company with a different culture simply by wishing it so. Wal-Mart is a beneficiary and a victim of its past. Its every effort to be more like the stores middle-income America shop at have failed. Miserably. Comically. (Wal-Mart sponsored an open-air fashion show in Times Square – “fashion” and “Wal-Mart” don’t go well together.)

The reason I find this fascinating is that there is a persistent myth that open source is cheaper than proprietary software. In many instances, it is. But I hope it doesn’t remain as such.

Have you noticed Red Hat’s shift in marketing? Sure, it will challenge the latest TCO studies put out by competing vendors or analysts, but its primary message is Value. Value might mean lower cost, but that’s not how Red Hat pitches it. Red Hat’s message is that CIOs will make more money and drive more productivity using its software than by using proprietary alternatives.

This is the marketing message every open source company should have. Competing on price can be a profitable ride, but it’s a frantic race to the bottom and one that a vendor will eventually lose. (Just ask Dell.) At some point, being the cheapest is not really what you want.

Look at Microsoft. Microsoft has dramatically lowered the cost of computing (and grew massive markets in the process). But Microsoft’s message is not “We’re cheap.” It’s “We help you get things done easily and efficiently.”

SugarCRM is significantly cheaper than Salesforce.com (and much, much more so than Oracle and other old-school CRM systems). But that shouldn’t be its message. Alfresco is 1/10th the cost of Documentum, but I hope that three years from now our price will be higher (though not that high – at a certain point, enterprise software pricing can be silly-high). For now, the message is ease of use and high performance, not price.

And so on. It’s important to be competitive on price, but it’s even more important to be competitive on value and innovation. “It’s not very good but it’s cheap” is a terrible value proposition. As open source matures, its marketing messages must mature, as well.

On a related note, here’s a thought: would MySQL be better off competing in the enterprise by raising its prices? Considerably? I suspect some of the alleged gap between MySQL and Oracle/DB2 in terms of “enterprise class” comes from perception as much as (or more than) reality. That perception is colored by its low price. Just a thought.