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Strategies for an upgrade decade.

According to Corporate Software's Mort Rosenthal, the 90s are about to become the "Upgrade Decade." In fact, the Upgrade Decade is already well upon us. Most of the top slots on the current best seller lists are occupied by titles that have gone through at least three or more major releases (depending on how you count version numbers), and it's now fairly common for developers--at least in mature markets--to generate 20%-30% of their revenues from upgrade sales.

Moreover, new upgrade opportunities continue to open up. Game companies have discovered that the life of a hot title can be extended almost indefinitely through Hollywood-style sequels. And as users trade up to new hardware platforms, the demand grows for more powerful versions of familiar applications. Push these trends out a few years and it's clear that the industry's traditional focus on first-time product rollouts is bound to shift to a much greater emphasis on upgrade strategies.

It's also clear that software companies still have a lot to learn about upgrades. Virtually every major upgrade we've seen lately has been marked by Keystone Kop screw-ups--which buyers don't think are funny any more. ("Software Users Are Beginning to Rebel Against the Steady Stream of Upgrades," the Wall Street Journal recently reported.) The problems we see aren't just the result of slippage in development schedules, either. All too often, would-be upgrade customers have to run a gauntlet of confusing prices, hostile paperwork, and sluggish order fulfillment. Other industries treat loyal customers like family members; software companies are lucky if they can find even half of their current users.

Fortunately, poorly-managed upgrade programs rarely create a crisis situation. Unlike Detroit automakers, who have to win back their customers with every new sale, software companies can count on the fact that switching to a rival product is almost always more painful than coping with an inept upgrade program. And if an upgrade flops, developers know they can always keep the current version alive until the problem is fixed.

But upgrade transitions still represent a moment of extreme vulnerability, even for entrenched products..WordStar and VisiCalc are classic examples of titles whose developers failed to deliver adequate upgrades; more recently, Lotus and Ashton-Tate have given away market share (if not more) by fumbling their upgrades. Big upgrade snafus like these probably won't happen too often again--but even a small mistake is bound to be risky once upgrade sales become the primary focus of a company's marketing program.

How will this shift in market dynamics affect the software industry? We've been paying closer attention to upgrade issues lately, and the result is a short list of strategies that we believe most future market leaders will adopt:

* Control the upgrade path: There may be a few naive, first-time buyers who really do evaluate products from scratch (with the questionable help of a local dealer). But the real money these days tends to come from sales to installed-base customers who buy additional copies, follow-on titles, and upgrades. Thus, it's not enough to win beauty contests against an established competitor. The real trick is to convince potential customers that you offer the best upgrade path for long-term commitment to a product standard. And, if possible, it helps to suggest that rival products represent dead-end development paths. That's the message microsoft hopes to get across when it runs huge ads that show nothing but a fork in the road, and Borland makes a similar point--probably more effectively--by offering dbase and 1-2-3 users a chance to "upgrade" to Paradox and Quattro Pro at bargain prices. The strategy seems to be working: Wall Street analyst Michele Preston estimates that 1185% of Quattro Pro sales have been $99 upgrades that have been sold directly to users of 1-2-3 who were solicited by mass mailings." Unless Lotus can switch those customers back to its own upgrade path, they've now taken a fork in the road that leads to Scotts valley, not Cambridge.

* Adopt a "model year": Detroit long ago figured out that car buyers like to see a new model appear every year, even though most model-year differences are primarily cosmetic. By contrast, the timetable for software upgrades tends to be highly erratic, sometimes with huge gaps between versions (or, less often, with not enough time). We suspect that users--especially in large corporate sites--would be a lot more enthusiastic about adopting major upgrades if developers committed to a reliable "model year" schedule of new versions. The ideal software model year for an established product is probably about 18 months; for rapidly evolving categories, 12 months is more likely to become an appropriate standard.

* Eliminate buying obstacles: Unless their current version is a complete turkey, users tend to feel that the benefits from upgrading to a new version are likely to be fairly modest. Since the perceived benefits of an upgrade are small, trivial frustrations--inconvenient ordering procedures, unclear instructions, even a busy phone line--can easily kill the sale. It's no accident that companies with good mail-order selling skills--again, Borland is the star in this class--also tend to run exceptionally hassle-free and responsive upgrade programs.

* Keep an eye on cost ratios: Upgrades typically sell at a steep discount, often more than 75% off list price. As long as upgrade revenues amount to little more than pocket change, the discounts don't matter much. But once upgrade sales account for a significant fraction of unit shipments--say, a third or more--the upgrade discount turns into to a de facto price reduction and some key financial ratios (especially COGS and marketing) may move suddenly into the danger zone. In effect, a company with heavy upgrade sales has become a new kind of business, and it may need a top-down reorganization to function efficiently. Sell direct: Despite a few exceptions like Corporate Software, resellers have shown curiously little interest in peddling upgrades. By default, developers end up selling most upgrades through direct mail channels Soft-letter, 3/5/90). And because dealers don't feel threatened by this kind of direct sales activity, we believe upgrades represent a major opportunity for developers to establish proprietary marketing channels into their own installed bases. Eventually, these direct channels may allow software companies to sell a whole range of follow-on products and services that the retail channel has never supported. If that happens, well-crafted upgrade programs may do more than just keep old customers loyal: They may provide a channel for marketing innovative new products as well.
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Copyright 1990, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:software publishing in the 1990's
Date:Oct 3, 1990
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