“Give it away, give it away, give it away now” — Counter positioning in legacy industries
By: Rick Zullo, GP & Co-founder at Equal Ventures
A big part of our mission at Equal Ventures is to democratize access to digital technology. We fervently believe that technology is the great “equalizer” — improving the way people work and live, while enabling equality and meritocracy. Pie in the sky? Maybe. But we’re seeing this thesis play out across our portfolio, enabling truck drivers to earn a living wage, buildings to be more sustainable, workers to improve their efficiency and childcare to be more affordable.
One of the biggest inhibitors of this transformation is the willingness to pay for software. My guess is that most of the audience for this article would characterize themselves as “digitally native”. You probably grew up on the internet and pay for multiple apps, software solutions, streaming services, etc. Technology feels like a second language to you and you trust it (for the most part). When it comes time to make a purchasing decision on a potential software solution (whether it’s for you or your business), you are fairly comfortable with making that decision.
For non-digitally native users, that decision is much more difficult. Many of the markets we touch are devoid of software, so behavior and pricing expectations for purchasing it are non-existent. Users in these markets use applications, but generally think of the internet as free. To be honest, I’m a victim of this myself. I can count the digital solutions I’m willing to pay for as a consumer on a single hand (Spotify, Netflix, etc.) and I’m a VC — someone whose entire career is dependent on the monetization of technology.
We’ve studied this behavior and it’s produced a few fascinating anomalies where the benefit of technology VASTLY exceeded the willingness to pay.
These are just some of the examples that we’ve encountered and invested upon at Equal Ventures. In each of these cases, we witness incredibly low willingness to pay for software despite impressive ROI. In each of these cases, you have buyers that are non-digitally native, lack a dedicated IT budget and often have difficult cashflow constraints. These conditions create an irrational aversion to buying software. When we see these conditions, our firm often leans to a certain playbook to unlock software adoption — giving it away for free.
This playbook is sometimes referred to as counter positioning, a concept popularized by Helmer in his book 7 Powers. Counter positioning refers to finding part of an incumbent business model that they cannot do without (i.e. charging for software) and flipping the script on them (i.e. giving it away for free). In many of these categories, there is an incumbent software or service provider that charges exorbitant high rates despite the low willingness to pay we’ve observed. Giving away software for free, a company can remove the biggest barrier to friction (unlocking new levels of adoption), while simultaneously counter positioning themselves against incumbents and future competitors (after all, what reason do you have to switch if it’s free?). This opens up an entirely new universe of buyers. The key is finding an alternative means of monetization to ensure the company is ultimately able to capture some of the value it creates via its software.
I first came across this approach as an angel in WorkRise (fka RigUp), when the company opted to start giving away its software amidst a challenging environment to sell it. Adoption exploded as they made this transition and the company ultimately realized that it could embed itself amidst transactions as a marketplace. The company is now a unicorn, having raised its most recent round at just under $3b. The initial success of this playbook has sent me on a multi-year journey AGAINST traditional SaaS. I initially wrote about this in 2017 and have evolved my viewpoint further in the years since.
While the means to monetization may differ, counter positioning has served as a playbook across each of the industry scenarios outlined above.
In each of these cases, we find a way to successfully monetize our software without creating upfront friction to the sales process. In most of these cases, the customer pays absolutely nothing out of pocket. In other cases, we cannibalize wallet share from others by offering superior services (energy in the case of David and financial services in the case of SmartHop) at dramatically lower costs than incumbent providers. In others, we provide services that our customers’s customers pay for (such as quickpay for truckers), leveraging the software as our distribution point for a high margin product. In ALL of these cases, our customers are given access to world-class software capabilities that transform their business.
While customers ultimately have little incentive to switch, the software layer of these companies ultimately becomes a commodity (the actual software is highly replicable). The best companies are able to identify a flywheel that ensures their initial counter position advantages strengthens with adoption. These flywheels may be anything from customer networks to data network effects to economies of scale on capital/insurance rates and we’re fortunate to see these in place for all the companies listed above.
We believe counter positioning represents one of the most powerful playbooks for vertical software adoption within legacy industries and see the value proposition of this model only continuing to grow. The falling costs of deploying/implementing software (i.e. SaaS) and advancements like fintech infrastructure making new means of monetization easier to unlock are making the freemium model increasingly attractive. As these success stories continue to grow, we suspect these examples will drive further expectation by customers that software should be free.
Digital “transformation” of these legacy industries is at the heart of Equal and this model provides us the opportunity to accelerate digital transformation without charging for it. Many of these hard-working customers have never had the cashflow or resources to purchase it before and have often been threatened by technology “disruption”, leading to distrust of digital solutions. Steps like this can go a long way in furthering trust in technology, something that is absolutely necessary to unleash the economic opportunity of digital transformation.
Who would have thought we’d be learning lessons on economic empowerment from the Red Hot Chili Peppers?
If you enjoyed this post, we recommend you sign up for our Substack here.
