It was a dark February night in 1994 when I boarded a late plane from New Orleans headed home, dealing with impending doom. It’s the only time I ever asked for a changed seat for health reasons. Claiming severe claustrophobia (an exaggeration), I got my seat switched from a window in the middle of the plane to an aisle in the extreme rear. Everything about that flight remains engraved in memory wrapped in darkness and doom.
I felt lost and alone a few times during my career, usually in the deep on night in lonely hotels halfway around the world from home, the depths of business travel, my consulting years. A few times in airports, in Asia and South America. But never as alone as I felt that night, traveling with Paul B., my supposed partner since 1993, “my sales guy.”
The Huge Problem
“Tim, your boxes suck.” The words of Kathy Colder, a VP for the Fry’s retail chain of computer stores, rang in my ears. Fry’s was a big deal back then, a major retail channel, a market leader in the Bay Area, California, and the West Coast. And Kathy owed me nothing, had no reason to share the real truth, but did it out of generosity. She could have said nothing. She meant it as useful advice. It was her response to my expression of horror as I discovered, in her presence, the concept of “sell-through.”
Sell-through was the immediate problem. I discovered, to my horror, that sales recorded as sales when they went into the channels weren’t really sales until the end user bought the product off of the retail shelves. I didn’t know that. Way worse, Paul B., my would-have-been partner, the one with the retail knowledge and experience, didn’t know it either. We were operating blind. Everybody else in the business tracked their sell through numbers carefully, but we didn’t even know they were available to us. We thought we’d sold a million dollars in 1993, but we actually owed $250,000 of that back to them. we’d sold them to distributors, who’d sold them to retail stores, who put them on shelves; but they didn’t sell through from the shelves. They sat on shelves unsold. And we had to take them back and return the money. And that included the boxes Paul Berger had given them for free, as promotional.
“Your boxes suck,” Kathy Colder said. “You designed them for yourselves but they are too drab. Go look at packages in a supermarket. Packages are supposed to sell, not to sit on a coffee table somewhere.”
Meanwhile, we had three kids in Notre Dame, Princeton, and NYU. The tuition expenses, after loans and scholarships, were about $75,000 per year. Palo Alto Software was our only income. We had next to nothing in savings. We’d left Palo Alto for Eugene in part to clear up our entrepreneurial finances, meaning we’d had three mortgages and $65,000 credit card debt at the worst point. We sold a nice home in Palo Alto and bought our longtime home in Eugene for half the proceeds.
The Bad Deal
Paul B. contacted me in 1992 shortly after we moved to Eugene. He’d been marketing packaging software for a Eugene entrepreneur whose sales had grown past three million dollars per year. He wanted to do it for and with somebody else; and as a partner, an owner, not as an employee. He offered to work for $1,000 per month (very little) if I gave him a shot at being half owner. My sales of template products ran about two hundred to four hundred thousand dollars a year, but that was less than my marketing expenses.
I made the deal with Paul B. I figured I had nothing to lose. Paul seemed to know how to build a software business with retail channels. We agreed that if he could get sales to $1 million in 1993, $2 million in 1994, and $3 million in 1995, then he’d acquire half ownership in Palo Alto Software. Of course I talked this over with Vange, and we both agreed that it was a reasonable risk. We were betting half of a losing and essentially failing business on making that a successful business. Furthermore, we didn’t have a lot of options. We had moved to Eugene. We lived off my consulting with Apple, which was mostly Apple Japan.
It turned out that there were two huge flaws in that deal. Both of which I had discovered in the two days prior to that long dark flight home.
First, Paul didn’t know the business nearly as well as he’d claimed. He didn’t know that sell-through numbers were available to us. He didn’t understand the importance of consumer goods packaging. He didn’t understand how sales into channels weren’t really sales; they could all come back.
Second, much more important, Paul B.’s targets were all about sales, and only sales, with no concern whatsoever for costs, margins, or returns. That was a big mistake. Paul B.’s incentives encouraged him to push up sales by pushing down prices. So Paul pushed the sales over the $1 million in 1993 by offering huge discounts to distributors just for putting our boxes on shelves. Buy two, get five was fine for him, because he thought that was a sale. In the last three months of 1993 he was giving so much away to channels that we were losing money on every unit. Margins in packaged software were running 85% to 95% (price less costs), but Paul had us running at about 10%, meaning that for every $60 unit we sold, we had about $54 in costs (mostly building other products that we were giving away for free). We weren’t covering fixed costs and expenses. Paul was destroying the business while increasing the sales.
Perhaps even more important, Paul didn’t understand retail software sales and the importance of the damned box. The box, the package, was 90% of the product’s sales pitch in one cardboard place. If the box didn’t sell it off the shelves, it wasn’t going to sell. Everybody in retail software — except me and Paul B. — knew that.
Of course it was all ultimately my fault. It was my business. But regarding sell through, returns, and packaging, I knew I didn’t know and I had reason to believe Paul did. He came to me as president of a software company selling more than $3 million per year in retail packaged software. His expertise was a given.
What happened? That’s my next story: 1994-95: We Saved It.
In February of 1994 Palo Alto Software was on the brink of failure. By February of 1995 it had a successful new software product with more than a million dollars of sales orders. Here’s how.
Note: I say I saved it because I did. That was me, in all the meetings, making all the decisions, doing the work, writing code, moving it all forward. But in all these hard times, Vange suffered with me, listened to me, took the risk with me, and advised me of her instinct about people, and her instinct about not spending money we didn’t have. She also supported me in the moral support sense, so that I didn’t feel alone, didn’t feel like I’d lose my family if I made the wrong decision.
The previous story here tells how it got that bad (1993-1994: PAS on the brink). I flew back from New Orleans in February of 1994 dealing with bad product, bad packaging, bad management, and the implied debt of about a quarter million dollars worth of unsold product coming back as returns.
Faced with all those problems, I doubled down. In my blogs and speaking I tell people to do what I say, not what I did. Don’t get yourself into a corner with no way out except digging deeper. Plan better. Anticipate better. But I didn’t. I was in that corner with no good option. My consulting income plummeted as my key people left Apple at about the same time. I had to make Palo Alto Software succeed. So I turned up the risk, doubled the bet. And won.
Step One: Undo the Bad Deal
My recovery plan started the day after the long dark flight from New Orleans. I called Ron Walro, my business attorney, then Paul B., then Ron again. Paul knew Ron and trusted him. I trusted him too. Ron was working on a mediation specialty for his practice and suggested a mediation session.
We met on the next Saturday morning. In one two-hour session we cleared the partnership language and got Paul B. completely out of Palo Alto Software. He got our $30,000 shrink wrap machinery and two Macintosh computers in exchange for signing away any and all rights and claims. I got Palo Alto Software back as 100% ours without any encumbrance. To Ron’s credit, each of us was relieved and happy with the solution.
Paul thought he dodged a bullet. He got out from what he thought was obviously doomed for failure. And he got his beloved shrink wrap machine. He had no faith in me or the business. He thought he’d escaped being associated with something that was so obviously going to crash and burn.
I did dodge a bullet. I got my company back. I got my freedom to do things my way. And I gave away nothing that hurt.
I hated the damned shrink wrap machine. I’d bought it only because Paul Berger was obsessed with it. From the day he started with me, until I finally agreed to buy it, I’d told Paul over and over that I didn’t want to manage packaging and assembly. I didn’t want to own the damned machine. Our core competence was business planning software. Packaging and assembly were fine as a per-unit variable cost and I didn’t want that to be assets and fixed cost to manage. Paul never stopped pressuring me. He was obsessed with the damned shrink wrap machine and owning the whole process I’d put the idea down — it was my company, so my decision — but he’d just wait a few days and then bring it up again.
This was a great example of mediation the way it should be. Both sides winning.
Paul B. was not a bad person. He was a tireless sales person. He was relentless with the distributors who held the key to our sales in a market that was all retail and mail order. He’d leave a voicemail every day for months without response and happily do it again the next day. He established Palo Alto Software’s relationship with distributors and retail chains. He was always honest and he always worked hard. As it turns out, I had trusted him too much, failed to manage him, just let him go on without supervision. My loose style of management was bad for his not knowing what he didn’t now, and his lack of strategic sense. And the incentives were wrong. I’d let him have goals on sales and sales alone, without regard for costs or expenses.
Step Two: Sales Reps
Do you know the concept of fixed costs vs. variable costs? It’s pretty simple conceptually. Fixed costs are like rent and salaries that you pay regardless of sales or financial health. Variable costs are like per-unit promotions and per-unit commissions that you pay only if you sell.
Sales reps are the ultimate variable cost. One bright spot in the darkness of the New Orleans revelation (1993-94: PAS on the Brink) was meeting Donna Corson, a successful sales rep, in the process of starting her own sales rep firm, who had also just moved to Eugene from Los Angeles. It was the great serendipity. I became Donna’s first local client. She took on all of my sales tasks in exchange for a 6% commission on sales into retail channels to be paid to her only after the channels paid us. I was one of only four or five clients and she was good at sales. People in the channels knew her and liked her. And she knew the business of packaged software sales. It was a match made in heaven.
Step Three: A Stand-alone App to Replace Templates
The huge underlying problem was trying to sell templates as software. I started Palo Alto Software with software called templates. These are programs that run with spreadsheets, also called macros. I had an excellent financial spreadsheet that linked all the assumptions together so that any change in any one would reflect in the others according to proper finance and accounting. The value I sold to my users was a finished professional spreadsheet standardized and well documented, with formula errors locked out. It absolutely required that my users have the related spreadsheet software (for example, Microsoft Excel) because my programming ran inside the spreadsheet. The spreadsheet software managed saving and printing and formatting.
Many people didn’t understand templates and the relationship between templates and the spreadsheet software they ran in. I sold the Business Plan Toolkit for $99. I got near constant friction from people who complained about saving, formatting, or printing, all of which were done by their Microsoft Excel (or similar). I had to take way too many calls wanting help with operating the spreadsheet, or their computers. In their minds, they had bought my $99 product and I should show them how to save and print. I couldn’t tell them their problem was using their spreadsheet.
So, essentially, going into packaged software with spreadsheet templates was a real problem of educating the market and supporting the spreadsheet software that I didn’t make, I have the money they paid for their spreadsheet, but I was expected to support it. I think the idea was essentially doomed from the start. And the evidence is that in the ensuing two decades, nobody I know of has been successful selling templates.
What I decided, in the days after my February 1994 shock, was not to solve the packaging, or sell-through management, or pricing, without first solving the problem. I needed a stand-alone business plan application. It had to manage not just the financials of the plan, but the text too; and charts, and page formatting, and the outline.
Furthermore, as of 1994, computing had evolved enough to make that stand-alone application possible, even with the programming limitations I had. First, the Windows operating system and computer power and data storage had improved and evolved. Second, Microsoft had published a visual programming language, which could create Windows applications, called Visual Basic. I learned Visual Basic and loved it. Third, a software developer published an Excel-compatible software tool that could build spreadsheet functionality into a Visual Basic application running in Microsoft Windows. The tool (I so wish I could remember it’s name, but I’ve done a web search, that history is lost) sold for $395 and its output was royalty free.
I said it was possible, but not easy. I couldn’t just do it myself like I had with the template products. I wrote about a third of the code myself, in Visual Basic, doing the spreadsheet portions and linking them to the application. I found a local three-person programming company (Cascade Technologies, which no longer exists; its founder was Ken Barley) to do what I couldn’t. They added a complete interface to include the words as well as the numbers, and keep it all, even formatting and printing, inside the one application. We bought Visual Basic add-on tools to manage the word processing, outlining, charts, and printing. I paid Cascade Technologies a $1,000 monthly fee for 12 months, plus a royalty of two percent of future revenue. We were still not able to spend money we didn’t have. But we managed to find that money, a bare minimum, to build the product. That product was the first Business Plan Pro.
Step Four: Packaging
In the packaged software business of the 1990s, packaging was 90 percent of marketing. Nobody read ads. Reviews helped a lot, But the real messages, the ones that mattered, were the box. The look and feel, the tag lines, the illustrations, the testimonials, the quotes from published reviews … the boxes sold the product.
Remember how Cathy Kolder (in 1993-1994: PAS on the Brink) said “your boxes suck?” She added, “it’s obvious you designed them yourselves, and you designed them to reflect your values, like recycling and earthy colors. That will never work. To understand packaging, go to a supermarket and look at the boxes. Especially the (bright orange and glaring) Tide boxes.”
So I knew that at the same time I was building a software product, I also had to create good retail packaging. As if it weren’t already completely obvious, I had also just hired Donna Corson the sales rep, and she took me on as a client only on the condition that we do completely new packaging and she had veto control. I was grateful for Donna’s input. Donna lived and breathed packaged software sales in retail channels. She knew and understood that packaging was everything. So I turned to local designer Dave Funk, who frequented local startup meetings, and hired him and his Funk Designs to create good retail packaging.
Here is the retail packaging we did for the first Business Plan Pro:
What Happened? We won!
We finished Business Plan Pro in November of 1995 and it hit the retail shelves in February of 1995. It was a success. It did get good sell-through. The channel tracking service everybody used had us as #1 in small business software by July 0f 1995.