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.