The Flight to Value & The Long View

I was surprised a bit this week in a call about what seemed like an attempt at an apples to apples comparison between our product and retail distribution and a new drink that might be released through the Whole Foods chain. So as usual I thought about it and did some more research. Here's a brief conclusion.

First, Whole Foods is perceived as a premium chain. Whether or not the perception is accurate isn't the point; in slower times, there is a flight to value. At the same time that Nieman Marcus dropped 28% and Whole Foods is down 3 quarters in a row, WalMart is up.

I could conclude that clothing and food stores will be hit hard and general department stores will thrive, but I'd imagine that we'll find well-run grocery chains that adjust and do well and general department stores that suffer. A flight to value is for everyone, but regardless we're a value offering.

I'm not surprised that GM isn't doing well. GM has been very slow to adjust its lineup, and SUV sales are, of course, declining. Yet the Prius is selling well, and supplies of used Prii are such that the resale value is significantly higher than the average car. And GM had been giving 0% interest loans, plus discounting, plus cashback. It wasn't sustainable.

People initially respond to crises with fear, and they take protective measures until they see a change. When the dust settles, they change their behavior for self-protection to self-advancement. The products that do well during tougher times tend to be ones that 1) help people save money and 2) ones that help them make money: aspirational products. If you have a product that does both, then you're in great shape. If you're selling SUVs or premium bottled drinks through higher-end grocery chains, you're not going to thrive.

For CircleDog, we have the convergence of a number of things in our favor. Listed:

• Boomers retiring.
• Boomer retirement income cut by 20% to 40%, depending on the mix of investments
• Boomers needing to generate income will create new businesses and will need affordable software easy to use and understand.
• Small business revenue contracting. They need to expand sales and marketing activities, even while contracting.
• Small businesses stopping purchases of higher-priced software, but still have need
• Layoffs. When times get tough, the tough get going. A large number of the unemployed will turn to creating new business. We'll be there with tips and the software to help them
• We'll test a subscription payment plan to make it easier for them as well.
• Unsaturated market. The hole between Outlook and Salesforce.com is significant. This is the original premise of the effort, and it is still valid.

Finally, startups are about the long view. If we are investing to see how things work out in January or March, we're likely to be disappointed--it just takes longer than 6 months to build value and revenue. Startups are about the discovery process, and this is no different. In our case, we have proven software, a substantial hole in the marketplace, unique differentiation, and a weakening economy creating turmoil that expensive software plays cannot take advantage of.

We'll know within 12 to 18 months whether this is the next great software company or one that just makes it. Either way, the economy is something we can leverage that not many companies can.

People are coming out of their foxholes and the dust is settling. Sure, things will get worse--I think much worse. But people need and want affordable tools that will get them through this rough stretch. We're selling to a group of people that are determined to get their retirement back, to survive after layoffs, to grow and thrive despite the macro rumblings. It will be much tougher for a mature company selling premium products.

For us, we have the early indications of a willingness to spend on products that will increase revenue and save money. That's the basis I'm operating on, and I'm excited by the opportunity. We're starting our direct sales efforts, signing up a ton of partners, releasing compelling software, launching the channel partner program to the IT services industry next week, digging in, digging deep. I'm betting on CircleDog.