Really, your desired point on the price/performance tradeoff depends on the specific circumstances of your business.
(a) Being able to compete on price means you have to be really hard-nosed about optimizing every part of your operations to stay lean. Good relationships with suppliers and competent execution of your strategy are paramount -- think Walmart.
(b) Competing on product means you have to be able to blow away your competition. It's easier the smaller your niche is. It's often about having a talented designer -- Steve Jobs, Shigeru Miyamoto, Notch -- together with a support team.
A lot of software is easier to compete on product, because (1) the zero-marginal-cost structure of the industry means that competing on price is a race to the bottom that will ultimately be won by open source, and (2) a lot of software is specialized.
Companies that win in (a) tend to be driven by business types who are good at the stuff they teach in MBA school. Companies that win in (b) tend to be driven by creative types and have a culture where the creatives' vision is the core competency, and the business side is seen as more of a support role. The good news for bootstrap-stage startups is, if you're in category (b), your business chops don't matter as much; the product can make up for a lot, if it's good enough.
So if your team is thin on business talent but has a ton of technical talent, you should use strategy (b). The reverse should use strategy (a) in theory, but in practice is rare among startups; business types who are good at what they do tend to pull down very good compensation, and mostly hang around companies that can afford it. Of course, if you're in YC or funded, you may have access to business-knowledgeable people; but getting to that point usually means you already have a great product and a lot of technical talent.
I agree with most of your points. You might reconsider your idea about open source = $0, though. You don't want code, you want your computers to do something that adds value to your company. So beside the code, you still need people who understand the code and who understand the problem. And you need to configure the software to mathc your context. That doesn't come for free. It's actually so expensive that a lot of companies rather bet on closed source products with support then on open source + learning it themself, and they are right to do so. That's why most open source products actually have companies around them that sell just the know how and support.
The lesson here can be even taken further. Most things that look like $0 actually have hidden costs. Nothing's free in this world.
Open source gets easier to install / use with time (eg Wordpress is a one click install on any standard hosting service) and it is really free for those who know to use it.
The problem with open source is that there is little short term incentive to the developer. But with time I believe Open Source will be a strong option for many areas like what Khan Academy or One Laptop per Child is for education. So don't discount it!
Note that open-source isn't always a shoo-in for the lowest cost solution.
For any significant software investment the total cost involves: initial purchase price; hardware; installation and (data) migration; integration with existing (or new) systems; ongoing support and maintenance; training and retraining.
In a lot of cases the latter dominate the initial cost.
Comments
Really, your desired point on the price/performance tradeoff depends on the specific circumstances of your business.
(a) Being able to compete on price means you have to be really hard-nosed about optimizing every part of your operations to stay lean. Good relationships with suppliers and competent execution of your strategy are paramount -- think Walmart.
(b) Competing on product means you have to be able to blow away your competition. It's easier the smaller your niche is. It's often about having a talented designer -- Steve Jobs, Shigeru Miyamoto, Notch -- together with a support team.
A lot of software is easier to compete on product, because (1) the zero-marginal-cost structure of the industry means that competing on price is a race to the bottom that will ultimately be won by open source, and (2) a lot of software is specialized.
Companies that win in (a) tend to be driven by business types who are good at the stuff they teach in MBA school. Companies that win in (b) tend to be driven by creative types and have a culture where the creatives' vision is the core competency, and the business side is seen as more of a support role. The good news for bootstrap-stage startups is, if you're in category (b), your business chops don't matter as much; the product can make up for a lot, if it's good enough.
So if your team is thin on business talent but has a ton of technical talent, you should use strategy (b). The reverse should use strategy (a) in theory, but in practice is rare among startups; business types who are good at what they do tend to pull down very good compensation, and mostly hang around companies that can afford it. Of course, if you're in YC or funded, you may have access to business-knowledgeable people; but getting to that point usually means you already have a great product and a lot of technical talent.
I agree with most of your points. You might reconsider your idea about open source = $0, though. You don't want code, you want your computers to do something that adds value to your company. So beside the code, you still need people who understand the code and who understand the problem. And you need to configure the software to mathc your context. That doesn't come for free. It's actually so expensive that a lot of companies rather bet on closed source products with support then on open source + learning it themself, and they are right to do so. That's why most open source products actually have companies around them that sell just the know how and support.
The lesson here can be even taken further. Most things that look like $0 actually have hidden costs. Nothing's free in this world.
Open source gets easier to install / use with time (eg Wordpress is a one click install on any standard hosting service) and it is really free for those who know to use it.
The problem with open source is that there is little short term incentive to the developer. But with time I believe Open Source will be a strong option for many areas like what Khan Academy or One Laptop per Child is for education. So don't discount it!
Note that open-source isn't always a shoo-in for the lowest cost solution.
For any significant software investment the total cost involves: initial purchase price; hardware; installation and (data) migration; integration with existing (or new) systems; ongoing support and maintenance; training and retraining.
In a lot of cases the latter dominate the initial cost.
Open source is not the same gratis, so there is non reason to suspect it would be lowest cost for any non-appliance product.
But open source has a free market of maintenance industry, instead of a monopoly, which pushes prices down in general.
Speaking of business schools, this analysis sounds almost exactly like the Porter Competitive Strategy theory taught at such places.