Shotspotter Blog

Relationship Economics

As a veteran tech entrepreneur, when I joined ShotSpotter over four years ago, I was both intrigued and surprised by a company that had developed truly groundbreaking technology for its segment, had a marquee list of early customers, but appeared to be stalled at the gate.  It was clear ShotSpotter had the potential to redefine the way cities and their respective police departments could respond to and ultimately reduce gun violence, but the business challenge (and opportunity) was that it was only deployed in 30 agencies. Even fewer of those agencies had fully deployed ShotSpotter, with meaningful coverage areas combined with operational best practices, in order to produce measurable positive outcomes. Early company and market due diligence, as well as customer and prospect interviews, confirmed for me, ShotSpotter had only scratched the surface of the ultimate market and societal impact opportunity.

In business terms, ShotSpotter had proven its technical efficacy in penetrating the “early adopter” market − those well resourced and sophisticated customers that embrace new technologies despite the enormous cost; implementation risk and adoption friction involved in the purchase and use of any new disruptive technology. Early adopters play a critical role in helping launch and refine a vendor’s new product offering in addition to providing much needed commercial revenues.  In the consumer world, you would recognize these “early adopters” camped out several days before the release of the newest Apple device. And, while due to the large size and impact of early adopter customers, this might be effective for some consumer focused businesses, it can be a death knell for any enterprise company that must look beyond early adopters to the larger and more critical early majority and late majority market.

The Business Model Pivot

It was very clear that ShotSpotter needed a business strategy to help drive penetration beyond the early adopters into the larger and more viable early majority/late majority market. We decided that in order to “cross the chasm” we needed to completely pivot our strategy to be able to reach a broad new base of customers. These risk adverse; less well resourced customers share a common need to combat gun violence are not as enamored with gee whiz technology.  They are more focused on positive outcomes and benefits that a technology could deliver e.g. “the what vs. the how”. 

This pivot required ShotSpotter to drastically shift how our solution was marketed and sold. We did away with our legacy go-to-market strategy of selling technology at a high price/capex/premise-based/perpetual license basis where technology ownership, integration and ongoing maintenance and operation were the responsibility of the customer and replaced that with a lower cost, simple, less-hassle managed services offering on an annual subscription basis. As a managed service, or Platform as a Service (PaaS), our customers enjoyed a significant price reduction and the elimination of technology and ownership risks that were now shifted back to ShotSpotter. In addition, we incorporated more features and service-rich capabilities to provide an even more complete solution so that agencies could focus their collective efforts on gunfire response and reduction vs. technology management.

The biggest and most important change for us internally was how to re-imagine our capabilities and adjust our external communication from “technology centric” to “value proposition centric”. While the technology is critical, and we are very proud of our history of innovation (33 issued patents/sole source procurement, etc.), in order to gain traction with the early late majority we needed a more solution-focused approach.

However by setting the annual subscription model at a significantly lower price point, we needed to ensure renewals were consistent with low to no attrition. The “bet the company” wager that the board and investors of ShotSpotter came to support was to take on long-term customer relationship risks in order to “cross the chasm” and reach a broader market. It would only be a good bet if we are able to deliver on our solution promise and help drive positive customer outcomes, thereby securing renewals and long-term customer relationships. We inherently understood in working in the public safety market that while it may be challenging to “get in”, if you are a consistent and trustworthy partner and deliver on your promise you can earn a significant amount of loyalty.

Relationship Economics

My exposure to relationship economics was informed early in my professional career as a sales rep with the Data Process Division of IBM.  I was a part of the Boeing Account Team (one of IBM’s top five largest customers) where we optimized around (some say endured) very long, complex sale cycles. We were viewed and thought of ourselves as consultative partners and collaborated as such. With that trust came the responsibility to serve the best interests of the client independent of annual quotas.  We knew our long-term success was completely tied to the success of Boeing. Some of our most interesting conflicts came from internally pushing back on IBM corporate and product divisions attempting to pursue sales initiatives that were not aligned with our client’s interests. This important lesson of relationship economics was reinforced later in my career at Goldman Sachs where senior partners of the firm admonished incoming investment banking associates that at Goldman Sachs “we pride ourselves in being long term greedy vs. short term greedy”.

Consider relationship economics in the specific case of ShotSpotter by comparing the ten-year revenue potential of our legacy business model vs. our current subscription business model on an illustrative basis. In the former legacy model we priced at a one time $250,000 per mile with a 15% annual maintenance contract, which over 10 years would total $625,000 in top line revenue. In our current subscription business model, our entry price is $60,000 per square mile per year with a one time $10,000 set up fee, which if renewed 9 successive annual terms would total $610,000 over 10 years.

From a top line revenue perspective, both the legacy business model and the PaaS are approximately the same IF and only IF there is ZERO attrition over 10 years. However, over 50%+ of the total revenue value is captured in the legacy business model after only three years compared to 30% in our annual subscription business model. When you include the total cost to serve, and consider margin contribution, the difference between the models is more extreme. The legacy model has immediate (and attractive) profit contribution at time zero whereas our current subscription PaaS model breaks even in year 2+ (remember we added more capability in our PaaS offering than the legacy model so our costs increased).

The moral of the story is simple − companies will secure ongoing renewals by offering good service and added value to customers over an extended period of time. This subtle but powerful distinction drives all manner of positive behaviors and customer/partner alignment as opposed to the legacy customer/vendor transactional oriented relationships where the vendor/transaction relationship can win on a single sales transaction versus seeking a mutually beneficial relationship over time.

Enterprise technology providers, operating a subscription-oriented business, must position themselves as partners and drive a high degree of customer intimacy and relevancy.  They must be manically focused on adding and being able to articulate ongoing value. As a company we have organized ourselves around those operating principles.

In addition to the standard customer training and success teams, as well as the traditional break fix customer support organization, infrastructure, tools and processes, we have further invested in relationship economics with Annual Account Reviews; a Client Advisory Board and a Net Promoter Survey Process.  We believe these initiatives significantly differentiate ShotSpotter from other Public Safety Solution providers and move our customers beyond satisfaction to our aspirational objective of customer delight.

Jump four years to the present, and I am still intrigued and surprised − but now it is by the positive impact our customers are making with our help in their cities and communities. As partners working together, we are a better company with a better solution because of our close relationships with agencies from across the country. This valuable on-the-ground perspective allows us to more quickly refine and improve our offering and respond to customer needs with the shared goal to reduce gun violence and ensure safer neighborhoods.

August 31, 2015
By: Ralph A. Clark, President & CEO