The Business of Software

I've seen a topic sowhere here about how to look big when you are just one-person company. I'm doing my second startup now, and I'd like to share with you my knowledge collected during several years in this business. In both cases it was B2B in the field of network monitoring. Average sale price was in the range of $500 - $2000.

My company is basically located in central-east Europe (Poland), so all my customers are abroad. Most of them in Germany and US. There are several problems associated with that.

1. US companies don't buy from non US

It's no difference if you are russian, german or whotever company. You are outside US and you could be as well on Proxima Centauri. For those of you living outside of US: in all bigger US companies there is purchasing department, which will not likely even start buying process if they can't buy in US. They sometimes have problems to send a fax abroad. They just don't know how to do that and sometimes online purchase is not possible. Many institutions and big companie will buy only with purchase order (on account). If you are not US company and do not provide easy way of placing purchase orders you are loosing most of sales. Yes, most of our sales was PO's. Even now, when we have a product priced at $129 PO's are quite important part of income.

2. Some customers need a real representative to contact. There are customers that need to speak to someone. They want to ask a question like a quotation for 10 licenses or they want to know if you know about some problem with your software or they just need to get more information about several features. If you have only an e-mail address they will not buy.

3. Some companies don't want to but if you are small or outside their country - the risk of no support. Yes, there are some companies and institution where the manager will not give ok if he thinks that there is a risk of having a product with no support. You migh been hit by a bus (they think if you are small) or there will be no way to sue you in case that your software deleted all accounting data of the bank (if you are abroad).

4. Customers in different countries will not buy, because they don't know how. They need to have a easy way to buy. They need a representative to call or any other way to buy with the procedure which is most common in this given country. If you have only online store, then they will not buy. They are not sure if they can include this buy into accounting books etc.

----

Ok, we know the disease, but what about the cure?

First of all: setup your US company. That should be a corporation. There are many companies is US which will setup a corporation for you within a day or two. US corporation is extremally easy to run. You do not do any paperwork until the first fiscal year end, and then, after you do this first filings, it's still easy. And what's also very important for enterpreneurs like me: in Poland IRS has the right to close the company at anytime and take up all your money if they think that it is possible that you made a mistake in your accounting. They don't have to wait for a judgement. So having US company which collects money is a way to be safe from such a situation. It can also help to keep cash flow, but that's another story.

Now, you have a corporation, but how to operate it? You need two things - a US phone number and a bank account. You can setup a phone number within minutes with such service like Kall8. You can have toll-free number or a local one, which is automatically redirected to your phone anywhere in the world for just $2 a month! If your business is bigger and you receive several calls a week or a day, you migh think to switch to a service with a living US person as an attendant, which will answer in your company name and will transfer a call to you.

The biggest problem may be with a bank account, but it also can be done.

Now we have a US corporation, US phone number and an account. With that you can take PO's, checks (US companies pay with a check, which is unusual for us Europeans, isn't it :) and you can act in your own country as just a reseller of a big American corporation.

What else? You need really well designed web page, which should be as good, as you really would be such a big corporation. You have to spend some money on professional designer and editor.

If you have all of that, then try to find a reseller in every country in which you have sales. In case of the software with the price higher than $500 reseller is often a must to do a deal. The customer just needs a local company which will do everything they need because they have no time to import the software from you. And sometimes they also need to know that there is at least somo kind of support in their country and language.

That's just for a start. It's not so easy to write down several years of experince. I'll wait for some questions and if there are any, then I'll write more.

Extremely useful information. I have several questions, though.

Q. Which corporation type? I assume LLC?

Q. Where to register the company? I did a bit of research and it turned out that it should be either Nevada or Delaware. But, don't they require a representative locally?

Q. Do I have to pay taxes to the state where the corporation was formed? Do I have to pay taxes in my own country as well? Someone suggested that I should show myself as a contractor in my own country.

Q. What happens in the case if I'm sued?

Q. How hard or how easy is it to obtain a US bank account, even though I'm not a citizen? Are there any countries blacklisted? I'm in Pakistan.

Q. What about a postal address? What if someone finds out there's no office there, but just a box? Would that be considered fraud or cheating?

Q. Is there a telephony service that would forward calls not through VoIP?

Q. Would it be possible to open an Internet merchant account in the US?

Interesting. I wonder how many US sales I lose due to being a UK company and not trying to hide it (UK spelling etc)? Certainly I have had a lot more US sales since I offered a price in US dollars. Probably not quite such an issue for me as most of my sales are B2C.

Greg, thank you for this very useful post!

> 1. US companies don't buy from non US

Not so sure about this. We are a UK based company and, so far, the majority of our sales have been to the US. Large and small companies included.

I guess it depends on your market. We sell to developers who, I think, have a good idea of what they want and are able to push their choice to management irrespective of the location of the vendor.

For larger sales most companies tend to use Purchase Orders and they can be as simple as a fax or email. Just make sure to check the credentials of the purchaser before sending release codes.

Slightly off topic, but I have found that the vast majority of US and European customers pay up on their invoices within the terms (30 days), but some UK companies (in particular larger ones) tend to drag their feet.

We're based in the UK, and (one) of our biggest problems is loosing orders as people find it to hard to buy from us. Your post was very interesting !

We have a large proportion of interest in our product come from universities/research institutes in the USA/Japan. It's very dis-heartening to have someone try our demo, tell us they've put an order in through their purchasing department, and then hear the order has been refused.

In the last case, the purchasing department (Texas) actually contacted us, but then wanted us to sign a form saying we were US citizens. When we pointed out we weren't, they said, Oh, don't sign it then, just tell us your FEIN. After asking what a FEIN was, and telling them we didn't have one, they said, don't worry, we'll assign you one. We said - but we didn't think we needed to pay US tax as we're a foreign entity - and didn't hear from them again. They probably figured out we didn't really have a clue !

So I've just spent the last week trying to work out what's going on with US tax (and the streamlined sales tax project etc) and can't figure it out.

I guess using a reseller would solve all these problems. What we would ideally want is someone who would act as an agent ie they'd take the order from X in country Y, They'd take the money, keep a proportion, give us the rest, and then let us handle the software delivery (it's a download type thing - not a CD). The shareware download.com type thing isn't suitable.

Anyone know of such an agent who might specialise in scientific software and be prepared to deal with a bit of a clueless company and what at the moment is a very few orders ?

If you think of what I wrote here you should end up with a conclusion that it's everything about making purchase as easy as possible to your prospective customers all over the world. Every possible obstacle there is in the process causes many or even most of potential customer not to even think about buying. You have to help your customers to buy your product axactly the same way they buy everything else in their country. They always have some specific procedure for this and if you do not comply, they they may feel lost and not likely to buy.

That's exactly what you noticed. Andy said that US sales increased when he put USD prices. In Europe we are used to have many currencies and we usually know exchange rates. When you throw a stone on a street you will most likely hit an exchange office. But that's not in US. They have US dollar and don't want to search what does it mean that the product costs 100 UK Pounds. Is that cheap or expensive? I'm pretty sure, that if you would do what I described in my first posting, your US sales would increase even more. Much more. In my first company, operated only from Poland I managed to reach about $0.5 mln a year just from US. And our US sales was about 40 - 50% of total sales. Compare this proportion with your sales and think about what you can get with a little of work.

I do not say that you should hide the fact that you are non-US, but it sometimes helps. Anyway the most important here is even not where you are, but how easy is to buy your product and if it's the process that your prospects undestand and use for other buys.

Some comments on your postings now:

toEmbarrassedToTellYou: don't even try to look at the US taxes. It will not help you to sell more products. Find a reseller first and do it quickly. And start setting up your US company. There is no reason to give up about 20 - 30% of your sales to a reseller which does not do more than acting as your store and does not know anything about the product. It's better to spend that money on the marketing. Rememeber that havimg many resellers does not do any good itself. Still that's you who have to create demand on the market and having resellers just ease the buying process. But customers are finding the reseller because they downloaded a trial and are already interested. Never count on resellers as a way to market your software. I'm not saying that this will never happen, sometimes you can have a great reseller which will actively search for customers, but that's quite rare, especially if you are quite small and have niche product. If you are interested I can help you to find a reseller, setup your US operations and increase sales.

Umair: I don't know anything about what you are doing so I can only tell you what I did - I chose S corporation and incorporated in Delaware myself and it should be ok for you also (the first company was incorporated in NY). In fact for small companies diferences between different states are not so important. And later, when you do several mlns a year you can move to any other state. In such situation you are the owner of this company, so you do not pay taxes as a person. Of course the company must pay federal and state (in most states) income tax, which of course will be very low since you transfer all profits to your country. The same note as above - I'm doing consulting for companies who want to start a business in US and I can help you.

I'll try to write more within several days - if you are interested.

Greg, thank you very much for this article and information. It is really helpful!

One question remains: let's say you are in Poland but you own a company in the US. How do you get the money from the US company to use in Poland?

What is the legal form? Do you employ yourself? Make a contract with yourself?

Thanks!

Greg, A very interesting post, thanks. I'd really like to see it expanded to see more of the specific details. This would make great material for a blog post. I'm sure Bob would be interested in publishing such an article over at: http://www.mymicroisv.com

I have two products. For the older one I have resellers in various countries and a representative in the US and that works well for folks that want to use PO's or are more comfortable dealing with someone locally.

For the new 'low cost' product I'm only selling over the net with payment by credit card. So far I've not had any requests to accept purchase orders for this product. Maybe I'm missing out on potential sales though. Certainly the trend I've seen over the years is that more and organizations are willing and able to use credit cards for payment.

We're a US based company, that sells products online from tens to thousand of dollars.

There are a few misconceptions in some of the views here.

1. The price of the product makes a huge difference. In most US companies people the decision maker can purchase inexpensive items using a credit card. Different companies have different cuttoffs, but $500 is a good rule of thumb. So if your product is under this threshold, you have a much better chance of selling online, from anywhere in the world.

2. You don't need to incorporate in the US, but it does help to have a tax ID.

3. Having a phone number that goes to Eastern Europe or to somewhere else in the world is a mixed blessing. Yes, on one hand, it make you look more like a "big company" to have an 800 number, on the other hand, the time difference is a problem. You'll almost never be around when people call, and when they do, the line is going to be a little choppy. Also, is your verbal English strong enough to hold a business conversation?

4. In my mind the main issue is to make your website look professional by US standards. Have several people proof read you text, and just present your information. Don't try to be funny or use emoticons on your web site.

Regards,

Dror

Now something about costs. How much does it cost to setup US presence? Well, it depends how serious you want to be. Lets start with something simple. Here is the list:

1. Corporation setup - $500. You could do it by yourself, but you would have to know how. It's not hard, but I chose to go with a company which did it for me.

2. Bank account - $0 if you do it by yourself, but it may take several months and may be really hard. It also may require a travel to US which will cost you a flight and a hotel for several nights. If you would use other company to help you with that it will be about $500.

3. Phone & Fax - $4 to setup and $4 monthly + $0.06 per minute of each call. Of course, as someone noticed here - you need to be able to take your calls during let's say 9-5 eastern US time whatever it might be in your place. So you migh want to spend some extra cash monthly to hire someone who will work another shift.

4. Now, how about the web? Well, it depends mostly of where you are. I paid for my site, including professional graphics and coding, about $1000. But it's Poland.

5. You must also pay each year: state frenchise tax (it's $100 or something in Delaware), your registered mail agent ($50), postage and mail processing ($300), accounting ($300 - $500 depending how many documents you have). And of course income taxes if you have any profits.

So adding everything - it takes only several sales to return everything and then we start earning.

How to transfer money to your country.

It's actually quite simple. You probably have your own company in your country. Then all you have to do is just sell product licenses to your US copany, which resells them. You issue an invoice for those licenses when you need money to be transferred to you. In the meantime you can accumulate them on US account. You should have no problem with that since this is just export/import of licenses, which is free of customs taxes in most countries as I know.

The thing which you should never do is just selling a license to US company as a natural person (yourself). In such case US company would have to pay 15% of tax for every licenses purchased from you.

Let me know if you are still interested in this subject. Just drop a line - I don't want to write just for myself.

Greg, all this information is very useful.  Many thanks for sharing.

Greg,

Is this you?
http://www.axencesoftware.com/index.php?PR=19

We use VARs to promote our product.  (Value Added Resellers).  They get a one time commission on the sale and they are allowed to train on our products if they, first, are certified from our training program. (train the trainer).

For non-shrink wrap software, VARs are the best way to go.  They help spread the word using word-of-mouth which is GOLDEN!  We, today, get interest & hits from our web site but by far, our VARs close more deals.  We have roughly 10 VARs and I say roughly because seem more ambitious while others we barely hear from.

http://www.softdatabase.com/

Greg, thank you very much for sharing this valuable information in such a generous way.

I'm in Ukraine (Kyiv) and while I do not do any B2B or B2C sales right now it's good to know the outline of options/difficulties one might face.

Thanks again and welcome you to visit developers.org.ua comminity site (as a neighbor). ;)

As Eric noted, having good VARs is one of the best ways to go. It's really hard to find them because almost all companies reselling software, just sell what customers want. So they are actually not very interested in doing marketing for you unless you already have some decent sales so they migh be sure that it will pay off.

In my previous company we managed finally to find several very active acting resellers. They did telemarketing and other actions to actively sell our software and they have been doing a very substantial sales for us.

It really good to try to find such partners in several countries. You shoud seek for reseller first and then try to make a stronger partnership with some selected ones. You should pass them your leads, but of course they have to make telemarketing and make monthly reports of that, and not just sending e-mails to the leads you send them.

I can't tell you exactly how to find such a partner, but I must assure that it's really important and can make a huge difference to your success. So always keep in mind that your good resellers are one of the most important resources.

Of course still, you have to cover all marketing costs and you have to create market demand for the product. But resellers are those that will help you take the full outcome of your actions. Resellers will not help you when you are really small in terms of sales and if your product/trademark is not known at all. But when you grow a little, try setting up several good relationships with a few selected resellers. But that's a general rule: when you most need it, noone will help you. When you are successful, everyone wants to help.

So search for such resellers, but you should also know that you should select they very carefully and you should meet them personally. So invite a reseller emploee responsible for your product sales to your country, meet with him and sing some king of dealer/distributor contract. You can also go to his place. In case of our company our best resellers has visited us.

How big discount shoud you give them? Well it should depend on the sales volume. In most cases I would advise something between 20 - 30%. You could also try to setup different discount for direct sales and those going through other resellers of your reseller. Let's say 20% for direct sales and 30 - 40% for undirect.

You will sometimes also get offers from some resellers requesting say 50% of discount. Or exclusive distribution contract in some country. I would advise not to take such offers from unknown companies, which don't look good. Some big resellers/distributors require bigger discounts and that may bee good for you if they would also do some marketing, but in most cases you would only loose some part of your income for nothing. Just don't take any offer - select those you trust will be good for you.

Where you can sell software.

That's a good question. Because you can't do everything at once, you should select several countries on which you should focus. But it's easy to make mistakes here and loose time for such countries, where you will never sell even one license.

The example of country where you could loose really much marketing money and get nothing is France. Throught all that years I sold almost nothing there. It's also not easy to sell software in Spain, the whole central-eastern Europe and Japan. I will not tell you exactly why. But in case of rich countries, like France or especially Japan the reson is that they do not but anything which is not distributted by domestic company and product/manual/webpage must be fully localized. Also the support must be available in this country and it's language. So basically the only choise you have is to find a partner which will do that for you: help you to localize the software and which will act as your front-end to your prospects and customers. And which knows the local market well and will handle all marketing for you in a way which will make sales.

But fortunately there are several countries where it's relatively easy to sell software. The most important are all german speaking countries, especially Germany, UK and US. In those countries having a reseller or other kind of presence (like I wrote in the first posting) is a must if you want to make a real money. So if you still have no reseller there, open your web browser and search for resellers in those areas. What is the easiest way to search them? Just take a look at reseller pages of those ISV that already have them and e-mail/call their resellers.

All that I wrote here is the most important for those of you that have products with average sale price over $300 - $500. As someone noticed here, more and more companies and even institutions will purchase with a credit card. But not if the price is over some threshold. And this is the case when you most need a reseller. But as I mentioned, I have a product priced at $129 myself and still PO's are quite substantial share of sales, which I would not want to give up. Enough to say is that they returned all expenses of setting up US presence very quickly.