Mark Leslie, founder and CEO of Veritas Software, discussed pricing strategies and building an effective revenue model. He emphasized that pricing depends on factors like bottoms-up costs, competition, proprietary advantages, and distribution channels. Building a revenue model requires considering product lifecycles, investment needs, and sales/marketing costs across channels like direct, reseller, and international sales. He provided a case study of his prior company Versant, which struggled to match its aggressive revenue projections, requiring layoffs and restructuring due to high operating expenses outpacing revenue growth.

1. Stanford MBA program
Presentation by
Mark Leslie, CEO
Veritas Software
April 10, 1998

2. Mark Leslie
Founding CEO of Veritas Software (~$150M run
rate, $2.0 B market cap)
Founder/Chairman -- Versant Object
Technology -- 10 years
board member -- D2K (data warehousing)
ex board member -- Aurum Software (acquired),
Worldtalk, numerous private companies

3. Pricing and the Revenue Model
Pricing
bottoms up
competitive pricing
proprietary pricing
pricing relative to distribution channel
pricing/deals relative to cost of equity

4. Pricing and the Revenue Model
Revenue Model
Channels of distribution
Multiple products, product life cycle
Building the revenue model
Investment implications
case study -- Versant Object Technology

5. Pricing -- bottoms up
What is the “standard revenue model” for your
industry
unit price = (COGS + Expenses + profit)/units
standard cost on what volume assumption
do you have a manufacturing advantage
bottoms up pricing sets a lower limit on pricing

6. Pricing -- competitive
Who is the competition
Pricing practices in the industry
competitive product comparison
luxury good, or commodity good

7. Pricing -- proprietary
Best situation
no direct product competition
but, still competing in a segment, and for share of
segment dollars
price needs to be justified
ROI based on increased R or decreased I (labor?)
time to market advantage
Context of longer term pricing strategy
market share vs. boutique
i.e.: semiconductor pricing curves

8. Pricing <--> channel
interdependent
Direct Field
SR+SE+office+expenses+ovhd = ~$400 -- $500K/yr
At $1.0 M/yr, COS = 50%!
ASP must start at $25K, oppty to $500 --$1,000K per
transaction
Direct Telesales
SR +++ = ~$200K - $250K
ASP must start at 5K, go to 50K per transaction
Channel
30% -- 55% channel cost
+ high marketing cost
high volume, low cost products

9. Web
# page hits, time per page, # banners/page/unit time, $/banner
who are you attracting, what are they worth?
mktg cost to get hits
sales cost to sell ad space
International
applicability of product
costs to internationalize/localize
costs to market
distribution or direct
$US plus international uplift
Pricing <--> channel
interdependent

10. Pricing/Distribution channel
Case Study -- Veritas Software
Veritas Software
Enterprise storage management software
File and disk management, backup, HA failover, etc.
Three tier distribution -- Direct, OEM, reseller
~650 employees
1997 revenue $121 M, revenue growth of 67%,
operating margin 25%
market cap ~ $2.0 billion

11. Pricing/Distribution channel
Case Study -- Veritas Software
List Prices
List prices are tiered for machine size
$1.5K --> $40K
List prices are different for OS platforms (UNIX vs.
NT)
about 15 underlying products, but...
some products come in lite and full versions
multiple products are bundled into application focused
editions
upgrades from various starting points yield yet more
“products”
combinations/permutations are extremely complex

12. Channel is continuous
Channel Discount Volume
EU/Direct 0 – 20% Site License
Reseller 30 – 40% +5%, coop
Distributor Rsllr +10% +2%, coop
Int’l Distributor 50% (Int’l price
list)
+10%
Binary OEM 60 – 70% +5%
Source/option 80% +5%
Source/bundled 85% +5%
Source/bundled
Lite Product
95% +5%
Pricing/distribution channel
Case Study -- Veritas Software

13. Pricing -- deals
The BIG, but BAD deal
The good
a bad deal is only once, (your) equity is forever
The bad
setting precedent in the market
internal sales discipline
The ugly
Are you giving away your company’s future

14. Pricing Summary
Strategy
COGS
Big Deals
Proprietary
Competition
Channel

15. Revenue Model -- Channels
Product <--> Channel <--> Sales/Mktg costs
Sales and marketing cost model
Direct Field
Direct Telesales
Reseller
Web
International

16. Revenue -- Multiple products
How fast can new variants or new products be
developed, layered into plan
High priced products
Complex products
long cycles
service business
Low priced products
simple products
short cycles
planned obsolescence, replacement business

17. Building the Revenue Model
Product constrained
production capacity
organizational capacity
customer acceptance limitations
Sales constrained
Average annual sales quota in startup -- no residuals
sales overhead model
sales productivity model
geographic dispersion, NA, Int’l

18. Building the Revenue Model
Sales model -- continued
Example
Typical industry SR quota = $1M/yr
Less residual business = $600K/yr
Ramp up 0,25,50,100%/qtr = 262.5K first year!!!
Vs. cost model of ~ $500K!
Strategic Deals
key partnership
prestige endorsement
assure revenue stream
cheaper than equity

19. Investment implications
Need to invest before harvest
either expensive sales force, or
big marketing program, or
both!
Reasons to invest slowly
prove product correctness
prove product completeness
prove channel correctness
“cheaper” breakeven

20. Investment implications
Reasons to invest rapidly
defined market window
competition/mind share
geographic coverage
start-up drive for success
“faster” breakeven

21. Case Study -- Versant Object
Technology
Formed in 1988
Object data base company
Three major competitors formed within 12
months
Objectivity
ODI
Servio-Logic
Direct selling model
“Hot” new technology/ “hot” new market

22. Versant 1991
Q1 Q2 Q3 Q4 1991 Q1 Q2 Q3 Q4 1991
Plan Plan Plan Plan Plan Actual Actual Actual Actual Actual
Revenue:
License 311$ 485$ 765$ 1,005$ 2,566$ 112$ 186$ 91$ 210$ 599$
Services 100 160 280 310 850 69 75 84 68 297
Total revenue 411 645 1,045 1,315 3,416 181 261 175 278 896
Cost of revenue:
License 2 5 20 35 62 5 11 6 8 30
Services 10 15 40 50 115 8 19 11 13 51
Total costs 12 20 60 85 177 13 29 18 21 81
Gross profit 399 625 985 1,230 3,239 168 232 158 257 815
Operating expenses:
Marketing and sales 360 355 410 475 1,600 372 471 483 620 1,948
R&D 500 475 495 510 1,980 480 478 453 473 1,884
G&A 400 400 420 420 1,640 395 396 426 455 1,672
Tot Op Exp 1,260 1,230 1,325 1,405 5,220 1,247 1,346 1,362 1,549 5,504
Income (loss) fromops (861) (605) (340) (175) (1,981) (1,079) (1,114) (1,204) (1,291) (4,689)
Other income 31 40 20 15 106 4 (26) (1) 11 (12)
Net income (830)$ (565)$ (320)$ (160)$ (1,875)$ (1,075)$ (1,140)$ (1,205)$ (1,280)$ (4,700)$

23. Versant 1992
RIF -->
Q1 Q2 Q3 Q4 1992 Q1 Q2 Q3 Q4 1992
Plan Plan Plan Plan Plan Actual Actual Actual Actual Actual
Revenue:
License 510$ 2,715$ 1,047$ 3,740$ 8,012$ 292$ 1,113$ 211$ 1,736$ 3,352$
Services 65 200 113 320 698 43 142 129 189 503
Total revenue 575 2,915 1,160 4,060 8,710 335 1,255 340 1,925 3,855
Cost of revenue:
License 5 100 10 725 840 5 1,120 15 640 1,780
Services 20 35 25 60 140 27 25 35 38 125
Total costs 25 135 35 785 980 32 1,145 50 678 1,905
Gross profit 550 2,780 1,125 3,275 7,730 303 110 290 1,247 1,950
Operating expenses:
Marketing and sales 855 1,155 1,280 1,280 4,570 742 1,043 1,229 1,099 4,113
R&D 445 1,500 575 700 3,220 443 585 531 523 2,082
G&A 540 575 685 790 2,590 522 597 572 662 2,353
Tot Op Exp 1,840 3,230 2,540 2,770 10,380 1,707 2,225 2,332 2,284 8,548
Income (loss) from ops (1,290) (450) (1,415) 505 (2,650) (1,404) (2,115) (2,042) (1,037) (6,598)
Other income 75 55 130 19 65 52 112 248
Net income (1,290)$ (450)$ (1,340)$ 560$ (2,520)$ (1,385)$ (2,050)$ (1,990)$ (925)$ (6,350)$

24. Versant 1997
Q1 Q2 Q3 Q4 1997 Q1 Q2 Q3 Q4 1997
Plan Plan Plan Plan Plan Actual Actual Actual Actual Actual
Revenue:
License 2,755$ 3,675$ 4,335$ 7,675$ 18,440$ 1,912$ 5,587$ 7,241$ $6,620 21,360$
Services 2,045 2,325 3,165 4,025 11,560 1,873 1,777 2,159 2,020 7,829
Total revenue 4,800 6,000 7,500 11,700 30,000 3,785 7,364 9,400 8,640 29,189
Cost of revenue:
License 350 420 505 750 2,025 237 114 619 475 1,445
Services 975 1,110 1,485 2,030 5,600 783 1,182 1,206 1,840 5,011
Total costs 1,325 1,530 1,990 2,780 7,625 1,020 1,296 1,825 2,315 6,456
Gross profit 3,475 4,470 5,510 8,920 22,375 2,765 6,068 7,575 6,325 22,733
Operating expenses:
Marketing and sales 2,060 2,580 3,225 4,915 12,780 2,604 3,902 4,726 6,030 17,262
R&D 710 825 935 1,465 3,935 937 1,221 1,467 1,600 5,225
G&A 375 400 425 475 1,675 495 917 877 960 3,249
Tot Op Exp 3,145 3,805 4,585 6,855 18,390 4,036 6,040 7,070 8,590 25,736
Income (loss) fromops 330 665 925 2,065 3,985 (1,271) 28 505 (2,265) (3,003)
Other income (45) (40) (40) (40) (165) 201 137 120 205 663
Net income 285$ 625$ 885$ 2,025$ 3,820$ (1,070)$ 165$ 625$ (2,060)$ (2,340)$

25. Versant -- discussion
What motivated management in the planning
process?
What could have been done differently?
What happened to the competitors?
Were they “faster” or “cheaper” to breakeven?
More recently, 1997 vs 1996 revenue grew from
$18.4M --> $29.2M (55%), but stock went from
$20.00+ to $7.00.
What should the board do?

26. The Revenue Model
Revenue Model
Product/price/channel indivisible
Multiple products, product life cycle
Building the revenue model
Investment implications
Versant Object Technology
Don’t forget the profit model!!

27. Stanford MBA program
Presentation by
Mark Leslie, CEO
Veritas Software
April 10, 1998