Pricing Your Product to Sell
How can a guy who doesn't use a personal computer sell $25 million worth of software a year? He found a niche that needed filling and has stuck to his business plan since 1982. "Value-priced software is our only business," says George Johnson, president and CEO of Cosmi Corp. in Rancho Dominguez, California. "We're the only company left that does this on purpose. All our products retail for less than $20."
Johnson's secret of success is simple: Cosmi's software engineers review best-selling software programs and then develop low-cost versions offering similar features. The company produces about 150 titles in all major categories: entertainment, education, business, productivity, travel and lifestyle. Some of its most popular business-oriented programs are Desktop Publisher and PDA Travel Companion. "We don't sell leftover programs at a discount," says Johnson, whose privately held firm has experienced 50 profitable quarters in a row. "We produce products to sell at the lower price point."
Another secret of success is doing everything from developing the programs to manufacturing the disks and CD-ROMs in-house. "We do everything ourselves so we have all the costs under control," says Johnson. "Our competitors don't." Cosmi sells to major retailers like Wal-Mart, Kmart, CompUSA, Software Etc., Staples and Office Depot. Cosmi frequently offers two-for-one or buy-one-get-one free promotions to boost sales and acquaint new customers with their products.
"We have to be tremendously proactive," says Johnson. "We know what's selling because we get the sell-through information directly from the stores."
Johnson says as smaller retailers disappear, companies wanting to do business with the major retailers like Wal-Mart must embrace what is called "vendor-managed inventory," the next step for manufacturers who already process orders and transmit funds electronically between their companies and major retailers. "Eventually this means vendors, not retailers, will be the ones responsible for creating purchase orders and pulling the items out of stock quickly," says Johnson.
However, preparing his small company to do business with the big guys required Johnson to spend millions of dollars on sophisticated enterprise software. "We were one of the first small companies to install software that allows us to interface directly with these huge companies," says Johnson. "We've become connected to individual retailers electronically so we can manage every aspect of the transaction."
In addition to having long-term profitable relationships with the nation's leading retailers, Johnson attributes his company's longevity to responding to the market rather than creating products someone in the marketing department thinks will sell. He contends most small software companies fail because they produce too many copies of a program that turns out to be a flop. "They end up with a great amount of product that doesn't sell through the channels. That situation destroys most software publishers," says Johnson. "At our price points, we can't have many flops. We don't maintain an inventory of finished goods, just raw materials. That means we don't have warehouses filled with mistakes."
But What if the Software's a Hit?
On the flip side, their biggest challenge is when they have a winner and must ship thousands of copies within 48 hours. Then, Cosmi's 150 employees shift into overdrive to fill the orders. (The company recently opened a division in Europe with 15 employees in the United Kingdom.)
If a retailer asks for a specific software program, Cosmi engineers can turn it around very quickly. For instance, after the September 11 terrorist attacks, a customer wanted a software program to help thwart identity theft. COSMI had it ready to ship in eight days. It would have taken a bigger company several years to do the work, Johnson says.
Comfortable with technology, Johnson began his career in the magnetic tape business and built one of the world's largest tape manufacturing facilities. Working closely with Radio Shack, his company eventually became the electronic chain's primary supplier of cassette tapes.
In the 1970s, magnetic tape was the memory device used in computers. Johnson says he began to learn more about the computer business. He had an offer to get involved in designing computer games but passed on it. But, by 1982, he knew personal computers would become a permanent part of life and believed software would someday become a commodity. (He still doesn't use a computer, but has two high-speed pencil sharpeners on his desk.) He also avoided being swept up by dot com mania, although the company does operate a Web site at www.cosmi.com.
When asked why he named the company Cosmi, he laughed. "Back in college, I took a marketing course that taught me if you want to create a name that is memorable, use five letters to spell something that mean nothing," said Johnson. "Think about Atari, Kodak and Exxon." Once he came up with the name, Johnson decided Cosmi stood for "Computer Operated Software Manufacturing International."
Here is some advice for entrepreneurs from Johnson: "Make a really solid business plan, and don't forget the profit and loss statement," he said. "Most failures are due to the fact that the guy who started the business just sees it from one angle."
Johnson also advises against having too many partners. He started Cosmi with 12 partners and ended up buying all of them out. "When Nintendo first came out, it devastated the PC business," said Johnson. "After five years of a rough transition, I went to all my partners and said, 'I'll pay you twice what you gave me.' So they went away."
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Jane Applegate is a syndicated columnist and the author of201 Great Ideas for Your Small Business. For a free copy of her "Business Owner's Check Up," send your name and address to Check Up, P.O. Box 768, Pelham NY 10803 or e-mail it to email@example.com. Sarah Prior contributed to this report.