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How to Beat a New Entrant with Superior EDA tool

How to Beat a New Entrant with Superior EDA tool
by barun on 07-31-2014 at 8:00 pm

 How to handle a new entrant with superior product quality is a point of worried to all EDA companies. Due to continuous research happenings and relatively lower investment requirement new and new EDA start-ups are coming in EDA domains regularly. In several situations, these start-ups offer product of superior quality in terms of run-time or performance metric achieved compared to the existing product available in the market. The immediate reaction of incumbent companies is to cut the price of the product to prevent a start-up to take away its existing or new customer. And the sales team, in good number of cases, asks for price lower that the start-up price to keep existing customer base intact. The argument follows is that as the existing product has lower quality than the new product, the price also should be lower.

But that is not the case, the existing company can even price the its product at higher price and even keep its customer base intact or acquire new customer – thanks to huge switching cost or adoption cost involved in EDA product. Let us see how a switching cost or adoption cost creates a great safety net to the incumbent company.

Scenario 1: Existing customer
Let us assume utility perceived by customer for the existing product ‘x’ is u[SUB]x[/SUB]. The utility perceived by customer for the new product ‘y’ is u[SUB]y[/SUB] and u[SUB]y[/SUB] > u[SUB]x[/SUB]. The price of product ‘x’ is p[SUB]x[/SUB] and price of product ‘y’ is p[SUB]y[/SUB]. The switching cost for customer from product ‘x’ to product ‘y’ is S[SUB]xy[/SUB].

So to change from product ‘x’ to product ‘y’ customer incurs total cost of p[SUB]y[/SUB] + S[SUB]xy[/SUB]. He will buy product ‘y’ only when the difference of utility perceived by him exceeds the additional cost will pay to migrate from product ‘x’ to product ‘y’ i.e.
p[SUB]y[/SUB] + S[SUB]xy[/SUB] – p[SUB]x[/SUB] < u[SUB]y[/SUB] – u[SUB]x
[/SUB]
So, p[SUB]x[/SUB] > p[SUB]y[/SUB] + S[SUB]xy[/SUB] – (u[SUB]y[/SUB] – u[SUB]x[/SUB])

And he will not migrate if p[SUB]x[/SUB] < p[SUB]y[/SUB] + S[SUB]xy[/SUB] – (u[SUB]y[/SUB] – u[SUB]x[/SUB])

And if S[SUB]xy[/SUB] > u[SUB]y[/SUB] – u[SUB]x[/SUB] p[SUB]x[/SUB] can be more than p[SUB]y[/SUB]

Hence the incumbent company can demand more money from its customers even its product has lower quality than the upcoming one.

Scenario 2: New customer
For using any EDA tool a customer needs to invest to evaluate the tool, learn the tools and integrate the tool in its flow. This is called adoption cost. Let us assume adoption cost for product ‘x’ is S[SUB]φx*[/SUB] and adoption cost for product ‘y’ is S[SUB]φy
[/SUB]
So customer will choose product ‘y’ over product ‘x’ if the difference in total cost paid by him is lower than the difference utility perceived by him i.e.

(p[SUB]y[/SUB] + S[SUB]φy[/SUB]) – (p[SUB]x[/SUB] + S[SUB]φx[/SUB]) < u[SUB]y[/SUB] – u[SUB]x[/SUB] i.e.

p[SUB]x[/SUB] > p[SUB]y[/SUB] + (S[SUB]φy[/SUB] – S[SUB]φx[/SUB]) – (u[SUB]y[/SUB] – u[SUB]x[/SUB])

The customer will choose ‘x’ over ‘y’ if p[SUB]x[/SUB] < p[SUB]y[/SUB] + (S[SUB]φy[/SUB] – S[SUB]φx[/SUB]) – (u[SUB]y[/SUB] – u[SUB]x[/SUB])

If (S[SUB]φy[/SUB] – S[SUB]φx[/SUB]) > (u[SUB]y[/SUB] – u[SUB]x[/SUB]) then p[SUB]x[/SUB] can be more than p[SUB]y[/SUB]

Hence in EDA industry switching cost and adoption cost has a big importance and company needs to focus on these two aspects in addition to the quality of the product. Let us now see how company can increase switching cost (from its product) and decrease adoption cost
Few of the ways to increase switching cost are

  • Offer substantial renewal discount to customers
  • Increase the compatibility of tool with other tools used in the flow
  • Provide regular training at low cost to the tool users
  • Create platform for user interactions where users can discuss the issues and solution of regarding usage of the product

Few ways to decrease adoption cost

  • Provide tools to the university at very low price so that huge pool of engineers trained in the tool
  • Make the tool compatible with the other common tools used in the flow
  • Create a easy user interface or readymade scripts
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