Recently rate of formation new EDA companies have come down significantly. Just thought of creating a thread to discuss some facts on the economics of EDA industry and how companies can use those facts to develop strategies
Fact 1:
High Development Cost, Low Reproduction Cost
The cost of development and deployment of an EDA product is very high, one needs to invest in research, implementation, testing etc, but once the product is developed cost of reproduction is low (yes, I agree there is need of customer specific customization in some areas, but that is not as high as initial product development cost)
Strategies:
Enter with Differentiation:
Hence it is mainly a first mover market. It is unlikely that a company can replicate a leading product in the market and be successful. There is always a need of differentiation. And I feel the amount of differentiation should be significantly high and needs to be in technology area, not in marketing and pricing area (addressed the reason in the next point)
Create Entry Barrier through Aggressiveness:
Show aggressiveness in customer acquisition and pricing once one enter the market with a new product. If competitors feel that the incumbent is ready to discount heavily to maintain the market leadership, the competitors will think twice before investing in the similar product.
Fact 2:
Network Effect:
As more and more companies start to use one particular EDA tool and/ or more and more design engineers got trained in an EDA tools, the acceptance of the EDA tool to other potential customer increases significantly
Strategies:
Train Design Engineers in Your EDA Tool:
Invest heavily to train engineering students as well as young engineers in your EDA tool. More the number of engineers got trained, more easier for a design company to get resource and they will be more interested in buying the EDA tool. Hence having a university program and/ or tie up with VLSI training institute is a must for EDA company. Also it makes sense to offer the tools at negligible cost to those universities or training institutes
Make Strategic Deal with Influential Customers:
If an EDA tool got accepted and used by a big company a lot of other companies (particularly design services companies) can be potential customers. Hence lobby and invest heavily to sell EDA tool to big SoC companies
Alliance with Companies making Complementary Products
EDA tool is very seldom used alone, it is used as part of a flow. Hence it is very important that a company should tie-up and collaborate with companies who makes complementary products in the design flow. If the tool is validated to work with EDA tools used before or after the tool, it will be much easier to sell the tool
Fact 3:Lock-in:
It is a well known fact that switching cost is very high for EDA tool. Customer is very reluctant to change tool due to effort needs to be made for integration of the new tool in design flow, train the employees in the new tool etc
Strategies:Invest in Customer Support and Training:
EDA company should be prompt to any customer queries and train the customers design team very extensively. This will increase the switching cost for the tool
Provide Renewal/ Loyalty Discount:
Offer deep discount to customers for renewal price upfront or send a signal to the customers. Also offer loyalty price for other products
Fact 4:Willingness to Pay for Convenience or Extra Features:
Users are ready to pay (or not pay) for availability (or absence) of a feature as well as easiness (or unfriendliness) to use an EDA tool
Strategies:
Customized Product and Pricing:
There can not be single pricing for EDA tool. Each customer has different level of needs and the pricing can change according to the need. For example one company have less experienced engineers (hence less salaried) and they are ready to pay high for a graphical user interface. But another company has experienced engineers and hence is ok with script based interface. Having product in modularized way where one can add or remove a feature very easily and price the products according the features incorporated is very crucial for success of EDA companies
Regards,
Barun
Fact 1:
High Development Cost, Low Reproduction Cost
The cost of development and deployment of an EDA product is very high, one needs to invest in research, implementation, testing etc, but once the product is developed cost of reproduction is low (yes, I agree there is need of customer specific customization in some areas, but that is not as high as initial product development cost)
Strategies:
Enter with Differentiation:
Hence it is mainly a first mover market. It is unlikely that a company can replicate a leading product in the market and be successful. There is always a need of differentiation. And I feel the amount of differentiation should be significantly high and needs to be in technology area, not in marketing and pricing area (addressed the reason in the next point)
Create Entry Barrier through Aggressiveness:
Show aggressiveness in customer acquisition and pricing once one enter the market with a new product. If competitors feel that the incumbent is ready to discount heavily to maintain the market leadership, the competitors will think twice before investing in the similar product.
Fact 2:
Network Effect:
As more and more companies start to use one particular EDA tool and/ or more and more design engineers got trained in an EDA tools, the acceptance of the EDA tool to other potential customer increases significantly
Strategies:
Train Design Engineers in Your EDA Tool:
Invest heavily to train engineering students as well as young engineers in your EDA tool. More the number of engineers got trained, more easier for a design company to get resource and they will be more interested in buying the EDA tool. Hence having a university program and/ or tie up with VLSI training institute is a must for EDA company. Also it makes sense to offer the tools at negligible cost to those universities or training institutes
Make Strategic Deal with Influential Customers:
If an EDA tool got accepted and used by a big company a lot of other companies (particularly design services companies) can be potential customers. Hence lobby and invest heavily to sell EDA tool to big SoC companies
Alliance with Companies making Complementary Products
EDA tool is very seldom used alone, it is used as part of a flow. Hence it is very important that a company should tie-up and collaborate with companies who makes complementary products in the design flow. If the tool is validated to work with EDA tools used before or after the tool, it will be much easier to sell the tool
Fact 3:Lock-in:
It is a well known fact that switching cost is very high for EDA tool. Customer is very reluctant to change tool due to effort needs to be made for integration of the new tool in design flow, train the employees in the new tool etc
Strategies:Invest in Customer Support and Training:
EDA company should be prompt to any customer queries and train the customers design team very extensively. This will increase the switching cost for the tool
Provide Renewal/ Loyalty Discount:
Offer deep discount to customers for renewal price upfront or send a signal to the customers. Also offer loyalty price for other products
Fact 4:Willingness to Pay for Convenience or Extra Features:
Users are ready to pay (or not pay) for availability (or absence) of a feature as well as easiness (or unfriendliness) to use an EDA tool
Strategies:
Customized Product and Pricing:
There can not be single pricing for EDA tool. Each customer has different level of needs and the pricing can change according to the need. For example one company have less experienced engineers (hence less salaried) and they are ready to pay high for a graphical user interface. But another company has experienced engineers and hence is ok with script based interface. Having product in modularized way where one can add or remove a feature very easily and price the products according the features incorporated is very crucial for success of EDA companies
Regards,
Barun
