Many people are wondering how the global recession will impact CAD software companies. After all manufacturing is one of the hardest hit segments, and manufacturing companies are the largest consumers of high-end CAD software.
So far the news is not good. PTC just announced that they would miss earnings estimates and CEO C. Richard Harrison said, “The global economic situation has impacted our financial results.” He also said the shortfall was due to reduced license sales in all major geographies.
Autodesk and Dassault Systemes, also both missed expectations in their most recent quarters. At that time, Autodesk said they had seen a “sharp downturn, a dramatic fall off in demand in all geographies” and Dassault reported “a fairly large sequential drop in SolidWorks units” and a 2% decline in revenue.
In addition, S&P Equity Research said it expects demand for new CAD licenses to worsen in the next several quarters on lower worldwide manufacturing activity.
What Happens Now?
We are in for a rough time in 2009, even if only the moderate-case predictions come true. Worst-case, poor conditions could continue through 2010 or later.
The large CAD software companies have been primary beneficiaries of the boom cycle during the last 15 years. During the early stages of the recession, through mid 2008, they continued to benefit due to a rapidly declining US dollar.
Now the stage is set for a significant reversal of fortune. Dassault Systems, Autodesk, and PTC all have huge infrastructures that require high-priced, high margin revenue to afford. They are geographically dispersed, with sales, marketing, and development offices spread around the world. Most of them have expensive direct sales forces and broadly deployed sales partners. This whole edifice is going to be under enormous pressure.
You can be certain that cost cutting is already underway with marketing, advertising, trade shows, and contract positions the first casualties. Further consolidation seems inevitable, likely starting with layoff announcements of 10-20% in the next month or two. This will be followed by less publicly acknowledged reductions in office space and facilities. More worrisome is the potential for a second or third round of cutbacks if the worst-case economic scenarios develop.
Most of the employees of these companies have never known anything but boom times and are totally unprepared to undergo the dramatic cost reductions and downsizing that will occur. Company culture, a fragile thing, will suffer.
3D CAD Software Pricing History
We wrote about the Evolution of 3D CAD previously. In light of the growing impact of the recession on manufacturing companies and their suppliers, lets take another look at where we have been.
1970 – CATIA / Mainframe - $1,000,000
1980 – ComputerVision / Minicomputer - $100,000
1985 – Pro/Engineer / Workstation - $20,000
1995 – SolidWorks / PC - $5,000
Every decade for the last 50 years, there has been a significant shift in the CAD software market that was driven by rapid improvements in computing price performance. Interestingly, the price of CAD software also very closely matched the cost of the hardware it ran on. It is hard to believe that companies paid over a million dollars a seat for CAD software in the 70’s.
Now it is 2009 and the economy is facing the deepest recession since the Great Depression. Today you can buy a high-end CAD computer for $1000 and yet we are still stuck paying $5,000 a seat for SolidWorks, Inventor, and Pro/E. The average selling prices of these products continue to increase with SolidWorks worldwide average selling prices approaching $7,000. To add insult to injury AutoDesk recently increased the price of AutoCAD LT, their low-end 2D software, again and it now costs more than $1,000.
The CAD software industry is stuck in a pricing and business model that no longer makes sense, especially considering the slowing economy and the dire need for companies to reduce costs and conserve cash. The natural inclination for all businesses is to seek improved profit margins, but rather than using process and technology innovations, the CAD software companies want to increase prices.
In order to justify these higher prices, the CAD companies add complex new features and extensions that overburden the product, cluttering the user interface and making them harder to learn.
Large CAD software companies also seek to maintain their dominant positions by locking customers in, making it difficult or impossible for them to switch to a competitive product. One of the ways that they do this is through proprietary file formats. In addition, they also use long-term software subscriptions and maintenance contracts, so that customers cannot easily reduce usage even in a downturn.
However, there is also a long-term trend away from large-scale vertically integrated manufacturers, and the recession will only cause this to accelerate, resulting in the proliferation of consultants, independent design companies and small manufacturing job shops. As this occurs, the founders and employees of these new companies will look for lower cost CAD software that can get the job done without the added expense of unnecessary bells and whistles.
With many manufacturing companies cutting work schedules and staff in response to the recession, the design engineers affected will turn to other lower cost 3D design products like Alibre Design for moonlighting and entrepreneurial efforts. After all it is not likely that a designer facing cuts in personal income can afford to spend $5,000 for SolidWorks, Pro/E, or Inventor for his or her own use.
In the current economy, customers are becoming much more price and value sensitive. Only Alibre is positioned to take advantage of this with average selling prices of $1,000 a seat for our design software.
Our strategy is to give customers more value for the money, and to do so by making a product with high-end features available at a lower cost. We call this strategy the “Best-cost” strategy because it combines a strategic emphasis on creating the “Best” product with a strategic emphasis on providing it at the lowest possible “Cost”.
We believe the key to success is to closely match our competitors on key product attributes while also beating them on price. Consequently, we have developed the organizational skills to both increase product features and manage costs down.
Alibre’s approach is to strive relentlessly to become a lower and lower cost provider of a better and better product, with the intent of becoming both the CAD software industry’s lowest cost producer and, simultaneously, the CAD software industry’s overall best product.
The Easiest CAD Company to do Business With
In addition, we are dedicated to being the easiest CAD software company to do business with. This starts with making our software fast and lightweight, yet very easy and simple to use.
Alibre also believes in making our products and company easy to access. Many customers find us through the Internet, via a search engine, or by word-of-mouth. And unlike our competitors our prospects can quickly find, download, install, and learn our products quickly and easily. The products include built-in help systems and extensive tutorials.
Finally to make the products easy to buy, we offer telephone and online sales, interest free monthly payment plans, and a 30-day money back guarantee. Customers also receive telephone and online support along with both video and instructor lead online training.
All companies are impacted by the recession and Alibre feels it as well. However, we are already a very lean and cost efficient company with a finely honed low-cost business model.
We rely on the Internet for marketing, sales and product distribution. We have over 150 Value Added Resellers worldwide, but do not have any infrastructure or employee investment outside of the United States. All of our employees are located at our headquarters in Texas.
The only physical products we manufacture are DVD’s and manuals for customers who are willing to pay extra for hardcopy and offline backups.
Arguably we are positioned to benefit, or at least suffer less, than our large CAD competitors.
Is it possible that the overpriced status quo in the CAD software business is an artifact of the economic boom of the last 15 years, and that the $1,000 price point is the next mainstream? Alibre thinks so, now all we need is for engineers and designers to put us to the test.