1Mby1M Incubation Radar 2010: Phitch

By guest author Praveen Kumar

ePhiphony Incorporated develops and publishes the inventory investment optimization solution suite Phitch, which provides software add-ons to existing accounting enterprise resource planning (ERP) and accounting packages that make it easier to optimize inventory. Phitch is designed to boost the performance of ERP platforms by determining inventory alerts, reorder points, safety stocks, and order quantities at a level to maximize economic profit. The program uses color-coded business alerts that can be accessed from any device and integrates with QuickBooks to improve the financial performance of small and medium businesses.

The Minneapolis-based company was founded in 2007 by president John Krech. The inventor of Phitch, Krech is an acknowledged expert in manufacturing, lean thinking, Six Sigma, materials management, and implementation of inventory management software. He has a BS in chemical engineering and materials science and an MBA. He is also a certified Six Sigma Black Belt and has worked with manufacturers all over the world for 20 years.

In developing Phitch, Krech found that the bottom 30% of businesses have nine times more inventory than their peers in the top 20% while being seven times more likely to be in a stock-out. He also found that the most common reordering strategies were based either cost, service, speed, or volume. Though they were easy to deploy, none made it possible to quickly balance the needs of minimizing costs, maximizing cash flow, and delivering top customer service.

Phitch sets inventory levels for maximum economic profit and communicates the status relative to this baseline. Economic profit is often referred to as economic value added (EVA), a phrase coined by management consulting firm Stern Stewart & Co. Phitch balances costs, cash flow, and customer service using patent-pending technology. While the analytics are complex, the program makes it easy to understand and communicate inventory with color-coded business alerts (i.e., blue = surplus and red = shortage). The platform can also be used to place orders, set reorder points, set safety stocks, send e-mails, and so forth. Phitch makes it easy for an entire organization to understand, communicate, and take action on inventory information.

The fact that Phitch leverages existing ERP packages and is able to work across platforms increases its market opportunity. According to AMR Research, the projected worldwide ERP market in 2011 is $47.7 billion. Based on partnership discussions with top ERP/accounting vendors, ePhiphony estimates Phitch’s opportunity to be $2 billion a year. To reach the target market, ePhiphony relies on components such as affordability and scalability, ease of implementation, portability, vendor partnerships, and third-party partnerships. For affordability and scalability, the company has developed a business model for marketing and selling high volumes, with pricing based on the number of stock items that a business user tracks. For example, a user with fewer than 500 items to track pays $15 per month versus $150 per month for 25,000 items. Users who prepay also receive two months free. The software is currently distributed via an Internet-based desktop version that can be downloaded from the website; however, the company is migrating to a SaaS version this year. This move will enable users to try Phitch with no setup and configuration. For portability, ePhiphony is developing the capability with its SaaS version to work across multiple ERP/accounting platforms. It is also developing portability across devices, including PCs, Macs, laptops, and smart phones across functional boundaries.

Inventory optimization software must perform well on many criteria, such as reorder point, determination of safety stock, lead time, demand analysis, order quantity recommendation, and so forth. There are some QuickBooks compatible solutions available such as ACCTivate, AdvancePro, EZ Analytics, FishBowl inventory, and eXactOrder. ACCTivate’s one-user license starts at $1,795 for features such as order placement, order quantity recommendation, reorder point, and lead time analysis. EZ Analytics is free but provides limited solutions. It sets inventory to a number of days of supply, which can result in overstock and understock situations. Similarly, eXactOrder provides the above features but does not have features related to variability in demand and lead time analysis. ePhiphony has tried to incorporate all of the above features into Phitch at a starting price of $150 per month.

ePhiphony began vendor partnership discussions with Intuit in October 2009 and is approaching Intuit on two strategic fronts: first a “push” to fully integrate Phitch as a reordering method and second a “pull” from an Intuit internal strategic direction in which the technology behind Phitch will play a vital but partial role. ePhiphony is also replicating this strategy with Sage, which provides business software, services, and support to small and medium-sized businesses. It has been invited to develop a third-party integrated application that will be monitored by Sage. ePhiphony plans to fully integrate Phitch into Sage alongside Sage’s other ordering methods such as EOQ and ABCD. It is replicating this strategy with NetSuite and will continue to migrate to Microsoft and SAP late in 2010.

ePhiphony’s market is segmented primarily by business size: small, lower mid-market, upper mid-market, and large enterprises. The company targets small enterprises with its QuickBooks-compatible version released in December 2008 and has been very well received. This positions Phitch to go after the 27 million small businesses in the United States. The typical QuickBooks small business has less than $500,000 in revenue and has fewer than five employees. Intuit’s QuickBooks reaches a market of 7.5 million small business customers, primarily in the United States. Krech estimates ePhiphony’s market opportunity with Intuit to be $20 million per year.

For the mid-market, a Sage-compatible version not only positions Phitch with both small and mid-sized businesses, but it also opens up the 375 million businesses outside the United States. Sage serves primarily (83% of base) small companies with 25 or fewer employees and medium-sized companies (15% of base) with up to 500 employees. Sage reaches a global client base of 6.1 million small and mid-sized businesses with revenues ranging from $5 million to $100 million annually. While QuickBooks reaches more customers, Sage obtains a higher revenue share (3.5 times that of Intuit). ePhiphony’s lower mid-market opportunity with Sage is estimated to be $70 million per year. Microsoft dominates the upper mid-market but has a lower revenue share than Sage (67% of Sage’s). The typical Microsoft user has more than 500 employees and fewer than 5,000.

For large enterprise, a SAP version opens up the largest spending share of the market (seven times that of Sage). The typical SAP customer has more than 5,000 employees. ePhiphony’s market opportunity with SAP is estimated to be $490 million per year.

Phitch has gained early traction through word of mouth, marketing in community forums, and media coverage (the company was featured on the Small Business Association’s SBDCNet, PC Magazine, and Enterprise Minnesota’s best of manufacturing). ePhiphony will be profitable and cash flow positive in 2010 as it continues to demonstrate viability. All growth is organic, and the company is on target for sales of $25,000 in 2010 and net operating income of 95%, which will be reinvested in migrating to a SaaS model and fine-tuning the solution based on user feedback. According to the company, Phitch’s user statistics shows that 85% are in retail, 12% in manufacturing, and the remainder in consulting. Forty-six percent are in e-commerce businesses and the same percentage import inventory. The average user tracks fewer than 3,000 stock items in QuickBooks, and 44% have fewer than 500 items. While Phitch provides a substantial return on investment by helping small business optimize inventory, the vast majority are seeking a solution that makes it easy – 96% of users are looking for a solution that makes reordering in QuickBooks easy. Krech also says that Intuit and the Intuit user forum is ePhiphony’s number one referral source. Reordering in QuickBooks is one of the most common recurring subjects in the Intuit Community. Phitch has addressed 55 questions regarding reordering in the past 12 months. Referral visitors from Intuit Marketplace spend over four minutes on ePhiphony’s website and visit 4.36 pages.

To date, ePhiphony has been 98% self-financed by Krech, who has provided $272,000 in funding. The remaining 2% has come from an advisory board member. The company’s goal is to secure $2 million in funding in 2011.

ePhiphony’s development plan includes implementing a SaaS model and expanding compatibility with additional accounting/ERP packages, namely, Sage (Peachtree, Simply Accounting, and MAS90); NetSuite; Microsoft (Great Plains and Dynamics); and SAP Business One. Krech says that the SaaS model will permit users to migrate from one platform to another and provide the framework to aggregate data to provide benchmarking reports and results. ePhiphony has estimated that sales of Phitch will grow to $10 million in 2013. Krech says that since the company’s sales strategy relies on partnerships with ERP vendors, its sales and marketing and development costs are kept to a minimum; however, these partnerships can take as many as four years to be realized. This estimate assumes one partnership to be established by 2013 with another four in development or negotiation. ePhiphony’s goal is to have three partnerships established by 2015 for total revenue of $300 million, and the exit strategy is an acquisition within four years.

ePhiphony presented at Sramana’s 1M/1M roundtable on April 29, 2010. The recording of the session is here [1:00–06:30]. You can also find Sramana’s recap here. Sramana advised Krech to continue to focus on QuickBooks’ customer base and not make the “spray and pray” mistake of going too broad into Sage, NetSuite, and other ERP vendors where the competition is much stronger. For the short to medium term, she doesn’t think this company should try to integrate with Sage.

This segment is a part in the series : 1Mby1M Incubation Radar 2010