Episode 102 | 4 Levels of Income Generating Web Apps

Show Notes

Transcript

[00:00] Mike: This is Startups for the Rest of Us: Episode 102.

[00:04] Music

[00:12] Mike: Welcome to Startups for the Rest of Us, the podcast that helps developers, designers and entrepreneurs be awesome at launching software products, whether you’ve built your first product or you’re just thinking about it. I’m Mike.

[00:20] Rob: And I’m Rob.

[00:21] Mike: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. How are you doing this week, Rob?

[00:24] Rob: Doing good. We got some really cool new reviews of the show in iTunes. C Snipes [Phonetic] said, “Every episode is a gem.” He said, “This podcast is dense with valuable experience and insight especially for small and early career tech entrepreneurs. Mike and Rob are experienced personable down-to-earth guys. Conversations are focused and relevant.” Then Don Felker said, “Best startup podcast.” He said, “It’s one of the best podcasts I’ve listened to in years. Great simple advice for micropreneurs and single founders. I highly advice listening to it.” You know, Mike when I’m down and sad and all alone, I go in to iTunes and I read all our reviews. It makes me feel good, man. It makes me feel good that we can…we can talk to people. Well, that we can talk to each other but that it resonates with people on that, you know, that they get value out of what we’re saying on the show.

[01:09] Mike: Yeah, that is pretty cool. I love getting e-mails from people whether it’s just praise or people asking questions and just sending things our way. So that’s really great to hear. Definitely, we want to say thanks to everybody for all that support.

[01:22] Rob: Yeah, it says a lot about our listenership. Our listenership is smaller than, you know, some major podcast like Mixergy or This Week in Startups. We rank really well for the term startups and we have per listener, I think we have a lot more ratings and reviews in iTunes. So it’s very cool. How about you? What’s going on this week?

[01:40] Mike: Well, I’ll be on Brooklyn over the next couple of months quite a bit, probably five of the next nine weeks I’ll be spending in Brooklyn, New York. So if anyone is interested in meeting, just drop me a line. You can shoot me an e-mail either questions@startupsfortherestofus.com or mike@micropreneur.com, either one will get to me and we’ll just kind of schedule a time to meet up or just shoot me a message on Twitter or whatever.

[02:01] Rob: Very cool. I am speaking on the Google Campus this weekend. I’m speaking in a Google Developer event that’s designed to get developers together and get them fired up about using like Google API’s and Maps and all that kind of stuff.

[02:15] Mike: Oh. I thought they were going to be replacing Marissa Mayer with you.

[02:20] Rob: Yeah, that’s what [Laughter] — that’s what it is. Wouldn’t I do a great job with that?

[02:24] Mike: Of course.

[02:25] Rob: Let’s say just stand there and look gorgeous and that’s all.

[02:26] Mike: [Laughter]

[02:29] Rob: Yeah, in terms of the speaking gig at Google, I was actually reticent to do it. I was invited a couple of months ago by a guy here in Fresno who had seen me speak and you know, as a rule, I don’t enjoy speaking at Developer events because when I say things like the code doesn’t actually matter that much and the idea doesn’t actually matter that much, it’s a lot about marketing, they don’t tend to want to hear that. So I’m not like a popular guy and it’s not even about being popular. I just — I don’t feel like it resonates with them because they, you know, in general, developers don’t want to hear that message. So it took some convincing but frankly, I’ve never been to the Google Campus there in Mountain View. I really wanted to be convinced till I do it and since it’s, you know, a talk I’ve given before that he said would resonate with the crowd and he knows the crowd and frankly it’s only 40 minutes, so you know, how bad it goes, I can [Laughter] I can flop pretty bad for 40 minutes and still feel okay about it.

[03:18] Mike: Cool. On my end, I’ve lost a couple of Altiris Training subscribers which is a little bit sad and unfortunate. But one of them actually didn’t drop from being a subscriber so much as they tried it out and that it’s the first person who tried it and said, “No, we’re going to actually pass on it. So we’re going to take a refund,” which a little disappointing but some of the content isn’t they’re — they were looking for and they were very adamant about me staying in touch with them so that when the content is there that they’ll check it out again. So that was at least good to see. But they’ve, you know, had high praise for the content that was there, just wasn’t particularly relevant for what they were using.

[03:52] Rob: Oh, interesting. So you need to add more content then if you want to keep customers like them around?

[03:56] Mike: Yeah, it’s just they were looking for more advance content and a lot of the stuff that’s there right now is for beginners and you just can’t find some of the stuff online — I mean you can find it but it’s — it’s a lot like the Academy. You know, it’s not like there’s anything in the Academy that you can’t find elsewhere but it’s highly consolidated in to one location. So you don’t have to go looking for it and you can get your questions answered very concisely and very quickly. And what they’re looking for is just some topics that I haven’t even touched on or talked about yet. So that was fine. It was the first person who said, “Hey, to be honest, this just doesn’t going to work for us.”

[04:31] Rob: Right. So do you think you’re going to invest some time in to adding more content in to keeping them around?

[04:37] Mike: Well, these people are already gone so once I developed — I can develop about half of the content that they want. The other half, I don’t actually have the abilities to do because I’ve never actually done some of that stuff that they’re asking for, so I have to figure out how I’m going to address that issue and I’ve got some ideas. I’ve got some consultants I could probably lean on or some other partners that I could talk to and say, “Hey, can I pay you to put together some videos for this or that,” and it might cost me a couple of hundred dollars to have them put together some videos that are some over views or some detailed description of how to actually solve certain problems but a couple of subscribers would — to completely offset that those costs.

[05:14] Rob: Right. Did you see the thread on Quora? It was about one of the most ridiculous technology patents ever granted.

[05:22] Mike: No, I did not.

[05:22] Rob: And it ties in a little bit with our discussion last week. Some of the mentions are some of the things we mentioned last week like Amazon’s one-click patent, the pull to refresh feature present in many apps. They said it’s actually patented by Twitter. Making links in an e-mail clickable. They say, “All links and phone numbers in e-mails can be made clickable, even when the original e-mail sent by the user didn’t make them clickable links. Sounds trivial but Apple patented and they sued HTC over the patent –

[05:50] Mike: Wow.

[05:50] Rob: … which is kind of frightening. Is that crazy? Buying stuff inside an app. They said, “Yup, even if an app says ‘Click here to buy the full version’, they are ‘infringing a patent’. Rovio got sued over this by Lodsys which owns the patent.” And I’m pretty Lodsys is one of you might call patent trolls. They aren’t actually building anything. They just owned a big portfolio patents and they make their money by suing people for it. So and there are few others. There’s — none I hadn’t heard before about that’s surprising.

[06:19] Mike: I’m surprised about the Lodsys patent where you have to click here to buy the full version. I mean doesn’t that blast out of the water the entire share where the industry from like the ’90s? And wouldn’t that patent have expired by now or  couldn’t you point to the entire or like pretty much all the ’90s as being one of the situations where it’s like oh where there’s past examples of  where this already existed so it can’t be patentable?

[06:41] Rob: I’m sure the lawyers tried. Rovio definitely has them. So I bet it’s only dealing with the mobile app or something to that effect.

[06:50] Mike: Oh, maybe –

[06:51] Rob: You know what I’m saying? I’m sure there’s a loop hole because they — I mean you can read the Venture Beat article and it looks like Rovio had a heck of a time with them. So it’s certainly was not as easy as saying, “Hey, there was prior art.”

 

[07:01] Mike: I saw something else. It was Rackspace and Red Hat or in staunch opposition to any software patents and we’ve kind of talked about this before. But, you know, they are completely against software patents of any kind and it was surprising to see that Rackspace had come out so strongly against them. I mean I kind of understand why but it’s interesting that those there were the only two major companies that have kind of thrown their names in along those lines.

[07:24] Rob: Right. Well and there’s been a bunch of things floating around. Silicon Valley of Paul Graham and like a commenter said, “We’re going to agree not to sue like even if we patent something, we’re not going to do offensive litigation.” I think Twitter had said that they weren’t going to use their portfolio for offensive stuff only for defense. I mean it’s pretty crazy. There weren’t software patents until 1998. It was only copyrightable before then and so we definitely have existed without software patents. And anything else going on with you?

[07:50] Mike: I suppose an episode wouldn’t be complete without an AuditShark update. I’ve talked about my database synchronization issues in the past and I had somebody from Microsoft contacts me who said that they thought that I was using some software that they wrote. So that was, you know, really cool to see but I’m finally at the point where after 3700 lines of sequel code and another 2000 lines of C Sharp code, I’m finally able to synchronized the databases or at least I have the databases in a state where I can synchronize them. I still can’t do it natively thru my code but I’ve got other tools that can synchronize between them so I can actually get started with building policies and pushing them to the clouds so that people can use them at this point. So I’ll be starting on building those this week and then hopefully by Monday, people will be able to start using them.

[08:35] Rob: Right. So what does that mean in terms – so that’s a technical side of it, what does it mean in terms of like the users that you have using it?

[08:43] Mike: It means my entire schedule has been pushed back by like six weeks because of this problem.

[08:47] Rob: So you’re going to be back where you kind of were six weeks ago before this thing cropped up and then –

[08:52] Mike: Right.

[08:52] Rob: … you’re going to resume. You’re going to continue with your — your early access users and hopefully, get a few more on board in the next couple of weeks?

[08:59] Mike: Uh huh.

[09:00] Rob: Very good. I was looking at a list of marketing task because, you know, I keep going back to that HitTail marketing plan that I wrote out about, what, nine months ago. It expanded for a while and then boy, for the past couple of months, it’s really been — I mean it’s a huge plan, right? It’s like 12-pages long. I’ve mentioned it before and I keep just plucking ideas off of it and implementing them as I basically as they strike my fancy. You know, it’s like, oh I want to do that. I’m going to try that out and see how it works. And some of them worked and some of them haven’t. I made a list. I started reordering them this weekend and I just put them in to three different categories like the “more traffic bucket”, the “higher conversions bucket” and the “higher lifetime value bucket”. And looking at them in this way was really eye opening because suddenly I realized that when you first launched an app, it’s more about more traffic, right? Because you have zero visitors, you know, and you want to get 500 to thousand, 2,000 just so you can start seeing pattern so you can get some customers. I mean it’s just such a scramble to get that initial flywheel traffic going.

[09:56] And then at the point now, I don’t actually need to do any of the more traffic thing right now for HitTail because I have plenty of traffic coming through that now needs to be optimized. So almost everything that I’m picking up the list now is either to increase conversion rates whether from visits to trials, trials to paid or to increase the lifetime value of customers. So the more traffic stuff is going on the backburner now and everything else is moving forward. But I think depending on where your business is at. You know, if you’re listening to this like give that some thought. It’s not always about traffic. It’s not always about conversions. It will bounce back and forth between these two things and almost for sure, if I get this converting really well and dramatically increased it over the next couple of months, I’m then going to want to go back and I’m going to want to double my traffic again, right? Because then — and then you can just take even more advantage of the higher conversion rates that you’re getting.

[10:47] Mike: Yeah, that’s very cool. I mean I hadn’t necessarily thought about breaking those in to, you know, all the marketing tasks in to the different results that you’re expecting to get from them but it does makes sense.

[10:58] Music

[11:01] Rob: So this week, Mike, we’re talking about Four Levels of Income Generating Web Apps and this outline is actually inspired by a recent episode — I was listening to the Podcast Internet Business Mastery and they looked at four levels of niche websites. And the way, you know, they’re in to the more like knowledge marketing information, marketing stuff and so he looked at having a niche website and then an affiliate website and then building authority website and then building kind of a personal brand website. So nothing to do with software but as I listened to it, I realized there are similar levels or tiers of web apps. So I kind of wanted to run through and give my recommendations, our recommendations on where we think you should start, pluses and minuses and some questions you should ask yourself to determine which level you might want to choose first and go through it from there. So again, there are four levels we’re going to be running through.

[11:46] Before we do that, I actually wanted to make an honorable mention. It’s level zero and this is — I’ve owned several sites like this that are not technically web apps but they’re more on just niche websites like AdSense sites, affiliate sites, smaller content sites that just get traffic via like SEO or affiliate traffic or some kind of flywheel traffic that continues to come every month that get really cheap visitors. The comments so you don’t need a high lifetime value to make a decent amount of recurring income and — this is not web app. So I don’t want to include it in our levels. I did want to mention this is something that I’ve seen people cut their teeth and learn internet marketing doing this kind of site. Examples of the site, there’s one — we’ll include this in the show notes but one of them is scootersmopedscyclesreview.com and the other one is whatsthebest-mattress.com. This gives you an example and these are — these are not great examples. I mean I don’t own these sites. These are just random sites I’ve found.

[12:41] But this gives you an idea of what like a really niche site is and how you can go in to such a tiny niche with such low competition that you can just create some content around that and instantly rank in a search engine and get enough traffic to make a few bucks  month. They can then be use to maybe fund, you know, ideas down the line and I don’t know if you’ve done that. I’ve definitely done that and I had some niche sites that were making 4 or 500 bucks a month which is not, you know, it’s like wow, I’m going to quit my job money but I could use that money especially early on that helped me quit consulting with — along with some other, you know, sites I had and it also helped fund some development and some of the advertising on, you know, some CMSthemer and some other early websites I had.

[13:22] I’m going to dive in to number one. It’s the first level of income generating web apps and this first level is a “low competition niche application”. So it’s a low competition web app. It’s in a tight niche. So the thought behind this is you can almost use another word for it. It could be like an entrenched web app or a web app that has a good source of traffic either from something light SEO or from affiliates or from, you know, WordPress.org searches or it could even be — if it’s a mobile app and not a web app, it can even be just from the App Store but it’s some type of recurring quite a bit of traffic, something where you don’t need a high lifetime value to support it. And so frankly, any iPhone app that gets a decent chunk of traffic through the IRS App Store could be called the low competition niche app because there’s not a lot of competition trying to fight of. I own a couple of apps like this. WeddingToolbox is like that.

[14:13] The entire market is not very big. The competition does not tend to be that that brutal, right? It’s not like I need to go out and do all types of info graphics and hardcore in-person marketing and heavy sales in order to keep WeddingToolbox as a profitable app. And then another example I thought of was Dave Rodenbaugh’s WordPress plugin AWPCP which is another WordPress Classified Plugin. And again, it’s low competition. He gets traffic through Google and WordPress.org and it is in a small niche and these are great. Now, these are don’t tend to be “I’m going to quit my job” apps. You don’t tend to make 10 grand a month off of these things. They tend to be very stable and inconsistent and you can build up a nice flywheel of traffic and they can either help fund larger ideas or if you combine a few of them together, they can be really good at helping you essentially quit your job and gain the freedom you probably been looking for.

[15:06] Mike: The nice thing about these types of things is that it’s very similar to the honorable mentioned that you talked about earlier which was just using those to kind of cut you teeth on internet marketing and learn the things that you really need to know in order to essentially take your future products to the next level. So it’s really hard to jump in to something as large as, you know, HitTail or a lot of these other applications and just jump in, feet first and go with it without necessarily knowing anything because you’re going to make a lot of mistakes and you know, you don’t necessarily want to make a lot of those mistakes early on or you want to minimize them as much as possible so it’s not to waste your opportunities.

[15:43] Rob: Exactly, that’s a good point about learning internet marketing from a simpler idea with lower competition because you can learn a lot and then apply that later on to more competitive apps. The low competition niche app is what we talked a lot about in the Academy. I mean this is is where we’re tying to get people in having, you know, some type of success early on. It builds confidence and it teaches those early skills that they can then use to leverage and to potentially if they want, can leverage in to larger niches. So the second level of income generating web apps is a “competitive niche app”. So first level was low competition niche app, this is a competitive niche app. So this is something that needs more active marketing than in a low competition niche.

[16:25] So examples of this do include like you mentioned HitTail. It’s not just going to have a simple flywheel of traffic coming in. It’s going to need more active marketing to grow. Pluggio, Justin Vincent’s app is a good example, Buffer app, anything in a hot niche like Twitter Client or anything like that, it definitely going to be competitive. Frankly, Bidsketch by Ruben Gamez which is proposals — when it was first launched, it was proposal software made for designers. So it was a niche app but it was a competitive niche and it wasn’t a huge market. And for the first year or 15 months or so, he really aimed after that and he actually made the leap in to the next level, you know, that we will talk about in a second.

[17:02] Mike: So the third one is a “competitive large market”. And examples of applications that fall in in to the competitive large market are things like HootSuite or Radian6. Other applications like SalesForce, that’s a very large market for CRM Software but it’s also a very competitive, you know, there’s lot of customizations that can be done. There’s a lot of different players. The market tends to be very fragmented but there’s also a lot of money to be had here because there are so many customers out there who been used a CRM. Other applications or things like HubSpot which has a very large horizontal market and HubSpot is use primarily to gain inbound marketing and then you’ve got things like Stripe which is use for taking credit cards from people.

[17:45] And Stripe is in a very competitive market as well. I mean there are tons of different players out there like Chargify, Recurly and all these other different billing services that will allow you to accept payments on behalf of you. And then there’s also things like we’ve just mentioned, Bidsketch being in a competitive niche. But now, Bidsketch is more in a large market that is competitive and there is so much higher growth curve to that, much higher I’ll say ceiling to where to Bidsketch could go as oppose as to where it could have gone 12 or 18 months ago.

[18:18] Rob: Right and there are certainly some overlap here like, you know, I mentioned Pluggio and Buffer as competitive niche apps, right and they’re in like level two. And one could argue that they should be on level three because it’s a larger market but I’m actually saying that they cater to a kind of a vertical niche within Twitter apps whereas HootSuite and Radian6, they’re like a horizontal Twitter app, right? So, big market and they kind of try to be everything to everybody whereas Pluggio and Buffer are very specific things. It’s like purely for buffering your tweets, purely for scheduling your tweets. It doesn’t do all the fancy stuff that the bigger guys do. And frankly, you know, you could argue the same thing with HitTail like HitTail I consider it to be in a fairly competitive niche. It’s a vertical. It really is towards search engine optimizers. It’s towards internet marketers. People understand digital marketing.

[19:02] You could say that’s a large market but it’s not a horizontal tool like HubSpot, right which is a — it’s also online marketing but it’s just way, way bigger. It’s a much larger market and as a result, if you enter in to a competitive large market, you either had to really, really know what you’re doing or you better have a ton of money backing up. And every — aside from, you know, Bidsketch, every app on this list has millions if not tens of millions of dollars that they’ve raised to compete in these markets. And to be honest, there is a, you know, range of the HootSuite market is obviously larger than Bidsketch’s market. I mean in terms of just the sheer number of people who would potentially use it.

[19:41] So there’s definitely a range even within each of these levels but again, the competitive large market is not something that you can just dive in to as a newbie and I think a lot of people make that mistake. I know I did early on by choosing ideas that were in these horizontal markets and just figuring — you know, if these guys can make it work, so can I. But these guys have way more experience than you and they’ve either launched the app successfully, grown the app successfully or they have just a huge amount of money backing them up and they can make, make a lot of mistakes.

[20:09] Mike: I feel like a lot of developers fall in to the trap of going after the competitive large market because they look at these other products that are out there and say, “Oh, well that piece of software sucks. I could build something very similar. It would ten times better.” And the things that come to mind or things like Service Desk Software or any sort of CRM or bug tracking and –

[20:29] Rob: Project Management –

[20:30] Mike: Yeah, Project –

[20:31] Rob: QuickBooks, that type of stuff. Yup.

[20:33] Mike: Exactly and it seems like it would be easy to build something that would be competitive and it’s really about the marketing at that point. It’s not about the product.

[20:41] Rob: Yeah, exactly. And you know, you mentioned that for a lot of developers make a mistake at going in the level three, I think a lot of devs and just  lot of people in general make the mistake of also going in to level four which is we’re calling the “disruptive apps”. And these are basically the moon shot luck shot lottery try apps like Facebook, Twitter, Google, Pinterest, basically anything that doesn’t really have a revenue model and that you definitely need to raise funding to get off the ground. Basically, you know, something that really doesn’t — doesn’t tend to be sold on value. It’s going to tend to disrupt and it’s going to be one in a thousand that might work or 1 in 5,000. I mean just a very, very long shot whereas if you go in to a low competition niche app that level one we just talked about, seriously, like 1 in 10, 1 in 5 if you get good at it. Maybe even better, 1 in 3, you know, a really good odd but the payoff is just not tremendous.

[21:34] But to a single person, if you’re trying to quit your job or you just want to make a car payment or house payment like that actually has a big impact on your life but we don’t see that, right? When we watch the Tech News or we read, you know, Inc. and Fast Company and they’re talking about the disruptive apps. That’s what everybody wants to talk about and so we, who are in the startups space tend to be to gravitate towards this — this disruptive app mythos.

[21:56] Mike: And I think the thing to point about the disruptive apps is that it’s disruptive the first time because — primarily because there isn’t a business model there like before when Google was first getting started, everyone looked at all these different search apps and I think there were 13 of them or there were 12 on the market already and Google was the 13th. And at the time there was no business model there for search engines. There just wasn’t and somebody took a chance on them. They went forward with it and eventually they figured out, “Oh well, we can do advertising in here and if we do good enough at search, we can get paid advertisements betted in to the search results.” And now if you look at something like DuckDuckGo which is kind of headed by Gabriel Weinberg, that you might point to and say, “Well, is that a disruptive app?”

[22:42] And I would almost argued that it’s not because there is a known business model that fits that is going to generate revenue whereas 12 years ago when Google was first getting started, there was no specific business model. They didn’t know how they were going to make it whereas with DuckDuckGo, they have a decent idea and I know that they’re not going in to the direction of specifically selling advertisements in line with all their search results. They’re going in a slightly different direction but they at least have an idea of how they’re going to making money whereas with Google, the plan was not to make money. They wanted to build it as quickly as possible, get as large as possible and then figure it out. So that’s really kind of what separates, you know, the disruptive apps versus a lot of these other ones because with the disruptive apps, they don’t know how they’re going to make money until they get to a point where they say, “Okay, well this is the direction we’re going to go.” They just don’t have those ideas upfront.

[23:31] Rob: And when we talk about these four levels of income generating web and I should say mobile apps because they kind of fit in it to this as well, what we really mean by level is like level of difficulty. So given those  four levels, put together a couple of questions that you should ask yourself to figure out which level you should choose because once you’ve decided on the level, it becomes a lot easier to choose ideas that fit within that mark and that are going to be more geared towards your level of expertise at the time. So we have four questions and the first one is, “Are you looking for side income or are you looking to ultimately have fulltime income?” And even if you say, “I’m looking to have ultimately have fulltime income,” you could still choose something in, you know, the level one which is that low competition niche app because you can combine several of them together. I mean that’s originally how I built the fulltime income and I’ve since kind of transitioned not out of box because I still own a lot of apps but I have some apps that would now provide fulltime income on their own.

[24:25] So to get you started, start thinking “Am I happy with my job? And I do want to stay here for a few years and I’m really just looking to get a side income with kind of the minimum amount of work,” and you should definitely think about level one. And if you really are a head strong to get out of your job as soon as possible, then it’s probably better thing to think about heading. Either thinking of heading in to level two or thinking about tackling level one, you know, several of them in series. Not at the same time but one after another.

[24:53] Mike: The second question to ask yourself is “Do you have a concrete idea or do you need to dive in and figure out what’s working and then delving down on it?” And the idea behind this question is really figuring out whether you know exactly what is it that you want to do or do you want to try a couple of different things to see what’s working and then head hard in that direction. And if you’re not really sure, you can try a couple of different things that are in that low competition and maybe they’ll grow from there in to, you know, the level two because I almost feel like a lot of this when you’re going from level one to level two to level three, the difficulty is essentially synonymous with the payoff as well. I mean in a low competition you’re making much less money than you would in something that’s a level two which is a competitive niche app. And these things you have to figure out where you want to start, what level are you comfortable attacking first and progressing from there?

[25:45] Rob: Third question we have is “How much time do you have on a weekly basis to devote the idea and how much money do you have to fund it?” Because obviously, level three and level four are just an entirely different order of magnitude than one and two. So it’s really something that you need to think about. If you’re going to work part time outside of your job and you just have, you know, a hundred or a few hundred box a month to put in to it, then you’re really — I mean I would honestly recommend starting with the level one, maybe a level two but I think that’s even where like starting with level two if you never had a success and you’re just trying to learn the marketing, it can become frustrating pretty quickly because without the resources to experiment boldly, your learning is going to take a long time.

[26:27] You know, you either need to be able and willing to pay for education through — actually learning it yourself through the hard knocks or you need to be willing to pay for it through like online classes and that kind of stuff will short cut you and it will get you, you know, ahead of where you are if you just learn it by yourself. But, it still does and it absolutely requires quite a bit of time of an ongoing basis to do a level two or above, lower as level one as just intends to be more of an upfront investment and then you can — you can tend to put it on to autopilot and move on to your future ideas and use that to then fund those.

[27:00] Mike: I think that’s a key that you — you just touched on which is being able to put something on autopilot because a lot of these other ones once you get above level one and the level two and level three, you really can’t put it on autopilot. You really have to keep on top of it and make sure that you’re continuing to try and move the business forward because if you start slacking it off at all, your business is going to — in some cases it will nose dive and in other cases it will simply taper down overtime as soon you neglect them. And the fourth thing to ask yourself is “Have you successfully executed with an online marketing in the past?” And if you or just starting out, you’ve never built a product before or and never tried to bring in product to market completely on your own and I do want to point out that this is completely different than being on a team of 10 or 15 people and then pushing the product out the door as part of a software company.

[27:47] When you’re doing everything yourself, it is a completely different story to try and tackle a large market versus trying to do it yourself. I mean there are worlds of difference in terms of experience with online marketing than if you’re coming from just a programming background. So although it may look easy, it really isn’t. You, having some of that background and some of that experience is definitely going to help you. So if you’ve never done it before, you’re much better off starting in level one or level two so that you do get that experience and you can build app to go after a level three if that’s ultimately what your goal is.

[28:21] Rob: Yeah, I heard an interview. I think it may have been with Dan Martell. He made the statement that once you’ve started a company like a million dollar company that has a million dollars in annual revenue, if you sell that or you otherwise, exit that you never want to do that again because now you want to go for a ten million or a hundred million dollar company. And that actually resonate quite a bit. I think that’s something to be noted here is that well, you don’t have to move up these levels. Once you’ve gained the experience and depending on your personality, if you really do want to continue learning, you will kind of master these levels. I certainly feel like I got bored in the low competition niche apps and moved in to the more competitive niches and I’ve known several other entrepreneurs who are doing the same who are just — but it’s just that you’ve done it a few times and there’s kind of nothing new to learn and I think as developers who are, you know, fairly intelligent people, you want to continue to learn and expand your horizons and that don’t feel like since you start in level one that that’s where you need to stay or that’s even where you’re going to want to stay past having the first few successes.

[29:24] Mike: I think part of it is just wanting to be challenged and fulfilled in your job or in your career. Nobody wants to do the same thing over and over. So starting out at level one and then progressing from there is it seems to me like it’s a natural progression. I can see people who want to live a specific lifestyle and they just want to stay in that level one or level two area where they don’t necessarily need to stay on top of things all the time or they can shift their focus away from it and live their life and have it as a lifestyle business versus something where they have to continuously stay on top of it, work 40 hours a week, continue to do it day in and day out in order to continue making that business a success.

[30:03] Rob: So those were are thoughts four levels of income generating web apps. If you have other thoughts or questions, obviously, feel free to post them on the blog or send them to us at questions@startupsfortherestofus.com. We actually got a few questions this week. They seem to be piling up. Mike, I think we’re going to have to do more Q&A episodes here soon. We’ve got another drinking game submission from Micah Alcorn [Phonetic]. Thanks for that. He says that the quote is “People should drink whenever we get a question that says ‘I’m a business guy with a brilliant idea. How do I find a technical co-founder?’” I like that one and the cool part is he says, “By the way, I am a business guy with too many ideas. My solution is to learn to write code on nights and weekends, build prototypes, test hypothesis and then outsource. Thanks, Micah Alcorn [Phonetic].

[30:45] Mike: Well, I got a couple of comments from people as well via e-mail. One of them was from a guy from Microsoft who apparently realized that I was using some code that he has written to synchronize the databases. So he said that if I ever needed anything or have any questions just let him know. So I’ll definitely hit him up for that. And then another one was from Scot who had a specific question for me about AuditShark and he said, “Hi, Mike. I was listening to the podcast this morning and you talked about the appeal AuditShark has for those who’ve been hacked. A friend of mine works for Core Security which is a Boston company that does penetration and security testing for enterprises. What do you think about companies like Core as a reseller or recommender for AuditShark? Great show. Thanks for putting all the effort in, Scott.”

[31:24] And I wrote him back and I basically told him that in order for me to sign on multiple resellers for product like AuditShark, I think that would be a pretty big challenge for me right now and not necessarily in terms of to time but I think that early on, it would be really difficult because there are a lot of different things that go in to it. I feel like long-term, it’s a viable strategy but when you’re early on, the problem is that you have to be able to justify what type of market there is for the products and provide the prospective partners with enough guidance about how to reach their audience effectively, how they can sell it, what types of companies are good fits for the particular product. They really need to know what the level of work, risk and reward is that they’re undertaking and that’s really hard to gauge when you’re first starting out with the product. So I would be hard press to provide a lot of those details to somebody. Those are a lot of good questions and I don’t necessarily know the answers to those yet. The really big one is that how much time and training is it going to take to get that partner up to speed on the product and how do you keep multiple partners from stepping on each other when they’re going after the sales and you know, just an example of that is let’s say that I give everybody a 25% discount on the software.

[32:32] Well, each of them is going to start competing and using the MSRP and drop it down up to 25% and they’re going to each try and maintain their own margins. And you would think that when these partners are trying to compete against each other for let’s say the same  account, that, you know, they’re going to either run in to these cases where they’ll say, “Well, you know, I’ve got a better relationship with you. So, you know, you’ll buy for me.” And that’s not generally the case. I mean a lot of times what will happen is customers will buy from whoever gives them the cheapest price which is why Dell is as large as they are because they sell pretty much every product you could possibly imagine. And if you got to Dell’s website or you call Dell, I guarantee you that they will sell you just about any given software product out there, you know, just look at the Fortune 1000 or look at all the software companies and I can almost guarantee that Dell will sell every single one of their products. And the reason is because Dell just does so much volume that they are able to get these giant discounts from various software vendors.

[33:28] So when you have that type of relationship, what you’re doing is you’re putting the partners in an uncomfortable position where they’re competing against each other. And that makes things really hard because those large customers, those large value added resellers even if they don’t actually add value to the deal, sometimes they’ll do things like they’ll bundle hardware and software together and they won’t necessarily differentiate between what the costs are and it looks like the customer is getting  great deal. And they may or may not be but what ultimately ends up happening is that they end up pushing the other resellers out of the deal So then they’re essentially destroying your reseller channel. So those are a lot of the things that you have to be careful of.

[33:28] There’s one reseller now that I’m working with that somebody that I have really good relationships because we have — we share a lot of core values and beliefs about how to run our business but for me I think it’s more a matter of starting out really slow and picking the right partners as oppose to just trying to get as many partners as possible and then working out the kinks so that it can be ramped up effectively. Going down the road of resellers is something I’m looking at but it’s not necessarily I’m going to go in to this direction and go as fast as possible. It’s really about working out the kinks. Trying to figure out what’s wrong, what’s right, what is and is not going to work and then once I’ve figured out all that stuff, then kind of ramp it up.

[34:44] Rob: Right, we hear a lot from different surveys and studies of startups that premature scaling was one of the biggest causes of startup failure. And in my opinion, trying to find resellers at this point would be far premature. And I think it’s pretty obvious, you still need to develop more features and really to get their product market fit, problem solution fit. I mean find that product that people are dying to have and then once you’re doing well, selling them one on one, then you start developing that that reseller channel. Beyond that, I’ve done some reseller stuff and affiliate stuff and it is quite a bit of effort. It’s a lot more effort than people realize in terms of exactly what you said. It’s like training, getting them onboard, getting them pumped up, reminding them they’re suppose to be selling your stuff, handling issues who, you know, that they do support that you do support. There’s more to it than just finding some people and having them magically sell a bunch of copies of your software every year. So I don’t see it as much of a super bullet as I think I’ve heard people mentioned. So those are two things to keep in mind.

[35:42] Mike: Well, I think that the one thing they’re pointing out about that is that most people look at affiliate sales and they say, oh well, resellers will make 30 or 40 or 50% or something like,” because that’s a typical margin on  a lot of those affiliate deals. But when partners have sales reps involved and they’re actively trying to sell those, they’re going to start cutting in to their commissions in order to make the sale. So then they’re competing against each other and I’ve seen situations where even on 6 and 7-figure deals, the commission isn’t only about 2% of the total sale. So you take $1 million deal and 2% of that is about $20,000.

[36:18] It is not that much with regards to the size of the deal and $20,000 it sounds like a lot but the reality is how long is it going to actually take you to land a $1 million sale and it’s not going to be overnight. It’s going to be several months. So if you spent several months trying to land one deal and you get $20,000 out of it, was it worth it at the end of the day? And for the partners, many times the answer is no. It just isn’t. So that’s something you really have to keep in mind when you start ramping up the partners. When you only have one, those issues are just not existent. You don’t have to worry about them. But when you have 10 or a hundred or a thousand, it’s a completely different story.

[36:54] Music

[36:57] Rob: So if you have a question for us and you’d like to hear us discussing on the show, you can call our voicemail number at 888-801-9690 or you can e-mail it to us at questions@startupsfortherestofus.com. Our theme music is an excerpt from ‘“We’re Outta Control” by MoOt, used under Creative Commons. You can subscribe to this podcast in iTunes by searching for startups or via RSS at startupsfortherestofus.com where you’ll also find a transcript of each episode. Thanks for listening. We’ll see you next time.

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8 Responses to “Episode 102 | 4 Levels of Income Generating Web Apps”

  1. As you mentioned software patents again in this episode, I’m curious where you stand on the idea of patenting something in your own software to stop someone else coming along later and then creating a patent and then suing you over it?
    Is this something even worth considering?

  2. Hey guys, really loved this episode – actually listening to it for a second time since it joined a lot of the dots in my head from other things I’ve read out there.

    I’ve read over and over about the importance of market research – but in regards to what folks are searching for on the Google and Apple appstores – is there anyway to see this data?

    Wondering if there is some way to see
    a) How many people are searching particular terms in the appstores
    b) The level of competition (obviously one could just go in and see for themselves, but if there was a tool for this that would be better)

    Cheers!

  3. Really interesting episode! I’m curious to hear your thoughts if you would generalize level 1 web apps as B2C and level 2/3 apps as B2B?
    It might be a good rule of thumb when choosing an app idea for these levels. What do you think?

  4. A great episode, thanks. I listened to it twice as well!

    It was super timing for me as I’ve just launched my first solo web site: (http://www.comicbrowse.com) precisely to learn about SEO and marketing techniques for use in bigger projects.

    From your categories my site is level zero, and as you described I hope it will make a small monthly income from affiliate links to help fund more projects.

    The experience of building and releasing something with a short development cycle (about six weeks of spare time) has been awesome, I highly recommend it. My other project will take longer to develop but now I feel I can gain important experience of managing and marketing a product without the wait. As valuable as any income the site brings in.

  5. @Matt – Patents cost around $25k and can easily take days to prepare the support documentation (even if a lawyer is doing the filing). So it depends on your budget/risk tolerance. Most entrepreneurs I know prefer to focus on building their businesses.

  6. @Pete – Google and Apple don’t release data, and the only tool I know of that does it uses estimates based on other sources:

    http://www.mobiledevhq.com/

  7. @Raul said: “Really interesting episode! I’m curious to hear your thoughts if you would generalize level 1 web apps as B2C and level 2/3 apps as B2B?”

    I would not. I consider DotNetInvoice a level 1 app and that caters to freelancers. If you include freelancers in B2C (they do have similar buying patterns) then I probably would agree with you.

  8. Thanks guys for making these transcriptions for every episode.

    Because you did I could find this episode with the following google search based on my fragment of memory from the show :-)

    levels “honorable mention” site:www.startupsfortherestofus.com