Episode 117 | Door to Door Customer Development, Courting Feedback from Customers, and More Listener Questions
[00:00] Rob: In this week’s episode of Startups for the Rest of Us, Mike and I are going to be talking about hiring an offshore developer, how to court product feedback from customers and using content aggregation and curation as a business model. This is Startups for the Rest of Us: Episode 117.
[00:23] Rob: Welcome to Startups for the Rest of Us, the podcast that helps designers, developers and entrepreneurs be awesome at launching software products, whether you’ve built your first product or you’re just thinking about it. I’m Rob.
[00:33] Mike: And I’m Mike.
[00:34] Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week, Mike two weeks into your AuditShark early access?
[00:41] Mike: So, things are going pretty well there. I guess over the past week or so we’ve had some minor set backs because both of the primary developer that I’m using and myself decided to upgrade our computers and he went the route of migrating his machine from Windows 7 to Windows 8 whereas I’d just wanted to upgrade the hardware and debated going to Windows 8 but I didn’t want to spend all the time associated with finding drivers and dealing with all the headaches of reinstalling everything. So, I just took a backup of my machine and then migrated it to the new hardware and just restore everything and I was done. [Laughter] Meanwhile, he spent I think three or four days trying to download all the software and get everything kind of back to where things where.
[01:19] Rob: Yeah, everytime I get a new machine an upgrade, I typically budget myself about 16 hours start from just a barebone instance, install Windows and install everything. But last time I got an SSD drive probably two iterations ago and that time dropped to between 6 to 7 hours because the installs are so much faster. I think Windows now installs in what, 10 minutes or something on an SSD. So, it really cuts a lot of that time out. But with yours, you just did a backup. So, you still have the – because you know how Windows develops that craft over years. I mean if you run Windows for five years, it just gets slower and slower as the – what is it called, the registry? It’s more bogged down than all that stuff? So, at some point you’re going to upgrade [Phonetic], right?
[01:58] Mike: Maybe, I mean I was able to just dropped it in to a back up and then do a complete restore on to the new hard drive and I had an SSD drive that I was going from. So, like my old set up was one SSD drive as my primary partition and that was my C drive and then I have another drive that – or two drives that are mirrored so that I can do my, you know, basically have everything else on RAID and that’s like one and a half terabyte drive. And then I have a third one that I have all my backups get dumped to. So, what I did was on my new machine, I just took my backup drive, popped it in, restored with the backup of my primary drive on to my new SSD drive and then pulled the two drives over out of them and as a mirror and then restore the secondary partition on to that so that my second drive came up in mirror is hardware mirroring instead of software mirroring and everything was pretty much fine. I mean everything is back to the kind of the way it was. The only difference is that now I have six cores instead of two and I’ve got 64 gigs of RAM instead of I think 10 it was. Things are going well.
[03:00] Rob: So yeah, I know that’ll make sense but oh – did you get what I’m saying like overtime if you let a Windows install, there’s run and running on 5, 6, 7, 8 years even 2, 3, 4 years, it just gets slower and slower that’s I —
[03:09] Mike: I know what you’re saying but I don’t really run in to that problem as much because I don’t install like tons and tons of stuff that I just know that I’m never going to use or that I’m going to use minimally. I tried to keep my system relatively clean. But I mean the thing is with an SSD drive, all those performance problems tend to go right out of the window.
[03:25] Rob: Yeah, I’ve still seeing them with the Dell. I have a Dell laptop and I built SSD and yeah, it’s definitely better than it used to be but when I upgrade to a new system, I make it a habit. I feel like I want to start fresh with the brand new OS install. You know, that gets rid of all that junk that’s been lying around. I only install maybe a dozen programs at this point because I’ve — so much as web-based. But it’s still – I don’t know. Maybe that’s an old school way of thinking. I’m interested if other folks still feel that way or if they also just kind of move their stuff as a backup, you know, or if they start from scratch.
[03:55] Mike: I think one of the issues you can run in to is there’s a lot of stuff that runs in the background on startups. So, like if you start using Evernote and Dropbox and all these other tools and services, eventually, they’re going to be starting up when your machine starts up. And what I found was that there are certain things that with an SSD drive, you’ll run in to problems where a service tries to start but there are other dependencies that haven’t quite loaded yet or haven’t finish loading so you have to change some of those services to start up as a delay of start instead of automatic start when the operating system heads. The other thing that you can do is I think you’re on a MSConfig and what that will do is that will allow you to see everything that’s starting up when your machine boots up and you can just go in and disable anything you want.
[04:39] Rob: I do all that. That’s my standard install procedure. On day one when I install a brand new OS, I do both of those things and I actually have two or three other steps that I go through to optimize it but still, over the years the stuff just gets slow. Windows is not Linux and or you know, or Mac OS and that’s why I like starting over from fresh.
[04:55] Mike: I get it. I just haven’t run in to those problems. I mean my old machine was a lot slower than this one just in general and then switching over I got a state of three SSD drive. So, it’s 6 gigabit instead of 3 gigabit and then the processor as I said is significantly faster. I’ve got three times as many cores in it plus it’s just a better architecture in general. So, I don’t see any of those performance problems that I was seeing before.
[05:20] Rob: If anyone out there runs in to or doesn’t run in to that problems Mike and I are talking about, I’d be interested to hear from you in the comments for this episode 117. So, for the second time in a little under three weeks, I found myself on the Central Coast of California. So, I hit Pismo Beach the last couple of days with the family and then the kids and the wife went home and I’m in San Luis Obispo for a couple of days. And what I love is it’s off-peak time, right, because it’s now…it’s a low season and then the week in that hotel rates are really good. So, you can get serve right on the beach for less than half. And I’ve found that this change of scene for me, really ignites creativity like I find myself wanting to dive in to new projects and thinking a different way about the projects that I’m already working on.
[06:00] So, Steve Blank says get out of the…out of the building and go talk to customers, I think you need to get out of your town or just get out of your space every once in a while and give yourself time to — even if you’re just working from cafés and you’re not even doing kind of the vision questing that I talked about where you take a retreat, I just feel rejuvenated and like totally psyched up right now to work on my projects.
[06:19] Mike: You know, one thing we forgot to mention on last week’s podcast episode was that MicroConf sold out in just between 51 and 52 hours.
[06:27] Rob: That was really cool. So, first we did an internal launch to the Academy and we sold more tickets than we thought we would. And then when we actually did the launch to our early bird e-mail list which really wasn’t even a public launch. It was just sending out e-mails to the list. We sold out like you said in just over 48 hours. It was…it was pretty crazy. That gives us a lot of time and flexibility to focus on the event now, you know, to like spend the time recruiting speakers and adding elements to the event that otherwise, in past years we haven’t had the time to do because we’ve been consumed with marketing it. And in fact, we’ve actually added a couple of more speakers since you’ve talked…you and I have talked about it lately. One is Erica Douglass from Whoosh Traffic. She had a web hosting business that she sold for a million bucks when she was, I don’t know, 26 or 27 and now, she’s on to a new startup. Dave Collins from Software Promotions who’s been doing SEO and AdWords for like 10 years and he’s going to be talking about SEO and then mostly confirmed.
[07:17] And I haven’t even talk to you about this but Josh Kaufman who’s…he’s a bestselling author of the book called The Personal MBA which I’m actually – I just finished listening to the audible.com. He has agreed to come but we just haven’t worked out all the details but he – I saw him on the attendee list. He actually tweeted out and said, “Hey, I’m going to be there.” And I’m just thinking, “Wait, I’m just reading your book.” There’s a bunch of stuff in that I took notes on that I’d love to hear expanded on. So, you and I agreed to invite him. So, I’m pretty excited about to have a line up shaping up. Those – because they’re an addition to Jason Cohen of WP Engine and Hiten Shah of Kissmetrics and of course, you and I.
[07:49] Mike: Yeah, that’d be really cool to hear from those guys. Obviously, some are the ones who were there last year but definitely looking forward to hearing from both Erica and Josh. That would be interesting.
[07:57] Rob: So, last thing before we dive in to several listener questions we’ve lined up is I was listening to last week’s episode which we had talked about the stage one through five and had to move people from stage three to stage four. And in my mind, I wanted to clarify kind of the discussion there but I think both of us made it sound like you could only find success if you’re in stage four, if you’re a stage four person and I don’t believe that’s true. I think that you can move faster if you’re stage four because you work better with people. I also think you can grow bigger because you work better with people.
[08:27] But I know a lot of people who are stage three and who truly are doing that microISV micropreneur, you know, not hiring contractors, not working with other people. It just takes you a lot longer to get there and eventually, you hit a ceiling. And in fact, if you talk to me maybe two years ago, that was – I was still in that mindset being my own person and just wanting to…to work alone and do everything on my own and that’s not a bad thing. It just matters where you want to go. Once I’ve made the decision that I wanted to go bigger, then…then the ideas that I was working on and I wanted to go faster than I was currently moving, that’s when I really made that switch through the “We’re great” mindset rather than the “I’m great” and trying to build up a small team to help move things along.
[09:09] Mike: Yeah, that’s absolutely right. If that was an impression that we gave, then I apologize for that. It wasn’t necessarily the intent because you can definitely be successful in stage three. You can definitely be successful in stage four. It’s just that with stage three, you’re limited by your own capabilities and success primarily because you are not willing to give out tasks to other people because you don’t feel like you can rely on them to get the results that you want. So, you really in essence self-limiting at that point. It’s not that you can’t be successful because you won’t be successful, it’s just that there is an upper limit to the size of the projects that you can undertake because you…because of that inability to hand out work to other people or to involve other people in your processes.
[09:50] Rob: So, today we’re going to be running through several listener questions and we’ll tackle as many as we can within our time constraints. Our first question today is about door-to-door customer development and it’s from Jeremy Frederick. And he says, “I’m currently involved in an investor-funded startup. It’s at learneverywhere.com but we are really struggling to sell the product and I’ve started other projects to hopefully have something else catch on. I launched the website called marketplacedeliveries.com. It might not be the typical site you talk to people about because the really work isn’t the website or software but the execution of the business which is online grocery delivery that focuses on local organic produce. This is definitely a cold market for me but I run an ad campaign in only the Orlando area that converted $100 to 67 page views.” So, 67 clicks I’m assuming.
[10:37] “…and 10 people adding their e-mail to the mailing list. I then printed 130 flyers which was $40 plus two hours of time and went door-to-door in my own neighborhood to pass them out and converted 26 of them to visit the website, 24 of them entered their zip code and 15 entered their e-mail. What I wanted to ask you is if you’ve ever done door-to-door advertising and if these conversion rates are reasonable. Do you think there is a market here and your personal advice on a business like this one? Thanks, I’m looking forward to listening to more episodes.”
[11:05] Mike: To me this is extremely interesting because of the fact that I don’t think that most people when they are trying to build a product of any kind go door-to-door and ask people if they’re interested in, you know, buying. And I mean I understand this is more of a B2C type of opportunity but still, I think that it’s very unusual. I know Patrick McKenzie did it when he was trying to build his appointment reminder software. You know, his is also more of a B2B product than a B2C product. So, I find that just in general very interesting.
[11:35] One of the things that I’m looking at here is that, you know, it says that there are 67 page views. I don’t know what the conversion rate on that is. Is it – was he paying a dollar per click or something like that? I might look at the percentages there to see if it’s a reasonable conversion rate but beyond that – I mean some of the other numbers that you threw out passing out flyers and getting 26 of them to come to the website, 24 of those people entered in their zip code, that to me seems like there is extremely high interest there because if they’re going to come to the website and then you’ve got 90% of them entering their zip code and then 15 of those of people entering their e-mail, you’re talking 90% conversion rate and then a 50% conversion rate. I mean those to me seem really, really high.
[12:16] The question is what type of margins can you get out of it and what is it that you’re actually going to be selling to them? To me, this is definitely worth exploring more. It’s kind of hard to give the specific advice without some more specifics to the numbers. But I would definitely pursue this a little bit more and really, what you’re trying to do is to verify whether there is not a market to be had or whether there is not a viable product. And that’s what you’re really trying to prove is to…is to disprove your theory about is there a market and you’re working theory should be, “I believe that there is a market.” You’ve gone around. You’ve done a lot of these things and to me, it just looks like you’re trying to disprove that but all the numbers are coming back and saying there are people who are very interested.
[12:53] So, I think you’re definitely on the right track and I would advice proceeding forward and start looking at the numbers and what sort of profit margins you can get and what it is that you’re actually going to be offering them and work from there.
[13:04] Rob: Jeremy did mentioned a bit of the conversion or you may had missed that one when I was reading it but he said it was a $100 for 67 page views and 10 people added their e-mail to the list. And so that comes out to about a buck fifty of click and then he paid a $100 for 10 e-mails. So, that’s $10 per e-mail. Now, the conversion rate is about 15% of visits from those cold ads to e-mails. They’re not – 15% is not bad. What is not great is paying $10 to get an e-mail at this early stage because from that list, when he actually launched this, my guess is he might convert somewhere between 10 and 30% of people to customers. So, you’ve essentially paid up to a $100 to acquire a single customer or you may have only paid, you know, $33.
[13:46] Well, that’s not terrible. I mean you can totally build businesses on that type of cost to acquire a customer. I think the next step I would take is figure out what – how much profit you think you’re going to make over the lifetime of a customer and take a guess — obviously, this is a recurring thing, I’m assuming you’re setting them not for a subscription. And these types of subscriptions of physical goods are really popular right now in terms of, you know, you think about manpacks.com. There’s a bunch of what — paleopaks.com. This space is hot but physical goods are – especially perishable goods like you have like you’re dealing with organic stuff, obviously, it’s going to come with a lot of logistically headache and it’s going to be tough to scale really large.
[14:26] So, I would take a serious look at just in the Orlando area, getting this up and going. Hiring people to do these door-to-door deliveries, cost of gas, cost of insurance, all of that stuff, how much you really think you’re going to be able to make per delivery and then say if a customer sticks with this on average for four months or six months kind of just pick…pick a number out of the air. And if you find someone who is doing something like this and get a better lifetime estimate even better. But for now, just take your best guess of what you think it might be and then look, “Wow, do I think I’m going to make enough money from each customer to actually make this worth all the effort of basically ramping up a warehouse and logistical delivery type stuff,” because that’s…that’s a non-trivial thing to do for sure. But I certainly admire your ambition, you know, way to go going door-to-door and setting up ads. I mean, you know, you really taken that the customer development stuff to heart and I think…I think you’re doing a good job with it.
[15:13] Mike: Yeah, I did miss it and kind of eluded to what the conversion rate is in there. I do understand where you’re coming from. I don’t necessarily disagree with anything that Rob just said. The…the other thing that I thought of that I would just want to mention is that the conversion rate that you’re getting from the people that you went door-to-door to and talk to them, my inclination is to believe that by explaining to them exactly what the product was that you’re offering, you probably give them a much better idea of it and then they would get from coming to your website. So, your conversion rate there is going to be a lot higher because you have the time to sit there and talk to them and explain everything to them as oppose to relying on them coming to your website and you know, looking at it for 3 seconds and making a gut judgment call as to whether to give you their e-mail address.
[15:56] Rob: Right and then the thing you have to think about is obviously, as the owner of the business, you’re not going to [0:16:00] do that, right? You’re not going to walk door-to-door but could you hire people on Craigslist either for a cut of, you know, you can give them – unique URL that they hand out and then they get a certain percentage or they basically affiliate or that you pay them, you know, 8 bucks an hour or 8, 10 bucks an hour just to walk around and pass out flyers. And from there, you could also figure out cost to acquire customer based on your success and you know, you’re now training kind of a – it’s a door-to-door sales force and again, that’s nothing I would – I have any desire to do personally but if that kind of thing excites you, it’s certainly a creative approach to acquiring customers and most people, you know, wouldn’t have the guts to step up and try to do it.
[16:37] Mike: Well, I think the other thing to mention is that we kind of titled this question as being door-to-door customer development and that’s really what I would take this as not necessarily looking at this solely as an effort to acquire customers but using that door-to-door experience to kind of figure out mentally what it is that people are actually looking for and you can kind of guide that conversation when you’re talking to people and I believe that obviously that, you know, Jeremy did do this because he got a significant number of those people who actually came to the website to put in their zip code and then entering their e-mail address.
[17:11] Rob: Right and my hope is, Jeremy, is that when you went to those customer’s doors that you also ask them, you know, not only, “Would you be interested in this,” but “How can I make this offering better,” or try to determine from them like Mike said actually doing customer development and not just doing pre-sales because there’s a difference, right? Pre-sales is when you say, “I have this product. It’s this price,” bam! You know, “Will you buy?” And that’s a good question to have sometimes but also customer development is that next step of saying, “How can I improve that? If you won’t buy, then why not?” And figuring out if you can slowly change your…your offering to make it something that appeals to…to more people and is perhaps more scalable for you. So, thanks for the question, Jeremy.
[17:47] Our next question is on hiring an offshore developer. It’s from Anthony Robson [Phonetic] and he says, “Like most, I want to start off the e-mail saying how much I love your show. I’m non-technical but web savvy and you guys still provide quality advice for founders like myself. Although non-technical, I know plus have learned a lot about marketing my product. I have also found several unique ways that I will try to market this idea. Now, let’s get to the meat of the burger. I want to hire an offshore firm to develop version 1 of my website. I’ve listened to your podcast regarding outsourcing to sites like oDesk. However, do you guys know any resources that can teach me how to hire an offshore development firm?”
[18:23] Mike: So Anthony, the first thing I would say is you should probably go back and listen to episode 64 which is titled Hiring a Managing Remote Developers. And this episode we talked a lot about hiring, you know, remote developers, what you should be looking for. I think that one of the issues you might run in to is the fact that because you’re non-technical, you don’t necessarily have a firm grasp on how to tell the difference between whether a remote developer is going to be good or not or just – or developer in general because, you know, they can blow smoke and you won’t know one way or the other whether they know what they’re talking about.
[18:54] What I would probably advice in that situation is come up with a simple task, ask three or four different people to do the same thing and then just look at the results. Kind of gage how well they get back to you and what the quality is of the stuff that they’ve delivered. So, if you ask them to build a very basic web app that allows somebody to register and log in. It shouldn’t take terribly long for people to do that and the more responsive they are to your request, I would go with the person who is more responsive and is willing to work with you and you know, provide those deliverables quickly as opposed to somebody who, you know, you think maybe really good but they take a little bit longer. They’re trying to fit you in between other projects and you farm this work out to, you know, 3, 5, 7 different people at the same time, you know, to kind of depending on what your goals are and whether or not the first couple of people work out. And you get those mini projects back from them and you just figure out who is most comfortable to work with and that’s probably what I would advice as a good starting point for hiring somebody who’s technical when you are not technical.
[19:57] Rob: Yeah, I also recommend checking out Codecademy, Codecademy.net I think it is. And basically, it’s a free online tutorial of kind – that gives you an idea of how to code and they have a few hundred thousand people have gone through it. But just to get an idea of what it takes to code will really give you a bit of insight in to how to hire a coder. And I think if you’re hiring it for a specific technology like PHP or Rails or .NET or even mobile, but if you learn that technology at least a bit, you’re going to have way more insight, you know, in to how to hire someone.
[20:29] Our next question is about how to court product feedback from customers and it’s from Paul. And he says, “I’m just setting up a new SaaS app. My question is how do you court product feedback from your customers especially around enhancement request? I was thinking of using an enhancement tracking tool to allow people to have visibility. I noticed on the HitTail website, you just have a contact this box and providing feedback on enhancement, et cetera is not necessarily promoted. Your thoughts are appreciated.”
[20:54] Mike: So, I think there’s two different things that I can think of here. One is using something like Olark and other one is using something like UserVoice and you can integrate this in to your products to help gets you direct feedback from your customers. The other thing you can do is you can build something yourself where, you know, you have this built-in customer feedback loop or you just have like a contact or something like that that they can e-mail you and maybe a little dashboard where the user can ask you questions and your replies will be there.
[21:23] But really, it seems to me like it might be a much more efficient use of your time to use one of these third parties that just has an integration component where you just plug it in to your software and it allows them to directly interact with you and they handle all that legwork because you don’t want to be building things that are not going to directly contribute to getting your product out the door right now. Your primary focus should really be getting the product finished and then working with the customers to, you know, make sure that everything is okay, what’s you…you’re building is, what they want, et cetera. But you also want to have some of these conversations up front so that you’re not building something that nobody is actually going to pay for.
[21:59] Rob: Yeah, I’ll start by saying regarding HitTail and the reason were not asking for customer feedback right now is because we’ve…we’ve hit a sweet spot where we have found a need that we filled with our product and we’re not doing major feature development right now. We already have a list of my long of different customer requests and we have those in a big Google doc and at some point, I’m probably going to pull them out. We’ve decide that, you know, for the further development and do maybe a Reddit style social news thing where – I think UserVoice allows you to do this. You just put a bunch of issues in there and I would probably just e-mail all of our existing customers, send them there and say, “Which of these are you, you know, interested in.” Vote up, vote down type of thing. That’s why I would handle that.
[22:39] We just been pulling them in via e-mail and what I found is that there are people who really want something build, they will in fact e-mail you and let you know even if you are not encouraging it. But if you want a higher volume of those – of that feedback which we, at this point, I don’t want a higher volume, but if you do, then having a splash screen when someone first logs in that they see this screen that says, “You know, we want your feedback.” That’s a great way to do it. Sending an e-mail during your trial sequence or shortly after the trial sequence ends to every customer and asking for feedback will also do that and then having like Mike said having a little UserVoice tab on the side of your website or the side of the app that basically is kind of pinging them all the time to give you feedback.
[23:17] That can work okay but it won’t, you know, people become blind to that, right? There’s the banner blindness where you just kind of tune it out but that at least help you manage the feedback certainly. So, if you’re really looking at to develop your product quickly and you want a lot of feedback, then those are three approaches I would look at implementing. So, thanks for your question, Paul.
[23:34] Our next question is on content aggregation and curation as a business model and it’s from Derek Kuntz and he says, “I look forward to each new podcast like a child waiting for Christmas. Thanks for your time and effort. You’re both are really a gift. I would love to hear your thoughts on content aggregation or content curation as a business model. Let me explain. I’m in a very early stages of launching realcardio.com, a workout app for busy people that allows you to get a workout in less than 20 minutes. Users build their own workout playlist based upon what types of workouts they want to do i.e. cardio, strength training yoga or even a workout mix. Right now, all of the video content is coming from YouTube and it’s only a small sample set. Eventually, much more content will come from YouTube and other sources like Vimeo, Dailymotion, et cetera. It’s much easier to pull content from existing sources like this rather than try to market original content and then host the data myself. Besides, almost every video eventually find this way to YouTube and anyone can embed a YouTube video. What are my potential pitfalls from monetizing a site like this? Derek.”
[24:33] Mike: Wow, I think that your major pitfall would be some sort of problems with legal problems. I mean I don’t know what the legal agreements are around a lot of those video sharing sites but I would be curious to know whether or not embedding them in to your application would be accepted or approved in their eyes. Now, you may be able to give around that, you know, with the technicality by saying, “Well, I’m not embedding your content in to my application, all I’m doing is linking to it.” But that doesn’t necessarily mean that they’re not going to turn around and sue you anyway.
[25:05] So, I would be really cautious about that kind of thing just because you don’t know what those legal issues are. You may want to approach them and ask them questions about it but, again, you may just find yourself in the same boat. They may say one thing, you know, the developers may say one thing and then the lawyers may say something different.
[25:22] One of the things that I can think of is that this seems like a very crowded market and I feel like the problem that people have is not necessarily finding music or videos or something like that to entertain them for the 20 minutes, it’s more of the fact that it’s a problem getting them to the gym. The whole market just feels very saturated to me.
[25:39] Rob: Yeah, in addition to kind of the Terms of Service stuff that Mike talked about, I questioned how much value you’re actually providing at this point. Basically, you’re in a non-business niche so it’s – I know it’s a fitness niche which is fairly popular but it’s still dealing with consumers basically and consumers are really price sensitive. So, it almost feels like a YouTube channel could do this. If someone has a good YouTube channels of yoga workout videos and someone who could just go and get all their yoga from their and if someone, you know, wants to get a different type, they can go to cardio workout says an example and get it from there. So, I won’t feel like I would – if I was working out that I would want to go and manually build a playlist like you’ve shown, right?
[26:15] I think that maybe a better value proposition is to think like Pandora where someone can enter an interest or enter a single video and get a bunch of videos just like that that are really good aggregated workout list that you build automatically. Even then, I don’t know of any consumer that’s actually going to pay a recurring subscription for that. I really think you’re going to need to be ad-driven which is a challenge because there are already ads in the video. From what I know the terms of service you can’t strip ads out or…or add…ads over them. Yeah, I – this is more of a challenge. It’s more of that raise some funding and get really big type idea. I don’t see that there’s going to be enough – that you’re going to be able to generate enough traffic and provide enough value to people who aren’t just going to go to YouTube and maybe put together their own playlist or just, you know, pick a few of their favorite channels and use those if they want to.
[27:04] I just thought of one other interesting angle. If you made a mobile app and it was basically a mobile workout app of aggregated videos, that could – or that may already exists but that’s another interesting thing but, you know, again, you’re going to make 99 cents or 499 or something off that single sale and I guess you could have, you know, in that purchases like we’ve talked about to expand it later on. Yeah, mobile maybe the way to go with this, mobile and iPad and you know, to kind of tablet driven.
[27:30] Rob: Our next question is about paying affiliate income on recurring payments and this comes from Will Claxton [Phonetic]. He says, “Hi, guys. I listen to every single episode and I thought it was about time I send in my own question. I was wondering if I could ask your opinion on something I’m struggling to get my head around. I’ve had about a million ideas for SaaS apps and always figure out a reason or two not to go with them but that’s okay, I know I’ll eventually find one that has all the right ingredients. The question I have is more to do with how to pay referral/affiliates on a monthly recurring revenue model. In all honesty, I don’t want to be paying someone forever for a percentage of the monthly income from a customer they referred to me once. Is that something I’m just going to have to bite the bullet with and do or is there a better option of paying them a higher percentage for just six months to a year then cut them off? I wouldn’t want to pay them a one off lump sum at the start because say the app is 10 bucks a month and I pay them $50 and obviously I’m going to get scammed big time. Hope the question makes sense. I absolutely love the show. Keep up the good work. Regards, Will Claxton [Phonetic].”
[28:26] Mike: I have a couple of thoughts on this. I know that Will seems to think that he’s going to get scammed big time but the fact is that if you have an application that you’re selling for $10 a month and you’re paying somebody $50 a month, then realistically, your lifetime value for those customers has to be at least $50. You’re not going to offer somebody $50 if you’re not going to make $50. So, that’s the first thing. The second thing is that you’re not going to pay an affiliate the second that they send you a customer. What you’re going to do is you’re probably going to wait 30 or 60 days for those customers to stick around and not only just to make sure that they are going to be a customer but to start getting revenue for them and to make sure that they’re going to be around for the long haul because you’re right, I mean they are going to be customers who sign up and they’re going to drop out that first 30 days or within two weeks or something like that. So, you almost might want to put something in there that says, “You get paid an affiliate if the customer stays around past the first month.” So, at the very minimum, you get at least one month revenue from them. So, that way what you don’t have to deal with is you don’t have to deal with all the problems associated with the people who are kind of dropping out of your funnel at the very beginning because they aren’t a good target market for, you know, the type of product that you’re offering.
[29:34] The second thing that it does is it essentially forces the people who are on the other end because they’re not going to be get paid for 30 or 60 days, it forces them to send you good traffic. And that’s really what you’re looking for at the end of the day. You want people who are qualified leads to come in to your sales funnel and as long as you’re managing that sales funnel well enough, you can pay people upfront. Now, the one problem that you could run in to is that what happens if somebody does start sending you large numbers [0:30:00] of qualified leads? What’s going to happen is that because it’s a SaaS-based business, you’re going to run to this cash flow deficit where you have going to have to start paying your affiliates mounts and mounts of money before you accrue enough money to be able to maintain your status as cash flow positive.
[30:18] So, if let’s say that you have a thousand people sign up, well, that’s a $50,000 that you would have to pay out, you know, about 60 days later but you’re not going to make that $50,000 until six months in. So, you’re going to have this gap between month two and month six where you have to basically have $50,000 cash on hand. Now, there’s ways to manage that. You can limit the number of people that an affiliate can refer to you at a given month. There are probably ways around that if you work with the affiliates and say, “Look, you know, you brought out enough people that I’m going to have to push this back. I can afford to give you the $50 upfront. I’m going to have to make a payment plan with them or something along those lines.”
[30:56] But those become cash flow issues and with any SaaS-based operation, when you find a traffic source that is working well, you’re going to have to have the capital. You’re going to have to feed that source of traffic and you know, with the affiliates, this is definitely a big problem when you are, you know, paying that much money upfront for them. It’s not to say that it doesn’t work. I think that WP Engine does this but they also have funding on the back end. So, they have the cash flow on hand in order to be able to fund this type of operation and do it effectively.
[31:24] Rob: Yeah, I agree with what Mike said…that sounds, you know, sounds a bit complicated. Unless you have someone fulltime managing that program, you’re going to have a lot of little details to think about and to keep people from gaming the system. I think overall, you need to think about what your version is to paying someone an ongoing monthly commission. Commissions for SaaS apps can be for a lay low like 15%, 20, 25%. I mean that’s typical, right? It’s not like the 50% e-book commissions you typically see. So, if you are charging 10 or $20 a month, 15% is only a buck fifty or $3 and that is in my opinion a completely reasonably enough to pay someone if they are referring you a paying customer because you should have a very high margins on your customers.
[32:06] In addition, you’re not going to be paying this person forever because customers don’t stick around forever. Your average lifetime is not going to be very long unless you have a very solid business like a hosting platform but average lifetimes are one year or less. And so, I would seriously consider either going with a 15 or 20% commission and just paying it for the fulltime their customers stays with you or giving the affiliate 100% of the first one or two months payments if you feel more comfortable with that.
[32:38] Now, someone could obviously come in and try to game that system but what do they get out of that, right? If you’re not paying them any more than a customer has paid you. So, it’s not like them sending you a hundred say customers does them any good that makes them any kind of profit. So, those would be the two, kind of the two simple suggestions that I look at doing. With HitTail, we offer a 20% affiliate commission and that is for the lifetime if that customer stays there and for us, that is totally worth. It’s just worth paying that much money because the profit margins are high and that’s enough incentive that we do actually have affiliates now working and sending us customers. We’ve actually had quite a few new customers created in January alone from our affiliate program.
[33:21] Mike: If you have a question for us, you can call it in to our voicemail number at 1-888-801-9690 or you can e-mail it to us at firstname.lastname@example.org. Our theme music is an excerpt from “We’re Outta Control” by MoOt, used under Creative Commons. You can subscribe to us in iTunes by searching for startups or via RSS at startupsfortherestofus.com where you’ll also find a full transcript of each episode. Thanks for listening. We’ll see you next time.