Episode 292 | Moving from One-time to Subscription Revenue, When Your Core Product Has Variable Costs, and More Listener Questions

Show Notes

In this episode of Startups For The Rest Of Us, Rob and Mike answer a number of listener questions on topics including moving from one-time to subscription revenue, when your core product has variable costs, and how to disrupt the current payment method for a market. Mike also gives some updates and recent challenges with BlueTick.

Items mentioned in this episode:

Transcript

Mike [00:00:00]: In this episode of “Startups for the Rest of Us,” Rob and I are going to be talking about moving from one-time to subscription revenue when your core product has variable costs, and [more, some?] listener questions. This is “Startups for the Rest of Us,” episode 292.

[Theme Music]

Mike [00:00:20]: Welcome to “Startups for the Rest of Us,” the podcast that helps developers, designers and entrepreneurs be awesome at building, launch and growing software products, whether you’ve built your first product or you’re just thinking about it. I’m Mike.

Rob [00:00:28]: And I’m Rob.

Mike [00:00:29]: We’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week, Rob?

Rob [00:00:33]: Well, MicroConf Europe is less than two months away, so if you’re interested in joining Mike and I in Barcelona with 100, 120 of your favorite bootstrapped friends, go to microconfeurope.com. We have a “buy a ticket” link in the upper right. We’d love to see you there. We have speakers that include Mike and myself and Steli Efti and Peter Coppinger from teamwork.com, and we’re currently working to recruit more speakers to the conference. We’re pretty stoked about it.

Mike [00:01:00]: Yeah, I’m definitely looking forward to it, although the time is going by really, really fast. I looked up the other day, and somebody had sent me an email: “Hey, by the way, see you in a couple of months,” and I’m just like, [groans] “Oh.” [Laugh]

Rob [00:01:09]: Yeah, it came up on us quick, so we have to get our other speakers in line pretty fast.

Mike [00:01:15]: Yeah. I think one of the downsides is just the timeline for us to sell tickets for MicroConf was pushed back a bit because of all the tax implications around accepting that for the conference –

Rob [00:01:25]: Yeah.

Mike [00:01:25]: – which, unfortunately, has to be also pushed onto the people who attend. We didn’t change the ticket pricing at all, but the tickets are priced higher now because we have to charge [VAT?] on everything.

Rob [00:01:35]: But then they can get refunds of [VAT?] –

Mike [00:01:38]: That is true.

Rob [00:01:38]: – so, ultimately, it won’t be more expensive. Almost everyone across the board will be able to get refunds, although I’m not an accountant. Don’t consider my advice concrete here, but that’s my understanding based on the consultants. It’s so complicated. We have to work with [VAT?] consultants. It’s crazy. You know you’ve grown up when you are hiring consultants just to deal with taxes.

What have you been doing the last couple weeks?

Mike [00:01:59]: Well, I’ve been working on on-boarding people into Bluetick, and I’m at the point where I’ve on-boarded over half of the prepaid customers so far. That’s good to see, but the downside is I ran into a bit of a minor setback. We ended up hitting a bug that caused a pretty major performance issue on my server. It was about three days or so – three, full days – and it was really hard to replicate in a local test environment, so we basically just bypassed the issue for a little while and said, “This functionality isn’t going to be available for you guys for a couple of days, or a week, or whatever until we get this straightened out.” We’ve had to refactor just a ton of code in order to get to the point where we can replicate those types of things locally. It just sucks to have to go through that, but I’d rather do it with under 20 customers than 200-plus.

Rob [00:02:49]: Yeah, now’s the time to do it. It is so painful early on, because you just want to move fast, because you’re just trying to prove things out and get that early revenue. But if you don’t make some good decisions here and eliminate that technical debt, not make the fast decisions where you have something hanging out there that later on can sting you, it’ll be brutal when you get into the hundreds; because having a major outage at that point sucks.

Mike [00:03:12]: Right. And it wasn’t even just that there would’ve been an outage. There’re things that, because of this bug, it just didn’t work. Or, at least there were parts of it that didn’t work. The rest of the application was still working, but it was causing certain jobs to be reprocessed over and over again, and it just pegs the CPU because of that. So, unfortunately, they just were never going to finish, which sucks. Having to take that step back and essentially put all forward progress on hold for close to two weeks – it really sucks, to be honest.

Rob [00:03:43]: Yeah, I know the feeling. It seems like with any app of any complexity these days, you’re going to run into this a lot in the early days because the code is just trying to ramp up. As you scale and you get more customers, we’ve found that about every – I’m trying to think. It’s probably every four to six months with Drip that we hit the point where we need to stop all feature development for a couple of weeks and just focus on fixing performance of individual – whether it’s queries, or whether it’s pages, adding caching, even upgrading the entire database to a bigger box with more RAM and all that stuff. We’ve cycled back on that to maybe three times a year, because you outgrow stuff. We’re not building these basic crud apps [laugh] like we used to be able to and compete. The stuff’s too competitive now. I think of a project management tool, or even time tracking, or invoicing software or something, you obviously want a lot of UX. There’s a lot that goes into building the product; but on the back-end the performance implications of it are really small compared to something that is sending a lot of email, or doing a lot of analytics, tracking opens, tracking clicks. Both of our apps do that, and any type of – I can’t even imagine what apps, like Mixpanel and Kissmetrics have to do on the back-end because they are the next level. Now I understand why those types of businesses had to raise funding. You just couldn’t get enough boxes and enough people to scale that up without having a big outlay in advance, even with a tool like Amazon EC2 or Rackspace Cloud.

Mike [00:05:12]: Yeah, I remember talking to Heaton at one point a while back about Kissmetrics, and one of the first versions of that that came out. I may have these numbers mixed up, but I think that he said that for 20 customers they had 12 servers, and it was just because of all the processing that they did.

Rob [00:05:29]: Yeah, I remember that. Obviously, they got better at scaling as it went out, but I do remember in some interview someone had said just the basic infrastructure, the fixed cost of their infrastructure – and I don’t remember if it was Kissmetrics or Mixpanel – was more than a quarter million a year. It might even have been half million. It was somewhere in that range just to keep everything running, and that wasn’t even to scale up as they got really big. That’s the kind of thing you have to think about. It’s getting easier and easier these days to build really cool tools, but the performance implications of those and the complexity of them as you scale up – it’s a real thing. I know that some startups have entire teams just devoted to keeping that stuff moving fast, and it’s a team of both Dev ops folks, DBAs and developers who are in modifying code just to keep things performing. You can imagine something real-time, like Uber, and how hard that would be since it’s worldwide and there’re so many incoming datapoints at any given time. The order of magnitude of complexity – that’s got to be incredible.

Mike [00:06:26]: The other side of that is that you have to have tools or systems in place such that you can test it and put it under artificial stress, and that’s something that we just haven’t really paid a whole lot of attention to because we were trying to move fast and trying to get the app out the door as quick as possible. We were able to do that, but the cost of doing so was that we didn’t have good mechanisms in place for us to be able to run absolutely everything locally and to integrate a lot of testing into the system. So, a lot of it’s been done manually, or there’re certain places that are much better-tested than others. It’s the places where we don’t have a lot of tests that really bit us, so right now we’re working on refactoring a lot of that code. Like I said, it’s been a full week. It’ll probably be another week before we get things settled down to the point that we can actually go back and start working on more features.

Rob [00:07:15]: Well, congratulations on getting half your folks on-boarded. I feel like this bump in the road that you’re hitting – that’s just the other shoe dropping. It had to happen eventually. You can’t get through this stuff without having something like that.

Mike [00:07:26]: Right, and these bugs are things that probably would have come up anyway. I would expect that the two we specifically ran into are ones that we would’ve come up with across other customers as well – eventually. Maybe not tomorrow, or the week after, but it would’ve been soon, and I’d rather find out now than later.

Rob [00:07:41]: So, what are we talking about today?

Mike [00:07:43]: Today, what we’re going to do is go through a bunch of listener questions that have come in. If you’re interested in having us answer any of your questions, you can email them to us at questions@startupsfortherestofus.com. Our first question comes in from Dan Gravel, and he says, “Hi, guys. I’ve been listening to the podcast since its launch, so thanks so much for all the tactical, actionable and practical advice you give. I’ve been running my business for almost seven years, and I’ve been full-time on it for six. The first product, called ‘Bliss,’ which you can find at www.blisshq.com, is still a bestseller, but it plateaued a few years ago. It’s a B-to-C, downloadable software product which automates the management of large music libraries. Arguably, the reason for stagnation is a drop in interest in self-stored music collections with the mainstream move to streaming. I’m considering moving all or most of the app into the Cloud and adopting a subscription payment model. I can’t move it 100 percent because a small software agent will always be required to perform the work on the music files. I think moving to the Cloud should lower friction in on-boarding, allow easier life cycle emailing and a higher LTV due to subscription payments that may enable a paid acquisition. How would you go about deciding whether to go ahead with this? Dan.”

What are your thoughts on this, Rob?

Rob [00:08:45]: Well, I think there’s two markets for moving to the Cloud. One is your existing customer base, and they’re easy because you can just ask them – right? You could do a survey, some one-on-one phone calls, and you could say, “Would this be of interest to you if we had a subscription version of this?” You can talk about the price point. You can talk about the benefits and find out if any of those folks are interested. Then the second market is everyone else – right? It’s all the audiophiles. You said you have an existing market. It’s some audio files, and there’s integration’s, and there’s certain customers who aren’t your customer yet, but who could potentially be. Those guys are a little harder to reach, but you could certainly survey your email marketing list. I’m assuming you have some type of list that is folks who’ve signed up to hear about updates, or maybe they follow some content you produce or something; and that would tend to be a much larger swath than folks who are actually paying you. That’s a good place to start.

[00:09:38] The other option is something I heard about from Patrick and Price Intelligently. He mentioned this in his MicroConf talk this year, and it’s a website called aytm.com. It’s AskYourTargetMarket.com, and you basically define all these demographics. I would imagine by this point you have a pretty good idea of where these folks live and if there’s any type of gender bias, if more of them are men versus women; what they do for a living; how they think about stuff. You can basically just define this at aytm.com, and then you pay per survey responded, and you could basically present the product as it is today and ask if they’d be interested in a Cloud version and try to do some market research that way. So, that’s the most data-driven way that I can think of and probably where I’d start to at least start getting some insight into whether or not this is a good move for you.

Mike [00:10:24]: Yeah, I’d have to agree with you that going back to your existing customers and asking them whether or not that’s something that they’d be interested in is probably a better bet, especially if you’ve been full-time and this has been the major source of income for the business for the past six years. The downside, I think, to doing that is that you have probably attracted a certain number of customers, or a certain type of customer because of the fact that it’s one-time, downloadable purchase and they can just buy it once, install it. Then they don’t have to worry about it ever again. There’s a certain profile of person you’ve probably attracted because of that, so I think that the data is probably going to give you at least some mixed messages there, because a lot of the people who fit that particular profile are not going to want to pay for a subscription service – not unless you can come up with solid justifications for what your service is going to allow them to do. Obviously, those are things that you’re going to have to work with those people to figure out what is it that they actually want and what would the Cloud service really do for them.

[00:11:18] One thing that I can think of off the top of my head is to be able to stream their music to any of their devices from anywhere; but then, of course, you’re going to rely on being able to take their own music and then replay it back to them through the Cloud, or through a streaming service of some kind that you would have to offer on the backend. I would imagine that all that’s possible. It’s just a question of whether or not the people actually want that and whether or not the existing services through Pandora, or Amazon, or any of the other ones already overlap enough with what you’re doing to be able to replace it and serve as a solid competitor; because they’re going to be heavily funded and already have access to a large market of people, but those types of people are probably not the same ones that are in your market.

Rob [00:12:00]: The nice part is that there are so many B-to-C services that are paving the way for you. As we know, B-to-C tends to be a tougher market, because you’re going to have lower price points, higher support, just a lot of things that aren’t as ideal with B-to-B market; but Apple, with iCloud and with iTunes Match and the Spotify subscription stuff; people are used to Netflix and Hulu. There’re just so many more subscription services than there were even two or three years ago, and consumers are getting more used to paying for these. I do think there’s at least some precedent for you to ride on the coattails as folks are getting used to more of these subscription pricing structures.

Mike [00:12:40]: So, Dan, hopefully that helps answer your question.

Our next question comes from Zachary Kesson. He says, “Hi, guys. I’m starting up a SaaS product and having a problem. I don’t have any traffic. My best day, I had 31 visitors to my blog, but they stayed an average of seven seconds each. It seems that all the sales advice I hear for SaaS founders assumes that the founder has a mailing list, and I don’t have one; and without some traffic to my webpage, I don’t see myself creating on in a realistic timeframe. At this rate, I should have a 5,000-person mailing list by September 2031, or something like that. I’ve put links in Reddit, tweeted them, put them in LinkedIn, but nothing seems to generate more than two to four clicks. Paid advertising is outside of my budget right now. What would you suggest? Zach.”

Rob [00:13:16]: This is saying, “How do I market a SaaS app with no audience?” The answer is you don’t want to. You want to have had a landing page up since you had the initial idea and to have at least been talking about it for a longer period of time so that you get some interest. Even an email list of 50 people is incredibly powerful at this stage. You don’t need 5,000, because having 50 people will allow you to get feedback and to do some type of customer research and figure out who wants to use it and for what, and talk to them about value propositions. That is much more valuable. I think that the fact, Zach, that you haven’t done that yet really puts you in a tougher position; because now you have to start from a dead-cold stop, and you’re saying paid advertising is outside your budget right now.

[00:14:11] AdWords is obviously very expensive, so you’re not going to do that, but you can get super-cheap clicks on something like You Tube; or, in Facebook you can get 10- and 20-cent clicks if you’re doing targeting. So, I would instantly put the Facebook retargeting pixel on your site even with 500 visitors per month. You said your biggest day was 31 visitors in a day, so if you do the math and it’s 900; and I’m assuming, since that was your biggest day, you don’t get that many every day. Even with 500 uniques a month, you can start some retargeting. I would also put an email capture widget on your blog. You’re not trying to build a massive list to market to, but you’re just trying to get some human beings that you can talk one-on-one with. You could test that versus, like, a Koalaroo survey box, or one of those other types of things. You’re trying to get information why are people leaving after seven seconds, because you have a problem if they’re leaving after seven seconds. Either your current traffic sources are garbage, or you’re not a fit for what people expect when they come to the site.

[00:15:08] You’re not going to get [out of this?] with split testing. This has to be a one-on-one effort, because you’re so early in the game. The fact that you don’t have a mailing list – and, again, even a mailing list of 50 or 100 – it puts you behind the eight ball. You have a product now, and it’s not going to market itself. You’re going to have to hustle. These days, you’re going to have to do everything under the sun that doesn’t scale just to get people using this app. So, putting a link on Reddit or tweeting it when you have 100 or 200 followers – that isn’t going to cut it. There’s too many people doing this these days to really be able to just do it with this kind of cold, random traffic. So, I would try to do a lot of one-one-one stuff to figure out who’s coming, why, what they expect, why they’re leaving quickly. That average number of seven seconds per visit is worthless. You don’t care about that, because a bunch of people are leaving after one second, and then some people are leaving after hundreds of seconds, and you want to focus on the people who are staying for those minutes. So, figure out how to differentiate those, whether you use Mixpanel, or whether you use Kissmetrics, or whatever it is you use – free trial of Crazy Egg, or Inspectlet. These are things that can show you what people are doing on your site, but don’t rely on the tools to do it. You’re going to have to dig in and do a lot of one-one-one stuff.

[00:16:17] The last thing I would say is if you have an idea of who should be buying your software, figure out where are they; because being on Reddit and Twitter is too generic. Using your tool relates to other CRMs, it looks like, so I’m assuming you integrate with something like maybe Salesforce, or Closeout iO, or [Bay?] CRM, or whatever. So, how do you get into those integration repositories? How do you get those guys to co-promote? You promote on your end when you finish integrating, and they co-promote to their audience via a blogpost. That’s integration marketing. Ruben Gomez was the first person I ever saw do it, and then I coined this term “integration marketing” and talked about it at a MicroConf talk a few years ago. It’s to get marketing done via these integrations, and in order to do that you have to hustle. It’s not going do it on its own. You need to communicate with them and convince them. You have to have some type of blog at that point if they’re going to blog about it, because you have to have something to offer them. They’re not going to email their list if you don’t email yours. Since you don’t have that, you don’t have that asset. An asset doesn’t build itself overnight. This is stuff that you need to be thinking about well in advance of when you need it. If you haven’t to date, then today is the day to start building that. It’s going to take you longer than if you’d gone about it in the correct order, or in a more optimal order; but you can’t really look back at this point. I think you’ve just got to get started building these assets as of today.

Mike [00:17:39]: I went over and took a look at his site. It’s yourcrm.link. It looks to me like the product itself is aimed at SaaS businesses who want to connect with CRMs, and that was just my initial idea of what the product does based on what I read there. If that’s the case, what I would probably do is move much more towards an [out?]-[?] model where you’re directly contacting those people that you think are going to be a good fit. So, sit down and make a list of the 25 companies that you think would be a good fit for using your product and then contact them. You just go through the list and talk to every, single one of them just to get a yes or no as to whether or not they’ll talk to you and see if it actually is a good fit. It sounds to me like if you’re not getting targeted traffic to your website, then you’re not posting things in the right places. If you don’t know what that target is going to look like, then it’s going to be very difficult to figure out where you should even post it. Is Twitter a good place to be posting those? I don’t know. It really depends on what the people who are interested in your product have to say and where they actually hang out. I can’t answer that, but I think that you should be able to after you have some of those conversations, and I think that’s the bottom line at this point. Because you haven’t had those conversations, it’s very difficult to figure out where you should be marketing your product to and who is an ideal customer for it.

Rob [00:18:55]: Yeah, that’s actually a really good answer. I think I may have liked your answer better than mine, because yours really is doing the one-on-one work and the outreach. It’s just a matter of getting in these one-on-one conversations and figuring out who can use it and why would they. His price point starts – I hadn’t even noticed that part, because I didn’t scroll down to the bottom. His price point starts at $149 a month and goes up from there. It’s like $149, $499 and up, so there’s definitely enough room to do some medium-touch sales and some high-touch stuff. I think that’s a really good start. The other stuff I talked about is probably as you want to drive more traffic down the line. I think these one-one-conversations are more critical up front.

Mike [00:19:34]: Yeah, and I think your point about not worrying about trying to do any sort of split testing or anything like that is also valid because of the fact that you just aren’t going to have enough traffic to be able to do that. It’s those one-on-one conversations that are going to be the single most valuable thing to you at this point. What I would probably recommend is visualizing what your sales funnel is going to look like just from a conceptual standpoint. You don’t have to be exact, but you could just set it up as a simple three-, or four-, or five-stage sales funnel where you say, “These are the 25 people that I would like to see as customers,” and they’re at stage 1. You haven’t even actually reached out to them. Then stage 2, you’ve reached out them. Stage 3, you’ve had a conversation or scheduled a meeting. Step 4, you’ve had the meeting; and then Step 5 is whether they are actually going to trial the service or sign up for it. At that point, if they pay for it, or they’ve decided that they’re going to evaluate paying for it, then they drop off that particular sales funnel right there; and then they maybe enter into another one.

[00:20:31] Those are the basic steps that you should probably go through. If you’re just doing things quick and dirty because you don’t have any of this traffic or any stats, just set up a Google doc or something like that, or a series of them. Every, single conversation that you have, you put that conversation into the Google doc. If you have a second conversation with somebody, maybe because they’re further down on your sales pipeline, you add that conversation into that Google doc. That way, you end up with a series of four or five different Google docs that are in line with what your sales funnel looks like, and you can always go back and you can refer to all the conversations that you had at stage 1 of your sales funnel, then at stage 2 and stage 3. It lets you look back at those down the road to see if there are any conversations that had a lot of overlap, or a lot of questions that specifically came up at a certain stage of your sales funnel. Then you can take that stuff and translate it back onto your website to help gather trust and answer questions for people that you are not directly talking to. So, that’s essentially the customer development process that I would go through for this.

Rob [00:21:30]: And if you need software to help you do that cold outreach, I would look at Bluetick.iO.

Mike [00:21:36]: [Laugh] Ah, yes, thank you for the plug there. So, Zach, hopefully that helps you out.

Our next question comes in from Corey Moss, and Corey’s been a long-time listener of the show. Corey left a message on our voicemail number, so we’ll play that for you now.

Corey [00:21:47]: Hey, guys. This is Corey Moss. Over the last year, I’ve stepped back from SaaS apps to concentrate on my Kanban board plugin for WordPress. You can check it out and the paid add-ons at kanban nwp.com. In the SaaS world, the holy grail is monthly recurring revenue, but in the WordPress ecosystem, most licenses are annual, and most don’t even auto-renew, if you can believe it. I want to apply SaaS best practices, but I’m nervous about doing things too differently from how people expect it. Mike, have you run into this in dealing with enterprise? Have either of you had experience with this disrupting the status quo when it comes to monetizing patterns? Thanks.

Mike [00:22:25]: Corey, if I understand you correctly, you’re essentially asking how to disrupt the current payment that a market is used to in standard practice today. So, your question to me specifically was did I run into that sort of thing in the enterprise market. Yes, I did. It was very difficult to get them to change their ways and, looking back on it, it was probably foolish of me to even try, and I would not recommend that somebody else try to do that. So, if you’re going after the WordPress space and you’re trying to convince them to pay for a subscription to something that they’re used to paying for once as a downloadable product, and potentially a yearly maintenance fee or something like that after that, I would be very hesitant to say that you should try and modify that model in such a way that they are not comfortable with or they’re not used to.

[00:23:10] I’ve talked to other people who are in the WordPress space, and they said that selling subscriptions in WordPress is a very difficult way to go, because people are just not used to it, so they don’t do it. I think Rob had one of his yearly predictions that this is going to change in the future, but I think that there’s also going to be a huge subsection of the market that is not willing to change, and it’s going to be years before they are convinced that that’s the only way to go because they are forced to do that. Even if you look at today, it’s 2016, and there is still a ton of downloadable software that’s sold out there. What we tend to see is mostly the recurring revenue, but there are huge number of downloadable products that are still available for sale; and people still buy them every, single day because they only have to pay for them once. I think that you’re probably going to run up against that roadblock in the WordPress space for several years to come. If I had to put a number on it, I’d probably say between five and ten. So, I would not bank on trying to do that overnight, and I almost certainly wouldn’t even recommend going in that direction if you can help it. I would probably double down on trying to figure out what people are willing to pay more for and try to increase your lifetime value that way as opposed to trying to change the way that they fundamentally buy their software.

Rob [00:24:19]: I know that there are some knowledgeable WordPress folks who are trying to attack this problem, and they haven’t really been able to break through yet. I don’t know of any WordPress plugins that don’t rely on an external service that are able to pull off a monthly pricing tier, because if you do have an external service – let’s say it’s backup to a Cloud server, and you’re maintaining the Cloud server, or it’s some other thing like – I think Jetpack doesn’t have external stuff that WordPress runs. They’d be able to charge a monthly fee. But in terms of just doing it for the sake of doing it and not having a strong justification? I agree with Mike. I think it’s going to be an uphill battle.

[00:24:53] I think the other thing to think about is, while monthly subscription is the holy grail of SaaS, that’s also its biggest drawback. It takes you years to get through the “long, slow SaaS ramp of death” – right? It’s just years of toiling away to build up any type of monthly, recurring revenue. The nice part about WordPress plugins is you can charge more up front. You do get a one-time fee. Let’s say you’re charging 49 bucks for the annual license, which a lot of people are doing. I think auto-renewing with advance notice – let’s say a five-day, or a three-day, or even a week notice before you auto-renew should be perfectly acceptable. I do know that some folks are moving in that direction. I think the more savvy WordPress business folks are doing that, and I would as well. The nice part is that, since most of the traffic that you generate will come from these recurring sources like a Google, or a WordPress.org plugin repo, you can ramp up your revenue to a couple grand a month really quickly; whereas SaaS is just going to take forever to get there. While SaaS will grow over time, I’m not so sure that’s what you want at this point. I personally would be going for that early revenue. Let’s try to get to between 2 and 5 grand a month as quickly as possible, and then you can start thinking about either adding add-on services that could potentially become subscription; or, using that money to stair-step your way up with either a second plugin, buying out all your time and then thinking about something long-term that is more of a monthly subscription model. Whether that’s in the WordPress space, or you just go straight for SaaS, that’s something to think about.

[00:26:21] But I am not bullish on the fact that, as a relative newcomer to the space, that you’re going to be able to come in and just charge monthly without a major justification; because so many WordPress users, the reason they’re using it is because it’s cheap and because there aren’t subscription fees. A lot of consultants use it because they know that their clients don’t want to pay subscription fees for things. They don’t want to pay for Shopify or Squarespace. So, if you come in and want to charge this 9 bucks a month or whatever it is that you could get for it, it’s going to be a deal breaker for a lot of folks.

So, that’s my advice as of now, the middle of 2016 here. I do believe that over time this will change. I think most things are going to move toward subscription. We see it happening in B-to-C entertainment, which was unfathomable a few years ago to think that millions of people would be paying for Spotify, for essentially music subscriptions; and even 15 years ago, to think that tens of millions of people would be paying for Netflix, for movies by subscription; but it’s happening. Do you think that WordPress will eventually go? I think it’s years out, and I think you’re ahead of the curve.

[00:27:22] So, my prediction Mike called out. As we’re talking through it, I’m realizing there’s just no chance that’s going to happen in this year. I think what my prediction was was that one person would figure it out pretty well; and that, of course, remains to be seen. I guess we’ve got another six months.

Mike [00:27:35]: I’ve seen one company that has done this, which I think they’ve done pretty effectively, Optin Monster. They have a little widget that you can install on your website, and they do charge a subscription fee for it, but they also have – as you pointed out, unless you have some sort of external service that integrates with, like for WordPress backups, or security checking, or things like that, where it needs that external service in order to function, and that external service needs to be up and running at all times, maintained and everything else. Optin Monster can do that because, one, the types of things that they integrate with are types of services that you’re going to pay for. So, it really sits on the front of that funnel and is aimed at those people who are used to paying for those things.

[00:28:16] The other thing is that I think they charge $50 or $100 per year, and it is that subscription fee; but they also keep the widgets up-to-date. So, if there are changes made in MailChimp, or Drip, or Aweber, or whoever, they will update the plugin so that when it comes down to your site, it is all up-to-date and you don’t have to worry about keeping your own plugins up-to-date. So, there are some advantages there, but they also made that switchover after they hit, like, 200, 300,000 customers or something like that. They’re not going from ground zero and trying to build a SaaS pricing model out of it. They already had a pretty substantial user base before they made that change.

So, Corey, hopefully that helps answer your question.

[00:28:54] Our last question for the day comes from Brian Kenry, and he says, “Hi, guys. Love the show, and it’s been a big help in getting my startup off the ground. I’m building a platform that will be monetized by generating leads and selling them to a private agency. I’ve assumed that I will partner with one agency and turn over leads at a cost per lead, but I’m wondering if I should consider a different dynamic. I realize this is a vague question, but is there any benefit to pursuing a subscription model or a marketplace for leads? It seems like a cost per lead is the most logical way to approach this, but I want to make sure I’ve considered all avenues. As always, thanks for your input.”

Rob [00:29:21]: I think I would stick with cost per lead, because that’s the most granular, and it’s the easiest to understand both from your and your customer’s perspective. Your costs are going to be variable, but you’ll be able to lock them down below a certain amount and then know what your margin is.

One thing I would consider is having customers – they could pay on a subscription basis so that they pay in advance. Here’s what I’m thinking. Instead of delivering a bunch of leads to them and having them pay at the end of the month or something, you really want to get that payment at the start of the month, knowing that you’re going to deliver those leads over time during the month. So, you could think about having tiers of, like, “Do you want 100 leads? Then it’s 1,000 bucks,” or whatever. If you want 200 leads, then it’s either $2,000, or you can give them some type of discount. Do $1,800 or something a month. The nice part about that is you don’t have to chase after them for money. They can either sign up for the PayPal subscription, or through Stripe, or whatever; and you’re automatically billing them, and you’re getting paid in advance. If their payment doesn’t go through, then you don’t deliver the leads. You’re not out the money. I think that is beneficial for you from a business perspective, and it’s going to save you time. That still works out to a cost per lead, but they’re basically committing up front to buying a certain amount of leads, and you’re getting that payment up front.

[00:30:34] Those are my thoughts off the top of my head. I can’t think of any way to get more complex without just making things hard to understand, and I know in the lead industry things are typically sold per lead. Do you have any other thoughts on it, Mike?

Mike [00:30:46]: I have a few that go into different places on this. As you said, the one that’s easiest to understand is just selling them directly cost per lead. The problem there is that you don’t know how much time and effort it’s going to take you to do the work to get a lead. As you said, if you do it enough, you’re going to able to figure that out and you’re going to be able to do some averages there and then tell people, “Yeah, I can get you X number of leads for Y dollars.” Then eventually, they’ll be able to make that mathematical calculation in their head or just look at it and say, “Yeah, that totally makes sense for us to do that.”

The other thing that I can think of that might be an option is to have them pay you for a specific service based on a flat fee. Whether it gives them results or not is a risk that you’re pushing on them. I don’t like this idea nearly as much because of that very thing, but you could say, “For $500 a month, we’re going to do X, Y and Z for you. We’ll reach out to X number of people with your emails, or with your script,” from whatever the call is, whether you’re doing cold calling or cold emailing. You can do something like that and put together different packages.

[00:31:51] I do agree that you should probably charge people up front so that you have the capital on hand to go do that, so that you’re not paying for or funding it up front only to have somebody cancel later on, and then essentially eat the costs associated with that. I’d definitely collect the money up front. Those are the things that come to mind for me. The real big there, I think, is who is assuming the risk for doing this. I think that you probably want to assume as little of the risk as possible, but I also think that you probably don’t want to go down the road of saying, “We’re going to do X amount of work for you,” but then basically push all of the risk onto them if it doesn’t deliver; because it could reflect very poorly on you if you go through a month, or two months, or something like that and, for whatever reason, you’re just not getting the results that you used to. I think that you’re better off evening those out for the customer and letting them look at the raw numbers and say, “Yeah, we expect to pay $10 a lead, and that’s what we’ll get.”

Well, Brian, I hope that answers your question.

Rob [00:32:45]: And that wraps up our episode for the day. If you have a question for us, call our voicemail number at 888.801.9690, or email us at questions@startupsfortherestofus.com. Our theme music is an excerpt from “We’re Outta Control” by MoOt, used under Creative Commons. Subscribe to us on iTunes by searching for “startups” and visit startupsfortherestofus.com for a full transcript of each episode.

Thanks for listening, and we’ll see you next time.

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2 Responses to “Episode 292 | Moving from One-time to Subscription Revenue, When Your Core Product Has Variable Costs, and More Listener Questions”

  1. Thanks for answering my question! ATYM is a service I’ll definitely be looking into…

  2. Thank you for answering that question about getting started with no list! When I heard the question being read out I thought “Wow, that sounds almost like I could have written it!”