Episode 36 | Recurring Pricing Discussion

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[00:00] Mike: This is Startups for the Rest of Us: Episode 36.

[00:02] [music]

[00:11] Mike: Welcome to Startups for the Rest of Us, the podcast that helps developers be awesome at launching software products, whether you’ve built your first product or are just thinking about it.  I’m Mike.

[00:19] Rob: And I’m Rob.

[00:20] Mike: And we’re here to share our experiences to help you avoid the same mistakes we’ve made.  What’s going on this week Rob?

[00:25] Rob: Well, today’s my first day back to work after a couple of weeks off for the holidays.  Yeah, what is today?  It’s the fourth of 2011 and things are going good.  I’m feeling super-motivated coming back just to knock out a bunch of stuff that’s been on my list for months.

[00:41] I find that the freedom of being an entrepreneur is, sometimes it’s a blessing because you can work on exactly what you want to, but it’s also been a curse for me at times because it’s like I don’t work on anything I don’t want to.  And so I get this list of crap that stacks up that doesn’t really have to be done, but I feel like it should get done.

[00:59] It’s like, “Oh, A/B testing that thing or adding these new articles to this AdSense site, or adding a resource page to this.”  It’s like, gah, it’d be a really good idea and I think it might improve something, but I just don’t know for sure, so I have a tough time justifying the time investment, as well as it’s just not fun.  You know, it’s not like writing a new blog post or something fun like that.

[01:19] So anyways, yeah.  But today I cranked out for like six hours straight and just knocked a bunch of those little ones off.  Gosh, once you get momentum going they go so quickly.  They just kinda start falling off the list, so that felt good.

[01:33] Mike: Yeah, I did the same basic thing, but I did it last week, kind of between Christmas and New Year’s where I had a little bit of free time here and there.  So I was just knocking off some things that have been kinda sitting on my list for a couple months.  And now they’re off my list and I can dedicate my time to some other cool stuff.

[01:49] Rob: Yeah, it’s nice to have that weight off your shoulders.

[01:52] Mike: Yep.  Definitely.

[01:53] Rob: How about you?  Did you take time off for the holidays?

[01:56] Mike: Not really, to be perfectly honest.  I took a couple of days off here and there, but really, I just basically worked pretty much straight through.  And because it was the holidays, nobody bothered me at all, which was kind of nice.  [laughs]

[02:09] Rob: Yeah, that’s what I was going to say.  I enjoy sometimes doing some work during the holidays or when everyone else is off.  It’s that feeling of like, “I’m not going to receive any emails this week,” or it’s going to be half the volume that you normally do.  So you can really crank through a lot of stuff.

[02:24] Mike: Right.  And I found that I just didn’t get interrupted hardly at all.  And my phone didn’t ring.  I didn’t get emails left and right.  And it was just nice to be able to sit down and feel like I was actually being productive on a lot of different things.  So it was very cool.

[02:35] Rob: Yeah, I really enjoyed the time.  I checked email a couple of times during the two weeks and shot back stuff that was urgent.  But I kinda took the time to do more thoughtful visioning, like to step back to a higher level and look out like, “What do I want to do over the next year?  What do I want to accomplish?”   It was well worth it.

[02:56] Anytime I sit down in front of my laptop and try to do that, it just doesn’t happen, because I screw around on Twitter, or my blog, or whatever, and I just kill time.  But the fact that I left my laptop at home, went out of town, and all I had was an iPad…

[03:09] Oh, I wanted to say this.  I wanted to find out if you felt this way as well.  I really like my iPad, and one of the reasons is because I don’t do very much work on it.  I will check emails sometimes, but I do a lot of thinking and reading and stuff that’s fun to me.  You know, like I read blogs and I read books and stuff.

[03:28] So I have this association when I pick it up that it’s like an entertainment device.  It’s not like true entertainment; it’s more like work/entertainment where I’m thinking of things, and that’s really fun for me.  Do you have a similar association with it?  Do you love your iPad and do you think it’s because of that?  Or what are your thoughts?

[03:45] Mike: I think it’s probably similar.  And I don’t necessarily pick it up and just immediately think, “Oh, I’m going to screw around for the next six hours” or anything.  But I certainly probably associate it with play more than work.  I’ve certainly configured it to be able to do work on it when I need to.  But a lot of the things that I have on there are things that I can use when I’m on the go or I don’t necessarily have access to my laptop.

[04:09] I’ve used it in the past a lot for catching up on TV shows and stuff while I’m at the gym.  So that has helped a lot.  I mean like I literally worked out pretty much every single time I was watching the Battlestar Galactica series.

[04:23] Rob: Yeah, I actually have that in my queue.  I’ve heard some good things about it.

[04:26] Mike: Yeah, it’s pretty good.

[04:27] Rob: Well it sounds like you are less productive on your iPad than even I am.

[04:31] Mike: [laughs]

[04:32] Rob: It sounds like you just watch TV.  No, that’s cool.

[04:34] Mike: But I workout at the same time, so…

[04:35] Rob: That’s true!  Think of how…you’re multitasking!

[04:38] Mike: I am!

[04:40] Rob: Hey, I wanted to give a shout out to a guy  named Doug.  And he did a very nice write-up of the podcast.  And that’s at DaddyDug.com.  We’ll have a direct link to his write-up in the show notes.  But he’s doing his Top 10 Business Podcasts of 2010 and we rank number four.  I thought it was really cool.

[05:05] Mike: He also mentioned that on Episode 18 we had asked people to let us know some interesting places that they’d listened to the podcast, and he listens to the podcast while he’s making falconry bells.

[05:16] Rob: Yeah, I actually had to look those up.  It says you attach them to the bird of prey, and they are essentially to allow the falconer to hear and interpret what the bird is doing, even from a surprisingly great distance.  So that’s kinda cool. I guess, yeah, you send a falcon off, you probably wouldn’t…not know what the heck it’s doing, so…

[05:34] So yeah, what a crazy thing to be doing while listening to our podcast.

[05:38] Mike: Yep.

[05:38] Rob: Thanks Doug.  Thanks for writing in and for doing the write-up.  Yeah, I was going to say, you have some news for us relating to this quote longtime listeners will know: “Eight to 10 weeks. Eight to 10 weeks.”

[05:50] Mike: Yep.

[05:51] Rob: All right.  What is it?

[05:52] Mike: So I finally put the sales site out there for the product that I’ve been “secretly” working on for months now.  The product is named Audit Shark.  I’ve had the domain name for about a year now.  The website is www.auditshark.com.  I’ll be doing marketing for the site for the next few months.  When I finish writing the code and actually get it ready to deliver to prospective customers, that’s where you’ll be able to get access to it and be able to use it.

[06:17] And I’ve already got a couple of people who are interested in doing some Alpha and Beta testing for me, some volunteers.  One of them is actually a 600 computer system company who’s interested in finding out more and using the software to audit their environment.  So I’ve definitely got some good prospects on the hook for using the product once it finally launches.

[06:38] Rob: Nice.  So you’re doing this to start collecting emails and such and to gage interest?

[06:44] Mike: Yep, yep. All the typical stuff you’d do, hopefully before you actually finish your product and after you have figured out that there’s a market for it.

[06:52] Rob: Right. That’s cool.  And how far out are you form an Alpha or kinda getting some people to use it?

[06:58] Mike: From an Alpha I’m probably about four or five weeks out, hopefully anyway.  And then after that I’m hoping that we’ll have a Beta out there sometime, about eight weeks or so from now.  And then maybe another four or five weeks after that we’ll actually be able to start talking about launching it.

[07:14] Rob: Cool.  We’ve never talked about what Audit Shark does on the podcast, have we?

[07:18] Mike: No, we haven’t.

[07:19] Rob: Did you want to give just an elevator pitch of kind of what it does?

[07:22] Mike: Sure.  The basic idea is that there are all these companies out there that have some sort of an industry or regulatory compliance initiative that they have to do.  So for banks, you have to adhere to like GLBA practices, which is the Gramm Leach Bliley Act.  For anyone who accepts credit cards, there’s PCI standards, so that’s a Payment Card Industry data security standard that you have to follow.

[07:44] And every industry generally has its own regulations.  And the problem that small businesses have, once you get past 10, 15, 20 employees, you kinda have stuff that you should probably be protecting and you should be making sure that you are locking your systems down, because of all the different ways that computer systems are breached, roughly half of them are due to patches that haven’t been applied.  The other half are due to system misconfigurations.

[08:09] And what these industry standards and regulations are designed to do is to help you make sure that you are locking down your machines and that those audits that you are doing on an ongoing basis are done to make sure that you have in fact gone through and verified that all those system settings are set.

[08:24] The problem is that when you get into small businesses, they don’t have the money to go out and hire somebody to come in and take a look at their systems.  They don’t have money to hire an expert to come in and help them understand what it is that they should be doing.

[08:37] So what this software does is it uses kind of the collective intelligence and brainpower of what everybody else is doing and shows you exactly what everybody else in your industry is doing and allows you to compare yourself against what they’re doing so that you have an idea of where you stand relative to other people who are in your particular market.

[08:57] So if you’re a small bank, you’ll be able to compare yourself to other small banks.  If you are a small retail shop, you’ll be able to compare yourself to other small retailers.  And just by the virtue of sharing that information, you are able to rely on other people who may very well be more knowledgeable than you are about what you should and shouldn’t be looking for.

[09:15] Rob: Very cool.  So keep your eyes out if you are interested in that.  Four or five weeks for the Alpha.  Let’s say someone was interested in seeing early bits.  Would they go to AuditShark.com and enter their email?

[09:29] Mike: Yeah, there’s a place where you can go and you can sign up for the mailing list.  I’ll probably just select a few people from that mailing list and see if they’re interested in the Alpha.  But I’ve already got a few people lined up to take a look at that– people who I’ve worked with in the past who I know are going to be able to give me some solid feedback and are going to be able to scale it up.

[09:45] I mean if you think about it, some of the numbers of the audit settings that I’m looking for are a little bit mind-boggling.  So, for example, the company that’s got 600 systems that they want to audit, if I’m auditing those on a  daily basis and they’re looking at 100 different control points, well, every single day they’re pumping 60,000 control points into my system.  Over the course of a month, that’s 1.8 million, something like that?

[10:07] Rob: Right.

[10:08] Mike: And if you scale that out, that’s just one customer.  I mean you start scaling that out and the data grows very, very quickly.  So I still have to do scalability testing and things like that on it.  But, you know, it’s coming along pretty well and I’m just looking forward to actually pushing it out the door and seeing what happens.

[10:26] Rob: Awesome.  Well I wanted to give an update on my book, Start Small, Stay Small.  I had someone purchase it from Azerbaijan.  It was really cool.  I think this brings the country total, it’s well above 40 in terms of the number of countries that have people in them who’ve purchased the book that have purchased directly through me.  You know, who knows…when they buy from Amazon I don’t see their address.  But like all of Western Europe, a bunch in Africa and India, and obviously Canada and the US, Central America, South America.

[10:58] So that’s kinda cool.  And then I hit 1,400 units last month.  Not in a single month, but since launch in June.  So in about 6 months sold 1,400 copies of it.  So I’m pretty stoked about that.

[11:09] Mike: Cool.

[11:10] Rob: So hey, I have one other thing.  I know we’re well into the time already, but I was talking with someone today, and he’s a micropreneur that you and I know; I won’t mention his name here.  But he has set his date that he’s going to quit his job because his app is making enough money.  He’s cut his expenses way down and he’s making a good chunk of money from the app, and he’s a member of the Academy as well.

[11:33] And we were talking about, and I came to realize that he’s been planning, like meticulously planning, for between 12 and 18 months for this date.  And he and I were having some conversations that like some people say, “Wow, you’re crazy for quitting your job,” or, “You’re crazy for being an entrepreneur.  It’s so risky!”

[11:54] And the other thing people often say is, “I wish I could do that.  I wish I could quit the job.”  We were kinda tossing around via email, but it’s like, “You could do that if you also took the time over the  18 months or two years to invest and to build a product, and to plan for this date and to cut your expenses.”  Like, he sold a car…He kinda did a lot of the stuff we talked about, what, 10 or 15 episodes ago on the “how to cut your expenses” one.

[12:21] So he’s gone at it from both sides of it and cut them way down.  So he’s going to make a lot less than he makes at his salary job, but realistically, for at least 18 months, maybe more, he’s been working 40-50 hours a week at a day job and then another 15-20 at night.  So suddenly, he’s going to be working so much less time and he’ll still make his expenses.  And then his plan, of course, is to take that 40-50 hours and build another app or expand on this one to eventually get back to where he has more money coming in, basically, but he can totally live on what he’s bringing in.

[12:53] So I wanted to bring it up.  Entrepreneurs, a lot of entrepreneurs are not as risk averse as people think.

[12:59] Mike: I think some entrepreneurs are very risk averse and some of them aren’t.  Some of them are risk takers.

[13:04] Rob: Yep.  That’s all I was saying, is I think people paint entrepreneurs with a broad brush.  That, “Wow, you quit your job.  That’s such a risk.”  And in his case, and actually, in my case, I am very risk averse.  I am not a risky person.  I don’t like taking risks.  People see me and they say, “Oh, you’re an entrepreneur.  You must do this crazy stuff.”  And realistically, if you plan and you’re meticulous about it, and you have this big cushion, and you do it smart and do it well, I don’t think it’s actually that risky.

[13:30] Mike: I think that it depends on your point of view, because a lot of people who are looking at entrepreneurs in general don’t necessarily see all the details.  They haven’t thought it through.   So, for example, this person has looked at everything, looked at all the different options, said, “Hey, I don’t want to work at this job anymore.  I want to go out and do my own thing.  And I’ve got this product that is making enough money that I can probably go out and do it.”

[13:52] And from that standpoint, he’s looked at the numbers and all the math that’s associated with it, cut expenses, and looked at it and said, “Hey, this is not a very risky thing.”  I don’t know for sure whether this person is risk averse or not, but if you were looking at it from that point of view and you actually have access to all those numbers, to you it probably doesn’t seem that risky.  To an outsider who isn’t looking at all those things and probably hasn’t thought all of it through, they’re looking at it from their own situation and they’re’ saying, “Well that’s very risky.  I could never do that because of…” and then they’ll start naming off all these different things.

[14:28] Rob: Yep.  From the outside it looks risky.

[14:32] Mike: It can still be scary.  Even if you know what you’re doing and you have carefully thought things through, there are still things that can come up that were completely unexpected and you just had absolutely no idea that those things were coming.

[14:45] Rob: That’s true.  There is risk.

[14:47] Mike: You know, it’s kind of a tough call.  Is it really risky to go out on your own?  You could certainly not make the money that you want to.  But if you get fired or laid off, you are not going to make that money anyway.

[14:59] Rob: Yeah, I feel like the key with that is like diversifying your income.  That if you’re working for a single employer, obviously you just make that paycheck and that can get cut off fairly easily.  But if you go out on your own, I think if you are a contractor and you’re working for one client that you’re making the same mistake, and you can get cut off way more easily.

[15:17] But if you have three or four clients or you build multiple products, or you just have these different sources, or you have a product with a really consistent recurring income, those are the kind of things that I think create a lot more safety than having a salary job.

[15:30] Mike: Right.  Well, I think that’s where the whole micropreneur mindset comes in and being able to have all these diverse incomes, or at least the idea of that’s what your goal is eventually going to be is to have several different products and maybe a portfolio of them so that if one doesn’t do well, another one will hopefully prop it up.  And as long as the entire economy doesn’t completely tank you’ll be OK.

[15:53] Rob: Yeah, and I see that every month.  I just did month end for December, and once again, some of my apps, they just come down for one reason or another.  You know, they’re 20% off from the previous month.  But then others will jump up and totally make up for it.  And it really is that idea of having a portfolio so that some lose and some win at all times.

[16:14] If I had just one of these apps, I look back over the year, and if I was relying on just one of these I would have huge income swings.  Like, it really would be scary.  There’s a couple reasons for that.  One is that I don’t really have…I have a couple of recurring apps, but nothing as stable as like a true SaaS application where people pay monthly and they stick around and they’re locked in.  I mean that’s the Holy Grail and I have one.

[16:39] But anyways, that one’s pretty stable.  But all the other ones really do bounce around.  And the one, like DotNetInvoice, which is actually really just a one-time fee, buy it and download it, that has massive income swings.  It will swing like 50% up, it will swing like 80% down in a bad month.  I mean just crazy stuff like that.

[16:58] So that’s why like you and I talk about like when people want to go build an app, go recurring.  I have to figure out a way to build a recurring app, because trying to sell the same thing, even at a higher price point, trying to sell that to a brand new audience every month, it’s a big deal.  I mean it’s not only time intensive, it means that your income is really erratic.

[17:17] Mike: You’re talking about these 50% swings, I mean I’ve had a $160,000 cash swing at one point, and that’s not an easy thing to go through, especially when it’s over a very short time period.  And when that sort of thing happens and you look back on it, you can certainly point to a number of different things, and you try and justify things and help make yourself feel better, but ultimately you eventually have to look at that checking account and just say, “You know what?  I screwed up.  There’s things that I could have done and I should have done and I didn’t.”

[17:44] And, you know, you’re right.  The recurring revenue, I know there’s a lot of people who do not like to pay for things on an ongoing basis.  Like, for example, I’m looking at QuickBooks Online right now and I own a copy of QuickBooks, and I can buy QuickBooks for something like $100, $120 from Amazon.  But I can pay $25 a month for QuickBooks Online.  And I’m just like, “OK, well I’m going to pay more than twice as much for a SaaS application and it probably doesn’t necessarily give me everything that I would get from the downloadable app. “

[18:18] But the advantage is that they’re going to have some things that are automated for me, they’re going to automatically bring in all my bank statements, and I’ll be able to do things from anywhere, not just from my laptop.  It’s all going to be automatically backed up and all sorts of different things.  It’s real hard to justify it though.

[18:33] Rob: Yeah. There’s a couple things to that.  One is QuickBooks Pro 2011 is actually $230.  So it would be almost $20 a month.  But Amazon sells it for $170.  So that’s like, what, $15 a month?

[18:45] Mike: I already own it, so I just have to pay for the upgrade.

[18:49] Rob: Yeah.  So $25 a month, I agree.  It’s a big mental shift.

[18:53] Mike: Yeah, I mean even from a developer’s standpoint though, you and I talk about having a product where the recurring revenue is really the way to go.  But from my own standpoint, I look at things like that and I say, “Well, what’s the justification behind a company being able to charge that?  And can I justify it for my own product?”  Like, for Audit Shark, that’s a recurring revenue product.  And the way I justify it is, as I talked about, all those different data points and stuff, I have to store those.  And I have to pay for storage of those, and I have to pay for aggregating all those.  And I also have to make sure that everything’s secure and that everything’s shared anonymously so that you can see all those different data points from other people and know where you stand in relation to everybody else.

[19:33] And I look at that and I say, “Well yeah, I cannot only justify that as the developer, but I could justify that as a customer as well.”  And in addition, I mean the price point of the competitors I have, it’s exponentially higher for competitive software out there, even after the yearly cost.

[19:50] So I look at that and I say, “Yeah, I could definitely justify paying for that on a monthly basis.”  Other things, not so much.

[19:57] Rob: I think that the first thing is people are getting more and more used to paying ongoing fees for things that are online.  So like SaaS applications.  Anytime you have a Software as a Service application that is online like QuickBooks Online is, I feel like…I’m not even shocked by that anymore. Like five years ago I remember hearing this Software as a Service thing and thinking there is no way people are going to pay $20 a month for stuff, and $30 and $40 and whatever.

[20:24] But to a business, I know now from my own perspective it is totally worth it.  And there’s a few reasons.  One is downloading QuickBooks and installing it on a single desktop for me is a total waste of time, because I leave town so often that I need remote access to everything.  And I know I could go to LogMeIn.com and have stuff running in Terminal In, but then I have a VA who I want to enter stuff, or a bookkeeper.  I want my CPA to have access.  There’s all these benefits to going online with it.

[20:54] So I think there are a lot of benefits in this particular case.  And I think the larger question of what you’ve asked is: are there some apps where it’s worth it to pay this ongoing fee, and how do you justify that?  And which ones are not worth it?  You know, how do you justify it to a customer?

[21:11] And I think the apps that provide ongoing value for the business, that they really need to use it long-term, like something that does analytics, SEO, something that prepares, like, proposals that you’re going to prepare all the time, invoicing software—all that stuff is like a core function of your business, and it’s something that you’re going to use for a long time and you need it often.

[21:32] Whereas there are some things that you just do once, like A/B testing.  I know you do that ongoing, but I do it in big blocks.  So I’ll do like a month or two of A/B testing and then I just put it on the shelf, I go and work on other stuff, and then I come back to it later, kind of when I’m in the A/B testing mood.

[21:49] So to me, I would have a tough time paying an ongoing monthly fee for an A/B testing engine, unless I was really going to be constantly running tests.  And I think there are other…I’ve had some app ideas that I think would work but I can’t figure out how to justify them being recurring.  People would basically just need to pay a onetime fee.  Like a keyword tool, something like that, where I want to do SEO keywords.

[22:11] And with micropreneurs, you aren’t launching a new product every month.  So how can I justify selling a micropreneur, like a keyword tool, or a competitive analysis tool?  Because really, you are going to use it once and then you’re not going to need it, maybe, for a year until you launch your second product.

[22:27] Mike: I find it really interesting that you take that point of view, because I see it completely opposite.  Because for something like QuickBooks, I used to use QuickBooks 2007 and  I recently upgraded to 2010.  And the only reason I upgraded to 2010 was because 2007 was no longer supported in terms of the banking downloads.

[22:47] So what I did was for three straight years I never bothered to upgrade because everything worked.  I used it constantly, it always worked fine, and there was no need for me to upgrade.  I mean I looked at some of the new features that were coming out, they were nice, but none of them were necessarily really compelling.

[23:04] But then once it came to a point where I could no longer actually use the product, then I upgraded, and that was it.  And honestly, at this point I’m probably set for another three years because the current version of QuickBooks will be supported for another three years.

[23:19] So for something that is a mature product that I’m going to use every day, I would rather pay once and then not have to pay for it again for three or four years.

[23:29] I wonder if the deciding factor is whether or not you feel like it’s a mature product.  I mean because if it’s bug-ridden, you obviously can’t use it.  You need to have those updates.

[23:39] Rob: I don’t think it in terms of mature product.  I think of it more as buying, downloading, and installing software, to me, now feels old-school.  And I certainly do it…I still do it for the Office Suite, I still do it for multimedia software like Camtasia and stuff.  But most other stuff, even Office Suite, I’m using Google Docs more and more for stuff.

[24:01] And so if I have a choice these days, I want to be virtual and I want my data to not have a single point of failure.   I know we have backups and all that stuff, you know, that I can backup my laptop with Mozy.  But if it’s really on QuickBooks online, I do trust their data integrity and their backups more than my little Mozy install and my hard drives here.

[24:23] Mike: I guess so, but I mean you can still use something like Dropbox for that, where you just dump all your data into Dropbox.  And Dropbox is another one of those subscription-based services, but you could use something like that where you’ve got all of your applications and all the data for those dumps into Dropbox.  And then let’s say your hard drive crashes or a virus comes in and wipes everything out.  You know, you install Dropbox on another computer and you’ve got all your data back.

[24:50] Rob: But again, you’re talking about just having a bunch of data.  If I have 20 or 30 apps that I’m using like that and I’m dumping them all into some Dropbox folders, that feels clunky to me.  It feels like I’m manually managing a bunch of crap; you know, a bunch of these QBX files, right?  And it’s like, “Which one is my data and which one isn’t?”

[25:09] And if it crashes and I can’t find my old 2007 version, and I can’t download it because they don’t allow me to anymore, then what do I do?  Do I get it and upgrade…Like, there’s possibility for data incompatibilities.  It’s just a very…there’s complexity there, you know?

[25:25] Mike: Yeah.

[25:25] Rob: Whereas if I’m on QuickBooks Online and my laptop crashes, the less I have running on my laptop, the less I have to reinstall the next time I go to Windows whatever, or if I move to a Mac.

[25:35] Mike: But all you’re doing is you’re shifting the risk. You’re shifting the risk of your computers crashing to their computers crashing.

[25:41] Rob: That’s right.  And I think the computers crashing…Well, first of all, I trust their systems more than I trust my own, honestly.

[25:48] Mike: [laughs]

[25:48] Rob: Because I’m not running enterprise stuff.  I have a Dell freakin’ Inspiron.  You know what I’m saying?  I don’t have a SAN here.  I mean I don’t have all the redundancy and stuff.  And again, I do back my stuff up, but it’s not like RAID 19 or, you know, like some crazy system.

[26:04] Mike: [laughs]

[26:05] Rob: In the meantime, between failure of my hard drive, there’s probably like 10 minutes from now, you know?  Because I think whether something fails or not, that’s one reason that I like recurring stuff, or that I like the online stuff.

[26:17] The other one is I can access it anywhere.  Like, from my father-in-law’s Macintosh last week I needed to do something.  And I just jumped on and I checked it, and then I made a thing and I sent a payment.  It’s just everywhere.  I didn’t have to try to get onto my laptop, which I typically turn off when I leave, and it timed out. I’ve had me logged in on it before and my laptop went to sleep.  And I was somewhere and I tried to…And it’s like, “Ahh!”  I couldn’t get to the stuff, you know?

[26:43] Mike: I’m totally on the other side of the spectrum though, and I think maybe it’s just me because I’ve got all this crazy infrastructure in place.  I mean I’ve got like 10 Terabytes of disk space just lying around.  And I’ve got all these different things in place where I can VPN in, I can issue remote wake on lan commands, I can fire up an ESX server.  I’ve got my RAID 5 arrays all over the place and SANS.  I can do all that stuff because I have it all.

[27:08] Rob: Then you have to maintain it, right?  And you have to keep in upgraded and you have to configure it, and you have to know how to use it.  And when there’s a problem, you have to spend time fixing that stuff.  And anytime there’s complexity, you know that your system takes more time to set up and maintain than when I plug my laptop into my Comcast router.  You know what I’m saying?  There’s just more there.

[27:29] Mike: There’s more there, but I know how it’s all set up.  So I guess I just don’t see how different it really is.  I mean I have stuff in here in my network where I can do a hardware independent imaging reinstall  of anything that I want.  So, you know, it’s all automated already.  I can have everything redone fairly quickly.

[27:49] Rob: Right, but there are two things. One, that’s specialized knowledge.  You’re one of one of those 10,000 people…less than 100,000 in the world who knows how to do that. I don’t know how to do that. Yes, I could learn. That’s not a scalable solution, a
“Yep, you can go do that.”

[28:04] Mike: I would say it’s not widespread. [laughs]

[28:06] Rob: Yeah, yeah, that’s what I meant. You’re right. It doesn’t scale to the whole world or to the bulk of small businesses. They don’t want to bother with that, you know.  So that’s true. I think techies are really the exception in these conversations. Techies don’t like to pay for stuff…

[28:20] Mike: I guess that was my whole point though, is like if you can…like, for example, in going back to AuditShark, I was able to look at it, and as a technical person,  as somebody who does this stuff kind of for a living, I was able to look at it and say, “I can justify paying for this if somebody were to offer this to me.” I could easily take that and say, “Yes, I would pay them on a monthly basis if that was what it took to help out my business so that I wouldn’t have to think about all the different things around that.”

[28:48] Because most people don’t have the knowledge that I have in this particular industry, and that was how I was able to justify it. I wonder about other industries where maybe somebody’s a little too close to it and doesn’t necessarily understand what businesses are actually willing to pay for and what they’ll willing to pay for on a monthly basis.

[29:06] Rob: Yeah, I think that’s a good point. I think two things you really have to do in that case.  You have to drive more value, provide more value than you are charging, obviously. That sounds totally obvious, but if you can monetize and justify a higher monthly savings than you’re going to charge, that’s one thing. The other is the less competition you have, the better, or if all your competition is also online.

[29:28] You look around nowadays and there are very, very few desktop apps launching. Everyone is going online, going to these SaaS applications. What that means is that people don’t really have another option. There are a lot of areas right now where you don’t have a good option for a desktop app. You can only do a SaaS application, like, let’s say, A/B Testing as an example. There’s Optimize.ly and there is Visual Website Optimizer, which is not the Google one. That’s called Google Website Optimizer.

[29:59] The other two you pay for on a monthly basis. There’s no desktop tool to help you do that. It’s only SaaS and I think it’s only recurring. That’s probably not the best example, but there are other areas where I look around and…Like keyword tools are actually a pretty good example.

[30:15] Mike: Yeah, definitely.

[30:17] Rob: You know, a lot like SEOmoz. I pay for SEOmoz every month.

[30:20] Mike: But I think those things are different though, and here’s why. It’s because for something like SEOmoz, those things rely on external data. For example, QuickBooks is largely self contained. I mean you work with it, you generate invoices, you take payments and you enter in all your accounting information. It’s more or less self contained. Yes, you can do things like importing your bank statements and your credit card statements and things like that, but for the most part it’s self contained.

[30:50] For something like your keyword analyzer, something like that you really need to have some external data feed, because you need to be able to rank things relative to other data points that you are not going to have on your system. There is no possible way that somebody could download the amount of data that it would take to, on a daily basis, provide you with all that information.

[31:13] Rob: Right.  So there’s not actually that much benefit is what you’re saying to go with a desktop in that case.

[31:18] Mike: Yes.

[31:19] Rob: That makes sense. So it sounds like…Well, there’s one thing. I think QuickBooks is a desktop model. That’s been a desktop app for 20 years and it’s now trying to move online, and so I think you view it that way.

[31:32] Let’s take BidSketch as an example. It’s proposal software for designers. 20 years ago that would have been a desktop application. It would have either been a plug-in over Word or it just would have been a shell where you could create PDFs that are proposals. Now, Ruben launched BidSketch, it’s a SaaS application, and you pay a monthly fee for it.

[31:55] You could say, “Well, I’m only going to do a proposal every few months. I just want to pay a one-time fee for this thing.” But he has no competition. There’s no one else doing it, so you don’t have a choice.

[32:05] In addition, he has larger horizontal niche competition. Proposable I think is one, but there are these really big companies. They are at least funded companies and they are going in the horizontal proposal software niche. They are also SaaS. They’re not doing desktop apps.

[32:21] The new wave of stuff is SaaS, and so if people don’t have a choice then that’s the way you go. That’s what you have to do as a customer. You decide, “I’m either going to buy them or not because there’s no other choice.”

[32:30] I think the bottom line that we’re coming down to is if you have a choice, it sounds like you would go with the one-time fee if you have a choice, and I would tend to go with ease of accessibility so I could do it from anywhere, ease of backup, ease of data management. I want low headache, low maintenance and you want one-time price and you want to run it on your own hardware. Is that right? It sounds like we kinda just have different priorities.

[32:58] Mike: I think so. There are certain things that I can certainly justify having outsourced.  Like, for example, bug tracking software. I have that outsourced.  I don’t host my own anymore. I used to. The same with my source control. I don’t host that anymore.

[33:11] Rob: That’s interesting, though. Why not? With both of those things you could pay a one-time fee, download them, install them on your own hardware. The same thing with QuickBooks. You don’t need any external data, so why have you gone to SaaS with those?

[33:22] Mike: Because it’s free.  [laughs] Because I’m not actually paying anything for it.

[33:27] Rob: So it’s only because it’s free. So if you went over the limit…because you use FogBugz and I think you get two free, and if you went to three and it was now $75, would you just go out and buy three licenses and download them and install it?

[33:37] Mike: Probably not.  And I think the reason I would not is because the price is actually comparable, and the fact that they go through and do automatic upgrades, and they do, from what I’ve seen, fairly regular upgrades that are meaningful. So for QuickBooks, I don’t see that. I don’t have that visibility.  So I’m just not comfortable shelling out a lot of money to them for stuff that I look at and I say, “Well, you guys do one release a year. Why should I pay you more money for something that you’re only going to update once?”

[34:08] Rob: Yeah. So it’s interesting. It almost sounds like we are talking specifically about QuickBooks the more we get into it. Because you’re right; the lack of updates really does kind of play an impact as well.

[34:18] Mike: It does.  I mean if we switch off of QuickBooks we look at things like SalesForce. I’ve owned ACT in the past, I’ve used SalesForce, I’ve looked at SugarCRM. For the most part, you’re going to pay about the same amount of money for each and every single one of them.  But because I have all of the infrastructure, why should I pay for their infrastructure in addition to paying for my infrastructure that I’m already paying for anyway?

[34:41] I guess if I were just starting out and I didn’t have anything, SaaS would make a lot more sense to somebody like me. But I have, as I said, I’ve got 10 terabytes of disk space sitting down here in my basement alone. I’ve got a full rack of servers, I’ve got a full rack of UNIX systems. I have a huge infrastructure that I’ve built up.  I’ve got a couple of co-located servers. I don’t need QuickBooks to host for me.  I mean I’ve got VPN access in here, I can get on to my machines any time I want. Everything is backed up, everything’s RAID; I don’t need to worry about it. It has more to do with what am I going to gain from this?

[35:16] Rob: Yeah, you have some cost in hosting infrastructure, essentially. You’re right, that could potentially make it a better deal for you to host it yourself.

[35:26] Mike: I understand where you’re coming from though, because if I were running things and I wanted to be able to move around all over the place and I didn’t have all of those sunk costs already, then I would probably see it a lot differently.

[35:38] Rob: Totally. We’ve talked about in the past. I run pretty lean and mean. I have very few pieces of physical hardware. I don’t like spending time on infrastructure. I used to have a couple of servers and I did host my own source control.  And I’ve slowly evolved out of that.

[35:53] I think it’s a personal choice, but I also think it’s the way a lot of companies are moving. I think the whole moving to the cloud, that’s what that describes, is a lot of people starting to push their stuff onto Amazon EC2, and S3, and Google stuff, and Microsoft Asher and all of that. I feel like people are doing less and less of that hosting.

[36:12] That’s not to say that you should or need to or anything. Actually, it’s better for you financially since you spent the money upfront. Then yeah, of course it makes sense to have your own. You certainly have more control over it that way.

[36:24] Mike: There are some things that I will go and I will pay those monthly costs for the infrastructure because they make a lot of financial sense. So, for example, for backup, take a look at things like BackBlaze and Mozy and all these other services out there that are $5.00 per computer, per month. If you take a look at just my desktop, for example, I’ve got a 1 ½ terabyte drive in here. It’s a RAID drive, so I’ve got technically 3 draw, but it’s almost full.

[36:51] If I wanted to take that and put it out in the cloud someplace and put in my own infrastructure that would back that up to the cloud, well, then I’ve got to worry about making sure that I have at least 1 ½ terabytes of disk space out there as well. For $5 a month, that’s $60 over the course of the year. Can you buy a 1 ½ terabyte drive for $60? No. Can you buy two? Definitely not.

[37:13] When you start getting into things like that, not only is the financial justification there to do that and outsource that as a monthly cost, it even makes sense over the course of two or three years, because chances are that if I were to do that in my own environment, some of those drives are going to fail and then I’m out even more money. Plus, it’s all automated. It’s all taken care of; I don’t have to worry about it.

[37:33] So I really think it’s more situation dependent. But I do see what you’re going for. I just think for certain applications I look at them and say, “I really can’t justify that in any way, shape or form.”

[37:45] Rob: Yeah, no, that makes sense. Specifically with QuickBooks, I actually can’t justify QuickBooks either because I hate that app. I used it and I just did not like it. So I’ve actually looked at all the online alternatives.

[37:57] Mike: What are the alternatives? Because I’ve looked and haven’t really found anything.

[38:00] Rob: There’s a handful. One is called OutRight.com and they’re pretty good. I ran into a couple of bugs but the support was good. The other one is LessAccounting.com and that’s good. These are pretty stripped down. Their strong suit is that, of course, they’re accessible online, they’re secure.  You know, it’s all that stuff.  Your data is up there. They also work really well. They integrate with PayPal, they’ll pull down transactions from your bank. It’s no extra charge stuff, where QuickBooks charges you for every integration you want to do. Or they charge you an extra monthly fee to do it as a block. Whereas these guys, it’s just a flat rate and you do it.

[38:36] Yeah, the other one is that Y Combinator company InDinero.com. I have an account with them and I’ve been watching it. There’s a couple features that once they add  I will use it.

[38:46] Anyways, so those are kind of the three that I’ve found. You know, it’s getting kind of brutal. I think Outright is actually free, which is a little bit…that was scary. I emailed the CEO of Outright and I was like, “I would prefer you charge me something.” He had a pretty good justification for it. He was basically like, “There’s other add-on services that we are going to charge for later, but this base thing will always be free.”

[39:07] So I would check those out. They are light, though. They really are more for, I’ll say like smaller business or pretty simple businesses. But stuff like you and I have, we have income and expenses and there’s no super-complex stuff. I’m sure QuickBooks can handle crazy situations, but that’s why it’s so big and bloated. I find it really hard to use because it can do so much and I actually don’t need it to.

[39:34] Mike: I know what you’re saying. I actually took the time to go out and I bought a book on how to use QuickBooks, and I sat down and I read it, which sucks, but I understand accounting now. I would prefer if it were a lot simpler because there are a lot of things that QuickBooks can do that it kind of forces you to do in a certain way that I don’t like and I don’t care for.

[39:52] I think that some of those other alternatives that you talked about are things that I’ll definitely be looking into, because I can justify paying the monthly cost because I do it all the time and I would like to see something that gets updated a lot. But QuickBooks, the way it’s priced and the way that they’re doing it, I can’t.

[40:06] Rob: Yeah, all three of those are cheaper and are updated way more frequently than QuickBooks online. QuickBooks online, I mean the pricing sucks because you need to go to two users and they charge you just $10 more a month. And then you want to go to four and  they charge you $25 more a month. I mean it’s just ridiculous. Whereas these others ones are more what we’re used to where it’s fair SaaS pricing, I would call it. You do have tiers, but they’re not these huge jumps.

[40:34] Mike: One thing I did notice was that QuickBooks online does not have PayPal integration.

[40:39] Rob: Yep. That was obviously a deal breaker for me because I have five PayPal accounts and I’m not going to be doing that manually. With all these other ones, that’s the first thing they add, then they add the banks after, because the PayPal is kind of the core thing, because these guys are really catering to the online entrepreneurs; the small entrepreneur who tends to use PayPal.

[40:58] Mike: Well, this has been a really interesting discussion. I mean I’ve always been curious about what other people’s mindsets were on recurring pricing and how to address it, and what things are worth it for a SaaS application and how do you justify that versus when you can’t.

[41:15] Rob: Yeah, I agree. I think that if people have specific questions that are listening to this, I would love to hear them because I feel like we covered a lot of ground here and my head is still spinning, honestly. I’m trying to figure out what really are the points, the takeaways, you know? But I think there was a lot of good stuff tossed around in this episode.

[41:32] Mike: Yeah. I think there were a couple that I can definitely point to. One that you definitely brought up was the history. The history of QuickBooks is that it was always a desktop application.  And now that it’s trying to go online, I think that their pricing model does not necessarily reflect what people’s expectations are. It definitely doesn’t reflect mine.

[41:51] And then a second thing is that if you look at the other competitors in that particular space and whether the feature set is something that could easily be put onto a desktop, or if there are other competitors out there in that particular market that offer a downloadable versus a SaaS application, that certainly plays into it as well.

[42:10] [music]

[42:13] Rob: If you have a question or comment, call it into our voicemail number at 888-801-9690, or you can email it in MP3 or text format to questions@StartupsFortheRestofUs.com

[42:24] If you enjoyed this podcast, please consider writing a review in iTunes by searching for “Startups”. You can subscribe to this podcast at iTunes or via RSS at StartupsForTheRestOfUs.com

[42:34] Our theme music is an excerpt from “We’re Outta Control,” by MoOt, used under Creative Commons A full transcript of this podcast is available at our website www.StartupsFortheRestofUs.com. See you next time.

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3 Responses to “Episode 36 | Recurring Pricing Discussion”

  1. Rob, Mike,

    Great Podcast. I have run into the exact same problem with Quickbooks and quickbooks online. I run another side business that carries inventory, and have yet to find an online solution that works for that.. but I hate quickbooks and can’t wait till the day I can drop it for something more automated like Mint.com. Thanks for the tip on Indinero.com, I’m looking forward to see what they can do.

    Rob,
    In this discussion, you mentioned that you pay for SEOMoz. I’ve read your book and am looking for a solution for investigating keyword difficulty. $99/month is kind of hard to swallow at this stage, and SEOLogs seems to be broken, as is SEOchat. Do you still recommend Micro Niche Finder?

    Thanks,
    Nick

  2. Great discussion guys.

    Really helps to dissect why it’s worth paying for SaaS apps.

    You could almost turn the transcript directly into a blog post.

    Mike, just one thing to say to you… “Sunk Cost Fallacy” ;)

    Keep up the good work guys.

    Justin :)

  3. Ridiculous story there. What happened after?
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