Episode 92 | 12 Rules for Building Your First Profitable Startup

Show Notes

Transcript

[00:00] Mike: This is Startups for the Rest of Us: Episode 92.

[00:02] [Music]

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

[00:19] 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?

[00:24] Rob: We have quite a few iTunes reviews. Worldwide we have 208 and the US we have a 154. So we’re up from something like 70 when we started our iTunes review drive. Some of the most recent ones, one from Ocanorton [Phonetic] in late July says, “I’ve listened to over 40 of these podcasts in the last few weeks. These guys are great. They’re open about their own business model holding each other accountable and they are laser focus. So I highly recommend for anyone starting a company.” Then Jeff and Jillian [Phonetic] say, “Highly recommended. I’m not a software guy but this is a great business resource for anyone looking to gain insight in to the world of startups. Highly recommended.” And finally just yesterday, Greg Barry said, “I first came across Startups for the Rest of Us a few months ago. I’m not sure how I didn’t find it sooner. As an experienced life-long entrepreneur, I still get a ton of value from the show and find the advice given by Mike and Rob practical and on point. I look forward to each new episode and continue to recommend the show to entrepreneurs at all levels. Keep the greatness coming.” So thanks for the reviews guys and really appreciate a five star rating in iTunes and this helps us appear in the top results when people search for startups. How about you? What’s going on?

[01:31] Mike: I talked last week about launching my new training site or at least the relaunch of it and I ended up having to do it a day late because I ran in to some issues with the billing and signup code. So there’s still an issue after straightening out where somebody tried to sign up and it bombed got him on the enterprise plan of all plans, you know, the one that’s $500 a month.

[01:50] Rob: Yup.

[01:51] Mike: So I [Laughter] have to do something about that but I look at that. Still trying to figure out what was wrong. I haven’t found it in the logs yet. So I’m still looking through that but otherwise things are going well.

[02:01] Rob: That’s — for the listeners, that’s altiristraining.com, right?

[02:04] Mike: Yup, that’s the one.

[02:05] Rob: Cool. So I’ve been wrestling with .htaccess rewrite rules in WordPress. Yes, so here’s the deal, all right. I have a blog, HitTail has a blog and it currently reside. It said hittail.com/blog and that’s great because it’s good for SEO, it brings people to the site, does all stuff. Problem is is that blog is about 300 flat HTML files because it used to be in Blogger and Blogger would export with FTP HTML files out. Google shut that feature down years ago and so the last time the blog has been updated is 2009. So I’ve imported all those in to WordPress, all the URLs have changed even though I had a contractor coming in and helping try to make the URL’s the same. It just — it’s virtually impossible to get everything working. So I said no problem, got to go in to .htaccess. For those who don’t know, it’s a way to have URL’s basically rewritten so they appear the same in the browser but it actually goes out to a different page and grabs the content and this should be no problem but WordPress doesn’t see it that way.

[03:05] So after — I mean staring at it for an hour and things not redirecting. If I create the flat HTML file there, it works great and if I use WordPress. It doesn’t work. It gives me a 404 when it goes to grab it. And it turns out that WordPress, it actually looks at the address in the browser. It won’t use the rewrite rules that are in the .htaccess. So I’m maybe going to have to hack the WordPress core like hack. It’s not — it’s like two to three lines of code to do it but it’s just one of those things you never want to do, right? Or I have to create a plugin so then I don’t have to hack the core. I have — I had someone writing blog posts and publishing them and Google just went haywire and was not indexing a bunch of stuff. So it’s been — been kind of the struggle.

[03:45] It sucks when things don’t work like you expect they should. I mean I know .htaccess rewrite rules just enough to be dangerous and I feel like I’m the same with the underpinnings of WordPress. Obviously I use the front end admin for all, you know, all my blogs and all the podcast and all that kind of stuff. But when you get under the hood and you start modifying, it’s not that I don’t know PHP and how to rewrite rules, what I have there should work but it’s the — it’s that interaction effect, you know, like which one is not working and why? And eventually after, you know, searching for quite some time on line, I’m so glad someone pointed out what the problem is because now like knowing the problem like, you know, actually shouldn’t be that, that hard to fix.

[04:25] Mike: I’ve dug into those rewrite rules before and I got to the point where I had so many of them because I imported my blog from subtext over to WordPress that I think that Apache was actually starting to choke on it a little bit and at some point, I just drew the lines so now down the heck with it and just [Laughter] let Google figure it out and if people –

[04:43] Rob: Yup.

[04:43] Mike: … have happened to sent it to the wrong one, oh well, there’s not much –

[04:46] Rob: Right.

[04:46] Mike: … I can do about.

[04:48] Rob: Yeah, I only have – I have about 250 rewrite rules right now but that should be a snap.

[04:54] Mike: [Laughter] It should be. It should be. Well the other thing I’ve got going is all the stuff for the AuditShark and I — I feel like I’m just buried under a code reviews because I — I review all the functionality that I send out to have developed and I got a list of like 30 or 40 different things that I have to sit down and review and they’ve been stacking up. So I’ve been handing out work and I haven’t had time to go back and actually review all of it. So my work load is piling up while they’re, you know, continuing to get through their work load and it’s just — it’s a nightmare. I get to sit down this week and really try to make a concentrated effort to get through those just because I don’t want to get too far ahead to the point where they have left that code for so long and I find the errors or bugs in it, then they’ve got to go back and try to work around things because maybe they implemented something completely wrong.

[05:41] Rob: Yeah, I agree. I think there’s a couple dangers with that. One, you get two to three weeks down the line and you kind of start forgetting what that code even does, you know, depending how complex it is, you can forget what you were doing. They’re just not as familiar with it as if you had gone back to them in a day or something. And then the other thing is you’re right, if you don’t make design decisions quickly and see that it’s something screwed up, then they just keep going with it in two or three weeks down the line. They’ve now made a bunch of more decisions that may not jive with what you want. You start outsourcing, you get multiple people working. It is a definite amount of work just to keep up and keep everything. It’s not even QAed. It’s just — it’s like you said reviewed to make sure it’s in line with what you expect out and to make sure that the code quality and the basic design decisions are off to snuff and that’s — that’s a non-trivial amount of amount to keep up with that.

[06:28] Mike: Yeah. It’s not like it’s two or three weeks worth of work. It’s more like five or six days, yeah, it’s just — it’s just hard keeping up with it.

[06:35] [Music]

[06:38] Mike: So one of our listeners sent in a blog article that he thought that we should take a look at and it’s called 12 Rules for Building Your First Profitable Startup and the person who sent it in is Rick. He’s from I believe Australia. He just said, “Hey guys, loving the show. I saw this article and thought the rest of your listeners might find value.” He gave us the URL on it and it’s on layeredthoughts.com. We basically walked through some of these thoughts on 12 Rules For Building Your First Profitable Startup and I thought we’d go through those 12 and see if there were some things that we could pick out and share with listeners.

[07:10] Rob: Very cool. So looks like the blog was written by the owner/founder of a site called SerpIQ, serpiq.com. It’s the ultimate — it bills itself as the ultimate SEO research tool outranked anyone with unmatched competition data. So that’s kind of the basis he’s coming from. So it’s look like it’s a bootstrap product. It’s a SaaS product, fairly low price point that is 29 a month, 59 a month, 149 a month.

[07:36] Mike: So why don’t we get in to the rules that he set out. And the first rule is to Sell something. And it’s interesting because I don’t know is that something I’ve never thought of. I think that one of the first things that comes to mind that most people will try to do is selling their time and expertise as consulting services and I don’t think that that’s what this particular rule is getting at. It’s getting to selling a product. And I agree. I think that that’s one of those mistakes that a lot of people make is they just they say, “Oh well, what can I sell? What would people find value in?” And you know, the natural answer to a lot of it is, “Oh well I’ve got this expertise in X. So let me sell my time and consulted services around X,” when what you should really do is probably try to build like a knowledge website like I did in altiristraining.com. You could also write an e-book. There is a lot of different ways that you could leverage your knowledge without necessarily selling your time directly for that.

[08:29] Rob: Right and I wouldn’t even read it as that. I don’t think he’s talking about consulting versus — versus products. I think he’s saying sell something meaning have someone pay you for something instead of building something like a social network. And I think that’s what he’s getting at because he kind of says in his intro. He says, “I’m running a profitable company. I plan to use it and the experiences and capital I am getting from it to slingshot myself into the next, probably riskier project.” And so he talks about unprofitable riskier ideas like Reddit or Facebook. And he says, “They’re great ideas to pursue after you have money in the bank and are not risking everything on your idea but until you reach that point, I think you should focus on ideas that, while smaller, can much more easily be made profitable.”

[09:10] So this is kind of, I mean this is what we’re talking about, right? This is the micropreneur approach. This is what that we talked about on the podcast. This is very much in line with that. And so I think that’s something to keep in my mind as we read through the rules is that they’re coming from that advantage point. And he said that the rules are to maximize your chance of success of your first startup, right? So it’s the first one and then after that, you can break these rules and go somewhere else. But I think with his lens in mind that he says, I do think that selling something is definitely the way to get started. All the products that I launched that haven’t sold anything, I have not been able to — to make much money from them. The only ones that I’ve ever made any kind of substantial money even my X hundred dollars a month have been more ads since websites. But everything else has been something worse. Someone actually gave me money in exchange for X.

[09:59] Mike: Yeah and then that’s one of the examples that he points out is specifically doing things where you’re making money from ads or affiliate marketing and things like that. You’re not actually selling anything. You’re making something off of directing someone to buy something from somebody else or you know, then those types of advertise that you really not actually selling anything at that point. So I think that’s a good one. The second one is Build a product your customer can directly or indirectly use to make money.

[10:26] Rob: Remember in my MicroConf talk, I talked about the four tiers of customer desire and I talked about tier 4 as an entertainment products and they’re really hard to market. Those are like games and social networks and they’re just — it’s kind of like if you get lucky, get on some hit list. You get popular, then yeah it goes big but it’s popular hit based in 99.5% of ideas and apps built along entertainment lines are going to fail and you’re not going to be able to do much about it. And then tier 3 is enterprise products and those are complicated products that have to really be sold. It’s high touch sales. Tier 2 is vitamin and tier 1 is aspirin. And I say are they sold on value, right? Because entertainment is not sold on value whereas aspirin and vitamin are sold on value. And just sold on value that phrase it means does it make someone money or save the money.

[11:14] That’s like a critical point. I feel like early entrepreneurs don’t necessarily focus on enough because we do see the big ideas of the Facebook, Reddit, LinkedIn that kind of thing. And without an enormous amount of funding in the bank, it is easy to make the mistake of not selling something based on value. So yes, I think this is a fundamental rule here and again, the rule is Build a product your customer can directly or indirectly use to make money. So I say it saves — saves someone money, make the money sold on value.

[11:42] Mike: Your MicroConf talk really ties a lot in to number three which is to Build a “must have” product, not a disposable “nice-to-have” product and that’s really, you know, as you said that’s aspirin versus vitamins. I mean vitamins are “nice-to-have” but aspirin is one of those “must have” products.

[11:57] Rob: Absolutely. An entrepreneur, I was — I’m still working with. He had a product that was a really good documentation system for developers and startups and open source projects and such. Problem is this documentation is “nice-to-have” and so what he found is that people would say, “Oh this is great but I don’t have time to do it right now but I’ll get to it like we all — I even said that. I was like, “Yes, I’m absolutely going to use it for DotNetInvoice and we could use it for HitTail,” but I never put my docs in and I basically advising him and was not using his tool, a tool that I could have use because it wasn’t “nice-to-have”. Now as soon as he’s now working on more of like a lead gen tool, that’s a “must have”, right? I mean everyone will pay for leads like it’s a total no-brainer. It’s the same reason that something like an SEO tool or any type of marketing tool or a tool that helps you get more work like proposal software, all that stuff is great because it’s at the front end of the process and it’s a “must have” and it’s obvious because everybody really needs more work.

[12:55] Mike: One of the quotes he has in here specifically relating to this is “Once your customer has started to use the product, they’ll be in pain if they have to get rid of your product.” And that’s — that’s a perfect quote for, you know, defining what is a “must have” versus a “nice-to-have”.

[13:10] Rob: The nice addition to this point is try not to add items to your customer’s to-do list. If your product adds items to their to-do list, try to figure out a way around that and that was one thing that HitTail used to do was add items to your to-do list because it’s basically said, “Here are some great suggestions. Now go build content,” and that’s what the article writing service has been successful is that it basically made it so if you do have a little bit of money, it’s 19 bucks for an article that we essentially give you something to do and then we can take that pain away pretty quick and you’re going to get a benefit out of it ultimately. Hopefully, making ourselves in your “must have” product. So rule number is Replace part of your customer’s workflow with a better solution and he basically says, “The easiest way to provide value to make it a “must have” product is to look at your prospective customers’ current business processes and identify steps or tasks of theirs that can be simplified, automated, or eliminated.” What do you think about that?

[14:06] Mike: So I think this is an interesting one because if you are highly focus on specific portion of your customer’s workflow and identifying what the pains are and then trying to simplify automate it or eliminate those things, then it seems to me like that is essentially a no-brainer. I mean it almost falls back in to rule number there where you’re building a “must have” product versus a “nice-to-have” because if you can eliminate that pain and make that stuff go away is part of their workflow process, then that tool becomes invaluable especially if that process or that portion of their workflow is something that takes two days or it’s just something that is just so — something that somebody does not want to ever have to do.

[14:48] So you know, like for example matching up your transactions from your bank account with your checkbook. Nobody wants to do that. Nobody likes doing that but it’s one of those things that is almost a necessity in order to figure out that, you know, how much money you have and you know, whether your bills are paid and whether people have been paying you. And so that’s one of those things that, you know, there’s a lot of software tools out there that will do that kind of thing and it becomes essentially a no-brainer for somebody to buy that because it makes that portion of their workflow better. I mean it makes it so they don’t have to resort to pen and paper to do it.

[15:19] Rob: Yeah, this one really comes back to makes someone money, save the money, make them time, save them time. One of the ways to do that is to replace part of a customer’s workflow and a better way to do it.

[15:29] Mike: So rule number five is to Have a “no-touch sales process”. So this is one of those things if were you have a “no-touch sales process”, I mean you probably have a website up there and people are coming to your website and they don’t have to wait for you to do anything. They could essentially just they can be in their pajamas and you know, at 2:30 a.m. as he points out that it can just, you know, go to your website, buy whatever it is that you have to offer and walk away and you don’t have to even be involved. And a lot of that actually has to do with automating your system from beginning to end so that you don’t have to be involve in any part of the sales process.

[16:03] So that includes putting documentation out there, putting your marketing, collateral out there. Making sure that you have trials or demonstrations of, you know, how your products work so that they don’t necessarily have to ask you questions if everything is available to them and you are walking them through that sales process, then you don’t have to be involved. And that’s kind of a sweet spot in terms of being able to run a business because the less you’re involve in that front end sales process, the more you can be involve in the back end stuff that can be done in your own time as oppose to doing that on the customer’s time.

[16:35] Rob: Right and I had to add something to this that have a “no-touch sales process” set up but be willing to do low in medium touch sales like that is such a benefit over if you have competition in the niche. If they’re not willing to jump on the phone with the customer to even exchange like detailed e-mails and answer questions. I’ve e-mailed some SaaS apps and typically it’s the lower price ones that are trying to compete on price and don’t really want to support the app and I’ll e-mail them questions and let’s say, “Oh that’s an RFAQ,” and they just link to the FAQ top line, right? So I have to now search through it and that’s fine but I’m going to be much less likely to go and use their product if there is a competitor out there who is willing to engage with me and basically act like a real person and so that is something that I’ve been pretty out and about. It’s like if someone e-mails us with the question, we don’t just point them to the FAQ. We do mention, “Hey, this, you know, this is answered — you know, FAQ along with some other stuff but here is your answer,” and we will type it in.

[17:27] So it takes a little extra time but it becomes then a low touch sales process and in addition probably been on the phones between six and a dozen times with potential customers who either have questions they want to know about. Typically I try not to get on the phone with a, you know, a $10 a month prospect but sometimes I do. Yeah, having those willingness to just step up a little bit since, you know, if your lifetime value justifies it if you’re not selling some 10 or $20 flat line product, I think having a “no-touch sales process” is awesome and it’s very efficient but being willing to step out of that when needed can be very profitable for you and it can also just be a very good experience for your customers and you can start building relationships with key customers.

[18:07] Mike: So a lot of what you said just reminds me of a recent article that Patrick McKenzie wrote that talks about SaaS applications and selling to enterprise customers and if you are in a market where there is a lot of large players and the potential customer that has e-mailed them and let’s say there’s a field of five or six different SaaS applications that the customers are evaluating. One of them goes to these really large vendors and they look at the deal size and they say, “Well that’s probably only a couple of thousand dollars on a yearly basis and so it’s really just not worth my time. I’m going to fire off, you know, one or two sentence replied to it,” and you know, there’s just really not engaging the customer where you have an advantage if you are small because probably to you 2 or $3000 is probably a large deal. So you can spend the extra time and effort to engage those types or customers and gee, you probably don’t want to do it all the time but if you have all the things automated, then it allows you that flexibility to start answering some of those that to you are a much bigger deal.

[19:07] So rule number six is to of your Build something that can scale independently staff. And I think that says builds a lot on the “no-touch sales process” so that if you can build something that scales independently, it means that you don’t have to do more work the more customers you have and most softwares are like that. I mean most software products if you’re running a website where you have a subscriber or any sorts of SaaS application typically fits this mold. Don’t get me wrong. There are times when support costs would kind of creep in and the more customers you have, the more support calls you’re going to have to answer and support e-mails you’re going to have to answer but you know, in the reality is that your sales can scale much, much higher than your support cost are going to arise. So if you have a hundred one or a thousand one in terms of your customers to support e-mails or support request, you can have a much smaller number of people filling those support request in, you know, the number of customers that you have and you know, this is certainly the model that you want to follow.

[20:04] What you shouldn’t do is something like groupon where you have to deal with a lot of different people. You have to have a lot of people involve in the process and whenever you do one thing, it doesn’t matter what it is, if there’s a lot of people that have to be involved in it, it just makes your entire business so much more difficult and this is exactly the reason why consulting businesses don’t scale very well because, you know, you’re trying to keep those people busy but if they’re not busy, you’re losing money. And you know, if they are busy, you — it’s very hard to pull them off of any given project to have them work on something else even if it is is more important.

[20:39] Rob: Yeah, I think this is a no-brainer rule, right? I mean this is why we’re building software products is to build something that scales. If you’re not planning on raising that money and you really want to bootstrap and you really want to pull a proper company, then I mean this is no-brainer. This is everything we suppose where you build something that could scale independently of your staff, a new software to scale that basically. So rule number seven is Avoid products that rely on a community to exist and grow. The bottom line is don’t build a product that’s value is dependent on something that’s out of your control. And so this is a great example of Facebook, eBay, Reddit. So Google would not be an example of that, right because if you build a good search and you don’t need a bunch of people using it in order for it to have value but anytime you have that two-sided market problem and we had a few people write in and ask about ideas they have to deal with that, it’s not that it’s unsolvable, it’s that it makes it a lot more complicated.

[21:30] So if you have experience building a community or you know how you’re going to get one side of it like once you get one side, typically you can convince the other side to come. So if you really get it say SEO and everybody is searching for, you know, a particular thing and you know that you can rank for that, you can build one side of that community pretty quickly and then basically you do outbound marketing for the other side. You can typically charge a lot more for that, that outbound side if you get one side of the coin. eBay is a great example of that. Once you have a bunch of buyers there, then sellers are going to flock to it, right? And so you could even go out and individually start inviting sellers and as long as you charge them enough, it could be — it could be worth your time doing it.

[22:09] Mike: I mean one of the things that comes to mind here is that how well that applies to things that our usage base. So example anytime your revenue depends greatly on the amount of usage that something gets, I wonder how much trouble that can get you in to. So for example, Google, don’t get me wrong. I think they’ve got a great search engine but they make money from people clicking on those ads and their revenue is at the very least indirectly tied to to the number of people who use their search engine and what makes me wonder about that is that let’s say that people decide that I don’t know DuckDuckGo is the next best search engine and they start using that instead and Google’s search traffic starts to go down and maybe goes to DuckDuckGo or you know, God forbid, Yahoo but their search engine results, you know, if these number of searches going through their systems start going down and then their revenue starts going down, I don’t know if there’s a lot that they can do about changing that. I mean there’s no amount of marketing that is going to fix that problem. It’s not as if they can really turn that ship around very quickly.

[23:10] Rob: But that’s not what he’s talking about here like Google if they started losing users, they would have a linear decline. If they get turn few eyeballs they get X percent fewer revenue but think of something like Friendster or Myspace like once people started leaving, it was an exponential decay. Just like there had been an exponential growth. There is tremendous value in their being a community there and if a community is not there like imagine going to Myspace having only ten people on Myspace versus there are being 10 million. Or Reddit is a great example, right? With zero people there, it’s a worthless site like you can’t do anything. You’re not going to stick around. Google, it doesn’t matter. It is a linear scale and Google is like any — I mean HitTail or AuditShark or any of those, if we started losing customers, we’re going to decrease linearly. We don’t need a community of people to support it whereas Reddit, Facebook, LinkedIn, any social network, any social news site, even any like — like I said eBay, two set of marketplace sites like TechZing is doing — the two guys are doing AnyFu. Like they have a two set of marketplace problem –

[24:15] Mike: Yeah, that make — that makes a lot more sense. I gues I wasn’t — I didn’t quite follow his train of thought on that. It applies more to those communities where you do have that — you rely on a network effect. So rule number eight is to Build a specialized version of an ordinary product targeted at a niche you’re acquainted with.

[24:31] Rob: I know it’s like an entire lesson-based in the Academy and I think it’s an entire chapter in my book of like why you must go niche. That’s like the exact phrase.

[24:41] Mike: Yeah, I totally agree. I mean it just seems so hard to conceptualize the ability to go after something that you’re — you’re not acquainted with and I mean all the big businesses that are out there I think are taken unless you’re going after angel or VC funding and you have the ability to take giant risks. And I just don’t think that for somebody who’s aiming for a much smaller business or you know, a smaller launching point is going to be able to find some big business that nobody’s ever uncovered before. So niches are definitely the name of the game and you know, the easiest way to build a business is to find a niche within an existing business and — and just tackle that one tiny slice of it. And if you focus on it, I mean you’re going to be able carve out kind of as much as you want while you’re focus on that one niche and you’re going to be able to carve it up from whoever else is out there. Because you’re focus on it, they’re looking at the broader market saying, “Well sure we could compete there but we do all of these other things that that company doesn’t do. We don’t really, really care about them.” And I think it’s just definitely a great way to go. I think that anybody can successfully take this strategy and go to market with them.

[25:46.] Rob: Right, there are so many benefits of going niche. One, there’s less competition in niches. That means typically the marketing is just not as good. So if you’re a decent copywriter and you know just something about paid acquisition, SEO, social networking like typically in a tight niche, there often is no one doing that. And so there cheaper clicks to be had. Typically the products are not as matured. They don’t have as many features. If there’s a market serving this market at all, word of mouth is big like if you get in to a niche like counter top installers or electricians or, you know, they talk to each other. So if your product really does serve that niche well, then word of mouth will take effect a lot quicker than if you have a horizontal product that’s going across an audience of 10 or 20 million people.

[26:31] So rule number is Don’t avoid competitors. The author of the articles says, “Competitors are a good thing. Why? A competitor with customers is a market validator. So what does this mean to you? It means you don’t have to spend your time and money finding out if anyone will actually buy your product.” And then he actually has a whole other post called Competitors Are Awesome You Dummy that he links to. He says, “To piggy back off of your competitor’s efforts in finding the market and then kick their ass by building a better product.” Any thoughts on this one?

[27:01] Mike: I agree. I think that the market validation piece of this is probably the most important part. If you’re building the product from the ground up and try to figure out whether there’s a market for it, it’s a lot easier to validate that there is a market for it if there’s already other products out there that people are paying for and that’s the — that’s a single easiest way to do it. And I can’t think of a better way to be perfectly honest. I mean you sure you can do a lot of market research and you can put up a landing page and try to get signups and show people what it is that you’re trying to build but at the end of the day if you’re not solving the problem, then it doesn’t really matter. And if you have other people out there who are already solving the problem and are already charging people money to solve that problem, then you know that you’ve got a product you can probably sell to people.

[27:41] Rob: I don’t think you should specifically always avoid competition but I also think that jumping in to a market that has a specific competitor that does basically the exact same thing you want to do is tough because just building a better product is not necessarily going to get you the customers. I think the more important thing is not that you can build a better product, it’s that you can out market that competitor. So if — I wouldn’t say don’t avoid competitors but I’d say don’t avoid competitors who have crappy marketing or you can see that they don’t know how to do X, Y and Z, you know, all the marketing approaches we talked about or you can see that you out market them on a number of levels. Really consider avoiding competitors in a niche where these guys really know what they’re doing and where they’re kicking ass with content marketing and where they’re doing a great job on their blog and they’re be in touch with people on Twitter and they’re just responsive and they’re known and they’re doing an excellent job of customer service and they have — even if they have a crappy product, if people are using it, I don’t think that just building a better product is enough. In fact I know it’s not enough. You have to be able to both do that and out market them.

[28:41] Rule number ten is Never compete solely on price and he says, “That’s because pricing your product as the cheapest solution simply so you can market it as the cheapest solution is a great way to go down in flames.”

[28:53] Mike: I couldn’t agree more. One of the things that delayed my training site launch over the weekend was I actually doubled my prices so I had to change all of the pricing plans.

[29:01] Rob: Nice.

[29:02] Mike: And obviously, I think that it will pay off for me on my particular site but I think that competing on price, when you compete on price, there’s only one direction to go with your price and that’s down. And I think that the race to the bottom is the race of who’s going to run out of money first. I mean I don’t think there’s any good way to win when you’re competing solely on price and you know, with software you don’t want to be the bottom on the barrel. You don’t want to be selling the product that everyone looks downs and says “Oh, that’s just a crappy thing that, you know, anybody can get,” or you know, it’s — the cheapest thing in the market, but if you’re going to afford it though with this other thing because that’s the premium one. You want to be positioned as a premium solution if you can and you know, that’s not just because you get more money for it but because you’re seen as the premium solution, you’re also the top of the line and people want top of the line. They may not necessarily always be able to afford it but it’s what they want.

[29:53] Rob: Yeah, when you’re charging more, you can afford better support, you can afford to build more features, you can afford to pay more to acquire customers which means you can invest more in your marketing and you can out market people. And so actually WP Engine is a great example of not competing on price, right? He’s going in the opposite direction. He actually found the middle. There’s a bunch of really cheap WordPress hosting and there are super expensive WordPress hosting and WP Engine is in the middle. And he’s — their fee is their competitive advantage. Yeah, it’s about going out market. I think, you know, the next — if I went up doing another — building another product after HitTail or acquiring something, I’m going specifically go after something that has a high price point. I see tremendous value in finding an app that provides enough value to build at least 49 bucks a month and ideally, a 99 bucks a month for the lowest plan.

[30:45] It just makes a lot of sense to me and you can grow a business so much faster doing that even though you will need low to medium touch sales and you will need to have more features and have really good support. And you do a lot of things that if you’re charging $9 support that you don’t need to do but you’re going to have a more long-term customers and you’re just going to be able to get and keep customers a lot easier. So that’s like a basic criteria of my next idea is to kind of a minimum price point in mind and then design the entire product around that assumption.

[31:13] Rule number eleven is Build something that you know can exist for at least 2 years. He says, “Most startups hit their sweet spot at about 18 months. There are exceptions. But don’t pick a fleeting idea for your startup. Don’t try to capitalize on something trendy. Oftentimes the most boring niches and products are some of the most profitable.” So I think that’s a section of my talk. It’s why boring products are more successful. I think a good example of not doing this is building a business on well it’s something trendy like you said like Pinterest. We don’t even know what if you built a business on like Myspace and they kind of went away. We’re pretty sure like — is Zynga — Zynga stocks down to $3. If you built that something that integrated with Zynga or they’re kind of made money off Zynga, that’s a tough game, right? What is really the longevity of an integration with Facebook if you’re — because Zynga is like what? 5, 10% of their revenue? So if brings in that much and it’s like how long – Facebook couldn’t allow that to happen, same thing with building on Twitter.

[31:13] They post some of their developers over the last year or two is they solely clamp down their API and although — I mean you could kind of say because Twitter is shifting, right? I’s — I don’t know if I’d say it’s trendy but it is like a fast moving startup and they’re — some people are getting kind of caught in the wake and — if they built an entire startup and now they’re basically, you know, are shut down based on moves that Twitter has made.

[32:31] Mike: Well I think that all of the things you just said, I mean all those kind of talk about finding something that, you know, can exist for at least two years and all the boring things that, you know, like billing applications and software for auditing servers and things like that. I mean any sort of training materials for products that are not going to go away, those things are going to have, I’ll call them a shelf life. Anything where that business is going to stick around for the next several years and you know that it’s going to, those are the types of things that you would probably want to target for your first business. Now if you’re looking to kind of ride the wave, yeah, Pinterest might be a good option, Twitter, Facebook, those kinds of things, sure, you know, you can certainly make some money and you know, turn a quick buck but does not that mean it’s just long-term sustainable business.

[33:17] And the answer isn’t necessarily yes or no, it’s just that it’s a risky proposition and I think that that’s really what he’s trying to get out. It’s just that, you know, if you pick something that you know has a shelf life at least two years, then it’s something that you not only have enough time to invest in it and turn it in to a viable business but you also know that fundamentally, things aren’t going to change so drastically that the business has no shot 18 months out.

[33:43] Rob: So rounding this out, rule twelve is Don’t plan for exits or VC money. He says, “If your business plan includes the phrases “get acquired” or “raise a big round”, stop reading TechCrunch and rethink what you’re doing. Focus on selling your product for a profit.”

[33:57] Mike: I don’t know as I would say don’t plan for exits. I think I said on the last episode. I mean my main intent for the Altiris Training website is to eventually probably would sell it off. And you know, I see it as a means to an end. It’s not necessarily something that I’m going to hold on to long-term. So I know what eventually is going to come out of that but, you know, that doesn’t mean that I’m planning to sell it. It’s not — it doesn’t mean that I’m saying, “Okay, well I want to do this so that I can get it sold,” or “I’m going to do that so that I can get it sold quicker.” That’s really not — intent. I don’t think that I’m intending to build it up in to a sustainable business so that I can — get a better price for it down the road.

[34:35] I kind of see where he’s getting out where he says, “You know, focus on the business. Focus on selling your product for profit,” I do agree with that but I don’t think that you should preclude looking down the road and saying, “Is this something I want to do long-term or not,” because things change. I mean, you know, don’t get me wrong. You could certainly change what your thoughts are on it in a year or two. I mean I start making a hundred of thousand dollars a year from the training website and I say, “Okay. Well, you know, that’s great. I’ll hang on to it for a while longer.” But I don’t think that’s going to happen. I’m going to build it up as a business and you know, contribute the videos to it and just kind of hopefully, put the marketing and things like that on autopilot and you know, gather subscriber for it.

[35:14] Rob: Yeah, I have to agree with you on this one. You know, rule number twelve is Don’t plan for exits or VC money, that’s just not a rule for me, right? It’s like I think that here’s a big difference between planning for an exit and making foolish decisions, building a shutty product, not providing support, just trying to grow fast, fast, fast with the hopes of selling out to Google like there’s responsible and irresponsible ways to plan for an exit and I feel like with every app that I work on, I always plan for an exit even if I don’t plan to sell it. Even if I’m only up for seven years, I’m always planning for an exit because that makes your product more valuable. The more you’re able to streamline, to automate, you know, everything from the marketing to the support, to the sales, to development, the more you’re able to outsource and get things out of your hands, it actually makes the product more valuable to you in the short term but it also makes it a much better acquisition target if someone were to want to buy it and it’ll makes — it makes more valuable if someone makes you an offer.

[34:35] So I don’t fully agree with this one. I mean I do feel like you should — you should always be planning for an exit. But when he says this don’t plan for an exit, I think he means don’t plan for an exit in the way that a lot of people foolishly, you know, build a business that can’t possibly sustain itself and they’re losing money just because they — they want to build it in order to — to sell it to someone.

[36:31] Mike: Cool. So any other thoughts on rules that should probably be added to this list though? I mean, you know, obviously there’s only twelve here but, you know, do you have any that you can come up with off the top of your head that might be worthy of inclusion here?

[36:44] Rob: Yeah, I think you have to do things that don’t scale early on and then figure out how to make things scale later on. I think that’s a pretty good rule. I don’t know if anyone who’s scale up a business who hasn’t done that. I also think that you needed to track some key metrics. I don’t know anyone who’s built a successful business who doesn’t track and focus on growing key metrics. I don’t think you can just stumble through in the darkness and manage to build this great product that’s suddenly as magically use by everyone. I know that maybe the dream of those of us who like to build products but it’s not the reality and it can never will be spend more time on marketing than you think you need to and spend a less time on development than you — than you think you need to because we as developers are going to tend lean towards making a gorgeous product and making everything perfect and making every line of code perfect and that doesn’t necessarily get people in the door.

[37:35] Mike: I think the one I would add is talk to your customers [Laughter] because –

[37:39] Rob: Yeah, there you go.

[37:38] Mike: … there’s not one thing in here about customer development and I understand the view point where this is coming from where it’s, you know, how to provide a set of rules for, you know, people who are trying to build their first business increase their chances of having that product to be successful but there are lot more things than just these twelve rules that go in to it and talking to customers and making sure that you have something that’s profitable with regard to your time is certainly something you really need to pay a lot of attention too.

[38:06] [Music]

[38:09] Rob: If you have a question or comment, you can call it in to our voicemail number at 888-801-9690 or e-mail it to us at questions@startupsfortherestofus.com. Our theme music is an excerpt from “We’re Outta Control” by MoOt, used under Creative Commons. Subscribe to this podcast in iTunes by searching for Startups or via RSS at StartupsfortheRestofUs.com where you’ll also find a transcript of each episode. Thanks for listening. We’ll see you next time.

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3 Responses to “Episode 92 | 12 Rules for Building Your First Profitable Startup”

  1. Rob,
    You complained you have old blog posts as a bunch of html files. This may interest you:
    http://www.allthingsdistributed.com/2011/08/Jekyll-amazon-s3.html

    I was able to use the idea to host update files for an embedded linux device for a past employer using the same ideas. Worked great and scaled better than self hosting.

  2. for rerouting old HTML pages to WordPress blog posts, there are some plugins that may help. I am moving an old joomla site to a WordPress install, and am remapping all those old urls. I think I’m using this plugin: http://wordpress.org/extend/plugins/quick-pagepost-redirect-plugin/

    not 100% sure, but I can’t check right now.

  3. Hey, I wrote that post! Thanks so much for covering it here on your podcast, I’m feel very honored.

    I have plans to expand each one of those rules into full individual essays and hearing you guys discuss these rules really got my gears turning for adding more to the explanations of each one. I’d love to get in contact with you both to further discuss things if you’re interested.

    Thanks again!

    Darrin