In this episode of Startups For The Rest Of Us, Rob and Mike answer a number of listener questions on topics including trials versus money back guarantees, product founder fit, the stair-step approach, and more.
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Rob: In this episode of Startups For The Rest Of Us, Mike and I talk about product founder fit, stair stepping, free trials versus money-back guarantees, and more listener questions. This is Startups For The Rest Of Us episode 415.
Welcome to Startups For The Rest Of Us. The podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you’ve build your first product or you’re just thinking about it. I’m Rob.
Mike: And I’m Mike.
Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. Croatia, sir. When this goes live, you and I are at MicroConf Europe.
Mike: Yes, that should definitely be fun. People have asked numerous times like, “What was it that made you select Croatia?” and it’s like, “Well, we’ve never been there before and it becomes a business expense.” Seems like a good reason as any.
Rob: And it’s hard for us to get to from the States but it’s reasonably easy to get there from within the EU. It’s gorgeous. It’s where they filmed a lot of Game of Thrones like the exterior scenes. Obviously, we do MicroConf Europe because we love to see everybody and it’s fun to get the people together and offer the value that we do through the MicroConfs, but we have always been pretty deliberate about where to place it.
First couple of years, we’re in Prague, and that was actually suggested by our coordinator at the time, Dan Taylor, and it turned out really cool because Prague was a fun city to be in. And then next, we picked Barcelona because you and I hadn’t been there and people want to go there. Then we went to Lisbon last year. Croatia is I think a nice next step. We’ve looked at Berlin and Greece, and a bunch of other cities and countries, and I think someday we’ll obviously move it to another place but I, for one, am very excited about this.
I’m going there with my family, wife and kids for two-and-a-half weeks. We’ll be in Dubrovnik itself for about a week but we will be surrounding cities kind of exploring. I don’t know if you’ve looked at images of Croatia or even just read up on it but there’s a lot to do there.
Mike: Yeah, definitely. I did look into it a little bit and there’s way more than you would actually think for a small country like that. It would be cool to just hang around. I’m personally looking forward to go and around looking at Dubrovnik itself just because it kind of mentally overlap between the stuff I’ve seen on Game of Thrones and then what the actual city looks like but I did hear that there’s a Game of Throne tour or something like that. I don’t know. I’m hoping I’ll have time to do that but we’ll see.
Rob: I agree. That’s going to be a no brainer for me for sure. This week we are answering some listener questions that have come in. With this episode, if we get through all of these, I believe that clears out our question queue. If you have a question for us you want to answered soon in the next couple of weeks, send it into us. Email us at firstname.lastname@example.org or call our voicemail number. As always, voicemails and audio questions go to the top of the queue.
Our first question is about how many commitments you need to validate an idea, it’s a follow-up question to episode 410, it’s from Chris Palmer. He says, “Hey, I have a question for you. You say you should find 30 people to validate your idea. I’m working on an enterprise software concept with what I would pitch at an ARR, it’s annual run rate or annual cost, of between $10,000 and $150,000 plus. In other words, roughly based on company population plus paid-for seats. What I want to know, in your opinion, is 30 people or 30 companies still a good target number for validation? I used to work in a team. The company had 80,000 people and they will use the product. I’ve spoken to two other companies. One of the people who’s really interested is the director of communication at a large company. I’m going through my network to speak to more people. Cold contacting has not worked.”
It sounds like he has three companies that he’s at least in conversation with. Back to the question. “Given the income per customer, what number should I set? I’m confident with my validation statement and the concept’s possible success. Also, I just wanted to say thank you for your advice last year regarding a situation I was in. Your advice was super helpful. Thanks, Chris.” What do you think, Mike?
Mike: I don’t want to call it an edge case, but this is one of those situations where there’s general guidelines that you can follow, and then there’s cases like this where things fall so far out of what is normal in those situations that they don’t tend to apply. Most of the guidance that I’ve talked about in terms of how many people should you really talk to, it kind of assumes that people are paying a reasonable low monthly rate for it.
Enterprise sales are very, very different and depending on who it is you’re selling inside the company, it’s going to be a very different sales. If you’re selling to the IT director, it’s a different sale than if you were selling to the marketing director. The marketing director is only concerned about their own team versus if you’re selling to the IT director, you have to convince them not just that it is good for their team but also for the entire company, too. That’s what it sounds like this situation is because it’s based on company population versus the size of the IT team.
Rob: That’s why I’m glad he sent this in because it makes me question assumptions that we might have when we kind of call out rules of thumb. There’s always going to be an edge case with the rule of thumb and it’s neat when we can hear about one and then actually talk about, “Well, this is how we would think through that.”
Mike: Right. I think in this case it sounds to me the product is aimed at the entire company. I don’t want to use WinZip as an example, but I’m going to. WinZip is typically installed on every computer in most organizations just because—not almost all organizations—people who have it, they’re going to install it everywhere. You’re not going to buy it for just one team, for example, because it’s going to be used by pretty much the entire organization.
If you’re licensing like that, then it is a much more difficult sale because you have to convince them not only can you deliver on whatever the promises are but there’s value there for everybody and they’re going to be able to get around the training issues, any support problems, those are going to need to be taken cared of, and they’re going to want to probably test it inside of their environment.
In addition, you mentioned that you used to work on a team in a company of 80,000 people and when you have software like that that gets installed and deployed across the entire environment, what you end up with every single day of the week, there are people whose hard drive fail and they need to have either the hard drive replaced or the machine replaced and they’re re-imaging machines left and right. You have to be able to deploy that software in some way. Now, if that software can be remotely pushed, great. Otherwise, it needs to be embedded into the software image. You also need to figure out how’s that licensing stuff going to work.
Back to your question about how many people you need to validate it, it depends on how much money do you need. I would think you’d want to get commitments from enough companies that you’re able to basically do this full-time because I think it’s going to be hard to do it part time especially when you’re trying to make commitments to an enterprise company and if you’re trying to roll it out to the entire organization site unseen, I don’t know how you would get the commitment from them to buy it or maybe even an upfront payment for it without having something actually deliver to them. I feel there’s a lot of landmines here and it’s just going to be hard. Rob, why don’t you chime in here because maybe we can pass some ideas around for that.
Rob: Yeah. This is a tough one. To be honest, I don’t know if Chris is a single founder. I’m going to assume he’s bootstrapping and either single or maybe has one co-founder. It’s really, really hard to sell into the enterprise. You experienced this with AuditShark, right? It’s a lot of work, it’s a long lead time, and you kind of live or die by two customers or three customers because, again, if you’re going to sell it for $100,000 for an annual license, you only need one or two of those to go full-time on it. But landing one or two can take you a year or two years of just conversations.
It’s definitely an all-or-nothing. It’s riskier than trying to do this $10 or $30 or $50 a month thing where you can just cobble people together. I don’t know if it’s easier or harder, but I do think that there is a big barrier if you don’t already have that list of logos at your back to show you, “Hey, this is where we’ve implemented it.” because enterprises are slow-moving and they’re not very trusting of new technology in general, and rightfully so, because they’ve probably been burned by a bunch in the past.
I think that, that’s a challenge that you’ll face so know that going into it. I would recommend against this approach. But with that said, you have an idea and you are talking to three companies. I guess I feel similar to you that if you get yeses from all three, but you need more than just a yes. You need some type of written LOI, letter of intent, that if you can deliver this, they’ll go through with it because the problem is, how long is it going to take you to build this? You can get these verbal commitments and then is it going to take you six months or a year to build it? Are even the same people still going to be in the same roles at that company? Are they going to follow through on this verbal commitment they forgot about, most likely, to pay you $100,000 To that, I think that’s a challenge. How does he overcome that?
Mike: Well, you said letter of intent. I think an enterprise company is going to shy away from that just because it’s going to have to involve the legal team. You could ask them for a purchase order, you can send them an invoice, for example, that can’t be paid until 30 days or 60 days after delivery or sign-off or something like that. You’re going to have to put lines on the sand for you to be able to deliver. If you can’t meet them, then either it gets pushed out or if it gets pushed out too far, then the whole thing is dead.
One other thing that I did think of is that you could essentially treat it as a consulting engagement because if you can find enough companies to pay you on a consulting basis to deliver a solution, it doesn’t have to be yours, it can be something you cobbled together from a bunch of different places, and then you gradually morph it into your own code and your own full-blown product and then pull all the data over.
I would probably approach it from that side of things. Maybe you deliver it as a virtual machine that you give to them and then they can host it in their own environment. That’s probably more likely to succeed, but again, it’s a matter of getting them to sign off on, “Hey, we know we’re going to pay more for this than otherwise,” but there’s nothing here that says that this is a desktop application or a hosted web app. I don’t know if that would actually be viable.
Rob: Yeah. I do like the idea of consulting, actually. That’s a nice way to get that revenue upfront, the consulting revenue that you’re billing, and then be able to build that product, you have to write in the code and repurpose it to other people. I think with enterprise, that’s not a terrible way to go. You’re going to be plotting along as you go anyway. That’s going to take awhile to get these approvals.
So, yeah, it’s certainly not 30. I mean, back to his original question, he said you said to find 30 in order to validate. That is with lower-priced bootstrap SaaS in mind. This is a different case. I don’t know that I even have that. I could take a guess of if you get three commitments or five commitments, that sounds right. But then again, just as we’ve said, those commitments, what are they worth unless they’ve sign something. I don’t even know if verbal commitments from enterprise companies is worth doing.
I would venture to say that the approach needs to be something entirely different. I can see this consulting idea—he kind of call that—where start consulting with one or two of them, build that out and see if the feature sets overlap, you may get to the point where enterprise stuff is so tough because you can build a feature set and then every enterprise wants something different and they’re used to getting customizations so you really are not building a repeatable product. You’re building a code base that you then augment and do customer consulting for each one. I’ve read a […] so that maybe the road you’re going down here.
Mike: The other nice thing that can offer as consulting where offers you is that it gets you into that enterprise sales process and teaches you how to negotiate it, and you’re more likely to get somebody to sign off on consulting engagement in an enterprise company than you are to have them purchase a piece of software for every user in the organization when they don’t necessarily know for sure if it’s going to work out for them or not. But for whatever reason, they’re more than willing to pay large sums of consulting dollars for that kind of stuff.
Then based on that, you establish this list of people that you came in and did consulting for, and then maybe come back to them later and say, “Hey, we’ve left and you’re now on your own. Is this working out for you?” It’s probably not because most of those consulting engagements they get down once and then that’s it, and then people just let it drop because they’ve got other priorities, but if there’s software in place, it will help them because then they don’t have to manually do things.
Rob: Thanks for the question, Chris, always good to hear from you. Our next question is about stair stepping and where does stair step from where they are. It’s from Will Gant. He says, “Long time listener, three-time MicroConf attendee. Trying to figure out how to stair step my way out of a current situation. I thought it might be a question to discuss. A buddy of mine and I have built a podcast, The Complete Developer Podcast, completedeveloperpodcast.com. In the software development space, it’s taken us three years, we just got our 250,000th download. We’ve got about 15,000 downloads a month and we generate about 2000 downloads in the first six weeks of an episode release. We also have a meetup group, it gets 10-40 attendees once a month, and on meetup.com, the group has about 850 developers in it. It’s only in Nashville, but we’re considering expanding.”
“We’ve tried a bunch of ways to monetize this. We’ve tried sponsorships but the CPM cost per thousand rates for podcast are so low, it doesn’t seem worthwhile. We’ve tried Patreon. Our email list is very small but we’re working on it. We both have full-time jobs. I plan to stay at mine for at least three years, but I like to consider having something else to transition to if it comes time to move along.”
“We’re in the process of putting together an audio book that we’ll sell under the podcast brand. I’ve personally written a small ebook, took a couple of weeks to write. We plan to continue podcasting. We’re getting everything done with 8-12 hours of work each week apiece. That’s 16-24 person-hours. We could cut some of that by outsourcing and process improvements. My question is, what’s a good next step for stair stepping from here?”
“I feel there are four options. First thing, of course, is to build the email list and then we could, number one, try to ramp up ads sponsorships. Number two, build affiliate websites and get commissions or do affiliates stuff in the podcast itself. Number three, create digital products like ebooks, video courses, and sell those. Number four, coaching developers on their careers. How would you evaluate the above? We’ve been leaning towards products, put together individually. Given the constraints above, if you were me, how would you proceed over the next six months? Thanks.”
This is a big one. A lot of aspects to it. A lot of ways to think about it.
Mike: Yeah and I think that the fact that he’s tried a bunch of different things gives a little bit more information to work off of.
Rob: Super helpful.
Mike: Yeah. The four options there, the first one was try to ramp up on ad sponsorships. He’s already said that that’s difficult, and then Patreon has been even less lucrative, and the email list is rather small. The thing about ad sponsorships is they’re going to scale linearly with your audience. If the money that your getting from them now is relatively small, let’s say it’s a hundredth of what you need, you would need to 100x your traffic based of the your audience in order to get that to the level that you need to. It doesn’t sound to me like that is probably going to work out.
I would say roughly the same thing with affiliates and giving commissions or selling affiliate stuff on the podcast. You’re going to get some revenue from it, but it’s probably only going to be—depending on the type of product—it can be anywhere from 15% to 50% of whatever the product is. But it doesn’t seem to me like that is going to pay the bills either.
The third option was creating digital products such as books, video courses, etc, and then the fourth option was coaching developers. I think if you’re going to coach developers, you need to have something very specific that you are coaching them on. I would question how many of them would be able to pay a rate that is going to get you out of a situation that you’re in. Individually, they’re probably not going to be able to pay more than $100 an hour or $150.
You could use something like a group coaching session. I have seen that work out. My wife joined up with a business coach who basically went that route and instead of coaching people one-on-one, we’re coaching them in a group. That’s sort of like a course, but not really. You really want to have everybody starting at the same time. You’re going to have to find the right people and catch them at the right time in order to coach them on that. You’re also going to want to say like, “This is what we are coaching on.” Whether it’s how to get higher salaries or how to program in this particular language or how to deal with these types of situations, you’re going to have to think really, really hard about that.
The third option he just said is digital products. Seems to me like the better bet. I think that there’s a lot of opportunities there for books and video courses tiered info product format. That provides a significant advantage over doing affiliate stuff where your only getting a small fraction of it which is split because there’s two people in the business versus creating your own digital products and then you guys get to keep 100%.
Rob: When I initially read this question, the feeling is 2000 downloads per episode, it’s obviously a great milestone to reach, but it really isn’t enough to monetize directly. If he had written in and said they hadn’t tried Patreon or ads, I would have said, “Don’t try them.” I don’t think they’re going to work. The money is really going to be in the email list and if you don’t have much of a list, I don’t know that there is a direct way to monetize this podcast.
I mean, you and I have never directly monetized this podcast. We’ve talked recently about doing sponsorships, but we’re essentially more than 10 times the size of their podcast. One of the reasons we haven’t wanted to do it today is because we’ve gone down other roads and monetize it with mostly MicroConf and FounderCafe. That’s really what pays our time and editing and all that to put the podcast together.
You and I also sold books and stuff independently, but at that size of an audience, I’m thinking back to Sherry. Sherry started ZenFounder. She and I started ZenFounder podcast. As it’s grown, she did small info product. She did her retreat ebook, The Zen Founder Guide To Founder Retreats, and I don’t know how many copies exactly, but it’s a $20 book and she sold a few hundred copies.
It took time to write, as Will said, took him a couple of weeks to write, but that’s not a bad way to go. What’s nice is that if you release it, you make a few hundred bucks from it, you learn a lot about launching, then you have this thing that’s valuable, and you can give that away as a lead magnet in the future, you can discount it on Black Friday, and you start building up this portfolio of products. Now still, with 2000 downloads, if you don’t grow that email list, it’s never going to be something huge. It’s not going to be a full-time living unless you can grow all of that.
I think that’s the thing to think about. Is this space big enough? We know John Sonmez who comes to MicroConf and runs Simple Programmer or used to run simpleprogrammer.com. I know he’s doing a much different stuff now but he built a big audience. If I recall, it was through blogging and videos, it wasn’t through podcasting. That either says it the audience isn’t there in podcasting or maybe it’s still untapped and you haven’t hit directly on that value proposition yet.
I’d be curious if how much you’ve promoted your podcast, like have you gone on every other podcast in the space? To be interviewed not just about your podcast but just about things and then talk about your podcast and how it helps people? What are the other avenues to grow that podcast listener base and then have more calls to action to your emails list. If you want to go full-time on this, I would not do that without an email list that could support this, which is let’s say 10,000 or tens of thousands of subscribers, depending on how much they buy from you and how much content you can put out.
While coaching is a short-term thing, I think at this size, it’s just so hard to monetize. It’s so hard to get a lot of value out of a couple of thousand listeners. Those are my thoughts. Do you have any other thoughts, Mike?
Mike: No. I mean, I agree with you like the idea of putting together a small portfolio of digital products that you can offer. Some of you may relegate to using this as a lead magnet later on. That’s probably a way to go. As an example, you said that there’s was one that took him about two weeks or so to put together and then plus there is editing time after that. Call it 6-8 weeks total. If each work on one, you can probably put out five, ten of them per year? That’s pretty good. That seems that would give you a fairly significant base to work from and you can have them about very specific topics and then if you promote the podcast more and then you maybe talk about them or get them on your email list. But again, you have to grow everything and you have to have products to offer.
Rob: Right and the nice part is once you’ve written that, well, you can then put it on Amazon as a Kindle ebook and you can even buy ads for that on Amazon now. There are other ways to promote it from there and then you could use that as a way to generate leads and just generate listeners or generate email subscribers. You now have multiple things out there. It’s a tough problem to have. It’s hard to work this much and not having enough of an audience to basically make a full-time living, but it’s a problem all of us have had at one point or another. So, totally get it.
I think the last thing I want to touch on is the 16-24 person-hours a week that you’re spending on a podcast. In contrast, what do we spend, Mike? Between the two of us, it’s four person-hours every two weeks? You think? Five?
Mike: There’s the obvious time spent actually recording. But then beyond that, we’ve outsourced pretty much everything else.
Rob: That’s what I’m saying is it’s not that expensive to outsource everything else. If you get even one of these ebooks that’s selling reasonably well, you could pay for an editor, our editor posts to WordPress and does all the stuff. Given that, again, you and I, let’s say 2 ½ hours a week total person hours versus the 16-24 they’re spending. If they could get all that time back, it would be a big deal. They could put that towards doing other things whether it’s towards growing a list, towards growing another podcast, towards building these products out, I think that’s something to think about.
No, I don’t know the format of their podcast. Maybe it’s just a lot more labor-intensive than ours is. Maybe it’s scheduling guests and it’s doing a bunch of things. But I would guess that a lot of that could still be outsourceable. Chicken and egg, right?
Mike: Yeah, it is. I wonder if there’s other options as well. If you could reclaim eight hours per week, that’s a full day. If you’re doing consulting or other stuff that is able to generate even remotely enough money to cover time or cost or something else, you could definitely outsource that. Let’s sa, you did four hours of consulting work per week. Finding that is a completely different topic, but you get paid $100 an hour for each of those. If you’re each doing that, that’s an extra $800 a week, $1600 between the two of you. It costs a lot less than $6400 a month to edit a podcast. Now, you’re cutting your time in half and you’re adding that money in.
I’m not saying consulting is the answer, but there are other ways to get that done. I would think more consciously about that 8-12 hours that your spending and how much value you’re actually providing. Are there other ways to pay for that, is what really comes down to and then to reclaim that time and use that time to generate revenue as opposed to do stuff that’s essentially a cost sink.
Rob: Thanks for the question. I hope that was helpful. Our next question is about derisking product founder fit and it’s from Heather. She says, “My day job is all about finding product market fit. I can usually figure out a way to test my side project ideas but I struggle to commit to any because I’m not sure if I’ll end up hating the everyday tasks. Do you have any idea for a lean approach for finding product finder fit or to de-risk that side of the equation?” It’s a good question. We’ve never had this before.
Mike: This is a good question and I actually addressed this to some extent in my book, The Single Founder Handbook, and it’s in Chapter 12. It’s on Idea Filtering. I did not call it this at the time because I don’t think I was either well aware of the term but it basically talks about that to some extent in terms of filtering out ideas that you’re brainstorming and trying to figure out if you should go after one idea or another based on your personality and interest.
I laid it out in terms of, there’s pros and then there’s cons, and then there’s also disqualifiers. In terms of the disqualifiers, I put things in there like two-sided markets or difficult customers or indirect revenue streams because it’s just difficult to get those businesses off the ground.
But there’s also the idea that some of your ideas are things that are going to require things of you that you are simply not going to want to do. For example, when it comes to enterprise sales, I’m good at it but I’m not good at finding the enterprise deals to actually then go in and do the sales stuff. I can do the sales stuff but I’m not good at all the prospecting stuff and I hate that stuff. There’s a difference in being good at it versus not enjoying it. Could I find somebody else and hire to do that stuff? Sure, I could. Could I do it temporarily? Yeah, I could. But at the same time, I know that I wouldn’t want to do that long term or manage that entire process.
I think I would come up with a short list of things that you absolutely, under no circumstances, ever want to have to do, and those become your list of disqualifiers. Every idea that you come up with, fit them up against that list and your can throw it into a spreadsheet, see if it’s going to work for you. If it’s not, then don’t do it. You can also test things to some extent and do it a little bit to see if you would be able to do them long term. For everyday tasks that you have to do, a lot of them you can outsource but there’s certain ones that you simply can’t. Again, for enterprise sales like that prospecting, you have to be the one to do it initially and if you hate it that much, the business is never going to work.
Rob: I like the way you framed that. I think that’s super helpful. I think that’s one reason why I never launched a super sales-intensive application is I’ve just known that I want to be low touch or mid touch. Later into the lifecycle, Drip became of higher touch app once we started getting these big contracts to get $20,000, $30,000, $40,000 a year and up. You’re going to talk face-to-face with people, but I always aim for lower touch and that’s because that’s one of my deal breakers is I don’t want to be doing sales in the early days. Later, I can hire people to do that once we grew to a team, it was fine. But if that’s the main driver of sales, you have to do that in the early days. Typically, you want the founder doing that.
Maybe it’s a good framework. What are your deal breakers? What do you like and dislike? This is hard to answer if it’s your first project because it’s hard to know what you like and dislike. You can take a guess but the more experience you have, the more you learn about yourself. I would totally go and take StrengthsFinder and maybe even the Enneagram. These are just personality test that give you more insight into who you are and I think those can help you determine some more things about what you like and dislike, but then it’s also, like you said, singlefounderhandbook.com, if you want to read that section on de-risking it from a product founder fit perspective.
I like this question. I actually want to think on it more. I would bet in a future episode it will come back around and we’ll have more thought. This is one of those that, one the spot, I don’t have the entire framework mapped out, but I know that I’m going to mull on it while doing dishes and kind of come back to it. Thanks for the question, Heather.
Our next question is a voicemail and you know what, Mike? This should have been top of the show. I messed up because voicemails typically go to the top of the queue but I kind of forgot. This is from Tim Burgen. He called in a couple of episodes ago from Brisbane, Australia and we could hear the audio. I did a call out and he basically emailed us a very high quality WAV file. Let’s listen to that now.
“Hi, Mike and Rob. It’s Tim Burgen from Brisbane, Australia. My question is around offering a free trial. Is offering a free trial the only recommended next step to bring prospects into the fold? Or are there alternatives that you’ve also seen work? Most discussions that I’ve read just seem to assume that offering a free trial is given. The only exception that I’ve ever heard was Jason Cohen talking about the early days of the WPEngine where he removed trial for a money-back guarantee. What’s your impression of that approach and are there other options that you’ve seen too? I look forward to hearing your thoughts.”
Mike: I’ve tried the money-back guarantee instead of a free trial and it does work but the problem that you do run into is that if you’re selling—and this is specifically with Bluetick I saw this, where somebody wanted to sign up and they decided against it because it was going to require a credit card, and they didn’t want to use their personal credit card even though there is a money-back guarantee because then afterwards they would have to go to their boss and if they liked it, they said, “Oh, I need to be reimbursed for this.” it was extra paperwork they didn’t want to have to do.
Going with the trial route was a better option than the money-back guarantee. Again, who you’re selling to is going to make a difference there. If you’re selling more to consumers then a money-back guarantee is probably going to work better, but if you’re selling to somebody who’s on a team, then they don’t want to expend their own social capital in front of the eyes of their boss by signing up with the company credit card when it’s something that they don’t know if it’s going to work. There’s pluses and minuses of both approaches.
I was actually just talking to my wife about this the other day. There was a time where money-back guarantee was a fantastic option because you could also just refund somebody’s money, and it didn’t cost you anything. Stripe used to eat those costs, for example, and then they stopped doing that because it just got to be too costly because there were info marketers out there that were selling $1000-$2000 products, and then they’d have to issue refunds for 50% of them, so Stripe basically, just killed that. Depending on how many of those refunds you have to do, it may or may not work. You may just want to eat those costs, but it may not be viable for you to do.
Another option I’ve seen people try is having an onboarding fee. Instead of just saying, “Hey, here’s a free trial,” or whatever, say that there’s also an onboarding fee of $300 or $500 or something like that, which sounds outrageous like, “Why would you ask somebody to pay more when you’re just trying to get them in the door.” But it’s a prequalification process. You’re saying, “Hey, if somebody’s willing to sign-up and they’re willing to pay this extra $750 just to get on-boarded, that’s a great way to do it,” just because you’re going to filter out the people who aren’t necessarily serious about the product.
Rob: I know that you get a chargeback fee if you’re charged back, if it’s a dispute, but I don’t believe there’s any expense for refunds unless you have an unusually high refund rate.
Mike: I have seen that there were. I could be wrong. I could be misremembering this.
Rob: Maybe someone can write in and let us know. I’m on their pricing page, and it’s talking about chargebacks, but if the chargeback dispute is in your favor, you don’t have a fee. If it’s a chargeback and you lose it, then it’s $15. I’ve been on services every 25 or 30 for chargebacks. The only articles that mentions that I can find on Stripe refunds talk about how the entire fee, and it says right here in the docs, “There’s no fee to refund a charge.” Someone write in if you know because Mike and I have different memory. There’s always a chance that this stuff is out-of-date. I’m looking at a page that hasn’t been updated, and they just changed that.
That’s one thing. It’s kind of beside the point if it’s a couple percent. It’s not a big deal. Your refund rat will be higher if you do a money-back guarantee upfront, but it’s not going to bankrupt you as a SaaS app. Your margins are high enough that they can handle it even if there is a a cost.
I think there are a handful of apps that I’ve seen do the money-back guarantee. WP Engine was one, I remember. Pluggio, Justin Vincent did that. I believe, ConvertKit used to do that. I’m not sure. I think they still do. They charge you right up front, there’s no trial, and then they have a money-back guarantee there. There are certainly other apps that do it.
I think the default and normal assumption is to have a free trial rather than money-back guarantee for exactly the reason that you mentioned. If you’re at a company, and you put your own credit card on, and then it gets charged, you need to go reimbursed. It’s kind of a hassle. It’s just one more piece of friction.
Like I said, it really depends on who you’re selling to because if you’re selling to individuals or nascent entrepreneurs or people who it’s like, “Hey, they’re pulling up their personal credit card to buy this and they are convinced that it’s the tool. It’s being recommended by some expert they know and they think it’s going to help them start their business,” then yeah, maybe this isn’t an issue.
But if you’re selling B2B, money-back guarantee will be a blocker. I’ll tell you that right now. Even just asking for credit card upfront for a free trial can be a blocker and you will get a lot of people who won’t go through with the sign-up because of that. You have to look around. There’s a couple of things. Figure out who you’re selling to and if it’s truly your business says, I would shy away from a money-back guarantee, not saying I won’t do it, but the added friction will eliminate actual prospects who probably would buy from you because it can just become a deal breaker of some.
I would also look around at competition and actually in Tim’s email, he mentions that some of his competitors offer a one-year money-back guarantee and a discount for the first year because the churn is very low and because the switching cost are high. That right there tells me, “Oh, that’s interesting.” Could there even be a really limited free plan much like MailChimp, kind of one that ESP space early on because they were the only one that can get a free plan to work.
It’s risky as a bootstrapper, but if the switching cost are high, you can just get this massive funnel coming in. There can be value there. But even if you don’t do free plan, I would say I would lean towards as little friction as possible to get someone into that trial because the more people you get in if the switching cost are high, that’s how you’re going to build value in your SaaS app.
He says another competitor is actually seen to be free but then they have back-end per-transaction charges. What these competitors have figured out is since churn is low and you’re all fighting for new customers, that the least amount of friction upfront is the way to go. That’s where again, I would personally—as a rule of thumb that could be broken—I would lean away from money-back guarantees and I would look much more at a trial.
Then you have to ask yourself, “Do I have to do credit card upfront or not?” If you don’t do credit card upfront, you’re going to get a lot more people in that trial. Can you convert them? Are they still qualified? This is an experiment I would run. I may start with lower friction, given the load churn and the fact that people don’t switch out after they become customers.
Mike: Just a confirmation on that last piece where, in terms of Stripe, right on their refunds page they say, “There are no fees to refund a charge but the fees from the original charge are not returned,” so whatever the percentage is. That changed I think in 2017 because they couldn’t afford to do that.
Rob: Which is 3% plus 29 cents or something?
Rob: Okay. If it’s $100, you’re to pay him $3, essentially you’re eating $3.30 per refund and with the SaaS app, with the margins you have, that’s probably trivial. That wouldn’t be the reason I wouldn’t do it. If would be the other reasons I think I talked about.
Awesome. That’s a good question. Thanks for the question, Tim.
Mike: I think that about wraps us up for the day. If you have a question for us, you can call into our voicemail number at 1-888-801-9690 and Rob will put it to the top of the queue or be fired.
Rob: Next time, yeah.
Mike: Or you can email it to us at email@example.com. Our theme music is an excerpt from We’re Outta Control by MoOt, used under creative commons. Subscribe to us on iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening. We’ll see you next time.
Regarding Stripe refunds, from their docs:
> There are no fees to refund a charge, but the fees from the original charge are not returned.
So when you refund a customer, the customer will get back the entire amount, but Stripe keeps its own fee.
However, Stripe used to refund their fee to you as well. Furthermore, they grandfathered accounts that were created before this change in policy. I think this is part of what made it a bit confusing, as should you have created an account before the change, Stripe will continue to refund their fees to you when doing a refund.
Woops, that’s embarrassing. Just finished listening to the episode and Mike points out the above…