In episode 655, Rob Walling answers listener questions on enterprise pricing frameworks, validating a business idea, and if it is possible for your churn rate to be too low.
Topics we cover:
- 2:17 – How to avoid login abuse on individual plans
- 8:12 – How to validate a business idea before committing to it
- 15:26 – Enterprise pricing frameworks
- 19:34 – What Rob learned in the early days as a consultant and building early products pre-Drip
- 26:22 – Finding role fit in a SaaS
- 32:21 – Is it possible to have a churn rate that is too low?
- 33:41 – How much should you pay yourself vs. investing back into the business?
Links from the Show:
- The SaaS Playbook
- Validate Your SaaS Idea Fast
- State of Independent SaaS Report
- The Stair Step Method of Bootstrapping
- Episode 628 I The 5 P.M. Idea Validation Framework
- MicroConf Youtube Channel
If you have questions about starting or scaling a software business that you’d like for us to cover, please submit your question for an upcoming episode. We’d love to hear from you.
I will admit that taught me a lot about how to interview, how to get jobs, how to present myself, and also how to work with a lot of different people and oh, this is a good one actually, a lot of different code bases. And this might be one of the reasons I was never scared to acquire companies or SaaS apps in essence, because I knew that no matter the code base, I could get in there and figure it out because so much of my career had been going into existing code bases and either refactoring or improving or adding on, and so I would’ve to learn the code base quickly. Sometimes I would’ve to learn the language, and so I knew that I could buy a SaaS app or a software product in a language that maybe I knew, maybe I didn’t, and that I could figure it out.
Welcome to another episode of Startups For the Rest of Us, I’m Rob Walling and I’m stoked to be here today. We got some great listener questions I’m going to comb through today covering pricing, idea validation, enterprise pricing, what you can learn as a consultant and more. This is the show where we dive into bootstrapping and mostly bootstrapping software companies, SaaS companies, but honestly, there’s a lot of listeners that are doing hardware info products. It really is just being an entrepreneur and trying to change your life and those around you through entrepreneurship. Whether you raise a bit of funding, whether you raise a lot of funding, it’s just about being motivated, not sacrificing your life or your mental health to get where you want to go. Before we dive into the first question, I have a new book. It’s my fourth book. It’s coming out in the next few months.
I’m actually doing a Kickstarter probably the week this comes out. It’s at SaaSPlaybook.com That will get you a link to the Kickstarter. If you’ve gotten value from me over the years, it’d be amazing if you could back one of the tiers. I have tiers starting at $30 for the book, plus either an audio or an electronic version of it, a PDF, all the way up to several thousand dollars for an in-person small group founder retreat with yours truly in Minneapolis this summer. I hope you’ll check that out and support me in the Kickstarter.
And with that, let’s dive into my first listener question from David.
Hi Rob. My name is David Canes and I have a SaaS business called WellPrept, which helps doctors send their patients homework. I’ll tell you about that in a second. But first, I wanted to thank you for Startups For the Rest of Us. I think I probably binged at least 600 episodes at 2.5x like a crazy person, but you’ve given me the language to understand SaaS in a way that has helped me communicate with my developers in an efficient way. You’ve helped me dream up a roadmap, you’ve changed my opinion on many different topics and really just wanted to thank you for doing this. I don’t know how I would’ve been able to become educated on these topics without your podcast. It would’ve been challenging. I know there’s a small violin playing for well-paid professionals who have struggles on the job, but one of the struggles that doctors deal with is that they have to explain basic concepts to their patients over and over, and WellPrept lets them set up customized education pages with their favorite resources they can easily share with patients.
My question has to do with individual plans versus team plans and how software can protect itself against the abuse of individual plans by teams. Sort of like how Netflix somewhat knowingly lets people share their passwords even though they lose money from it. Maybe there’s other examples of software where people use one seat but they somehow surreptitiously let many people use it. In my case, we allow individual doctors to set up really cool customized profiles, and while this is a selling point for most of them, we’ve had some groups say, “Yeah, we’ll forego the customization and we’ll just have a page for our whole practice and all our doctors can use it.” We want to set up team-based pricing, but to some degree, we don’t want this to completely be an honor system. What are the things that we need to be thinking about, either tech safeguards or otherwise, to help minimize the abuse of individual plans by teams? Thanks for everything that you do.
You binged 600 episodes? Well, that is a huge compliment and I’m sorry that I had to put you through all that pain, but hope you enjoyed the journey. It’s 13 years at this point, and that’s pretty incredible that you went back and listened to all those. I’m glad they were so helpful. To answer your question, I’m not sure I fully understand all the nuances of it. I think the basic piece of how to avoid login sharing is usually that if two people log in from the same company, they need to see something different in order to charge by seat. If you think about logging into a CRM like Salesforce or Close, or even like Trello, if I log in, I see my tasks, and if my co-founder logs in, they see their tasks, that makes it really easy to charge per seat. Versus let’s say you have an email service provider like MailChimp or Drip, if two people log in from the same company, they see the same thing.
There’s no customization. That’s like let’s say the standard rule for when to charge per seat. And it sounds like you have something like that. You have a public facing page that is customized per doctor, and so in that case, it should be pretty easy that if they have 10 pages and you charge 10 seats, but I hear you on the fact that it sounds like some do the entire practice. The only thing I can think of, I can think of two things. Number one, don’t let them do that and make them create a page for every doctor. That’s a little weird, but that’s one way to do it. Another way is to think about is there anything on the backend that’s not public facing that would allow you to charge per seat? Meaning they log in and they see something different, the leads go somewhere, whatever.
It doesn’t have to be a public facing aspect. It can be much like a CRM or whatever things are assigned to people. I don’t know if that’s happening. It’s hard to say. The third option is, I guess it is kind of honor system, right? If you do want to allow one page per practice, then yeah, you would ask them, “Well, how many doctors do you have? Because that’s how we charge.” Or you say if you want to do that, it’s this really expensive plan to discourage people from doing it. I’m not sure I can think of a brilliant way to achieve this without making it honor system or having this mechanism, the public or the private mechanism that means they can’t share logins. I mean, I guess the other way is that the way Netflix enforces it, right? Which is simultaneous logins or you’re like logging which IPS log in at different times, but if they’re all in the same office, how are you going to tell?
Then you start looking at IP and browser and you can fingerprint things. To me, that’s just a rabbit trail, man. I can’t imagine enjoying building that system. That sounds like a terrible waste of time, but that is a way to do it, right? There are technically ways that you can try to fingerprint individual computers based on browser settings and the computer, the laptop itself. And there are libraries that would try to allow you to look at how many people are either simultaneously logging on or logging on in a given week or a given month, and you could use that. I wouldn’t use that as a hard and fast. I personally probably wouldn’t bother with it. It sounds like a waste of time, but if you decide or if I’m misunderstanding and you do want to implement that, I would use that as more of a reporting to you, to your team of like, “Bing, they’re paying X amount, they said five seats and it looks like 20 computers are logging into this in a given week.”
Then you would have to reach out and say, “Hey, it looks like your usage varies.” I wouldn’t use it like I think Netflix literally blocks you or forces the other account to log out and you can do that. Again, it just feels heavy handed and a bit anti customer, and I think this entire path feels cumbersome to me. And I’m just wondering without trying to take a technical stand on it, because it just feels like a rabbit trail. You’re going to go down and waste a bunch of engineering time. I would try to think of more of a business solution to it, which I think is what you’re doing. It’s obviously a challenging problem and I appreciate your question and I hope that was helpful. My next question is from Karol from Slovakia on how to validate a business idea before committing to it.
Hey, Rob. Karol from Slovakia here. First of all, thank you for your podcast and everything that you do. It’s been really inspiring and my question today is how do you validate business idea before committing to it? I know it may sound like a cliche question, but I’m really struggling here. How do you go about finding that niche specific problem that people want to be solved? If you haven’t experienced hands-on, some very specific problem, your or your friend’s work or personal life. I feel like it’s so hard to get a customer without at least some sort of basic MVP, but at the same time, it’s difficult to commit to an MVP if you don’t know for sure that people will be willing to pay for it. I’m starting to feel like it’s a vicious circle and I can’t get out of it. Any insights would be highly appreciated. Thank you very much. Take care.
Yeah, so this is a good question, Karol, and a common one. The thing to keep in mind is you’re never going to get to 100% validation. I say that all the time. When you come up with a brilliant idea, you’re probably at 10% out of a hundred that anyone else needs this. And then as you have conversations or as you drive traffic, collect emails, whatever smoke test you’re going to do, that slowly creeps up, oh, maybe 20%, 30%, 40%, and then you show an MVP and people start using it and that slowly climbs up. But until you launch and people are paying you money and not churning, you will never be at a hundred percent. In fact, I don’t think you can get much more than 50, 60%, whatever. It’s a arbitrary number that I’m throwing out. But that’s the idea is you will at some point have to make the decision to move forward because being an entrepreneur is making hard decisions with incomplete information.
And this is a great case in point. With that said, we actually released a YouTube video, which is just, it’s me talking to a camera for 12 and a half minutes. It’s called Validate Your SaaS Idea Fast, Step by Step SaaS Validation Process. And in it, I walk through the two methods that I typically see for people to validate. One is to put up a landing page. This is if you have a low-touch funnel, you’re going to have to drive a lot of traffic at a lower price point. For this, you put up a landing page, you start driving that traffic, you do SEO, you do pay per click, you do whatever it takes that you would be doing if the product was all done, and you’re basically asking people to opt in for interest. That’s like this landing paid smoke test.
Another approach, and I’ve used both of these by the way, is to have conversations, and these can be email, they can be Zoom, they can be in person, but this is where if you’re charging a hundred dollars, $500, a thousand dollars a month, maybe it’s not such a high traffic business, maybe it’s going to be one that relies on individual sales with demos. And for that, a lending page smoke test is a lot weaker, just doesn’t give you the right signal. That’s where you have to cold call, cold email, cold LinkedIn, or warm for that matter. If you have a network in the space, which it’s an unfair advantage if you do so, certainly take advantage of it.
But that’s where you have a bunch of conversations and you basically say, “I’m a founder, I’m a software developer, I’m not a salesperson, I don’t have anything to sell you, but I’m thinking about solving this problem.” I guess I’ll back up and say, do you even know what problem you’re solving? Are you going to go out and try to find a problem? Because that is hard on its own, but if you do already know the problem and you do know that say psychologists face this problem in their professional career, then you can approach them.
“Do you have this problem?” And if they say no, you move on. If they say yes, then you ask them the questions from the mom test, right? You say, “What are you doing today to solve that problem?” And you get on the list and then you get 5, 10, 40 people who are interested in your solution. Sometimes a solution is software, sometimes a solution is productized service. Sometimes a solution is that they should keep doing what they’re doing in their Google sheet or Excel spreadsheet. But if you realize that software could solve this problem, then you move to the next step.
With Drip, I got 11 yeses. With WP Engine, Jason Cohen got 40 yeses before he started coding. And when we did Drip, I did landing page validation and I did conversations, I did both. And here is a list of other things I validated using landing pages. Two books, MicroConf, TinySeed, Drip, and I believe my original online community was like a precursor to MicroConf. It was an online community and a bunch of content like information. I think that was also a landing page. These things are very versatile. Now, I did want to call out a couple pages in the 2022 State of Independent SaaS, and it’s page 15 and 16. We’ll link up to the State of Independent SaaS, which we do through MicroConf and we survey many hundreds of independent SaaS, non venture backed SaaS founders.
And we ask them a bunch of questions about MRR, and this and that. But we do have a couple questions about ideas, how they came up with them and about validation. Under how did you discover the idea for your business? 46% of respondents said it was a problem that they experienced. Another 24% said it was a problem they saw customers experiencing. 10% said it was a problem they saw at their day job. 7%, so pretty small, got it through research. 8% said it was a problem, friends and family experience, and then 3% acquired the business and 3% had other. You can see the vast majority is basically a problem they experienced, problem they saw customers experiencing. This was oftentimes like an agency that had clients who were experiencing something or they already had a product and they had customers experiencing this problem, so they built a different product, right? Between a problem they experienced, customers experience, day job or friends and family, that’s like 85% of the way people have discovered ideas, at least according to this survey.
And then in terms of validation, how did you validate the need for your solution? 33% built a prototype or an MVP. Almost 10% did pre-sales where they actually took money. Almost 10% had verbal commitments, which is the way I did with Drip. 8% said they did no validation, 20% said they asked their audience, and then 7% put up a landing page, like I said, and 7% copied a competitor. That gives you an idea of how folks are doing. It doesn’t necessarily comment on the effectiveness. In addition, what I’ll say is if you build a step one business and you can Google the Stair Step Method if you don’t know what that means, but if you’re building a step one business and you can just get something out there quick in under a month, that’s where personally I don’t know that I would be validating. If I’m going to build a Shopify app, a Heroku add-on, a Salesforce add-on a HubSpot add-on, and I can just code this thing nights and weekends, four weeks, six weeks, that’s validation unto itself, right?
Because validation alone is going to take you weeks to research and evaluate and then validate. And if you can just get an actual MVP into people’s hands, that’s also one way to do it. Lastly, I want to call out The 5 P.M. Idea Validation Framework, which I’ve mentioned on this show. That’s to take an idea and just run it through a filter. That’s not validation, it’s pre-validation. It’s just evaluating an idea from multiple perspectives to get an idea of do I want to tackle this? And then the next step after that of course would be validation. Thanks for the question, Karol. I hope that was helpful. My next question is from Gokul and it’s about enterprise pricing.
Hi Rob. My name is Gokul and I’m a longtime listener and a huge fan of the pod. My question today is related to pricing. A lot of your videos on the past have really great pricing frameworks for the low to medium touch funnel sort of businesses at a slightly lower price range. I was wondering if you had any frameworks or strategies to think about pricing for the higher monthly price enterprise customers, seat based pricing, feature gating, flat monthly price. How do you decide what’s the right pricing strategy for your product? To give you a little bit context on the product that I’m building, I work in deals analytics.
Typically when a company goes through a deal, so a divestiture, IPO, acquisition, they hire a lot of accounting consultants to help them prepare their financial statements, and I work with these accounting consultants a lot, and what I’ve found is on all of these projects, these accounting consultants spend a lot of time doing the same steps and processes multiple times, and it’s very manual and it’s done in Excel, so it’s very time consuming and it’s prone to error because it’s manual Excel formulas.
The tool that I’ve built basically automates a lot of these standard processes and reduces all the errors and improves efficiency by a lot. Now the problem is my customer is an accounting consulting firm, and so while it is a manual process for them, all of those hours that they spend are billable hours for revenue for the consulting firm. My tool basically greatly improves their efficiencies, but may reduce their billable hours, but at the same time, it could help improve their margins because they need less people to the same amount of work, and so they could increase their billable hours or billable rates. How would you think about pricing for something like this on the enterprise scale where you’re charging over two to $10,000 a month? Thank you.
Thanks for the question. This is a good one. My rule of thumb is charge a lot because enterprise customers are a pain to deal with in terms of procurement and all that. I think minimum 25K, 35K on the bottom end for these types of deals. In terms of seat based feature gating and all that, I laid out almost everything I know about it in The SaaS Playbook. I realize that doesn’t help you today, but hopefully that’s an entire section, it’s a sixth of the book is all about pricing. In addition, I did a talk at MicroConf Europe that is on YouTube and we’ll link it up in the show notes, but it’s called The Fundamentals of SaaS Pricing With Rob Walling, and if you watch that, that can also give you some ideas of how I think about it.
In terms of the specifics of your customer, that’s a very challenging question because this is selling to lawyers where if you make them more efficient then they bill fewer hours. Unless you’re dealing with fixed fee folks, and it doesn’t sound like you are, I don’t know that the value is there. When I did have an agency and I billed per hour … And that’s not true. I personally wanted to be more efficient just because I wanted to be, so I would buy frameworks and build them to help me be more efficient, and then I would usually just raise my hourly rate at that point. But I don’t know how you get around the you are going to make them pay you for the software and then that’s going to shrink their contracts. I mean, I think the only way would be to convince them like, :Well, this is a flat fee add-on to each project,” right?
Or if they bill on a fixed price basis, then obviously they become more efficient, they make more money. If truly they are making money per hour and you’re going to reduce that, that doesn’t sound like a great approach to me. Yeah, I don’t know an easy way around it. I think, again, if I were selling to these customers though, I mean, this sounds like 50 to $150,000 a year type price points because they are probably charging a lot and anytime you’re in the investment banking, the financial areas, there’s liability, there are long sales cycles and there’s things, there are things like that that make it a requirement that you charge that much in order to make the deals worthwhile. My next question is from Phil.
Hi, Rob. This is Phil at PhilDaniels.io. I’ve heard you talk about your journey acquiring and building small products, about Drip, about starting TinySeed, but I don’t recall you talking about your early days as a consultant building your client base, quitting your 9:00 to 5:00. Being someone who loves startups and freelancing, I’d love to hear a little about that along with anything you might have learned along the way. Thanks.
Thanks for the question, Phil. Yeah, it’s not something I talk about so much because it was a less interesting part of my journey. I learned a little bit from it. I just didn’t enjoy building things for other people and also, I don’t know, man, the clients, you’d get these clients who didn’t know how to build software and they wanted to tell you how to build software. And you’d have this great UX designer you’re working with, and we’d wire it up and it’d look amazing, and they’d be like, “Well, can we move this around?” And it’s like, “No, this person knows way more than you do about how to build a user interface.” It got old. I’ll say I learned how to run a business. I will say yeah, I quit the 9:00 to 5:00 to kind of start this micro agency.
I was a consultant and then I would have other contractors helping me to fill in the gaps. It was a great living. I was making, I don’t know, two or 300 grand a year. I was working from my home, and that was just unheard of. This is early 2000s, right? But what I found was it quickly became a 9:00 to 5:00 because now I had to bill clients and do all the things you do as a consultant or a freelancer, and then I was also trying to write code and be in these remote meetings and phone calls. I learned to run a business. I learned to market. I mean, the way it was all content marketing, right? That’s one of the reasons I started the blog, although I started the blog because I really liked Paul Graham and Joel Spolsky, and they were writing essays, and I started learning enough as a contractor, a developer, a project manager, just a manager of people.
It was early still, but I was like five, six years into my career, and I was like, “I think I have some unique insights,” which that’s debatable. But at that point, then I started blogging about everything I was up to and theories I had on becoming a better manager, and I’d read a book and then I would kind of summarize that or I would incorporate it into my own thinking. I think I learned a lot more from perhaps books and other blogs than I did from the actual consulting. But some things I did learn are obviously content marketing and that blog, I transformed it into an entrepreneurial blog. As I started having products and having success with them, that’s what became Software by Rob, and then it’s now at RobWalling.com, all my essays from back in those days. That was one piece. Another thing, I did learn how to manage and outsource because I didn’t want to write all the code and I was billing a hundred, 125 an hour, and I could hire people for less.
That was an early learning curve. That was challenging for me, but that helped me once I had these small products that I did know how to basically hire people and not have to do everything myself. Now, the thing I learned is that I didn’t want to work for other people for the rest of my life. I was really constrained both by the demands of the hours where they would say, “Oh, we really need this out,” so then I just have to crank over a weekend, and I don’t mind working weekends if I’m making myself do it. But the moment someone else asked me to, it makes me mad. I think it’s that phrase unemployable, right? I learned during that time that I was kind of unemployable and that I should figure out a way to make my own path, because while I did a great job and I was usually one of the better team members, I didn’t enjoy it.
That’s where, for me, entrepreneurship was so much about freedom. It was not about changing the landscape of the Silicon Valley. It was not about becoming a gajillionaire. It was about being free enough that I could do what I wanted when I wanted. And I did learn that and those early years, because originally I thought being a salaried employee would be cool because I was coding and it was creative, and it was cool for about a year, year and a half. Then I got bored and I got frustrated. Then I said, “Well, I’m going to be a freelancer then I’ll control my own destiny. I can work from home.” And it was great for about 12 to 18 months until I got bored of it and got frustrated. And as I said before, clients were sometimes challenging, and so it was helpful to learn those things along the way and to learn the skills of dealing with a lot of different people.
That’s the other thing. I would have a job for a year, year and a half, then I’d get bored or be unhappy, so then I’d go freelance and then I’d go back to a job. I think I had two or three salaried jobs as a developer over the course of six or seven years, and then I’ve filled that in with this consulting work and essentially running the micro agency. That was probably pretty helpful for me. I was concerned early on that I would be viewed as a job hopper, and that just became irrelevant at a certain point. I don’t need anyone’s permission now to get a job, but I will admit that taught me a lot about how to interview, how to get jobs, how to present myself, and also how to work with a lot of different people and oh, this is a good one actually.
A lot of different code bases, and this might be one of the reasons I was never scared to acquire companies or SaaS apps in essence, because I knew that no matter the code base, I could get in there and figure it out because so much of my career had been going into existing code bases and either refactoring or improving or adding on. I would’ve to learn the code base quickly. Sometimes I would’ve to learn the language. When I first started, I knew Pearl, and then I had to learn on the job ASP. Then I learned PHP, and then I learned ColdFusion, and then I learned .NET. I mean, this was all within two years. And as a consultant, you basically work in the language that the client asks. Oh, Java as well, Java for the web. I knew that I could buy a SaaS app or a software product in a language that maybe I knew, maybe I didn’t and that I could figure it out.
And I don’t know that if you’ve worked at a job for five or 10 years in the same technology, same code base, I don’t know that you have that malleability. I think maybe that was an advantage that I had having worked in so many code bases. Thanks for that question, Phil. Honestly, it’s something I haven’t thought about in a really long time. I started working in construction in the late ’90s. I did that for about two, two and a half years, and I taught myself Pearl. I had a coding background, but I didn’t know modern languages.
I taught myself Pearl and HTML nights and weekends by checking out library books, and I got my first job professionally as a programmer in 2000, and then I became essentially a contractor within about two years of that. Then bounced back and forth a few times and then really had my first product success in like ’05-’06 with .NET Invoice. And then I quit the day job and by that I mean, consulting and salaried employment, working for anyone else. I believe it was late 2008, and that was the last time I worked for anyone. I appreciate that question. It’s just not something that I’ve thought about in a while. My next question is about finding a role fit in the SaaS world. It’s from Nick.
Hey Rob, Nick here. I’m a co-founder of a hardware startup and we’re trying to sunset it/sell it off and just try to get some value for the hard work we’ve put in over the last three or four years. I’d like to consider moving into the SaaS world. I think it’s really interesting. I’ve been listening to your podcast for a long time. I’m a non-technical co-founder, but I do have some technical chops. I have some coding experience, but I’m certainly not a programmer. I would consider myself a non-technical co-founder, and I am looking at co-founder options in the SaaS world, but I think I might want to consider a smaller team with maybe a little bit of traction as well. I think my question to you is for someone who has a co-founding experience, and I’m sure as you know, when you’re a founder, co-founder, you’re kind of a jack of all trades.
I haven’t really developed a mastery of let’s say sales and BD or marketing or anything like that. And when you’re a co-founder, you have to do a little bit of everything, and that’s perfectly fine. But when you’re a small team, I feel like generally speaking, small teams look for specialized people to come in and take a particular role and really elevate it like a chief revenue officer or a chief marketing officer or something like that. My question to you is how would you view my experience in the context of a small team, and then how can I better position myself to small teams that might be looking for a third, fourth, fifthish member of their team? Thanks for everything you do. I’ve been listening for a while and I just got back from a run, and I often listen to your podcast before I run because it gets me excited, it gets me juiced up for the day, and it helps me run faster. Thanks for all the advice and thanks for helping me run faster occasionally too. All right, take care.
Yeah, this is a really interesting question, Nick. I think the way I about it is what do you like doing the most and what are you really good at? And you might be evenly good at a bunch of things. Then I would say, well, what do you like doing the most? Where do you think you could provide the most value? The nice part about knowing you want to get into the SaaS world is that there are only 10 departments in a SaaS company, right? And in a SaaS company of five people, not even departments, but it’s just roles. There’s product who decides what you build and how you build it, at least from an experience perspective. There’s design, there’s engineering, there’s marketing, sales, customer support, customer success, human resources, legal, finance, and I would just combine all those into ops, frankly.
I think for you, if you’re not an engineer, it’s like do you want to manage engineers? Are you good at making product decisions? Are you good at marketing? Everybody needs marketing. If you’re good at that, that’s one thing. Or are you better at sales, customer success or operations, right? I disagree with you that in a four-person company that people are hiring specialists. That usually doesn’t happen until … It depends. You’re hiring engineering specialists, they’re developers who write code, but in marketing, you’re not hiring specialists. And even I heard my first customer success person and they did customer success and sales. There’s a lot of these roles that are combined, and I actually call them out, not to do a callback to my book again, but it’s top of mind because I just wrote it. I talk about the most common combined roles at SaaS companies, and it depends on inbound or outbound leads, but customer success plus salesperson is a role that I hired for.
Customer success plus support is one that I see often. Product manager plus designer, engineer plus product manager, engineer plus designer, and then there’s some marketing combined roles and legal, finance and HR combined into operations. I think that’s what I would be asking myself if I’m going to join as employee number two through 10. I mean, the TinySeed companies, the MicroConf companies, and even when I was two through 10, always wanted people with multiple skill sets. They were like the unicorns that I looked for because I couldn’t afford to hire an individual for each role, and yet all the roles had to get done. I actually think it is an advantage for you. In your shoes, I would look at the two things that I’m most excited about and best at, or maybe three if you want to stretch it.
Like me personally, let’s just say hypothetically I had to go get a job at a startup today. I haven’t thought about this in forever, 15 years or something, but I could do operations. I would just hate it. It’s just not in my wheelhouse of fun. It is in my wheelhouse of capability because I’m Type A enough, but I just hate all the details and just having to take care of everything. I could absolutely run an engineering team. I could run product, I could do both. I could do a mix of product plus engineering. That’s essentially what I did at Drip after the acquisition, and we grew that team up to 20, right around 20 people, I think. I could also be involved with marketing and I could probably run a marketing team. I’m not, especially now, not the best marketer. I would need to get back at it because of the tactics change and these days getting into tactical SEO and tactical paper click advertising.
I just haven’t done that stuff in six or seven years, so I would have to get back to it. But I think the more valuable part anyways, this strategic thinking and the project management aspects, and I could definitely do both of those. Those would be the things I’d be thinking about. But obviously Nick, you’ll want to ask yourself the same questions. Hope that was helpful. My last question of the day is a text question. And man, this is from September, so it’s been a while. That’s the problem. The text questions are getting beat out by the audio and video questions. If you want to submit a question and get it answered soon, go to StartupsForTheRestOfUs.com. Hit the ask a question button at the top of the screen, and then you can record an audio or a video clip there in your browser, even on your mobile.
Or if you just want to record something and send an MP3 or an MP4, you can send in a Dropbox or a Google Drive link to questions@StartupsForTheRestOfUs.com. But Nick at BeeLine Reader asked several months ago, “I have two questions. The first is it possible to have a churn rate that is too low? I’ve heard you talk about what a good churn rate is and how a churn rate can be bad if it’s too high, but I’m wondering if it’s possible to have one that’s so low that it indicates you’re not charging enough. At BeeLine, we’ve never lost a B2B customer, and I wonder if this means we’re being too conservative in our pricing or annual increases.” Yes and no. I think when I first read the subject line of can you have a churn rate too low, I thought, “No, that’s impossible.”
But I do think a churn rate that low indicates that you’re probably not charging enough. Yes, Nick, I do think that’s something I would play around with. I’d probably start not by raising prices on existing customers. Usually when I think of pricing as an experiment, I change it on the pricing page first, make sure it doesn’t break the business, and then if I want to raise it more, then I do that again. Otherwise, I go back and decide am I going to grandfather people or not? There’s Rob’s rule of 15, which is if you’re not going to make at least 15% more MRR by raising prices on existing people, then it’s not worth a headache because people get mad and there’s a bunch of support, and it’s just a lot of effort. But if you’re going to make, honestly, it’s between about 10 and 15% more MRR just by raising prices on existing, then I start to think, “Ah, this is worth it.”
And really at any MRR level, that kind of holds true for me. That’s something I’d be thinking about. Nick’s second question is, “On a recent episode, you had a conversation about founders paying themselves versus plowing money back into the business. Given the disparate tax treatments of W2 wages, dividends, and capital gains,” this is in the US, “especially if it qualifies for qualified small business stock exemption, might be useful to have a conversation about how to weigh different factors related to compensation. I happen to be aware of some of these aspects since I was a tax lawyer in a former life, but I’d love to know what you or others who have gone through the process have found. I know there are also very fruitful ways to use SEP retirement accounts. Any chance you could have a guest on to discuss this topic, both for folks who plan to independently run their business for many years or those who are hoping to sell?”
This is a good question. Obviously, I’m not a tax attorney, can’t give tax advice. The way that most people do it in the US is you put your salary at a reasonable amount that you can defend to the IRS, nd then if you run an LLC, you can then take additional money out as owner’s distributions, withdrawals, dividends, whatever you want to call them. And on those, you save on the payroll taxes. Now, I know in the UK you can make your W2 equivalent wages very, very small. I think you can make them some ridiculous amount, like 10,000 pounds, and then everything above that you don’t pay any payroll tax on. And that just seems like a big loophole. But if it is and everybody’s doing it, then that’s what you do. In terms of plowing money back into the business, for me, I always knew the enterprise value was a multiplier.
It was so much more than any salary that I could take out. If I took a hundred thousand dollars out, my business is doing a million a year, and I could sell that business for $5 million, which is totally reasonable in the SaaS world, especially if you’re growing halfway decent. I knew that every 5,000 MRR was 60,000 in ARR, which times five is 300,000 in net worth. To me, you want a balance. You want to be able to live comfortably, but know that every dollar you pull out, if that negatively impacts growth, you are negatively impacting your outcome. So much more than that. If every thousand dollars you take out means you can’t put a thousand dollars of new MRR in place, that’s a 60 times multiplier. Now, that’s not super reasonable. I don’t know that you could put a thousand dollars into a business and get a thousand MRR, but just think about that 1000 times 12 times five gets you 60,000 in enterprise value.
Even if it’s half that, even if it’s a fifth of that, it’s still for every thousand I pull out in salary, maybe it’s 30,000 of net worth that I’m giving up, or it’s 20,000. It’s some number that’s larger than a thousand dollars. As long as you’re paying your bills and not trying to live on nothing, which I know some entrepreneurs do. I think that’s how I think about it. The other thing, yeah, SEP retirement accounts you mentioned, definitely talk to an attorney. My attorney has moved me from a simple retirement to a SEP retirement. And then at some point to individual 401ks, because those were most advantageous and those, I just don’t know all the details of those. And to your point, I could get someone on here to talk about it. I may do that. In all honesty, I think it would be an unfortunately very boring, I know it’s applicable, but these types of things are just so boring for so many people, and they’re not at that point where it’s like this matters.
I will give it some thought and see if I want to cover something like that. Oh, in addition, I want to tack onto this. Think about this. If you pull a hundred grand out of your company as a salary, you pay income tax on that, right? You’re in whatever, the 25%, the 35% bracket, you pay a lot of money. When you sell that company, as I said, let’s say it’s a million, you can sell it for five million. You pay long-term capital gains on it. Again, this is in the US, assuming you’ve owned it for at least five years, your tax bracket is, it’s 15% or 20%. If you sold it for five million, you pay 20% plus whatever state tax.
It’s way less. In addition, if your stock qualifies for QSBS, if it’s a C corp, you’ve held it more than five years, and there’s a couple other things, you pay no federal income tax on it. Just think about the difference between taking a wage out that, again, taking that thousand dollars out as a salary, and you pay a quarter of that to the government versus 20, 30, 40 times more in net worth, and you pay somewhere between zero and 20% tax to the ISR. It’s an incredible difference. The taxes are more advantageous if you sell the business, and the economics are more advantageous if you later sell the business rather than trying to pull it out as a revenue stream.
I’ve had businesses that are both, I’ve had amazing lifestyle businesses where I was pulling two, $300,000 a year out, actually more than that, and it was great. But the life-changing income that I’ve received has been from selling my own companies and from angel investing in companies like WP Engine and a few others that had these massive returns on my investment or on my time, and the tax advantages were there as well. Thanks for that question, Nick. That was a really good one. Hope it was helpful. Thanks for joining me this week and every week. It’s always great to be on the microphone. If you keep sending in questions, I will keep answering them. This is Rob Walling signing off from episode 655.