In this episode of Startups For The Rest Of Us, Rob talks with Jordan Gal of CartHook about his big move to stop his free trials, move to demos, and increase his prices.
Items mentioned in this episode:
- Bootstrapped Web Podcast
- CartHook Pricing Change Blog Post
- Lincoln Murphy blog post about Qualification
This week’s guest is Jordan Gal. You may know him from BootstrappedWeb. Also, the founder of CartHook. In this episode of Startups for the Rest of Us, I talk with Jordan about what I’ve seen as one of the gutsiest price increases and sales process changes by going up market that I’ve ever seen. The quote that I’m using in the title is, “We went from hundreds of free trials to a few dozen on purpose.” This is Startups for the Rest of Us episode 476.
Welcome to Startups for the Rest of Us, the podcast that helps developers, designers, and entrepreneurs be awesome in building, launching, and growing startups, whether you’ve built your fifth startup or you’re thinking about your first. I’m Rob and today with Jordan Gal, we’re here to share experiences to help you avoid the mistakes we’ve made.
It’s a great conversation today. In fact, often times I say we have many different episode formats. This one is less of an interview and it’s more of me and just letting Jordan go on this topic. He thought about it so deeply with his team. It was their realization of, “Our churn is way too high and we’re just running on this treadmill that is getting faster and faster, and the business doesn’t feel healthy. How do we fix that? It’s not one tactic. It’s not changing, making people email to cancel you. It’s not moving to annual plans. It’s not the little tactics. How do we revamp our entire sales, onboarding, pricing process, and go up market to change the nature of our business?” That’s what we’ll talk about today.
You can tell during the interview that I’m obviously impacted by it. I was impacted from the outside. I’m an angel investor in CartHook. CartHook has raised a small amount of money. It’s still very much in that bootstrap indie-funded mindset. Jordan is super capital efficient. He’s not on the constant churn to raise that Series A to Series B and go there. He hasn’t raised that institutional money that forces him to go after that. He’s very much like a Brennan Dunn […] with the RightMessage.
A lot of the other companies we hear about that are in our MicroConf community, they’re in the Startups for the Rest of Us community, they’ve raised a small amount of money to hit that escape velocity. They’re not looking to unicorn or bust. They’re not looking to be that one billion dollar company, necessarily. Jordan’s in that camp. I love the way he’s meticulous. He really thinks these decisions through. I really enjoyed the conversation today.
To set the stage, if you haven’t heard of Jordan, years ago he ran an ecommerce company, ecommerce business. If I recall, it was with his brother. Maybe his dad. It was like a family member. They sold that. He had a small exit there. Then, he wanted to start a SaaS or a software tools for ecommerce. He wound up starting CartHook. Originally, it was just cart abandonment emails and they’ve since stopped doing that.
They eventually got to the point where CartHook essentially replaces the checkout on Shopify. The headline of CartHook is “Maximize Conversion Rate and Grow Average Order Value Today.” They have a real competitive advantage that’s very much differentiated from a lot of the other products in the ecom space, and he’s got a lot of traction.
As we talked about during the interview, they’re doing several million dollars in ARR, which is a big deal. They’re in the 25-30 employee range. He’s really just been grinding it out for years to get there.
What I like about this conversation is I was getting investor updates and then I saw a blog post where Jordan was talking about increasing prices. That’s always such a dicey proposition. I then started chatting about it. I asked him what the thought process was and how they’ve gotten blowback. They basically led to the conversation that we have here on the podcast today.
Without further ado, let’s dive into the interview with Jordan Gal. Jordan, thank you so much for coming on the show.
Jordan: Rob, thanks very much for having me on.
Rob: It’s great to chat again. There’s a lot that we’re going to dig into today. It’s been a fascinating journey. From the outside, I have an inside seat as an investor in CartHook. I’ve watched this transformation that you’ve taken over the past year or so. I’m really fascinated to begin with that.
The nugget for this episode actually came when I saw you raised prices. You did it so well, you did it so elegantly with (I believe) almost no pushback. I read a blog post, it was a blog post that you put on the CartHook blog, and I was like, “Man, I really want to get you on the show to just talk about what the thought process was there.” There was so much more to it. It wasn’t just a price increase. There’s this whole story that were going to dig into today. You want to kick people off with letting us know where we’re headed today?
Jordan: This is a topic I’m excited to talk about, something that I’m proud of. The best way to get started is to give some context around what these decisions are, what they entail, and why we got to a point of wanting to take these bigger actions.
What I need to do is to ask everyone to go back with me for about a year. The history of our checkout product, 2017, is when we came out with it. It was very difficult, technically. It was just one challenge after another. Then, we released a version two where we made a lot of big fixes. That’s when we start to hit traction.
2018 was our big year of growth, where we 3X revenue and got to multiple millions in ARR. That was this wild ride. It was fun. I look back on that year very fondly. That’s how I always want to feel.
The holidays in ecommerce are always big, obviously. Black Friday, Cyber Monday, and then the holidays. The end of 2018 for us was gangbusters. Then, January–February 2019 comes around. We start to be able to catch our breath, really look at the company, and analyze how things are going. There was one number that stood out that was a problem. It was an obvious problem and something that could not be ignored. That was churn.
In January–February 2019, we’re cruising at 12%-14% monthly churn. Ecommerce itself has high churn. There’s a reason Shopify does not disclose their churn rate because it’s much higher than other software companies. It’s partly the nature of ecommerce, the nature of the market, whatever else. Still, 12%-14% monthly is unsustainable.
On first glance, it looks like the company’s a washing machine. It’s just bringing people in, spitting them out, and that’s not going to work out for the long-term. When we started to really analyze it more deeply, what we realized is that the situation was not nearly as bad as 12%-14% looked. What was happening was that we were attracting a top tier of merchants that really fit with our product. What they were selling, the way the company was set up in terms of the number of people, how technically savvy they were, all these characteristics from revenue point of view, cultural point of view, product point of view, and so on. We really lined up with this nicely. Those customers were sticking around for the longer-term.
The issue was that we were also attracting this lower-end merchant that did not fit with our business. It didn’t fit with the software, sophistication level required, pricing, all that. That large chunk was not staying. Those customers were coming in, doing a free trial, either leaving before the free trial ended, or paying once or twice, then leaving after that. There was a real bifurcation in these two populations.
The challenge was, how do we improve the health of our business, overall? We had a few goals. Why don’t I list out a few of the goals that we came up with when we start to tackle this? We wanted to do things like take more control of our business. A lot of it felt like we were not in control. We just had a ton of word of mouth. It was just a bunch of incoming demand. That did not feel like we were really controlling who was walking into the system. We obviously needed to reduce churn significantly.
At the same time, we also wanted to increase our pricing to align with the value we provide. We hadn’t changed our pricing since we launched and we were significantly better than we had launched. Overall, the saying that we came up with was “fewer, more qualified merchants.” That was our goal. To work with fewer merchants that were much better fit and much bigger overall. Those were the goals.
The way we did it was changing two big things. We changed our pricing and we changed our process. You started off this conversation talking about a pricing change. From the outside, it really looks like a pricing change. In reality, it’s more of a process change like a sales process, like how we bring people onboard. The pricing change served that larger process change.
Rob: Yeah, that makes a lot of sense. I have a couple of questions for you. You used this phrase, “To take control of our business.” You touched on that a little bit, but is it that you’re controlling who comes through the gate such that you only deal with customers that you deemed are nice or that are qualified? Or is it taking control? Are there any other aspects to that?
Jordan: There are a lot of different aspects to it. What’s happened over the past years as I have gone further away from the frontlines and from the customer interactions, is I have become shielded from the kinetic activity, actually talking and rubbing up against customers on a daily basis. I don’t feel that nearly as much as when I started to.
The anecdote I give was I had a conversation with our support team. I asked them, “What percentage of your work is for people who are in trial that won’t convert or people that have converted but are only going to stick around for a month or two?” They looked at me and said, “Probably 80%.” To me that sounded horrible. I’m setting up my employees to run on a treadmill at a very high rate of speed and looking at them saying, “How do we increase the speed?” That’s not a recipe for a happy employee.
What I mean by taking control over our business, it wasn’t just like this external-facing, “We only want to work with big merchants.” It was also, “This feels like a mess internally.” We’re doing an enormous amount of work for people that don’t fit. The reason we’re doing it is because they just walked in the door on their own and create a free trial. All of a sudden, we are forced to engage with them. It’s definitely unexpected that one of the biggest problems in our business is how to limit the number of people using the product. That’s not what I expected. I expected, how do I beg people to use our product and make them successful with it? That was a reality.
Rob: Yeah. You’re in a unique position, for sure, to be able to do this. There is no model for this. I’ve heard of apps going up market or changing. Drip went from generally as […] to focus on ecommerce. Obviously, that drove some people away in terms of that pivot or that focusing. There’s a model for that.
While you are going up market, you did it in a different way. You didn’t just raised prices. As you said, pricing is one piece of it. That’s where Ifind this whole decision and process super gutsy. It feels risky to me hearing about it. Did it feel that risky to you upfront? Were you just like, “No, I know this is going to work”? Or were you like, “Oh my gosh, this could completely tank a lot of things”?
Jordan: There was definitely a lot of fear. We’ll get into a bit of the math around what helped me overcome the fear was just being very objective in the math and saying, “No. This isn’t going to work out. Even if it’s not very successful, it’s still going to work out on the math and finances.” All of this comes back to the finances. If we had raised $8 million in a Series A, we would be trying to gather as much of the market as possible. That’s not what we’re doing. We raised a little bit of money. We want a healthy, profitable company.
If you want healthy and profitable, then you need to live within your means. The reality of our situation, just taking on as many customers as possible, was not leading to that outcome. It had churn way too high. The amount of work that was happening internally was too high for customers that didn’t make sense. That’s what helped us come to the conclusion of, “Okay, I’m going to take a risk, and we’re going to gather the forces. Let’s get into what we did.”
Rob: Jordan, I want to interrupt you real quickly. When you say it wasn’t working for you, I know that CartHook is doing several million in ARR. It was working to a certain extent, but was it really the churn? That double digit churn that wasn’t working for you?
Jordan: Yes. It’s all relative. Yes, I really shouldn’t be complaining. It is working to a degree because the revenue is where it is and all these. That’s from the outside perspective. From the inside perspective, sitting in my shoes, I have to acknowledge what’s good and what’s bad. Just because I can say we’re at several million in ARR does not mean everything is good. I was fine with that. A lot of this role is holding two things in your head at the same time that are completely in conflict with one another. That’s just the way it is.
The truth is, it wasn’t working for us in a sense that I didn’t like the way the future looked. There’s a straightforward formula that everyone can Google. I don’t remember exactly what it is. It basically tells you what your maximum revenue is. Given your growth and your churn, this is the maximum that you will reach. It will not go beyond that because that’s how math works. You will get to a point where a 12% of your revenue equals the amount of growth your getting, and then you’ll stay there forever, mathematically.
I looked at that and that wasn’t that far off on the horizon based on where we were currently. We still had room. We still had another 100+ MRR to get to that point but I felt that we need to move on this now before we hit that and then all of a sudden everything hits a wall. That’s what led into it.
Now, let’s get to the first big part of the decision. The first big part of the decision was on July 1st, 2019. We are doing two big things. We are shutting down the ability to create a self-serve free trial and we are changing pricing. Two massive things at the same time. A lot of complexity came out of that because when you do that, you don’t want to just do it quietly and not say anything. You do have to acknowledge it with your existing customers because they’re going to ask, “Hey. I noticed you changed your pricing. Does that mean that my price is going to change?” There’s a lot of communication with the existing customer base that went along with the changes that were intended for the non-existing customer base.
Rob: Yeah. I find that’s a good moment where, certainly, if you are going to raise prices on your existing customers, whether you grandfather them 6 months or 12 months or whether you don’t—there’s a whole conversation; we’ll probably going to get into around that—or if you’re not going to raise on them at all, it’s still a good time to get in touch. If you’re not going to raise on them right now or in the future, then you’ll let them know that. “Hey folks, we just raised the prices. We’re not going to do that for you. We’re going to grandfather you for now.” It’s a nice way.
If you aren’t going to grandfather them, it’s a perfect time to get in touch and say, “Hey, by the way, we’re going to grandfather you for a certain amount of time, but then change it up later and here’s why,” and give the whole defense or the reasoning behind it.
Jordan: That’s right. Now, for our situation, we did want to raise prices on existing customers. That’s a complicated thing because people are not used to that.
Rob: Yeah. I was going to ask. There is obviously a debate in the SaaS space. Every founder has their own opinions about it. It’s like, “I heard people say…” You know I’m not a fan of absolutes, right? So I hate it when you say, “You should always grandfather. You should never grandfather. You should blah-blah-blah.” I don’t think that’s the correct way to think about pretty much any of this.
I think there’s something in between and there’s a spectrum. I’ve often thought, “Hey. There are reasons to not grandfather, especially if you can communicate those reasons well in a letter, a blog post, or an email to your audience. If it makes sense to them and if it’s the right thing for your business, then these are the times when I would think about doing it.
I know that had been a hard decision. Grandfather for a period of time is what you ended up doing. Talk me through that.
Jordan: Yes, it was a hard decision and an easy decision at the same time. The math of it was very straightforward, that we would be foolish not to change pricing on existing customers. Here’s why. When we started the business, we didn’t have a full understanding of exactly how our business work from a financial metrics point of view. We thought we were on the software business, where we license our software to people to pay a monthly subscription fee to have access to the software. It’s a traditional SaaS.
The reason we thought that was because that’s what we had in our hands at that time. “Here’s the software. You can use it.” What we didn’t realize was the significance of the payment processing that we would be doing. We do significant payment processing. Hundreds of millions of dollars annually. We did not factor that into the business model. That resulted in our very heavily underutilizing our GMV (Gross Merchandise Value), the total amount of money being processed into our system. We were not monetizing our GMV.
If you look at, for example, Shopify, at scale, they make 50% of their money, $400 million annually around monetizing their GMV. That’s somewhere around $28 billion worth of GMV in total. They’re out over a basis a point. Over 1% of their GMV turns into revenue for them. $400 milion on $20 billion is 1.2 or so basis points.
We were well below that. Our pricing was 0.1%, a tenth of a percent. Shopify was making 10X what we were making on a monetizing GMV perspective. We didn’t realize that when we first started the business. Where we ended up was grandfathering pricing for existing customers on the subscription fee. If you pay $100 a month, $300 a month, $400 a month, or whatever that is, that will stay that way forever. On the GMV that you’re processing through our system, we move it up from 0.1% to our new pricing of 0.5%. It is a 5X but still very much in line with our competition, with Shopify, and with the market overall.
What we had to back it up was our software had just gotten so much better. It’s tough to describe how much better—how bad it was to begin with and how much better it is now. What we did is we put ourselves in their shoes and we said, “If I were a merchant and I had been with CartHook for a year, I had been around when it sucked, now it’s better and I’m happier, but I stuck with you guys this way, how would we want to be treated in that situation?”
What we decided to do was write that blog post that you alluded to earlier, that we should link up, because that was a very complicated blog post to write, and then make a promise that we thought was fair. That promise was, this is the new pricing for everybody, for new merchants. You will be grandfathered into your subscription price forever but your transaction fees will go up. However, we will let you go through the entire holiday, Black Friday season of 2019, and the price increase will only go into effect in January of 2020.
Basically saying, we’re not going to be bastards and raise the prices right before the holidays to maximize the amount of money we can make off you and you have no choice because you’re already using the system. We said, “No. We’re going to forego that revenue because that’s the right thing to do. But we will be raising it after the holiday’s over in January.” That makes sense?
Rob: Absolutely does. The thing I’m fascinated to hear is how did it go over? How many positive, negative comments? What was your sense of what your customer base responded with?
Jordan: The truth is we’re in the middle of it now. We’re halfway through. We sent out an initial email in July. Two weeks ago, we sent out another email. What we sent in July along with the blog post was, “Between now and January 2020, we have six months to earn that price increase in your eyes. Here’s what we’re planning on adding to the product and this is part of the justification of the price going up.”
What we’ve been very conscious of internally and from a product and prioritization point of view is that’s coming due. We will need to send an email to all those existing customers telling them that the price is going up next month and, “This is what we promised you and this is what we’ve accomplished.” We have an internal list of, “These are the things that are worth noting in that email that we can say these are significant improvements and significant additions that helped to justify the price increase.”
When we first sent it out in July, we heard nothing. Just no negative reactions. A few emails about clarification, a few questions, and then all good. That tells me that it went over pretty well and that a lot of people didn’t read it. That’s the reality of it.
Now, things are ramping up. We communicated again two weeks ago saying, “Hey, just as a reminder. In January 2020, your pricing is going to change. We will get back in touch in December before that happens to make sure that you are fully aware.” That communication started to cause a little bit more of a pushback. A lot of it was our fault because we communicated what the pricing change was. What we really should have done is personalize it.
“Last month, you did X and paid Y. In January, if you do the same X, then your pricing will be Z.” We should have laid that out more specifically and we didn’t. Because we didn’t, people started doing math themselves. If you do the math emotionally, you’ll get the wrong answer. We had a lot of emails back and forth just clarifying, “Look, it’s not going up 10X. Here’s the change for you.”
On the positive side, what it has also done is it has armed us with a bargaining chip with larger merchants. If you’re a large merchant and you’re processing $2 million a month in our system, and you don’t want to go from 0.1% to 0.5%, then let’s have a conversation to make sure you don’t go all the way up to 0.5%. Let’s set something up that makes sense, maybe get you in a 12 month contract. Let’s partner on this and do it the right way.
It has helped us get a lot of our larger merchants talking about pricing and moving toward annual contracts in order to lock down a predictable cost for them as opposed to something that’s variable.
Rob: There’s a number of things that I won’t even pull out of that because it’s the right way to think about it. It’s very smart, but one of the things you said was, “Let’s think about it from their perspective.” I imagined that that sentence, that phrase was uttered many, many times in your office when you were trying to make this decision. You thought it through. You and your team thought it through to the extent of some people could say if they were your customer, it would be a little outrageous. I could come out and say, “You 5X-ed my pricing. Even though technically I know I’m still grandfathered in the monthly, but 0.1 to 0.5 is a 5X. I’m going to come on and be outraged.” The fact that people didn’t do that indicates that you had (a) a case. You had justification. And (b) you communicated that in a way that made people feel comfortable. You weren’t screwing them.
Jordan: Yeah. It was not abstract. It was very real. It was, “How is […] from Native Deodorant going to react to this exact email that we’re about to send?” We’ve gotten to know these people over time. We worked for them in a long time. How is this specific person at this company going to take this? Are they going to go write to the Facebook page? Are they going to email us? Are they going to ask us for clarification? Are they going to want to get on the call?
Everything in that communication was based around real reactions. It was a lot of, “We’re here to talk about this. Here’s a Calend.ly link to set up a call with somebody if you want to talk about it.” It was thought through that way.
Rob: That’s the power of being a founder or a CEO who’s in touch with your customer base. Even at several million ARR and at 25-30 employees, you still know a bunch of customers by name. Not only do you know them by name, you know how they’re probably going to react to an email. You think it through deep. The best founders, best CEO that I see doing this, doing hard things and not pissing their customer base off, are the ones who are in touch with them. That’s a big key to this.
Jordan: Yeah and that’s gotten harder. I would say that it shifted away from my responsibility being super aware with these specific merchants, their personalities and relationships, and more just understanding that that’s important. And then, looking at my success team and saying, “Okay. Let’s think about these people. What’s your opinion on how’s this person is going to react?” Just knowing that that is a key thing to keep in mind is now more important than actually knowing and understanding the relationships themselves.
The conversations we’re having internally here is I’m asking my leadership, the people who are in these communications, in these difficult email threads of, “Does this make sense?” “Should I leave?” “You guys are being greedy.” These really difficult email conversations. What I have to do is I have to ask them to put two hats on. “Here’s your empathy hat for when you’re talking to people and we wanted the right thing by them.”
Then, I’m also going to ask you to switch hats, come to the conference room with me, and look at the spreadsheet that says, “When we make these changes, if 30% of our customers leave, and that still results to adding $100,000 to MRR, can you acknowledge that? Do you think 30% of our customers are really going to leave?” The answer is no. Can you carry both those things at the same time? Can you be very empathetic to people and make sure we’re doing right by them?
At the same time, acknowledging if someone leaves, we have to be able to accept that because the math will work out for us. That sets us up to be a healthier company, hire the people we need, and then get a bigger office that we need. We have to have that as part of the goal. It’s not just about what the customers want. It’s also about our business. It’s both together.
Rob: And that makes a lot of sense. That’s a big reason that you did have success with this. What’s next?
Jordan: That’s really the pricing change. Our existing customers, we had to communicate with them. That’s not done, but it’s going in the right direction. Now, the bigger change is the process. Making the switch from self-serve free trials to an application process with demos was the harder call. That was the scarier thing because we started getting good, we started getting to the hundreds of free trials every month. Then, you’re taking that flow of potential revenue and you literally just shut it down 100%. We took a faucet that was all the way opened and we closed it all the way. Now, people could not create a free trial unless we sent them a link to create a free trial. We shut the faucet all the way down.
We went from hundreds of free trials a month to a few dozen. That’s where it got scary because if you think about the nature of churn, it carries on for a few months. If we have this messy washing machine of merchants that don’t fit and only pay for one or two or three months, then they leave, when you shut down free trials, you are now going to hurt yourself both ways. You’re not going to be getting new customers and the customers from the past 90 days are still going to be churning.
It was like, “Alright guys, our revenue is about to go down. Everyone be okay with it. We’re going to keep calm. We’ve had this amazing run of growth. Everything’s going up. Now, we are purposely just going to chop off 10%-50% of our revenue over a 90 day span and we’re just going to be okay with that.” That expectation setting was super important so nobody freak out because I saw what was going to happen. We’re going to go from a few hundred to a few dozen and then the churn is going to continue on.
Rob: That’s really important to point out that, (a) you called that out to your team in advance, but (b) most people who have never run an app, where you have big waves of customers coming in and a lot of trials, if you shut that off, it’s exactly what you said. It’s like this huge wave. The churn is going to crash but it never crashes because your trials bolster it. It just keeps going up, and up, and up. But the moment I’ve had a couple apps where we had hiccups, whether it was suddenly Google downgraded us, the ads stopped working, whatever it is, our trials plummeted.
It wasn’t just, “Oh. We didn’t grow that month because we didn’t have as many trials.” It is devastating because oftentimes, your first 60 or first 90 day churn is way, way higher than your 90 day to infinity day churn. That’s the part that just crashes. If you don’t keep that constant influx top of funnel, it can be devastating. Like you said, 10%-15%, 20%-30%, I’ve seen with smaller apps. It’s painful if you’re not aware, if you don’t look at the math in advance.
Jordan: Yes. This […] back to what you’ve mentioned a few minutes ago, where I should be happy because things are going well. I knew internally that this is what was happening, that the trials were just keeping it afloat. The trial’s just kept overwhelming the churn. If anything happened at all to the trials coming in, then we’ll be exposed. Making this move was like, “Let’s do that on our terms instead of someone else’s terms.”
It’s also why we did it in the middle of the year, July 1st, literally right in the middle of the year, well in advance of the holidays so that we would have our act together now. That’s what happened. We completely stopped free trials and the churn kept going for 90 days. That hurt, but the benefits were amazing and immediate.
July 1st comes in and we just shut it down. You can’t see a free trial on our site. It’s apply for a demo. That terminology was super important to me. It was not “request” a demo, it was “apply.” It was a position of power. This is really good. You’ve heard about it. You’ve heard about the success people have with it. If you want it, you need to apply. We soft pedaled it on the site.
We’re not like, “Apply here to see if you’re good enough for us.” That sucks. That’s not good positioning. It was really, “Apply to see if we’re a fit.” People are like, “That’s […]. You’re basically just saying that we’re not good enough if you only want to work with successful merchants. We’re up and coming. You don’t want to work with us because we’re not big enough. That’s not cool.” In reality, it was much closer to, “Let’s make sure we’re a fit.” Think about all the things we’ve been talking about. It’s not just, “Do you make enough money?”
I read Lincoln Murphy’s blog post about qualification. He had a great write-up about the different types of qualification, where it’s strategic, cultural, financial, all these different things that are in line. We have some merchants that makes $1,000,000 a month, but we absolutely cannot stand working with them. That has now become a factor in the qualification.
Now, we have an actual pipeline. That sales process that was happening inside the product and a few interactions with support is now happening with people, with an application that people fill out, then every morning the success team comes in and either denies or accepts the application. Right now, we’re denying roughly 50% of the applications. We’re just saying, “It does not make sense for you to work with us. Here’s a link to our competitor that might make more sense for you.” We literally linked to the competitor in that rejection email.
Rob: That’s crazy. It’s such an unorthodox approach. It’s the Velvet Rope Policy. It’s just letting in exactly who you want. As we’ve said, it’s a luxury. Most apps needs all the trials they can get. You hit a certain point where that made sense, but I do think that more companies should think about doing this once they hit that point.
Jordan: When I spoke to other founders about this, I got the sense that people were like, “Can you do that? Is that okay?” To me it felt like, “That’s what I think we should do. It felt very strange to be like a slave to the fact that people want to use it, therefore we have no choice but to let them. What? That doesn’t make sense.”
Rob: I’ll tell you what, it’s way better to do it upfront than to let people in. Whether it’s just people aren’t qualified or they’re the toxic types of customers that you can identify pretty early on that you’re like, “Oh boy. This person’s never going to be happy with anything. They’re just going to rag on my staff the whole time. They’re going to Twitter the moment we don’t answer their email in four minutes.” If you can get them upfront, identify them that way, and not have to fire customers who’ve been with you for two or three months who are a pain in the ass (which all of us have to do, it sucks), for that alone, this is pretty valuable.
Jordan: Yes. We call them category four. We have category one, the best of the best direct-to-consumer brands that we recognize. We’d love to work with them, absolutely get them in, let’s give them the white-glove treatment. We have a category two that are a good fit. We have category three that are not quite there yet, it’s on the bubble. It’s the success team’s call whether or not they should come in or not. And we have category four that are jerks. It doesn’t matter how much revenue they make. If they’re just going to make us miserable, they just don’t get in.
Rob: Yeah. Isn’t that a hurricane category one?
Jordan: Yes. Think about what this has done internally. A few things that it has done. First is establish an actual sales pipeline that we can optimize. What we did there is first, we took a stab at what we think the pipeline actually looks like. Think about the different stages. We get a demo whether they get approved. They get the link to set-up a time to talk. Then, they get the link to sign up after that. Then, they create a free trial. Then, they’re launched and have a processed revenue. And then, they’re into the conversion piece of it.
Before, we didn’t have those steps. It was just a free trial and then hope the product does its job. Now, what we did is we set up the pipeline and those steps. We have in HubSpot, but I got a good recommendation from someone (I can’t remember exactly who) to put it up on the wall. I’ve got a bunch of index cards, we’ve got a bunch of markers, and we’ve got these tacky stuff that sticks to the wall. We created the categories as columns on our wall. Each prospect got an index card with their name on it and we would physically move the index card from stage to stage. It was just mimicking HubSpot. You would move in the HubSpot, you’d go to the wall, and you’d move it from one column to the next.
What that did is it showed the entire company in visual, physical format, what was happening with our sales pipeline, instead of just, “I don’t know. We have a few hundred trials.” The second thing it did is it was a dead obvious way to see where the friction was. The friction is the columns that have the most people, pretty simple. What it tells us is that stage in the pipeline is where we have a lot of friction, and that’s where we need to get the communications and marketing teams to create content.
Now, what does the success team need in order to help merchants get from that column to the next column and then start creating content, videos, support docs, to help people through that, so that the success team could provide those and the merchants can also get on their own?
We did it for three months or so. We’ve since taken it down. It’s no longer useful as it was in the beginning. At first, we made the switch. It just had this amazing impact. I have a bell on my desk. When someone became a paying customer, I would hit the bell. It was like this visceral experience for people. We’re not a company that just answers emails. We’re doing something specific. We’re finding people, identifying who the right people are, moving through this pipeline, and getting them to success.
Rob: I love that idea, the visual nature of it. Just seeing cards, it must be obvious visually and just be an amazing queue for you guys. That’s really cool.
Jordan: Yeah. They were just a very large vertical stack of prospects that didn’t go from, let’s say, approved but didn’t schedule the actual appointment to do the demo. Okay, we need to be better at that. An obvious one was also like they’ve created a trial, but they’re not processing revenue yet. They need to get over the hump of actually using the product.
One thing I did mentioned earlier on the pricing is that not only did we remove self-served free trials but we removed free trials entirely. We asked for the first $500 upfront at the time of sign-up that we have a 30-day money back guarantee instead of the free trial. It’s all toward the same type of positioning of, “Let’s make sure that you’re a good fit. Once we know that you’re a good fit, then you commit to us. We’re committing to you. You commit to us. Let’s do this together.”
Rob: Yeah. When you look at large, enterprise companies, let’s say HubSpot or Salesforce or something, they get a bad rap for being enterprises. They’re a pain in the ass to deal with, they’re too expensive, and their sales process sucks. You’re moving somewhere between self-serve and what they do. It sounds like there is less friction. Is your pricing public on your website?
Jordan: Yes, it is.
Rob: So the pricing’s public, that’s a difference. They tend to hide it behind a thing, then it’s a negotiation, blah-blah-blah. The difference is there. You put up the velvet rope. You’ve gone upmarket. They’re typically not free trials with these really expensive enterprise plans. It typically all annual. I don’t think you’re there yet, but my guess is you’ll be moving there because there’s a lot of reasons to do that. Both predictability with the merchant but also predictability for you. You are taking that step towards the upmarket playbook, right?
Jordan: Yeah. The results, if you think about internally, going from hundreds of free trials to a few dozen, what we’ve been able to do is give love to the right merchants. We’ve told our support team, “Guys, we’re no longer doing things. It’s not about crushing tickets. You could take your time. You can spend 45 minutes on an email as long as on the other end the person goes, ‘Wow. That was everything I needed and you took your time. I feel great about it.’”
The fewer, more qualified merchants is the theme. We’re much common internally. Our support staff finish things up by 11, then they’re doing support docs, they’re helping testing on the product team, and everyone’s happier. People who are jerks, no one feels the need to like, “Hey, I guess I can’t turn down money because it’s not my business.” Now, they’re empowered. If this person sucks, tell them to get lost. People are more empowered. They’re happier. Our monthly churn went from 12%. It continued on for those few months. Five or so months later, we’re at 5% monthly churn.
Rob: Oh, man. Wow. That’s crazy. That’s such a testament. On the podcast and in the whole MicroConf community, what’s funny is before we started talking about this, let’s say in 2010, there wasn’t just this common knowledge on a lot of things that we talked about. Lower price products have higher churn. The customers are more of a pain in the ass. We all know that now. You know that if you’re selling a $10 product, everybody’s price sensitive. Your churn is through the roof. They want all the features. It’s just known now.
Then, there’s the next step up of $50 price point average revenue per customer or $100 average revenue per customer. You guys were at such a high volume that even those numbers didn’t make sense anymore. It just didn’t make sense to service them because they were such a small portion. They were huge portion in your customer base, in your trial base, very small portion of your actual revenue. Now, we can only bother or we should only focus on $500 to $2000 a month average revenue per user.
That’s the step. It’s obviously very deliberate and I’m just struck by the impact. It’s not one thing. It rippled through the entire business in mostly positive ways, it sounds like. The fact that you support people now have the ticket, the ticket volume is whatever it is, a tenth of what it used to be, is just phenomenal.
Jordan: Yeah. The way we look at it is that we really made a healthier company. The growth in 2019 was nothing nearly 3X of the previous year. But now, we’re in a position to grow in a much healthier way.
Going back to the faucet analogy, now that we’ve tightened it up all the way, fully controlled everything, now that we have our systems in place, we understand who the right matches are, the systems are better, the people are happier, now we can start to open up a little bit on our terms, and grow faster but in our way. An example is when someone’s a category three, they’re qualified but they’re not one or two, we send them a recorded version of the demo. Now, we can open that growth back up, but on our terms and under control. If we don’t like the way that’s going, we’re just going to shut that back down.
Rob: We talked a lot about the positives. Was there a major negative repercussions to this?
Jordan: Just finances.
Rob: That’s short-term.
Jordan: Yeah. The short-term financial hit that hurt is just a stressful thing. We did that with what I felt was enough money in the bank, that we wouldn’t get to the point where I felt like I have to go raise more money. I wanted to get through this in a way that we come out to the other side.
Really, if you think about all the way back, the decision to increase prices on existing customers and that kicking in January, what we really needed to do was just get through this six month period. The increased pricing on that GMV that is coming on the door already is going to overwhelm all of the negative impact of it. Then, we’ll be in a position where we are much more profitable and much happier at the same time. Just six months of pain but all towards putting ourselves to a good spot in 2020.
Rob: Yeah, and that’s playing long ball. You have a long-term mindset. You’re not churning and burning, “Oh, how can I maximize revenue now to raise the next round? Or have an exit?” or whatever it is. You’re thinking, “If I’m going to run this company for years, what is the healthiest company? What company do we all want to work for? What’s best really for the customers that are the best fit? What’s best?” The six months of pain, I’m sure, has sucked but you’re basically coming out on the other side of that. I hope January is truly an amazing month for you.
Jordan: Yeah. Thank you, man. I appreciate the ability to talk through the whole thing. I’m actually writing a blog post about this. I’ll let you know when that’s out.
Rob: Sounds cool.
Jordan: I know it’s all unique to each individual business, but the big lesson I hope people get from it is that you don’t have to play by what you think are established rules. You should do what you think is best for your business.
Rob: Love it. We will link up the price increase blog post that you talked about. I have that link right here. I googled Lincoln Murphy’s blog post about qualification and hopefully it’s the same one. We will also link that up. If you get your post published before this goes live, we can throw that in there as well.
If folks want to keep up with what you’re up to, they can go to @jordangal on Twitter and carthook.com is your app. Any other places they should keep their eye on?
Jordan: Yeah. I also do a podcast with my good friend, Brian Castle, called BootstrappedWeb. Those are the three places: Twitter, CartHook, and BootstrappedWeb.
Rob: Sounds great. Thanks again for coming on.
Jordan: My pleasure. Thank you.
Rob: Thanks again to Jordan for coming on the show. Also, I should call out episode 452 of this podcast. Just a few months ago, Jordan came on and answered listener questions with me. If you’re interested to hear more of his thought process, go back and listen to 452. You can hear his take on several listeners questions.
If you have a question for me or a future guest, leave me a voicemail at (888) 801-9690 or email email@example.com. As you know, our theme music is an excerpt from a song by MoOt. It’s called We’re Outta Control. It’s used under Creative Commons. You can subscribe to us in any pod catcher. Just search for “startups” and visit startupsfortherestofus.com if you want to see a transcript of each episode as well, to see show notes, and comments by other loyal Startups for the Rest of Us listeners. Leave a comment of your own if you want to give a thumbs up, your thoughts, constructive criticism, whatever it might be on any of the shows. Thank you for listening. I’ll see you next time.
In this episode of Startups For The Rest Of Us, Rob talks with Shai Schechter of RightMessage, about his amazing launch and then finding himself near bankruptcy and how he was able to right the ship.
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In this episode of Startups For The Rest Of Us, Rob interviews Ken Wallace, of MastermindJam, about his new project Nugget. Nugget is a subscription based product that sends you startup ideas on a monthly basis. Ken talks about the origins of Nugget, some of the negative and positive feedback he got pre-launch, as well as his launch strategies.
Items mentioned in this episode:
Rob [00:00]: Before we roll this episode of ‘Startups for the Rest of Us,’ you may have heard that my startup DRIP was acquired by Leadpages in the last week. And if you tuned into this episode to hear Mike and I discuss it, unfortunately Mike was on vacation this week. So this week is an interview with Ken Wallace. I think you’ll really enjoy it. But be sure to tune in next week and possibly for several weeks after, where I expect there will be a lot of discussion about the acquisition, the thought process. There was so much that went into it. It was months and months of conversation. In addition, we’ll be talking about the mental side of this, the psychological side, over on my other podcast ZenFounder at Zenfounder.com. So if you’re interested in hearing more about that, sit tight. That’ll be coming. But for now let’s dive into this week’s episode. In this episode of ‘Startups for the Rest of Us,’ I talk with Ken Wallace about how to charge for startup ideas. This is ‘Startups for the Rest of Us’ episode 297.
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 built your first product or you’re just thinking about it. I’m Rob.
Ken [01:14]: And I’m Ken.
Rob [01:15]: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. Mr. Ken Wallace, welcome to the show.
Ken [01:20]: Thanks for having me. This is amazing.
Rob [01:22]: Yeah, it’s awesome to have you here. So for folks who don’t know you, you’re probably best known for starting MastermindJam which has kind of the become the defacto recommended MicroConf and Startups for the Rest of Us service for finding other startup mastermind members. You’ve also been to several MicroConfs and you host The ‘Nights & Weekends’ podcast with our mutual friend Craig Hewitt.
Ken [01:44]: Correct. Yes. Sure. I’ve been to five MicroConfs actually.
Rob [01:47]: Indeed. Wow. Have they all been Vegas, or did you make it any of the others?
Ken [01:49]: All Vegas. Yeah.
Rob [01:50]: Cool. And you’re coming to us from Chicago, is that right?
Ken [01:53]: Yeah, the Chicago area. We actually live in northwest Indiana, so yeah. When I first started coming to MicroConfs, I was commuting the 90 minutes every day into downtown Chicago.
Rob [02:01]: And since then, you work from home now as well as with MastermindJam on the side?
Ken [02:04]: Yes. Correct. So full time working from home now, and MastermindJam. And then now Nugget.
Rob [02:10]: Indeed. And that’s what we’re here to talk about today. And the reason I wanted to have you on is I feel like there’s a lot of value in what you and Justin have put together in terms of doing something that may be counterintuitive to some of the common wisdom we hear about in blog posts. So when we were talking about this offline you said, “There’s common wisdom of like ideas aren’t worth anything, it’s all about execution.” And yet you’ve started Nugget, which is at Nugget.one. And so that’s Nugget.O-N-E. And, in essence, you are selling startup ideas. You’re selling access to new startup ideas.
Tell me about what you’re up to and kind of how you guys got here.
Ken [02:44]: Right. So, the selling access to startup ideas, we find that a lot of founders – a lot of entrepreneurs – seem to get stuck in a step. All entrepreneurs, I think, we have in common the knack of looking around the world and seeing a world of abundance, and seeing ideas everywhere we look. And the problem is how to pick one, how to validate one. And a lot of times entrepreneurs – especially tech founders -will pick one that feels interesting or feels close to home, but they don’t pick one that actually has a waiting customer on the other end that is willing to pay them money. So, what we do is we source ideas that are definitely from a person who is willing to pay money today to have this problem solved. And then we send those out to the paying audience. So what you get in addition to the actual business idea, you get a person that says, “I am dying to pay for this. I would 100% pay for this, or pay for it out of my own pocket if we could have access to software that did X, Y and Z to solve this pain point.” But then we also give you a community to help you execute on that idea and to clear the next hurdles that come up.
So, back to how we started. Justin Vincent – you might know him from the Techzing podcast – he approached me a few weeks ago asking if I was willing to help him out with Nugget. And he had kicked around a few other name ideas for this. But the point was one business idea every single day, and find a way to monetize it and find a way to really help entrepreneurs through this. Now Justin and I have kind of been – he’s been helping me out just kind of as a mentor maybe or a mastermind of two where we just kick around ideas for how to grow MastermindJam, and also kick around ideas for what was going to be his next business since he had a successful exit from Pluggio. And so, we’ve been talking for months. We met on another discussion forum, Discuss @ Bootstrapped.fm, where he posted an idea saying, “Hey, wouldn’t it be great if there was a service out there that matched people to mastermind groups.” And at that time I was maybe eight months into MastermindJam, so the sphincter tightens a little bit and you’re like, “Uh, oh. Competitor.” I was looking at him as not only a competitor, but he had just had a successful exit, he’s got time on his hands, he’s got some money in the bank, he’s going to eat my lunch. Like right away. So I reached out to him immediately, and I knew a lot about Justin from listening to Techzing and listening to some ‘Startups for the Rest of Us.’ The two podcasts have kind of had a good relationship for a long time. And then so we just kind of developed a friendship from there. Basically, I reached out to a potential competitor, I opened the kimono, I showed him exactly how MastermindJam worked, what the business was like, what the challenges were, what the hurdles were, what the vision was. And he said, “I love it. I love that business for you. And I don’t love it for me. So what else can I do?” And from that point forward, we were just helping each other out to find a good business fit for him. And he helped me out tremendously for MastermindJam pricing or for different business model questions. So that’s how we kind of became friends.
Rob [05:24]: Very cool. And for those listening, there might be MastermindJam customers or people who’ve considered using your service. And you wanted to be very clear that you are not shutting MastermindJam down and that you’re basically pursuing both ideas at once.
Ken [05:38]: Yeah, that’s correct. MastermindJam is really at a point where it’s largely automated. So all the processes that match people into groups just happens automatically. You sign up, you get it put in the queue and, based on your answers to the onboarding questionnaire, the computer algorithm basically does the rest. Really I only need to step in every week if there’s a problem with that, where maybe somebody’s answered questions in a really restrictive fashion so that the computer can’t really find them a match in a timely fashion. Or if there’s something going awry in a group and members need me to step in and help out. That’s really what I do for MastermindJam. So, on an ongoing basis, I had a few extra hours every week to help Justin out with this. So, yeah. MastermindJam can keep doing that, can keep growing. There’s still some things I’m going to do to help with marketing for that because as the MastermindJam business is, it’s almost like a marketplace where you need a certain traffic of people to make the thing work in a timely fashion. So, I still need to market that to make sure it’s viable for the people that sign up.
Rob [06:34]: For sure. Yeah, and like your – You know the headline on Nugget is, it’s changing but it says, “Receive a new business idea in your email inbox every single day. Receive a shiny business idea, receive a fresh business idea.” And so the idea is that you guys are, essentially, sourcing business ideas. And are they limited? Are they mostly, let’s say, like SaaS business ideas? Or are they software-based business ideas? Are they B2B, B2C? Is it filterable, or have you just focused on a single line, like a vertical?
Ken [07:01]: They are all over the map. The ideas are all something that can be approached with an online business. So it’s SaaS, or it’s like an ecommerce site. You know, something of that nature. Something that can be focused on online, and marketed online, and the perspective customers can be reached online. Those are really the only requirements to get through our gauntlet. The ideas range from an app to help parents find video games and mobile apps for special needs children. That was the one that just went out this morning. We had a food truck owner requested an app to help him locate where the upcoming events are in my community, “Where I can go to find foot traffic for the food truck.” These are all kind of like software ideas. There’s some biotech ideas, there’s some healthcare ideas, there’s some eBay auction tools, there’s some Amazon FBA reseller tools to help them track cost-of-goods-sold in their FBA inventory. Really, from day to day, all over the map.
Rob [07:55]: Cool. So you’re offering these business ideas and you guys have been live for how long?
Ken [07:59]: We went live last Monday morning at midnight.
Rob [08:02]: Okay. So you’ve been live for about a week and a half and your launch was –
Ken [08:05]: Yeah, June 28th, 27th.
Rob [08:06]: Yeah. And your launch was pretty good. I know both of you guys but I didn’t hear about it from you that you launched. I heard about it from the broader entrepreneur startup community. You were on Product Hunt I knew. You said you got on Ask Hacker News. There was something else. Tell us the story of like how that came about, and was this a carefully kind of calculated launch? You and Justin got together and said, “We’re going to kind of hack this and submit it to all these places”? Or did you stumble upon these thousands of visitors that you received on your launch day?
Ken [08:33]: About three weeks ago Justin and I got serious about this and we’re like, “You know what, let’s move forward with this. I think we can maybe make this work. The only way to find out is just to get it in front of customers and see what happens.” Justin and I both are in a situation where we both have day jobs and a family and a limited number of hours we can devote to this. So it kind of dragged on for about a week and a half. And I think I was the bigger hurdle. Justin could devote more time to it than I could. But the problem was I was the tech guy. So he kept waiting on me to get the site up, and get the messaging out.
In that process of getting all the landing pages up, and the logo on things, and trying to choose a tool to use as our membership site and our discussion forum. In discussions Justin had with his Techzing cohost, Jason Roberts, and also Jason and Justin’s friend Phil – who is also on their show once in a while – they were adamantly against the name Nugget. So they pulled Justin aside and just grilled him for about an hour on why Nugget was a horrible idea moving forward, there’s a lot of upside to changing the name. And so, they kind of – three quarters of the way – convinced Justin that we needed to change the name. So Justin got on slack with me, and this was here about maybe ten days ago now. He said, “Look, we’ve got to change this name. Jason and Phil cornered me, and they really want us to change the name and here’s all the arguments why.” And I’m like, “Look man, you’re in charge of the branding and a creative. I’ll go with it. I don’t think it’s a good idea. I think it’s a waste of our time. I don’t think our audience really cares about the name right now. I think they really care about solving those hurdles in their business. So, if we’re going to change the name let’s do it. Let’s make the decision tonight and let’s just get it done.” And then we spent many evenings in a row just trying to get everything transitioned over to the new name, the new logo; we’ll leave the placeholder on the old site so if somebody happened there they get redirected gracefully to explain the move. In the middle of all this, Nugget.one is still up collecting waiting list signups. In the middle of all this, somebody mentioned us on Ask Hacker News. And suddenly we have all this traffic, now, coming to the site.
So, previously it was six or seven hits a day, which were mostly Justin and I. And then suddenly we have 50, 60 people hitting us that hour. And I’m looking at the Google analytics thinking, “Wait a minute. Why is the meter pegged? Why are we getting so much traffic?” You track it back and it’s this thread on Hacker News. So I said, “Justin, we’ve got to stop and rethink about this. You can’t switch horses midstream like this. We’ve got this streamer traffic coming in and it would just be confusing to everybody; confusing to the people coming over, confusing to the original person that posted us. We need to rethink this. Maybe if this is a name change that has to happen, we do it later in a more organized fashion. But right now, this is like switching midstream. This is changing your name in the middle of your Super Bowl ad.” is the analogy I used. And so he’s like, “Fine. Fine. Let’s leave it as Nugget.”
Well, the problem with that is we had transitioned so much over. Now it’s, “Okay, put everything back to Nugget.” So we’re just wasting so much time on thinking about the name. So we finally get everything back, we’re going through the motions of doing all the testing that you do before a launch, and we didn’t really have a solid launch date in mind other than he and I were just kind of tired of not being live. We’ve got a lot of people that are signing up on our really simple landing page and we just wanted to know, we’re dying to know, how many of those people were willing to put a credit card down. We hadn’t asked them for money yet. A lot of people are always willing to sign up for Beta, but it doesn’t really matter until you ask them for money. So about 11:30, midnight on Sunday night, I sent out an email to a few people saying, “Hey, can you just double check, make sure the language is good, make sure there’s no bugs in your browser, that kind of thing.” Well, one of the people that I emailed with was Haydn Shaw. And Haydn shoots me an email back saying, “Hey, this looks great. It’s really interesting. Want me to post this on [Product Hunt?] for you?” And it’s just one of those moments where you’d really like to say no. It’s like in the pit of your stomach it’s like, “Uh, I don’t know if we’re ready for that.” But it’s like, “Yeah, go ahead. We would really appreciate that.”
The problem with that was at this point I still don’t know any details. I don’t know when he’s going to push it live, I don’t know. Is he going to do it right then? Is he going to do it Tuesday or tomorrow morning? I had no clue. So, the next morning – Monday morning at 8 a.m. – I get an email from Haydn, “Hey, I just put it on Product Hunt. You’re going to want to jump in there right away and start answering questions.” So, suddenly we go from, I think, up to that point in a week of having just the trial page up we had 180 people sign up for just the waiting list. Suddenly, that day 4.5 thousand people visited the site.
Rob [12:53]: That’s awesome.
Ken [12:54]: It was just off the charts. And suddenly, I had to actually turn off the stripe notifications because it was distracting. I would actually stop and try to look up the customer and just find out details about who could this possibly be. It was just distracting throughout my day job business day. So it was a good problem to have.
Rob [13:10]: It always is. The day that you turn off the trial notifications and the new sign up notifications. Awesome. Cool. So had you guys done any prior validation to this? I know that Justin had emailed me several months ago he asked my opinion and for some thoughts on it and I think he had a mockup of a PDF or something. But is that what you had done? You had emailed several people?
Ken [13:29]: Um-hmm.
Rob [13:29]: Did you have validation that like, “Yeah, you should move forward with this.” And got to the point where this launch started? I mean, we’re kind of working backwards at this point, but –
Ken [13:36]: He sent out a lot of emails like that and so did I. I talked to Craig on my podcast about it. Craig hated the idea [laughter]. I talked to the people of my Mastermind group about it. They loved the idea. I got a lot of mixed messages. And at the end of the day, we got enough positive signals that we thought it’s kind of like where there’s smoke there’s fire. And that’s what caused us to put up the initial landing page. It was a one-pager: “Here’s what we’re going to do, we’re going to send you this every day.” There really was no talk of a community. There was no talk of any other add-ons. It’s just like, “At some point we’re going to ask you for money, but here sign up for this.” And 80 people did. So that just kept giving us good vibes that this at the core there was something there that people wanted.
Rob [14:14]: Yeah, to get 180 that quickly it tells you that somethings going on here. Whether everybody’s going to be willing to pay for it or not is another thing. But at least you have some validation that there’s interest here. So you guys have had a lot of conversation about the business model, I suppose. I guess it’s always been – since I’ve heard about it – it’s been a monthly subscription. I know that you probably started at a low price and have moved it up. Did you give it to anybody for free, or has it always been a paying service? Talk about how you guys thought about that and what levels you’ve been at and whether that’s worked or not.
Ken [14:41]: Right after the initial landing page went up, I saw Paul Jarvis and Jason Zook launch emojibombs.com. And it was kind of a similar idea where – I can’t remember if it was daily or weekly – but they send you basically emoji that’s been personified into a character. And they send it to you in an email at $11 a year. You just click “Buy Now” for $11 a year we’ll send this thing to you. And I know the PDF he probably sent you is a lot more complicated than just this simple one-pager, “click here to buy”. So he was like, “You know, just to validate that this is right let’s put up that landing page.” So that was kind of like the start of our talks. It’s like, well if people are willing to pay $11 a year just to have something fun, would people pay $11 a month to get an actual business idea that’s actionable, and that they can actually take it and run with it; that’s been vetted and analyzed. Would they actually pay $11 a month for that? And so we sent that around to a few people. Like, for instance, [Greg Polumbo?]. He got back to me. He said, “Look, the idea is interesting. But at $11 a month do I believe that you’ve got a business idea in there that could potentially earn me five or six figures every month?” He’s like, “No, $11 feels amateurish for what you say your offer is.” And I’m like that’s interesting. So people really do attribute the potential value of the product – even before seeing it – from the price. And Justin and I know how much time we’re putting into analyzing these business ideas, but we can’t also charge for that time. So, it’s not like a one for one. This is a $1000 idea so here, pay us $1000. So we just settled on let’s start at $49 and we can test up from there. And for a few people on our trial-to-paid conversion list we can actually test coupons or discounts if we need to if that proves to be too high.
So before the launch day – “launch day” because it was all kind of unplanned – the business model changed a lot. So initially, for the first day that we had the trial landing page up, we said, “This is free right now, but it’s eventually going to be $11 a month.” And to those people – the ones that signed up – we offer it for that, because that’s the deal they saw. So we’re willing to grandfather them in at $11. But we quickly took down that offer and took away any mention of price just so we could see if we could communicate with people on the side and see what price points they’re willing to go to; $25 a month, $49 a month, is this a $100 idea? The problem is you get a lot of confusing feedback from people. You talk to my podcast cohost and he figured, “I don’t want to pay monthly for this. Because if your business is good that means I’m going to churn after two or three months. But if your business is bad, and after three months and I’m still paying this monthly fee and I haven’t found a business idea, I’ve got to ask myself why am I still paying. Because your goal is to give me business ideas.” So this is all good feedback that we’ve been working through.
Rob [17:25]: Yeah. That makes sense. Pricing is really hard. My two cents is I think making this truly a monthly business is going to be tough, and that probably you’ll want to go with just an annual upfront or – I don’t like lifetime, but that’s the concept here. It’s that someone really is kind of just paying to have access to this for an extended period of time. It’s funny, I was talking at lunch with some folks and I said, “You know, SaaS providers, if you look at a lot of them, they’re trying to go towards annual and all the WordPress providers who do annual they’re trying to go towards monthly.” It’s like we’re all trying to go for what the other guy wants.
Ken [17:56]: Grass is always greener.
Rob [17:57]: All the annual guys with a one-time fee, they want more flat revenue, whereas the SaaS know that the flat revenue takes forever to grow so we try to go for the big upfront cash payment, which is the annual payment. So, I think in the end there’s pros and cons to both and my guess is trying to go for a higher price point, but perhaps not recurring or really infrequently recurring like annual, feels like a better fit than trying to pay monthly. Because your churn is going to be – the same reason everybody points out – if your service doesn’t work, they’re going to church. If it does work, they’re going to churn. You’re in the worst position there.
Ken [18:30]: This was an endless debate, because we feel that – equal to the value of the actual ideas – we feel that maybe the ideas are almost a hook to get you into the community to get you executing on the ideas. If that makes any sense.
Rob [18:41]: It does. And I think if you’re able to monetize either a community, or you’re able to add add-on services or if there’s anything else there –
Ken [18:48]: Exactly.
Rob [18:49]: – this could be killer lead gen. But you’ve got to get that stuff going.
Ken [18:52]: Yeah, come for the business idea, stay for the – It’s almost like a masterminder, the community that’s helping you accomplish your goals.
Rob [18:59]: And what’s funny is I was looking back. So Justin had emailed me May 9th, which was about two months ago, and he had sent a PDF of this. And I sent a few different responses and I said, “I think this idea might have legs the way you’ve presented it. It will have high churn but that doesn’t mean you shouldn’t do it, because if you can get it running you can start add-on services like landing pages and courses on building and launching and I think you should go for it.” And then I replied again and I said, “Oh, and by go for it I mean don’t write a line of code but get ten people to commit to paying you $50 a month for it. And then launch the damn thing manually and see how it goes.” And so, that’s kind of where you ended up. It’s kind of funny.
Ken [19:31]: Well, we had a long discussion about that too, because originally we thought, “What about $9.99, because nobody’s going to churn at $9.99 if you’re seeing business ideas coming through right. Because it’s kind of a fear of missing out kind of thing.” And it’s like Rob advocated $50 a month, so $11 is still more than $10. Your email kept pushing us higher up the value chain.
Rob [19:53]: Yeah, what a trip. I remember thinking about this and thinking the way that a lot of us would – gut feeling – we would want to make this cheap because you think, “Ah! Business ideas. They’re a dime a dozen.” But I think what you’re providing – from what I’ve heard. I haven’t used their service, but from what I’ve heard the vetting and kind of the depth that you’re going into with these ideas is far beyond just a two sentence summary of something in an email. And I think there’s a lot of value there. And even if you have one fifth of the customers, if you’re charging five times more I actually think you’re going to be better off, unless you really are going for a volume plan and doing up sales later. But if you’re going to make money from it, I feel like there’s value here. Speaking of that specifically, talk a little bit – like maybe one example of – what is included in these emails. Because when I heard – I think I heard you explain it on ‘Nights & Weekends’ – I was surprised and impressed with the level of detail that you’re going into and kind of the resources and the research and the other stuff that you’re including when you get this idea.
Ken [20:49]: Well, the one that went out just this morning I spent three hours on it. We give the industry it’s in – or the niche, whatever you want to call it – whether it’s B2C or B2B. We give you the original user – we call it the “user submission”, but you can think of it as a user story – the actual unedited “I really wish this pain were solved” text that we got from the potential customer. And then we go into our analysis, and we try to do kind of a who, what, and how with the analysis. So who is this target audience? Where do they hang out online? Are there ways to find them? Where are their forums? Where are their communities, Facebook groups, whatever? We look at the what. What is it they’re asking us to provide? Is this technologically feasible? Is this something that’s easily achieved or you need a huge funded team? Are you building Uber or are you building a new WordPress directory? What end of the spectrum is it on? And then we talk more about the how. We dive into the how of like you want to look at these competitors and these other technologies in this space. And so, we do kind of a really thorough kind of run-down of what questions you’re going to have before you would dive into even looking more into the business. Like, “Who are my potential customers?” How you’re going to achieve the technological hurdles that we describe. And then we have usually at least three or four – but the one last night had eight or nine – links of resources that was like must reading after you read this references from what we talked about.
Rob [22:05]: And so a question that might come up in someone’s mind is, so you’re sending these business ideas out and there are tens, hundreds or perhaps eventually thousands of people that are going to be getting these. Are they less valuable – or I would say they are less valuable if a bunch of people start them all at once. Do you have any mechanism to keep 20 people on your list from snatching one idea and running with it?
Ken [22:26]: This is one thing that we’re experimenting with. When we launched we had three pricing tiers. We had the free trial, then we had the middle tier which was the standard $49 a month or a yearly for $490, and we had the higher tier which is advanced access to Nugget. So you’d get the business opportunity seven days before anybody else saw it. That was $97 a month. We hit 2000 MRR in the first two days of launch because we had people signing up for all four of those paid plans. We validated that those numbers work, that people are willing to pay all four of those plans – the $49, $490, $97, $970. And so what we ended up doing was realizing we, at the time, didn’t have enough of these ideas in the queue to start giving people advanced access plus having the normal stream of people. And it was splitting our time in a way that we didn’t want to do. So we downgraded all the advanced access people to regular paying. So that totally adjusted the revenue curve right there. So everybody that signed up at $970 or paid for the year of advanced, they got downgraded to the normal plan.
So right away we were in conversations with those people that signed up for advanced access. So now we know, this guy signed up, he wants to see all these ideas before anybody else. So you reach out to him. “Why is that? Why do you want to see these ideas?” For a lot of these people, they said, “I don’t care about the community. I don’t want anybody seeing an idea before I get to. I want the opportunity to skim your database of ideas, cherry pick the ones I want and have exclusive access to it.” Almost like on Getty images or istockphoto, you can have exclusive rights to an image. Same kind of deal. So we do have an audience that wants that. But on the other end of the spectrum we have an audience that doesn’t care as much about the ideas and they really are begging for the community, which leaves us kind of torn. For instance, before you and I got on the phone, Justin and I had a 40-minute call with a customer just to talk about that, because he was really excited about the community and kind of ho-hum about the ideas.
Rob [24:18]: What a trip. So you’re split there and I’m wondering – I mean, I’m intrigued by someone willing to pay for exclusive access, because could it be something where everybody pays $49 a month and that’s kind of the entry level and then you see how many views certain ideas have had – or all the ideas – it shows 50 people have viewed this idea. And if you want to buy exclusive access which basically removes if from the database from then on, you pay a one-time fee of however much. $50, $100, $200 depends. Is that something that’s been discussed?
Ken [24:50]: Yes. We’ve been not only discussing that anytime a customer comes at us saying, “Hey, you should do this.” we’re like, “Great. How much would you pay for that?”
Rob [24:56]: Yeah. Totally.
Ken [24:57]: Because here’s the stripe link. That kind of thing. We had one customer say, “You know, I like the idea but I wouldn’t pay more than $3 a month.” And it’s like, “Well, thanks anyway.” Another customer reached out and said, “You know, I like this idea but money’s tight right now. I couldn’t pay more than $15 or $17 a month.” And so we said, “Would you pay $20 and here’s a link? We’ll make that happen for you.” So those kinds of discussions have gone on. Customers have reached out and said, “I would definitely pay for exclusive access.” We’ve been in deep conversation with those particular customers of, what would that look like? What would the community see? Would they suddenly see this idea vanish from nowhere? There was four days of discussion and it’s just gone. What happens at that point? So we’ve really got to dig into that. But we are definitely toying with that.
Plus, there’s the advantage here that once we get a corpus of these nuggets – 30 days, 60 days, 1000 nuggets even – suddenly you can build really cool tools that help people analyze. Because before we put out the nuggets – I mean we have all these things in a database and we have facets of information about each idea. So, “Is the idea bootstrappable or not? Is it more of a funded suited thing? Is it B2C or B2B? Is this a marketplace? Is this idea really a marketplace? What industry is it in?” So somebody could log on and if we had a search tool to sell them exclusive access to, and say, “You know, I’m not interested in the daily feed, but if I could just search and see if you have any healthcare ideas that are bootstrappable with this tech, blah, blah, blah, and just look at what you have. And then maybe even set an alert; like email me when something like that shows up. I would pay a monthly fee for that.”
So we’ve had customers that are like, “Oh yeah. We would definitely sign up for that.” We’re so early right now we don’t have enough of these opportunities in the can to make that kind of a tool even worthwhile because you’re not going to log into a tool that has ten ideas in it. You want at least a thousand.
Rob [26:39]: Yeah. I have a question for you piggybacking on that. I guess it’s really two questions. I’ll break it into two pieces. One is: from where are you sourcing these ideas? And I understand that this is kind of your secret sauce. This is your Coca-Cola formula so you don’t have to tell me everything precisely, but how much are you talking about that?
Ken [27:00]: Justin told everybody on his podcast so I think I’m okay talking about it.
Rob [27:04]: Alright.
Ken [27:05]: When Craig asked me that question, I was all cagy about it on my podcast.
Rob [27:08]: I remember.
Ken [27:09]: I was listening to techzing and he’s telling everybody how it works. Right now, we’ve got a few channels in mind that we’re going to eventually be sourcing from a lot of different channels. Right now, just to get started, we’re using Mturk – Amazon’s Mechanical Turk.
Rob [27:22]: I knew it. When you didn’t reveal it on ‘Nights & Weekends’, I was thinking, “I bet they’re using Mechanical Turk in a very clever way.” The thing here is, you can tell us exactly how it’s done. It doesn’t matter, because I would never go to the lengths that you’re going to go to to find an idea and, yet, I would pay for ideas. You know what I’m saying?
Ken [27:39]: Yeah.
Rob [27:41]: It’s only going to be the people who are going to bitch and complain about your $7 a month price point that are going to go do it themselves. Anybody who is actually probably going to spend the time, and has at least a modicum of money, is not going to go through the process that you guys are doing today and that you’re going to get better at, right? If you do this for six months, you’re going to be way better than us even if you told us the whole approach to doing it.
Ken [28:02]: Yup. Mturk, I don’t know if you’ve used it, it’s kind of a hassle really. It’s not at all user friendly. And there are things that you can do through the API programmatically that you can’t do in their user interface. There’s a ton about Mturk that sucks. So we don’t want to be wholly reliant on that. Like, it was down for four days for no explanation, and it just came back up. But initially, when we first talked about this, just to see if it was feasible, Justin went on – it was like 7 a.m. on a Sunday – and for an hour he had this, they call it “”hits”, so he put the hit out and we were going to pay $1 for anybody who submits and idea to us. And then people, at 7 a.m., started submitting tons of ideas. That’s just how it begins. If we got this good a quality of ideas on a Sunday morning at 7 a.m., what would happen if we did this every day. So we’ve been testing what times a day that certain kind of people that have certain kinds of ideas that fit our audience are around answering these questions. So there’s a lot of learning that we’ve done on Mturk. But that’s right now how we’re getting the ideas. In the future, we can’t be wholly reliant on that but it’s doing good for now.
Rob [29:08]: Right. That makes sense.
Ken [29:09]: In fact, it’s given us more of a backlog than we can actually handle.
Rob [29:13]: Well, that was going to be probably my final question. The obvious question was when you’re talking about cranking out 30 ideas a month, 360-ish a year, you wonder – as an outsider – can they keep this up? Can the quality still be high? How many business ideas can someone possibly generate? And I guess what you’re saying is you’re not really generating them out of thin air. You’re using a massive distributed nervous system, essentially, of a lot of different brains.
Ken [29:40]:Yeah. Crowd sourcing.
Rob [29:41]: Cool. Well, sir, we’re at time. I really appreciate you coming on the show today. I feel like our listeners probably got a look into a couple things. One is how to cleverly use a third party service like Mechanical Turk to build a business on, which I think is cool. I always love ideas like that. And like another is that you guys have moved fairly quickly. I know it’s been weeks in between maybe the initial discussion, but I got an email from Justin less than two months ago and you guys launched within that period. And, as you said, got to 2000 MRR for a certain glimpse of time. And then, you’ve essentially gone against some conventional wisdom which says that business ideas aren’t worth anything. It’s all about execution. But you’re value adding is what it is. You’re not giving two or three sentence summaries, you’re giving this whole email with the research and like you said, you spent three hours on it and there can be value in that.
Ken [30:29]: Yes.
Rob [30:30]: Very cool. Well, if folks want to keep up with you, where should they look?
Ken [30:33]: You can go to Nugget.one. We are also on Twitter @_nuggetone. And also you can just email us at firstname.lastname@example.org.
Rob [30:41]: And if you want to hear more of the ongoing developments of this I would check out the ‘Nights & Weekends’ podcast with Ken Wallace and Craig Hewitt. Thank you very much, sir.
Ken [30:51]: Thank you. It’s been a joy.
Rob [30:54]: So, if you have a question for us you can call our voicemail number at 888-801-9690 or email us at email@example.com. Our theme music is an excerpt from ‘We’re Outta Control’ by MoOt. It’s used under creative comments. Subscribe to us on iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each episode.
Thanks for listening and we’ll see you next time.
In this episode of Startups For The Rest Of Us, Rob and Mike talk about back of the envelope business model test. This episode is loosely based on chapter 2 of the book, Scaling Lean: Mastering the Key Metrics for Startup Growth. Some of the points discussed include defining your minimum success criteria and converting revenue goals to customer acquisition.
Items mentioned in this episode:
Mike [00:00]: In this episode of ‘Startups for the Rest of Us,’ Rob and I are going to be talking about back of the envelope business model tests for revenue. This is ‘Startups for the Rest of Us,’ episode 294.
Welcome to ‘Startups for the Rest of Us,’ the podcast helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products; whether you’ve built your first product or you’re just thinking about it. I’m Mike.
Rob [00:25]: And I’m Rob.
Mike [00:26]: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. How you doing this week, Rob?
Rob [00:30]: I’m doing pretty good. I’m coming off a series of split tests that we’ve been running on the homepage of Drip. And actually Zack on my team took that over recently. And after I had run a couple split tests with – basically the normal result of a split test is that you’re not going to have an improvement. If you run ten split tests you’re going to get improvement on one or two that’s significant. And so, my split tests were just chugging along and just taking forever to run. And then the first one Zack runs, he made some more dramatic changes, he saw a 41 percent improvement in the click-throughs. And so now we’re taking it another step and we’re actually installing – something we should have done from the start – but we’re installing the pixels. So we actually know if it’s not just click-throughs but it’s actually leading to trial sign ups and that kind of stuff. But it was pretty cool to see that kind of jump because that’s definitely a notable percentage.
Mike [01:19]: Nice. Now that you’re doing that and when you go back, are you going to track everything through because obviously you have to have some sort of a benchmark, right?
Rob [01:25]: Yeah. We’re going to track it through. We didn’t talk today about whether we’re going to rerun the same test now that we have the revenue pixel in place, or if we’ll just use this as the new benchmark and start from there. But either way this stuffs always fun. I geek out on it because it’s like the engineer – this is engineering marketing. Nowadays it’s called growth hacking but this is what we’ve been doing for ten, 12 years, where it’s like applying the engineering mindset to marketing. Which isn’t something that was commonly done, or maybe it just wasn’t talked about very much, except for by direct response guys before a few years ago when kind of this growth hacking thing became popular.
Mike [02:03]: Cool. Well, I just recently kicked off my Twitter ads for Bluetick again. And I’m hoping that they aren’t completely messed up like they were the last time. I think that I talked about that a little bit on the podcast, where just before MicroConf I had put a bunch of new ads out there on Twitter and people were tweeting back to me and commenting to me like, “You’re doing it wrong”. And I was just like, “What ae you talking about?” And I didn’t really think to go back and look to see what it was. I just thought it was people trolling a little bit. I got enough of them that I went back and took a look at it and, of course, the Twitter lead cards were all screwed up and it was like people had to click on them and then click on them again. It was just messed up so I had to redo not the entire campaign, but at least different parts of it. Hopefully things will go well this time.
Rob [02:42]: Good luck with that. It’s always touch and go when you first start any type of ad campaign, especially if it’s not proven because you just have to monitor it really closely. Once you get to that point where you have something that’s working and you have history behind it and numbers behind it, it’s so much more – I don’t know, comforting. Or it’s just less nerve-wracking I guess when you start it up. Because you generally know the range that it’s going to fall into. But at the start, man, you can turn it on and be paying crazy click amounts or you can just get no impressions and not know why and stuffs always frustrating when you’re trying to figure it out.
Mike [03:11]: What happened before was I was getting lots and lots of impressions but very few click-through rates. So I wasn’t actually paying for very much, which on one hand that was nice, but on the other hand I just wasn’t seeing any sort of results that I was looking for and I just hadn’t had time to go look at it at the time. At least now I have a benchmark of what I should not be getting.
Rob [03:30]: For sure. Cool. So what are we talking about today?
Mike [03:32]: Today what we’re going to do is we’re going to go through back of the envelope business model tests. And this is loosely based on chapter two of a new book that just came out called Scaling Lean: Mastering the Key Metrics for Startup Growth. And this is by Ash Maurya. And he’s written a couple of other lean startup books or at least books that are in that particular realm or genre so to speak.
But what I wanted to do was go through chapter two specifically and take a look at what some of the different thoughts are from him about how to look at a business model and determine what the forward looking plateaus are going to look like. And you can use this either for an existing business or for a brand new business that you’re getting off the ground. Some of the calculations that he has in the book are especially relevant just because they greatly simplify what he calls ‘customer throughput,’ which is your customer acquisition. And it kind of measures that against your customer churn rate as well, on a yearly basis. So taking those two things into account, you can sort of look at where your business plateaus are going to be and figure out whether or not you’re going to be able to have enough of a customer acquisition channel or channels in place in order to be able to just maintain the business – whatever your revenue goals are for the business.
Rob [04:43]: And keep in mind that unless you’ve run a business before and you kind of have some loose rule of thumb numbers that you use, some of the stuff we talk about today is going to be less applicable if you have no business at this point. Because you’re just pulling numbers out of the sky and you’re going to find that you’re pretty far off. But if you’ve already started and you have at least a few thousand a month in revenue, you have some numbers and you know your kind of trial to paid, and you know how something should go, you can be much, much more accurate with these calculations because you just have a concept of where you are and where you need to get to. Realizing that the numbers will change but in much smaller increments than if you’re just kind of throwing darts at a dart board as you would if you really do have a business with no customers to date.
The other thing I wanted to mention is keep in mind with books like this that they are written for a broader startup audience. And so not everything – if you do go buy the book, which I’m guessing is pretty good – if you do go buy it you got to take some things with a grain of salt. And we’ll try to point some things out specifically with chapter two, here, that I think may apply more to bootstrappers or ways that these could be shifted to people who are self-funded rather than the examples of the ten million dollar ARR after three years. It’s like that’s just so irrelevant to our audience in particular. We’ll try to call that out as we go through.
Mike [05:55]: Let’s dive right in. And the first step of chapter two is to take a look at the business itself and define what you would consider to be the minimum success criteria. And as I said before, the business model that’s shown in here can be applicable to either an existing business or to a new business that you’re trying to get off the ground and you’re trying to figure out whether or not it’s going to be a viable business. Take a look about three years out and try to think about what the business looks like specifically in terms of revenue. Now those two different things are extremely important. The first one is that you’re looking no more than three years out. And the second one is that you’re looking specifically at a revenue dollar amount so that you can make some sort of calculations.
If you try and go out further than three years, you’re probably not going to be nearly as accurate. And in addition, if it’s a business you’re trying to get off the ground, three years, trying to look beyond that and plan beyond three years is not going to be helpful to you because the business may just not be there or you may have a really hard time getting the customers. So looking at those in a much shorter time period, essentially time boxing your problem so to speak, is going to be really helpful.
The other side of it is being able to take a look at a firm dollar amount. You can adjust that later on, but the idea here is that you want to have a dollar amount in terms of the yearly recurrent revenue that you want to shoot for, that you can base most of your other calculations on. And we’ll talk a little bit more about how you can play with the numbers to kind of reach that revenue target based on lifetime value, customer acquisition rate, how long those customers stick around, etcetera. But those are just the two basic things that you need to think about when you’re talking about the minimum success criteria.
Rob [07:24]: And I’ll admit, to even think about thinking three years out feels crazy to me. It feels very MBA to even be talking about 36 months out because so much is going to change after you launch. When I’m first starting a business I tend to look six months out and think what can we get there. And if we hit product market fit where can we be at 12 months. With that said, this exercise, by the time we get to the end of it, it gives you a cool formula that I’m impressed with. It’s a high level way of trying to find plateaus and figure out where the business is going to plateau based on lifetime value and based on how many customers you think you can pull in.
So there’s a give and a take here. I don’t love the idea of looking three years out because I just think that you’re going to be way off. Even with the business as consistent as Drip, if I looked three years out I’m going to be way off and I know the numbers like the back of my hand. Take that with a grain of salt and realize that if you are projecting out and you’re thinking I need 120k per year, and maybe you want that after the first 12 months and you want that to be you quitting your job. But then you want the business – you’re thinking you want it to go to maybe double in the next year, and then go to 360 of 500k, kind of in that range is ambitious but I’ll say it’s not impossible for a bootstrapper to get there. Those are the kind of numbers that you should probably be thinking about in terms of this exercise. Assuming that you’re not going to have funding at the start and then you’re not going to try and grow a seven, eight figure business super-fast in the style of Silicon Valley; that you’re going to build it like a real business and hire based on profit and that kind of stuff.
Mike [08:56]: The second step is to take that revenue goal that you came up with and convert it into what he calls customer throughput. And this is your customer acquisition rate over time. And there’s a number of different steps to doing this. And the first step of that is if you’re building a new product you have to come up with some sort pricing on it. And if you don’t know what your pricing is, the recommendation is to use some sort of value based pricing to estimate the base price. This is essentially pricing your solution on the value of what it provides, not on what it costs to build and deliver. So that’s a difference between the solution value to your customers versus the cost structure on the back end to you.
Something else that you might look at is using cost based pricing, which is essentially taking your costs to deliver the solution, and then adding a margin on top of that. There’s a lot of business models that fit this particular mold of a service based model of any kind; productized services. Those tend to fit that. But those tend to fit that particular type of model. But if you can get away with it, if you can provide some sort of a value based pricing, you’re much better off. And going back to what we said before, if you have an existing business in place, you already have your pricing. You can essentially just use that number.
Rob [10:02]: For SaaS, I’d say it goes without saying that you’re going to want to shoot for value based pricing. That’s just kind of the way it’s done. You look at the value you’re providing, figure out if there is any competitors that are doing similar things and you either price above them if you want to be premium, or you price similar to them if you just want to be a better product. And I think another example – you mentioned consulting and such of using cost based – another example of that is kind of metered pricing, like how Amazon EC2 does it. I’m sure that they just look at their costs and then add some kind of margin on it. So, I think for the purposes of bootstrappers and folks listening in this, value based is 99.9 percent going to be the direction you want to go.
Mike [10:39]: The second step is to calculate the total number of customers at the end of the time period that you want in order to identify what your active customer base needs to be in order to make your ends meet for the revenue target. So let’s say that your revenue target is $180,000 a year, if you’re charging $30 a month then you need 500 customers in order to be able to reach that revenue goal of $180,000. That’s the kind of calculation that you need to be able to do. And this is why it’s so important to come up with not just the time periods but also what you are selling your product for and what your average price point is going to be for your customers. Obviously, if you have different pricing tiers then you kind of have to guess a little bit. So if your pricing tiers are $50, $100, and then $200 a month, your average price might be something like $75 a month or $90 a month. It really depends on where in the pricing spectrum the largest number of your customers fall. And obviously it can go in the other direction, too. You might have an average price point of $175 even though you have a bunch of people on the $50 a month plan. So take those things into account, but you’re trying to get down to an average price point per customer, and a lifetime value.
Rob [11:48]: Lifetime value is very hard to calculate if you don’t have a product. I think we’ll come back to that point. If you really are spit balling this, you’re going to have to use some rules of thumb and you’ll be off by a factor of two or three. If you already have a product this is much each because then you should know this like the back of your hand.
Mike [12:03]: I think if you don’t have a product at all, then using benchmarks from other similar companies to get to an estimate or just using what their pricing models look like – again, going back to what Rob said about determining whether or not you want to be a premium priced product or commodity based product or something along those lines. Just use a conservative estimate if all else fails. If you’re really not sure, come up with some sort of a conservative estimate for most of these numbers.
Now that said, once you have the numbers for your lifetime value and for the yearly target that you’re trying to reach, the calculation that he offers up is to get your customer throughput. And to do that you would take your yearly revenue, divide it by the customer lifetime value. And this comes out to the number of customers per year that you need to add into your business in order to be able to maintain the business at that level, at that point in time. Now that’s not on day one. It’s not on the 12 months in. It’s at that multi-year mark that you came up with in the beginning. So the recommendation was three years, if you’re using three years. And for sake of an example let’s go through that. If you’re trying to get to $500,000 a year at year three and you have a $50 a month product with a two-year lifetime value, your lifetime value is very easy to calculate, it’s $1200 lifetime value. But your customer throughput is that $500,000 divided by your lifetime value. And that comes out to 417 new customers per year that you need to add.
Now again, this assumes that your business is at year three. And if you just look at the raw numbers of the customers who are paying you on a monthly basis, your business would need 833 active customers to get to 500k in yearly revenue. But if you also take a step back and you look at that lifetime value, you’re churning out 417 of these customers every year. Which means that at 500k a year you need to add 400 every single year in order to just maintain the business at that level. And this is really where those calculations start to come into play and you can start figuring out where your plateaus are if you’re going to hit them at that particular level.
Rob [14:00]: And when I first saw this calculation, which again is called customer throughput, and it’s your yearly revenue target. So, like Mike said, that 500k divided by your lifetime value. And when I saw that my first question was why are we dividing by lifetime value? Shouldn’t we be dividing by the annual revenue per customer? And as Mike and I batted this back and forth offline, and in fact this formula works, the one that he’s given works. And he’s doing some clever math and canceling some things out, but suffice to say we tweaked around with different lifetime values, different lifetimes and different monthly price points and in all of them the math works. So, what I like about this is it’s a high level thing. Don’t get me wrong, this is not something that you’re going to sit down on day one and it’s going to dictate everything about your business. But what I like about this is it’s pretty fast to calculate.
And based on when I’ve launched products, you have a general idea of what your price is going to be. You know it’s going to be maybe around 30 bucks, or around 50, or around 75. You know that your average revenue per year should kind of be that based on what you’re launching into. And then you can always take a guess at your lifetime. When in doubt go with 12 months. That’s kind of been my rule of thumb for people who are starting a new business. You’re going to start off way lower than that when you kick off because you’re not going to have product market fit, your customer lifetime’s going to be like four or five months. But as you improve it you’re eventually going to hit that one-year mark and move beyond it. So a one-year lifetime is reasonable, and a two year means you’re doing pretty well.
In certain spaces like, let’s say Web hosting, where people just don’t churn out nearly as much, you might have a four year LTV or even a five year LTV. And big enterprise software is also like that. Maybe a HubSpot or a Salesforce, those guys have these really long customer lifetime values. And with lower price point software, typically let’s say average revenue fees are 20 to 99 bucks a month. You’re just going to have higher churn, you always will. So you’re going to have between, let’s say a one and three-year customer lifetime. So it’s pretty easy to kind of run a couple different scenarios on this. If it’s 50 bucks a month and you’re doing one year, then it’s $600 lifetime. And if you’re doing three years then it’s $1800. And then you can pretty quickly get an idea of how many customers you’re going to need to bring in each year in order to replace the people that are leaving and to maintain that revenue level.
This is not a projection of where you’re going. That’s a whole separate conversation. To project where you’re going you want to sit down with an Excel spreadsheet and it’s a whole different set of numbers. But what this is telling you is where the business is going to plateau based on your customer acquisition. So if you see this number of 400 new customers per year, if you’re already in your business and you’re trying to grow this thing, it’s going to be pretty obvious to you whether or not you can bring in 417 new customers per year. Because you know your numbers. And you know your traffic sources. And you know your trial to paid. And you know how many trials you get based on unique visitors and you can pretty quickly see you’re either going to be above that or below it and where you’re going to plateau. That’s the fun part.
From here I would actually take this estimate – it is a higher level, more ballpark estimate – and I would dive into real numbers so to speak, of like your exact churn rate. Because I have a big Excel spreadsheet that I use to do this but anyone can put this together if you have your true trial to paid and your true visitor to trial and your true first 60-day churn and post 60-day churn. It’s just much more complicated though, and it’s going to take you a few hours to put together. And you’re going to see an exact projection. But the cool part is that this one that you can throw together in like five minutes is going to be within the ballpark. Close enough that it’s a nice first cut to give you an idea of where your business is going to plateau if you’re accurate enough with your churn and your lifetime value numbers. So this could be more useful when you’re first starting out if you do use those benchmarks of other existing businesses you might be competing against. If you can get any idea about their pricing and their churn and that kind of stuff this can give you an idea of how many customers you need to acquire right up front. And just give a sanity check on, “Boy, can I really bring in 4,000 customers a year if that’s what it takes to maintain that revenue level?” It just stands as a decent five-minute sanity check, I think.
Mike [17:47]: The other thing that I think that this is really helpful in showing you is that because you have that high level number of – whether it’s 400 or 4,000 new customers that you need to add per year – you can backtrack a little bit and say let me divide that by 12 and figure out how many new customers I need to add per month. And let’s say that if comes out to 100. If you’re only adding two customers a month or three customers a month right now, then you know that looking forward to that particular point in time that it’s probably going to be really challenging to find enough customer acquisition channels to get from two to a 100. So it does give you that ballpark sanity check that you may need in order to be able to determine whether or not this is a business that is going to take you to where you want to go. Or whether it is something that you should probably offload and go look for a different business or just try a completely different business to start with depending on whether or not it’s an existing business that you have or an idea that you’re trying out.
Let’s move on to the next step. Once you have this customer throughput number, then you can go back and take a look at revising some of your previous estimates. And the first one that you can obviously adjust is that high level revenue target. That’s probably the last one that you want to adjust but it’s the first one that shows up on the list because that’s the high level, big, hairy, audacious goal that you’re trying to reach. You can adjust that; you could up or down. Chances are probably good that based on your estimates it will most likely end up going down. But that is one option.
The other option is to take a look at the lifetime value and try and figure out whether or not there are ways to either increase the lifetime of the customer, which is going to raise your lifetime value. Or raise prices in such a way that it also raises the lifetime value. And those are essentially the two ways that you can adjust this number. It’s either adjust that revenue target or increase the lifetime value. And those are really your only two options available to you.
Rob [19:30]: And again, if you’re doing this on paper before you started a business it’s harder because you’re just guessing at the LTV. But if you are a year or even six months into a business, you’re going to have a reasonable idea of your LTV and probably some ideas about how to increase that, whether it’s by reducing churn or increasing prices.
Mike [19:47]: The one thing I do like about this particular piece of it though is that – even if you are at a pre-revenue stage and you’re trying to validate things – if you have to look at your lifetime value and ten X it or 20 X it, or raise prices by ten or 20X then chances are good it probably points to the fact that this may not be a viable business model at all for you. Obviously, there’s probably other costs and stuff that you’re going to take into account. But again, you want to be using conservative estimates to begin with. So if these numbers do not pan out on paper then they’re probably going to be significantly more difficult to make work in real life.
That kind of leads us to our takeaway. And that’s the first takeaway. If you can’t make this business model work on paper then you’re never going to be able to make it work in real life, barring some form of miracle in terms of doubling your LTV or quadrupling it. Because those things are going to be very difficult unless your initial estimates were way off. Which is possible, but you also have to take into account that when it comes to math like this, if you have a bunch of estimates – there’s various theorems out there that say if you have all these different estimates or a number of different data points – chances are really good that your final number, because it’s an average, it’s going to come out in an average range. It’s not going to be at one of the extremes.
Rob [20:59]: And to give you ballpark ideas about lifetime values, it ranges very broadly because if your churn is high and your price point’s low, you can pretty easily have lifetime values in the $100 range. Like if you’re charging, let’s say $9, $19, $29 a month, if those are your tiers, you’re probably going to have a lifetime value that’s between – assuming you don’t have just crazy churn – you’re going to be looking at around somewhere between 80 bucks and a 150 bucks because that’s just where lower prices apps tend to churn out more than higher priced apps. And getting something into that range, let’s say that the 150 to 250 range is harder to do than you might think.
Now with that said, if you’re able to build an app that businesses depend on and that they really are using as kind of a core piece of their business, you can pretty quickly jump that above $1000 to $2,000 is completely reasonable for a business or for a SaaS app that has a monthly fee. Maybe the tiers are 50, 100, 150 and even on up for enterprise. If you’re building something people are relying on and they’re sticking around for a couple years – two to three years – that quickly gives you a lifetime value in that $1000 to $3,000 range, let’s say.
And moving on up, of course, you get a Salesforce or a HubSpot of whatever, which have lifetime values of tens of thousands of dollars per customer. And some even into six figures. And that is because the price points are so high and because they lock them into annual contracts, and because their entire business if focused on it. And so that’s your real range.
But if you’re listening to this podcast and you’re just starting out, you’re probably going to want to think my LTV’s going to be between 50 and 100 bucks. 150 bucks once you know what you’re doing. But it’s going to start out really low. Unless I’d say if you’re a repeat entrepreneur and you kind of know more of what you’re doing, you’re going to be able to push it into the several hundred dollars and then potentially into the low thousands. These are kind of ballpark guesstimates based on all the apps that I’ve seen.
Mike [22:44]: Another key takeaway is that the calculation for the customer throughput is really heavily dependent upon the inputs and the outputs to the model. And those inputs and outputs help you to define what is and is not actionable. So when you’re taking a look at the lifetime value, for example, that’s one of the inputs into this. And you can take action on that. You can raise the lifetime value of the customer by either increasing prices or increasing the lifetime of the customer.
In terms of the outputs, the number of customers that you need to reach on a yearly basis, you do have influence over that, and it is dependent upon the types of marketing channels that you use, advertising, whether you’re doing some sort of affiliates or leveraging other people’s networks. A lot of those things you have some level of control over. But obviously the math itself has to work. If you can’t make those final numbers work for you based on the inputs and the output, then the business model itself is not going to work for you at that point in time.
Rob [23:36]: I think some other things to keep in mind are this type of calculation, it estimates the viability of a business. It doesn’t give you an exact answer but it does give you a ballpark sanity check on whether or not this thing’s going to fly. In addition, Ash points out that time-boxed goals are more concrete and thus better than kind of simple revenue goals of I want to get to 500,000. It’s like without it being time-boxed what does that mean? And that’s something that I’ve always liked. I look ahead, like I said, six to 12 months and have a spreadsheet that’s looking at that. Because without the timeframe, it has so much less meaning because you have no concept of how many customers you’re going to need and how low your churn’s going to need to be. And therefore, how many trials you’re going to need. And therefore, how much traffic you’re going to need. If you know one step to the next what the conversion rates are, you can just back calculate from a 12-month revenue goal, you can back calculate to exactly how many unique visitors you need per month in order to make that happen. And if you’re complex enough you can include things like churn and upsells and downsells, and upgrade revenue and downgrade revenue.
It gets complicated but the idea is that this calculation that we talked about is that first swipe at it to give you the sanity check, and then you can dig into it as you get numbers that are better and that are real once you’re into the business. And then you can start plugging those in and figuring out how to improve them and how close your original estimates really were.
Mike [24:56]: Now I don’t know if this is something that Ash covers in a different section in the book, but one thing I think that we should probably talk about is a little bit about the difference between something like this versus your growth targets and your growth goals and how to look at those. Because what this gives you is that back of the envelope test to say at such and such point in time what does the business have to look like, how many customers do I need to acquire and how many will be leaving at this particular time. But that can be heavily overshadowed by your growth or your current growth. So if you’re growing at a very fast clip right now, it can be very easy to be distracted and look kind of micro focused at the business itself right now; how it’s doing, how you’re acquiring customers, doing split testing on all these different things and onboarding customers, doing support. And not really think about this down the road because you’re so hyper focused on that three to six-month timeframe.
But if you don’t take a step back and look at something like this then you can easily run into a situation where your business essentially flip flops and you almost drive it into the ground because you’re not paying attention. You’re hiring ahead of the curve or ahead of the need because the business is growing so quickly and you don’t realize that 18 months, 36 months down the road you’re probably going to run into serious customer acquisition problems or business problems because your customer acquisition needs are going to become so high based on your lifetime values.
Rob [26:12]: That’s the key here. These are not growth targets we’re talking about. These are plateaus. This is a heads up about a potential plateau. And this is something you need to be looking ahead at constantly as a subscription business. We had Ruben Gamez from Bidsketch on 50 episodes ago, I guess, to talk about how to identify and overcome plateaus. And this is the biggest hurdle that I see new SaaS founders hitting is not looking ahead and projecting. Given my churn, given my average revenue per user where are we going to plateau and how do we get past that? And the answer can be add more trials into the funnel. Sometimes that’s what it is. Sometimes the answer is we know that our funnel has no optimization so it may be running a bunch of split tests because you should be, at that point when you’re projecting, that you should be at scale. And I don’t even mean big scale like venture capital scale, but even if you just have 10,000 uniques a month or something, you can start running some split tests or even just making improvements on conversions on the site.
So there are a bunch of different ways to do it, but the idea is that when you’re running this business you have to be thinking ahead and projecting when am I going to hit the next plateau? And that’s what this calculation is about rather than growth projections. That’s probably another episode entirely.
Mike [27:24]: Sure. And then once you’ve identified what those plateaus look like and where they are likely to occur, then you can backtrack to where you currently are, plug in your numbers into a growth model and say, “when do I think that I’m going to end up actually hitting that plateau?” Because the business model might say it’s two years out or three years out, but looking at where your business is right now, if you’re growth rate is much higher then you could very well hit it in 12 months. And you really want to be in a position where you are looking at how to adjust the lifetime value of your customers well in advance of that. As Rob said, if you’ve done all those optimizations and then there’s not really other ways to address that, then you can start looking at your lifetime values and say, “how can I keep customers on longer? Are there ways for me to raise my prices or offer additional services?” And what that will do is that will increase your lifetime value, which will essentially push out that plateau even further.
Rob [28:15]: That wraps us up for today. If you have a question for us call our voicemail number at 888-801-9690. Or email us at firstname.lastname@example.org. Our theme music is an excerpt from ‘We’re Outta Control,’ by MoOt. It’s used under Creative Commons. Subscribe to us in iTunes by searching for ‘startups,’ and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening and we’ll see you next time.
In this episode of Startups For The Rest Of Us, Rob and Mike make a list of 13 signs you should kill an idea you’re validating. These are different signals that can be negative to the idea actually working.
Items mentioned in this episode:
Mike [00:00:00]: In this episode of “Startups for the Rest of Us,” Rob and I are going to be talking about 13 signs you should kill an idea you’re validating. This is “Startups for the Rest of Us,” episode 262.
Mike [00:00:16]: 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 you first product or you’re just thinking about it. I’m Mike.
Rob [00:00:24]: And I’m Rob.
Mike [00:00:25]: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week, Rob?
Rob [00:00:29]: Well, I was just looking back at my 2015 goals, because it’s early November now, and so it’s kind of time for things to start winding down. I’m starting a new [?] what I would like my 2016 to look like. I’ll do a retreat around the end of the year, but so far, so good on the goals. There was a revenue goal for Drip that we passed a couple months ago. I hadn’t even realized it. I probably should’ve celebrated, and I definitely think I’m actually not great at is celebrating my victories. I tend to be happy for five minutes and then say, “All right. What’s next?” I actually think that one should celebrate them more, actually. I think it brings you – it just adds longevity to what you’re doing, because we all have a lot of downs. It’s like take the opportunity to have an up once in a while.
Mike [00:01:09]: Well, if you’re not celebrating those opportunities for where things are going well, then it can also be a long time between certain types of goals that you have, just because the nature of some of them is an extended time period. If the reward pattern is off a little bit, then it can be difficult for you to stay motivated to go after those goals.
Rob [00:01:27]: Yeah, that’s right. So, it was quite – I looked at a list. There were, like, four or five goals; and I think I achieved four of them. The fifth one was to write another book, or rewrite my last year’s book and within probably 60 days of saying that, I called that off. There’s no chance it was going to happen, so it’s kind of an honorable mention, I guess; and I feel okay about not hitting that one. We’ll talk more in depth about this probably in December, when we review our 2015 goals and set goals for 2016.
How about you? What’s going on?
Mike [00:01:53]: Not much. Just doing more design work for the app that I’m working on so that I can go back to people that said that they were interested in it.
One thing I saw that was completely unrelated to that was that Google has started selling domains. I think that they announced that they were going to be acquiring some top-level domains, but I hadn’t really heard anything about it. Ironically enough, I saw that they were advertising for these Google domains on Facebook.
Rob [00:02:15]: That is so cool. So, Google is running Facebook ads is what you’re saying?
Mike [00:02:19]: Yes, because –
Rob [00:02:19]: That’s great.
Mike [00:02:20]: – it was – yeah, and I looked at it, and I was like, “Oh. I feel like I have to click on this just to make them spend money.” [Laughs]
Rob [00:02:25]: Are you sure it wasn’t more of, like, an affiliate or something that maybe was getting a –
Mike [00:02:31]: I don’t –
Rob [00:02:30]: – commission?
Mike [00:02:31]: – no, I don’t think so. I don’t know. Maybe it was. Maybe it was. It was in the main activity area of Facebook, and it looked like a Google ad. It went directly to domains.google.com.
Rob [00:02:42]: Yeah. The other thing regarding Google domains is – did you hear someone registered google.com through the google domain engine, and they owned it –
Mike [00:02:48]: Oh, yes.
Rob [00:02:48]: – for, like, two minutes, 12 seconds?
Mike [00:02:50]: A minute. A minute.
Rob [00:02:51]: I don’t know.
Mike [00:02:51]: Two minutes.
Rob [00:02:51]: Yeah, or something like that, and Google caught it. They didn’t even get access to the DNS or anything, but I thought that was funny that they sold their own domain.
Mike [00:03:40]: Yeah. I think I saw a blog post from either Steven or Allan a while back that discussed their own approach within Less Accounting, and that’s how they were getting information back from their users, so it was to intercept those people and ask them questions about why they were cancelling so it’s interesting to see them turn this into a product other people can use.
Rob [00:03:58]: So, what are we talking about today?
Mike [00:03:59]: Well, we got an email from Jeff Madsen, who asked when is it time to call it quits on validating an idea? He says, “Hi, guys. Listen to all the shows. Have a question I’d really love to hear your input on. When do you call it quits on validating an idea? I know this feels like a ‘that depends’ type question, but I think there has to be some science behind it – or, at least some good ground rules. Appreciate your input. Keep up the great work.”
[00:04:18] So, what we did was we put together 13 signs that you should kill an idea that you’re validating. Essentially, these are things that you might be doing as part of the customer development process, or even before you started building. Quite frankly, some of them might come after you’ve started building, so it’s important to take a look at these things and keep in mind that, depending on where you’re at with your application, you may need to rethink where you’re at. The other thing to keep in mind is that not all of these things mean that you need to walk away from it. Some of them just mean that you need to rethink it, maybe take a couple of steps back, or re-validate certain parts of it. So, it doesn’t mean that outright it’s time to kill it, but it’s time to reevaluate where you’re at.
Rob [00:04:58]: Yeah, I think these are more signals than true deal breakers, show stoppers, red flags. That’s not what they are. They’re really signs or signals that are negative towards the outcome of this actually working, so the more of them that stack up, you really need to take notice and think twice about continuing with the validation.
Mike [00:05:17]: I think one of the things that’s worth pointing out here is that when you’re talking about validation, there are different stages to the product development process. There’s the part where you’re very, very early on and you’re just validating whether or not people are interested in something. Then you move on to say, “Are people not just interested in this, but interested enough to the point that they’re willing to pay for it?” Are you trying to validate that your idea is actually solving somebody’s problem? I think that there’s different angles that this validation comes up on and, depending on the specifics of what part of it you’re validating, then that’s going to play a role in some of these different signs.
Rob [00:05:54]: Yeah, you can certainly be pre-problem-solution fit, where you’re just saying, “Boy, is there a problem?” Right? You’re just trying to validate if there’s a problem. Then next you’re saying, “I now have a solution. Is that the solution to this problem?” Then the next thing is, “Is this product going to be that solution to the problem?” Then, “Will people pay for the product if I build it?” Then, “Can I reach people who will pay for the product if I build it?” Right? I just outlined five steps right in a row that I would want to validate each individually.
[00:06:23] Then there’s also validation like – let’s say you have a product, and you have 500 customers, and you’re wondering, “Should we build this major, new feature?” or, “Should we go in this major, new direction?” Oftentimes, you need to validate that. You don’t just want to go out and spend two months building something. You actually want to validate that by talking to your existing customers, talking to prospective customers. Validation should not just be something you do once at the very early stages of building a product. I believe it’s something that you want to do all the time, because it just saves you so much time in terms of not building features that no one wants.
Mike [00:06:54]: I think with that said, we’ll just dive right into the first one. The first one is that you’re avoiding talking to prospective customers. I think there’s a natural inclination to just start building because you have a good idea of what it’s going to take to solve a particular problem, but sometimes you really need to start talking to those prospective customers to figure out whether or not they’re actually interested in solving that particular problem. It’s very easy to say, “Oh, this is going to be a really cool technology,” or even just finding a cool technology that you want to work with and starting to build something and then saying, “Oh, I’ll figure out who I’m going to sell it to later.” I think it’s a different story if you’re just trying it out to learn something versus you’re going to try and figure out how to make it into a product later.
Rob [00:07:34]: I think especially for technicians and whether you’re a developer or a designer, just someone who likes to build and create things. Most of us – especially if you’re introverted, you don’t like talking to people. You don’t like going out of your comfort zone. You feel like that’s probably more for salespeople. This does get easier over time but, to be honest, early on I had a really time with it as well. You might have a vision that you want to launch a website and never have to talk to a single person and that they’re going to come and sign up for your SaaS app and then hang around, and maybe you can email with them and support a few times, but that’ll be it. That’s not impossible; but it’s very, very rare. You’re not going to build a long-term business.
[00:08:10] Even if you don’t want to build something huge, if you just want something to stick around over time and pass the test of time, you really are going to have to talk to your customers and get to know them. It’s just in every business that I see that’s successful and that’s been around for many years at this point. In SaaS, “many years” is – what – four? Five? Six? You really are going to get to know your customers, and I think the more that you get to know them and the more that you talk to people, the easier this gets later on. So, this is an acquired skill just like delegating, just like marketing, just like development. Just being able to speak one-on-one with customers and talk to prospective customers and not feel anxiety about that anymore – I think that is a learned skill. And it’s one that, if you’re not good at it already, that you should really focus on improving over the next six to 12 months if you are, in fact, trying to validate an idea.
Mike [00:08:55]: The second sign you should kill an idea you’re validating is that you’re having a difficult time finding people in your target market to talk about the idea. I think that there’s two, different pieces that come into play there. One of them is that you don’t even really know what your target market looks like, so you don’t know the type of people that are going to use it, whether it’s realtors or real estate developers. Obviously, those two are different things, but they’re related. So, you might have an idea of who you should talk to, but if you’re having a hard time getting them on the phone or getting them to give you any sort of attention, then that right there is a signal that you might need to just take a step back and reevaluate where you’re at.
Rob [00:09:31]: It’s important to have at least an idea up front how you’re ultimately going to sell this product; because if the product requires you to do high-touch sales, then you’re going to need a very high price point, which means it’s going to be more of either enterprise pricing or at least several hundred dollars a month if you’re going to have to speak to everyone on the phone before you close them. And if you are selling to realtors, or lawyers, or more non-technical brick-and-mortar stuff, the odds are that you are going to need that several-hundred-dollar price point. It can scale really well, but you need to know that you’re going to be talking to folks. And like you said, if you’re having a difficult time, whether it’s through cold calling, or whether it’s doing some type of inbound lead gen and talking to them on the phone, and you’re not able to get them up front just to validate the idea, then imagine how hard it’s going to be once you’re actually trying to sell them something.
[00:10:18] The same thing goes if you’re going to sell online. If you want to set up a landing page, you do some SEO, or do some pay-per-click ads – whatever you’re going to do to drive traffic to that – you’re going to know pretty quickly whether that traffic’s converting, if you have a nice headline and you’re offering something in exchange for an email address, even if that thing is just a sneak peek at the product, or early access, or whatever it is. And, again, if you’re having trouble driving traffic to that or getting people to convert, then imagine how hard it’s going to be once you actually have a product. This kind of plays hand in hand with validation. It’s can you even get people interested.
[00:10:48] So, if you can’t get over the hurdle of just finding people who are willing to talk to you about the idea, then it’s probably not enough of a pain point either. There’s one of two things happening. It’s not enough of a pain point for them, or you’re just really bad at this, in which case you need to get better. And you need to identify which of those it is, but I agree that this one is definitely not a good sign.
Mike [00:11:08]: The third sign is that you find it difficult to describe the idea or the value proposition quickly and easily. I don’t think that this in and of itself is a deal breaker, because early on you’re not necessarily going to have the best handle on exactly what that is. Sometimes you fully understand what the value proposition is, but you make that pitch to people, and they don’t care. Unless you’re going back to number one, if you’re avoiding talking to people, even if you have a solid value proposition for it, if they’re not really that interested in it, it doesn’t really matter what you come up with because they’re not going to buy it anyway. So, you really have to be careful that you can describe that idea in a way that doesn’t confuse people; because if people find the idea confusing and you’re talking to them over the phone or in person, how confused are they going to be when they hit a landing page or a website? You really have to be able to target those things in, because you have much less time to explain it to people. When you’re talking to somebody one on one and you have them as a captive audience, it’s a lot easier to convince them to give you a little bit of extra time to explain it, but on a website you don’t really have that option. So, you have to be able to narrow it down exactly what it is that you’re offering and what problem you’re solving. And, again, this just takes time. It’s going to take some of those conversations to really narrow in exactly what it is that you’re talking about.
Rob [00:12:24]: Ninety-nine times out of a hundred, you will not get the value proposition right the first time. It’s just too ambiguous and amorphous until you’ve talked to dozens of prospective customers and really understood the language that you’re using and really understood where they’re at in terms of their understanding of this problem; because if you come in and you start talking right away about SEO, or email marketing and DNS, or marketing automation – I mean you throw these terms around – a lot of people have no idea what they mean. Suddenly, you’re going to realize, “Oh. Calling myself ‘Marketing Automation for Realtors’ has no meaning for them, because they don’t even understand what that term means.” Maybe you have to say, “Boy, I have to start asking realtors, ‘Do you know what email marketing is?’” Maybe they don’t know what that is, so then you say, “Boy, do you know what Constant Contact is? Or, MailChimp?” You just have to seek which terms they’re familiar with and then piggyback on those in order to describe your product; because most people, when they see or hear about a new product, they try to categorize it in their head, and they try to relate it to products that they already know exist. Right? They try to figure it out in relation to one of those, so that’s what you have to do here.
[00:13:25] You’re highly unlikely to get this right the first time; but you start with something, and then as you talk to these prospects, you’re going to hone that value proposition, and you’re going to arrive at something where you start saying it, and eight times out of ten, it really resonates with people. That’s when you know: a) you’ve made a bunch of progress, because you have a clearer idea of what people want. You’ve written the headline for your home page, probably, and that’s how I would look at it, and you’ve done a lot of learning. Even if you haven’t validated the idea fully, you at least know how to describe it now – which is a big step.
Mike [00:13:57]: The fourth sign you should kill an idea is that you’re having a difficult time identifying a specific group of people who will use it. By this, what I really mean is that if you can’t narrow down the type of person who would use this — you can’t put together a customer avatar for them, so you can’t say, “Oh, it’s somebody who works in a company from 10 to 50 employees, who works in the accounting department,” for example. That would be a good mechanism for identifying a specific type of person, or a specific group of people. As soon as you start out with, “Anyone who,” and you’re not able to really narrow down to being able to say, like, exactly what I just said about the person in the accounting department in a small company; if it’s just, “Anyone who works in an accounting department,” that is going to fall over on itself some point along the way.
[00:14:40] If you are having a hard time differentiating between multiple groups of people and you’ve got maybe three, or four, or five different categories of people who could use it, then you really need to start digging a little bit further and identify one of them, or the one that you think is the most likely to be a good candidate and then validate whether or not they are a good candidate or not. I don’t necessarily think I would worry too much about which one is the best candidate, over finding one that is a reasonably good candidate.
Rob [00:15:08]: And our fifth sign that you should kill an idea is really a list of general disqualifiers. So, this is not something that you’re doing during validation, but more of just some not-to-do’s, especially if you’re a bootstrapper trying to validate an idea. I’ve seen some of these. Jason Cohen talked about them in his MicroConf talk a couple years ago. We’ve mentioned several of these on the podcast. You had them in your book. I have them in my book. These are things that I think overall are just anti-patterns for trying to bootstrap a startup, so early on in validation, if you find yourself doing one of these, the sign is not good for you.
[00:15:41] The first one is that you’re not able to directly charge your customers, meaning that – now, again, this is for bootstrappers, right? If you’re going to raise 10 million bucks, then that’s fine. You can try to do an ad revenue model, or you’re going to take a tiny, 5 percent cut off of each transaction. You go do that. But if you’re trying to bootstrap off of revenue, you really need to think about directly charging your customers, because you just need so much more revenue. You need to provide so much more value to a smaller group of people rather than looking to make a dollar per month off of 10 million users.
[00:16:09] The second disqualifier, or negative signal, is to try to develop a two-sided market. It’s not impossible, but it’s really hard to do as a bootstrapper. There’s so much work involved, and you basically have two marketing efforts. You’re trying to bring in the supply side and the demand side. So, trying to bootstrap Uber, as an example, or bootstrap eBay – which I know they did for a very, very short amount of time – it would be nigh impossible at this point. That’s why these guys do raise buckets of capital, tens and hundreds of millions of dollars to develop both sides of a marketplace. So, for bootstrappers, something we definitely do not recommend. The other problem with two-sided markets is you’re typically just taking a little cut – let’s say 10 percent, 20 percent – of that revenue. Unless you’re at scale – meaning tens of millions of users – you can’t make enough money to keep the doors open.
[00:16:43] The third negative sign of these general disqualifiers is you’re dealing with difficult customers, really enterprise customers, government customers. Education tends to have very long sales cycles. Consumers often have a lot of support. Consumers it’s not a “never do that,” but it’s not a great sign. You typically want to be dealing with small and medium size businesses. It’s kind of the rule; and, hopefully, if they’re online, even better, if you have those skills.
[00:17:17] The fourth one is don’t try to build a social network. What’s funny is – you know, I’m on Cora pretty frequently kind of looking around, and there’re so many people that are posting like, “I have the idea for the next Facebook. What should I do?” And it’s crazy. I think in our circles, it’s just understood you should not do this, namely because it tends to be difficult consumers. See one above, that I just talked about. And you’re not able to directly charge customers, so it’s kind of a tiny, tiny ad percentage revenue model. Most importantly, you just need tens, if not hundreds, of millions of dollars to even have a shot at this; and the odds of it succeeding are infinitesimal. Just because something’s popular or hot today, and we see everybody – you know, the Instagrams and let’s say a Whatsapp – I know it’s a messaging app, but there’s a social aspect to it – and Facebook and Twitter and all that stuff – you don’t go there. Just don’t go there if you’re going to bootstrap. You’re going to need to raise funding.
[00:18:03] The last one is, frankly, if it doesn’t have a revenue model; or, more commonly, if you have multiple revenue models – and that’s the worst thing. I’ve talked to folks. See, I’m starting to do a little more angel investing these days, and I’ve talked to a few folks who have three or four different revenue models. It’s like, “Well, we’re going to do ads, and we’re going to have a premium marketplace, and we’re going to have a this and that.” For me, I like to keep it simple. Especially if you’re going to bootstrap, or just raise a really small amount of funding and do the fundstrapping route where you’re going to get to profitability, if you pick multiple revenue models, it’s not a good sign, in general – unless you really know what you’re doing; because just like having a two-sided marketplace, where you’re trying to market to two groups of people, having multiple revenue models means you have to manage and maintain all of these things. You have upsells all over the place. It becomes very, very complex to manage and to actually close some of those sales. The simpler you keep it, especially early on, when you’re low revenue numbers, the better off you’re going to be.
Mike [00:18:56] I think the important point to keep in mind about all those general disqualifiers is that you may try to avoid them up front, but you also may find out through your discovery process that the path of, quote-unquote, “least resistance” is actually through one of those disqualifiers. At that point, you really need to take a step back and say, “Okay, now what do I do?” And if you want to go the funded route, then that’s perfectly fine; but if you’re going to try to go the bootstrapped route, it’s probably not a good idea to keep going in that direction.
[00:19:24] The sixth sign you should kill an idea is that you’re having a difficult time identifying a common problem among the people that you’ve spoken to. So, for example, there’s a lot of heavily fragmented markets out there, including help desk software, bug tracking software – those types of things. If you start asking those people, “What do you really need from the software? What is it lacking?” chances are really good that you’re not going to find a lot of commonality between those people. There’s just a lot of different products on the market that do those types of things, and it can be very difficult to identify a small slice of the market that you’re going to be able to peel off and be successful in just because of the sheer number of competitors that are out there and the size of the people who run in your circles and the number of the people who you’re going to be able to talk to. So, if you can’t find a common problem among them, it’s going to be very difficult to get a product off the ground just because you can’t find enough of those types of people.
Rob [00:20:17]: The seventh sign is that people say it’s interesting, but nobody’s actually willing to pay for it. There’s different levels of “willing to pay for it.” Some people will just verbally commit, and you can trust that they’ll pay for it. Some will. Some won’t. You can take their credit card number, but not charge it. You can get a check from them, but not cash it. You can take their credit card number and charge for three months of service. Obviously, you let them know up front. So, there’s varying degrees, and I think we could probably do a whole episode on the merits of that. I think maybe we have done a whole episode on the merits of charging up front during validation versus not, but the idea here is that you really want to get someone to commit either by giving you money, or verbally committing to give you money. If no one is willing to do that, then it is definitely a bad sign for your product.
Mike [00:21:03]: The eighth sign is that you can’t see yourself working on this or being interested in this in the next four or five years because you’re doing it for the money. I think this one’s really hard to address directly just because of the fact that there are certain ideas out there that you look at, and you’re like, “Wow. I’m not particularly interested in this, but I think that there’s a lot of money here.” It can be very difficult to maintain the level of motivation that you need in order to be able to follow through with that and maintain it as long as you’re going to need to, because if it’s successful – and you want it to be successful – then you’re going to be working on it for probably a long time.
[00:21:37] Now, you could certainly get partially down the road and, assuming that it’s at least moderately successful, you could end up selling it off; but at the same time, you don’t necessarily want to sell something that is on a hockey-stick growth curve, for example. So, you do have to be a little bit careful about whether or not this is something that you’re interested in or not.
Rob [00:21:53]: The ninth sign is that you’ve spent more than a month doing customer development, and you still haven’t been able to answer basic, objective questions about the idea: who it’s for, the price range – the fundamental things you need to know to move to the next step. I think a month is a good, round timeframe. This is an arbitrary amount of time we’re choosing here, but a month is nice because even if you’re doing it on the side, it’s enough time to get something done and get some hard questions asked; but it’s not so much time that you’re going to do this perpetually.
Mike [00:22:24]: The tenth sign is that you can’t quantify how much the idea is worth to somebody. You can say that it either saves time, or it saves money, or it makes money; but unless you have a benchmark to measure that against, it can be very difficult to really understand what you should be charging for it. I think that there’s another side of it, too, which is what you believe it’s worth to people and what they believe it’s worth. Those two things, hopefully, will intersect; but there are occasions where those things are just wildly different from one another. If your expectations for it are much higher than that of your intended market, then you have to think about whether or not that’s a direction that you want to keep going, because that’s a bad signal. If you’re expecting to be able to charge $500 a month and people are only willing to pay $50 a month, you have to think about, “Well, is there additional value that I can add that will make it a $500-a-month product?” Or, is there just really nothing that you’re going to be able to do? You can either accept that it’s a $50-a-month product and go down in that direction, or you can walk away from it and go find something else that is going to be in that level.
Rob [00:23:24]: The exception to this is if you’re doing business-to-consumer stuff, because there can be a lot of entertainment, or other aspects that it doesn’t necessarily save time, make money or save money; but you’ll notice that, in sign five, we talked about “don’t do business-to-consumer stuff.” That’s why we’re focusing here on actually quantifying what the idea is worth.
Rob [00:23:42]: The eleventh sign is that you’re finding it hard to be objective. In other words, getting emotionally wrapped up in an idea, kind of like an “I’ll show you I can do it” attitude; or, instead of trying to disprove the hypothesis, pushing really hard to try to prove the hypothesis and really forcing it and looking for any way that you can find an affirmative answer to the theory that you’ve posed.
Mike [00:24:03]: I think that’s very difficult to do is to be able to look at that objectively enough to try and not prove yourself right, but to prove your theories wrong. I think it’s a different way of looking at it. I think it was – Heaton and Steli talked about this on the Startup chat about validating and kind of a popular misconception around Lean Startup, which is simply trying to prove different hypotheses wrong and not be emotionally attached to them. I think that in certain cases, especially if you are invested in an idea because you have this particular problem and you say, “Oh, I know exactly how to solve this, and this is how I’m going to do it,” it can be very difficult to separate yourself and your own ideas about how to solve that problem from those of the people who you are supposedly trying to serve; because it’s the people who you’re trying to serve that are going to be paying you – not you.
Mike [00:24:49]: The twelfth sign is what people want is something that you can’t deliver. There’s certainly going to be times where you’re doing customer development and you’re talking to people, and they say, “Hey, it’d be really great if you could do this.” For example, if you’re dealing with stacks and stacks of paperwork from the government, for example, and somebody needs to go get something notarized and there’s no electronic equivalent of a notary, for example, it could be very difficult – virtually impossible – to get that done if there’s no electronic equivalent. So, either you have to find a way to manually handle that particular process, or you have to just say, “Look, I can’t do this. Maybe there’s somebody else who could.” Or, if they had millions of dollars, maybe you’d go out and get some laws changed, for example; but it may be bordering on impossible to get certain things done.
[00:25:34] There are certain a lot of other examples as well. For example, if you’re building software that will integrate in with a platform and you don’t have direct access to that platform, that’s another place where it may be technically possible to do it; but for you it’s going to be almost impossible just because you can’t deliver something like that. Another one that I’ve heard a lot of people in different circles complain about is the fact that when they start building on certain platforms, those platforms can change underneath them. I think Twitter was kind of notorious several years ago for constantly changing the rules about how they operated and how people would integrate into their systems, and it just made it very difficult to build additional products that would hook into Twitter just because they would change the rules all the time.
[00:26:13] So, if those types of things are going to cause you an extensive number of problems and you’re not ultimately going to be able to deliver the experience that people are looking for, then that’s also a negative sign.
Rob [00:26:23]: Another good example of this recently in the bootstrapping community is Justin Vincent from Texting was validating an idea, and it had something to do with transcribing meetings for development teams. People seemed to really want it, and he described it, and they liked it; but the technology wasn’t there. He wasn’t going to himself write the transcription engine. He wanted to use an off-the-shelf one, because obviously you’d have to be an expert in voice transcription. He went and used several different APIs, and none of them could do it. So, frankly, what people wanted was something he could not deliver at this point.
[00:26:52] Maybe in the future, transcription software will catch up, and he’ll be able to launch the product, but for now he said he just had to shut it down, because he couldn’t get the results that he wanted in order to actually have people pay for it.
Mike [00:27:02]: The thirteenth sign you should kill an idea you’re validating is that you’re not learning anything new. If you have come to the conclusion that the people that you’ve talked to have essentially told you all the things that you could possibly learn, then it’s time to either move on to the next step of validation or walk away from it. I think that applies more to moving on to the next step than it does to walking away from the idea; because if you’re having, let’s say, 20, 30, 40 conversations with people and you start hearing the same things over and over again and you’re simply not learning anything new, then at that point you’ve got the information that you need in order to make a decision one way or the other.
Rob [00:27:38]: To recap our 13 signs you should kill an idea you’re validating. Number one was you’re avoiding talking to prospective customers. Number two, you’re having a difficult time finding people in your target market to talk to. Number three, it’s difficult to describe the idea or the value proposition. Number four, you’re having a difficult time identifying a specific group of people who will use it. Number five, we gave general disqualifiers about several factors that make an idea very hard to bootstrap. Number 6, you’re having a difficult time identifying a common problem among people you’ve spoken to.
Mike [00:28:06]: Number seven is that people say that it’s interesting, but nobody’s actually willing to pay for it. Number eight, you’re interested in it just for the money, and you can’t see yourself working on it for an extended period of time. Number nine, you’ve spent more than a month doing customer development and still haven’t been able to answer some basic, objective questions about it. Number ten, you can’t quantify how much the idea is worth. Number 11, you’re finding it hard to be objective. Number 12, what people want is something that you can’t deliver; and 13, you’re not learning anything new.
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