In this episode of Startups For The Rest Of US, Rob and Mike answer a number of listener questions on topics including monetizing B2C, selling a small SaaS,and insurance. They also get a update from a past listener’s question.
Items mentioned in this episode:
Welcome to Startups For The Rest Of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you’ve build your first product or you’re just thinking about it. I’m Rob.
Mike: And I’m Mike.
Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. Speaking of mistakes, Mike, you’ve got on a podcast with me today and that was your first mistake. So don’t make the same mistake that Mike has just made.
Mike: 436 times in a row?
Rob: Exactly. You’d think you’d learn. Fool me once, shame on you. All right. Who is the only non-Jedi in the original Star Wars trilogy to use a lightsaber?
Mike: The only non-Jedi? That would have been Han Solo.
Rob: Nice. Which movie and what was he doing?
Mike: Empire Strikes Back and he was slicing it to open to keep Luke warmer after freezing.
Rob: There it is. Well done, Mike. I thought they smelled bad on the outside. What is the word this week, sir?
Mike: That was not a great lead-in.
Rob: Not at all. We lost our three listeners.
Mike: Well, I have an article that’s going to be in the SaaS Mag on email follow-ups. It’s coming out I think in the next week or two. We are at MicroConf this week and my understanding is that the magazine is going to be distributed at MicroConf by FE International, who is a MicroConf sponsor.
I’ve been working on the article since the fall at some point. It’s very different than working with online articles where can do all the editing and you just publish it versus something that’s actually printed and then months later it’s actually printed.
Rob: We have lead time on them because they’ll have them sure printed overseas and they get shipped here, they have all that layout and all that stuff. It’s tough. I’ve heard when I’ve contributed articles to a magazine, it’s like 3–4 months lead time.
Mike: Yeah and my wife used to work in the magazine industry at EH Publishing and that what they did is the same thing. She never knew what date it was because they had to work three or four months in advance, so all of her work was three or four months out and she’s just like, “What is today? I have no idea what the month even is,” so she’d always gets confused about that.
It should be coming out next week. I haven’t seen the final article but it should be good. It will be interesting to see that in print.
Rob: Congratulations. That will be good. And as you said, we have at MicroConf day, we’re hanging out emceeing and doing all that kind of stuff when this episode comes out. I also wanted to mention again that next week in a sense, I’ll be in London with my family and I’m thinking about putting together a bootstrappers’ meetup with Sherry. So if you have an evening between April first and sixth, go to robwalling.com/london, fill out a quick three-question survey to figure out if we can pull something together. I believe we’re staying in the West End of London, so we’ll probably be within that vicinity. I hope to see you there.
Mike: Cool. I would recommend that we should never have MicroConf scheduled in late March ever again. That is the worst time ever.
Rob: I know. This is the first time we’ve done it early and it will never happen again. I think you and I have both just had experienced great pain of trying to pull it together.
Mike: Yeah. Part of it is just because of the beginning of the year and obviously, taxes kind of factors into it but my health insurance is right up for renewal about this time. So, I’ve got all this paperwork to go through for that. Between my business, my wife’s business, then personal taxes, and all the stuff going on with MicroConf, it’s just really, really hard to keep up with everything.
Rob: And then it’s one last month to sell tickets. I think you and I have to start thinking about the first of the year, like, “Hey, MicroConf’s in a few months,” but that didn’t work this year because we had 90 days from the first of the month, so we just had to push everything on a different time scale. Given that I’m cranking on all this TinySeed stuff, which we have mental goals to get a bunch of stuff done by MicroConf, if we had another month, things would be just so much better. In the past, we’ve often done MicroConf like April 30th and I think if we can get as close to that date as possible, that’s where we want it to be.
Mike: One last thing on MicroConf, if you’re listening to this and are coming to Starter Edition this year, we have a new addition. We have a MicroConf community ambassador I want to introduce you to. This is Marie Poulin. She has spoken at MicroConf this past year and she’s also attended the previous two years.
What we wanted to do is we wanted to have essentially a community ambassador in place that people could go talk to. I get the impression that some people are a little hesitant to come talk to you and me directly just because we’re involved in the conference itself, but at Started Edition it really made a lot of sense to bring somebody else in who could act as the interface and the ambassador, either on their behalf and make them feel comfortable to coming to MicroConf. Not that we don’t do that ourselves but I do sense some hesitation from some people in talking to us just because they’re just starting out.
Rob: Sure and we can’t talk to everyone and we can’t gather everyone. The first year we did the conference, if I recall, it’s like 110 people. You and I could almost single-handedly—seemingly stayed up until 4:00 AM every night which we did—almost talked to everyone there, almost get everyone gathered, and try to build that community. That was a lot of hustle in the early days but given that we had back-to-back conferences, both of the conferences were substantially larger than that and since they are bigger, there’s more moving parts, you and I are just busier than we used to be with stuff. This makes a lot of sense is to have another person. Zander does as much as he can, too, although he tends to be running a lot of the logistics and such, but to have someone else who can help connect to people and who they feel comfortable gathering around, I think is a really good idea. You’ve come up with that idea yourself?
Mike: Yeah, I did. I reached out to her and asked her if it’s something she’d be interested in doing, she said yes, and it kind of worked things out.
Rob: That’s cool. I think we are both excited to have Marie hanging out and building some community at MicroConf Starter.
Mike: What are we talking about this week?
Rob: This week we’re going to be running through some listener questions, some comments, we actually have a callback to a question we discussed a few weeks ago. It’s a pretty good mix today. Several voicemails which, as you know, I like.
The first question is actually a comment from Michael Needle. And he says, “You guys so crush it. I’ve written before and you responded to at least one of my questions on-the-air. I just listened to the latest episode about SaaS KPIs and I wanted to say that you nailed it. This info came at exactly the right time for a project I’m working on, so thanks for keeping the podcast going and keeping it so relevant. I’m always learning something from you guys, but today it was really helpful. Thanks.”
Really, I appreciate that. It’s nice when we hit someone right where they are at that time.
Our next email is a follow-up from Zamir Khan who had emailed a few weeks ago about his B2C SaaS app called VidHug, which he built as a scratch around itch and has a little LTV and that kind of stuff. He asked us if he was crazy and you and I discussed it for a while. He says, “Hey guys. Thanks so much for answering my question on the podcast and in such great detail. I have to admit, when Mike first answered yes to my, ‘Am I crazy?’ question, my heart sank, but I soon realized it was a joke. You guys really got me.”
“I was actually bracing myself the whole time for a take that I would strongly disagree with, but it never came. I pretty much agree with everything you guys said and giving myself a finite timeline, likely the end of the summer if not earlier, to scale VidHug beyond the point you talked about, for example, $5000 a month. If not, then I’ll put in the word to remove myself from it and make it a mostly passive income stream if that’s possible.”
“Recently, the experience I’ve had that I think is another downside of B2C is it’s extremely important to set support expectations. I’ve got customers in multiple time zones and they’re all working on an important special occasion. I can’t afford, from a mental standpoint, to take all of that on, so I’m putting in work to set up some real expectations when we’ll be available to respond, et cetera.”
“I appreciate now that in a B2B North America-focused business, that problem is quite easier to manage. Even still, I imagine setting support expectations as something a lot of new founders don’t get right away. Things like having a live chat widget on your site. I have one from Drift and I’m removing it. The value-add hasn’t been great in terms of talking to customers, where it seems to signal that we’re available at all hours even when it shows offline. People aren’t understanding that. I love to hear your take on setting support expectations chat versus email, et cetera.”
I don’t know. In all honesty, I think he’s doing a good job of it. I think just setting them is the right step to letting people know how long it will take you to respond. With some businesses, I think chat works great. When I was still a single founder, I would never put chat on the site. It’s just too interruptive. If you’re trying to write code and get other things done, you push them towards email. People do tend to think deeper about what they’re going to email about, whereas with chat, they can just start typing as soon as they have any thought. If you’re B2C and you’re a high-volume-low-cost thing, you really do need to think about narrowing that focus down to just the critical chats to get through. If you’re higher-priced, it might be a lot less of an issue.
Mike: I think if you are going to have that support, if you get a true support system in place—there’s lots of direct apps out there that will do it; there’s Zendesk, there’s Teamwork Desk, there’s Groove, there’s all kinds of different things out there—just about any one of them should respond to an email with a ticket number or should be able to and give them a ticket number, and tell them, “This is what you should expect in terms of a response time.” If you don’t set that expectation with them through email, they send the email, and they don’t hear back from you, it’s very easy for them to say, “Oh, I haven’t heard from you guys in three hours. I’m going to send another email,” or five minutes. There are people out there who will send you an email and five minutes later they’re like, “I haven’t heard from you, yet.” So, you need to set those expectations and having some sort of automatic reply with a ticket number and saying, “Hey, this is when you’ll hear back from us, and this is the days of the week we will respond to tickets.” That’s going to go a long way.
Rob: I wouldn’t do that from the start. I would do it when it becomes a problem. It’s nothing personal because I personally find them irritating when I get the response. It’s like, “I don’t want that.” If it’s not a problem, don’t clutter people’s inboxes. Thanks for the feedback and input and best of luck. Moving forward, feel free to update us at the end of the summer, based on what happens with VidHug. I think we’re all curious to hear about it.
Our next email is actually another follow-up. Zee has asked us about insurance and what insurance does a SaaS app need, I believe was the question a few weeks ago. You and I have discussed it. He says, “Hey guys. Thanks for taking my question and the feedback. I actually did find Founder Shield and got liability insurance through them before hearing your response on the podcast today. Funny that you mentioned it but yes, they are awesome, highly recommended.”
“This biggest thing was not just the personal insurance but the cyberdata security. As you grow your SaaS, I think it’s important to protect yourself, especially if you’re doing B2B and storing a good amount of data. The insurance was not too bad, roughly comes out to between $1500 and $3000 per year, depending on your policy, up to around $1–$3 million in protection. Hope that’s helpful as a follow-up. Thanks again. You guys are doing an awesome job. Keep it up.”
I always love to hear the follow-up. You and I can have ideas and thoughts and experience because I’ve used Founder Shield, but it was couple of years ago. It’s cool. We get better as the community gets better.
Mike: Yeah. Things change over time and you don’t necessarily always have the context from when you first did something versus what recent updates are. Sometimes we’ll grandfather people or sometimes we’ll change policies and you don’t necessarily notice because you’re just still a customer operating under some slightly different agreement that was in the past. So, it’s good to hear these types of updates.
Rob: For our first question of the day, we have a voicemail about monetizing a B2C app.
Gurpreet: Hi, Rob and Mike. This is Gurpreet. I’m calling you from India. I have a question regarding a new side project that I have just started. Check out the website flowlog.app. This is a personal productivity tracker, which was inspired from a recent podcast that I heard on the Tim Ferris show of a great writer called Jim Collins. He has a system to log his creative hours and so on. I’m making an app around it.
My question is more around monetization. This is a side project for me and I’m not planning to earn big money from this, but I would like that my expectation would be that in a reasonable period of time, let’s say about six months or so, that app should start generating $3000–$5000 a month so that I can continue working on it, developing it, maybe spend some resources on marketing and so on.
My question is, what, according to you, is the best way to do that? One way that I could think of is have a free app on the app store but have a subscription model for certain advanced features. That is one. It would have to be a very small amount $2–$5 a month, or I could just set up a Patreon page and see the people who are benefiting from this app might want to donate something. Can you share your thoughts or how would you think about it?
Rob: For listeners following along, it’s a personal productivity app, so very much B2C. It’s based on Jim Collin’s system that he talked about on the Tim Ferris podcast, and it’s flowlog.app. What do you think, Mike?
Mike: I think the question he’s trying to answer is what’s the best way for him to get the app to generate between $3000 and $5000 a month in 3–6 months. The thoughts that he had were maybe putting it out as a free app on the app store, maybe having a subscription model for advanced features, or maybe doing a Patreon page, what sorts of things would we think about in terms of going in that direction.
I think putting the free app on the app store, it’s a great idea in terms of getting distribution. The problem is determining which features you’re going to charge people for and how you’re going to get essentially traction there to the point that people are going to pay for it. I would be careful about, in terms of the subscription model, is I would not charge $2–$5 a month. I would charge a yearly fee instead of a monthly fee.
If you’re charging $2 or $5 a month, then what you’re going to end up with is people sign-up for a month or two and then they’re going to churn out versus those people who sign-up whether it’s because they’re aspirational or because they’re really committed to tracking that stuff and they want to get the full experience. You’re going to have a lot less charge-backs, a lot less churn. It’s going to be easier to deal with if you charge on an annual basis.
There’s a bunch of apps that I pay for on an annual basis but if I were paying for on a monthly basis, I would probably think twice just because sometimes, I’ll fall off the wagon, so to speak, and stop using it for a little bit, and then I’ll come back to it later. But with an annual plan, they can always come back to it later. If they’re going to charge for it every month, if they stop using it for even a couple of weeks, they may very well second-guess it and say, “Oh well, I’m not going to continue paying for this because I haven’t used it.”
Those are the things that I would probably think about. You have to do some customer research to figure out whether or not the features that you want to charge for are going to be worth it for people to pay for them. That’s going to take some customer development. You’re going to have to talk to people and without using your app, I don’t know exactly what those features would be.
Beyond that, you could also go the route of trying to charge outright for it. But I feel like that’s probably longer-term, potentially losing proposition because you have back-end stuff that you need to keep running to store their data or be able to export it, do reports on, those types of things are probably going to be a support burden for you that you’re not going to want.
Rob: I don’t think I have anything to add. B2C is really hard. I think $3000–$5000 a month in six months is extremely, extremely ambitious. You would have to just catch a lucky break to grow this to that if you’re charging, as you said, $60 a year or $100 a year. I guess that’s the thing.
Let’s say you were able to pull off $100 a year. You do only need to sell 30 people a month on it to be able to use it. If you use a freemium model, you’re going to get about 1%–3% to sign up. That means you need 10,000 people to get between 100 and 300 and that’s every month. I guess if you’re charging $100 a piece at that point and you could pull it off, then that would be a substantial amount of money because 100 times 100 is 10,000. But I think that getting 10,000 people that download your app every month, and I think the price sensitivity of this group, means that you’re not going to be able to charge $100. With some more realistic numbers, I feel it’s doable but very difficult and you’re going to have to catch a lucky break. You’re almost going to have to have Jim Collins endorse it, link to it from his website, or tweet about it and then get some momentum. Interesting stuff needs to happen.
So these are those plays where it’s a little more hit-based, meaning, it’s not exactly but it is more similar to writing a hit song or making a movie that everyone likes. It is B2C rather than building a more boring B2B app that has that repeatable process that we know how to execute on, whether it’s inbound or outbound sales, you do this marketing, you optimize your funnel, and this and that. It’s more erratic and it’s more difficult to accomplish with mobile.
I don’t want to discourage him from doing it. I think if you’re super interested in doing it, you want to do it as an experiment, and you don’t need that much money, I wouldn’t have the expectation of $3000–$5000 in six months. I think it’s one thing. I think you can make that as your high-end goal. If you achieve it, that’s awesome. Let us know. But I think it’s much more realistic to build this and make a few hundred dollars a month by the time you get down the road.
But again, it depends. You just have to get in. You’ll know more than us in two weeks or four weeks or whatever when you get this app in people’s hands. It’s like what is the price sensitivity and how are other apps like this charging? Can I only charge $30–$50 a year? How many people can you get in? And all that stuff. Definitely, I wish you the best of luck and hope it works out.
Mike: My other comment that I would add on, that I agree with you on the fact that it’s probably going to take longer than that 3–6 months to get there. There’s also the trajectory to consider because very early on, you’re not going to make as much money the first month.
Let’s say you make $50 or $100. You want to progressively be making more money as time goes on versus having a giant spike either early on or later on in the 3–6 months time frame that you’re looking at that is going to peak and then come back down. Maybe you hit it for one month but then it drops. I don’t know what that’s going to look like for your app or for these types of apps, but that’s something to be careful of is what does the trajectory looks like over time.
Even if you’re selling, let’s say, annual subscriptions. Let’s say you sold 10 annual subscriptions this month and 20 the next month. As long as those are continuing to go up, you’re going to get there at some point. But you want to make sure that you’re on that trajectory. If you’re not, then it’s a problem.
Rob: Thanks for the question and best of luck. Our next voice mail is about whether to sell a small SaaS app that’s doing about $100,000 a year versus continuing to run it.
Adam: Hey guys. My name is Adam. I have a SaaS Ruby on Rails app. I just hit yesterday $100,000 ARR, which is awesome. I have a question about choosing to have someone acquire an app versus running it myself. The question is, what is the true value of this thing that accrued? I actually talked to FE International and it looks like you get a bump for SaaS, but the multiples for a small company like mine seems to be two to an app.
So if I made $50,000 in net income from that $100,000 ARR—that’s without paying myself—they would say that it’s worth maybe $130,000. But for me, if I continue to run it, I’m going to make all those cash flows from the future cash flows for the business. It seems like I would be a sucker to sell it for 2½ times net income because if I run it for the next 10 years, I’ll get 10 times my current income and probably going to continue to grow. Are the valuations really, really low for small businesses like us?
I see companies traded on the stock exchange and they’re getting these huge multiples like 20, or 30, or 100. Is it true that we’re getting screwed as small micropreneurs and we only get 2½ of our income? Is that ever a big deal for a developer who’s running a company? Would you ever want to sell it for 2½? It seems the buyer really gets the benefit, not the seller. Could you talk about these issues? Even with success, what is the value of this thing even if you’ve made it to $100,000 ARR? Thanks so much. Sorry for the long message. Bye.
Rob: So just to clarify, 2½ times net profit sounds low to me. I would thing for a small SaaS app like this, you should get 3½, and if it’s growing, you should get between 3½ and 4 even for a small app like this.
But I don’t think that counters his point. He’s basically saying, 2½, 3½, whatever, he sees things on the public market trading at 10 or 100 times net multiple. And shouldn’t he just run it for 10 years and get 10 years of of running rather than taking 2½, 3½, whatever it is? What do you think, Mike?
Mike: I think one of the things to keep in mind is that your operating in this price range, I would say, where the multiple is going to be different based on where you’re at. If you have a business that has a, I think you’ve mentioned, $50,000 net income, if somebody takes it over, they’re probably going to have to put somebody in, which essentially reverses the earnings of that particular business, which again, is totally true. But if you had, let’s say, 10X that, you had $500,000 of net income, the difference in value of that business versus something that only brings in $50,000, is going to be very, very different.
That’s something to definitely keep in mind because there are certain ranges where, if a business is making just $50,000, it’s not going to be worth nearly as much as something that has $500,000 of disposable income. They can use that money to bring somebody in, pay them, and they still got $400,000 left to play around with to do other things, marketing, bring on more people, do growth experiments, all kinds of different things.
The other thing that I think he had mentioned was comparing it against larger businesses. Again, the earnings of those large businesses like public companies and things that you see in the stock market, they’re making a lot more money, so they are going to naturally be priced higher. Those are the things I would definitely keep in mind.
The thing that he didn’t mention at all was the fact that if you are going to run this for the next 10 years, for example—you said that you get to keep all of the net earnings from that, that is true—is the business going to be the same in 10 years? Is it going to grow? Is an event going to happen at some point during those 10 years that it’s going to wipe out a substantial portion of the market? Is Google going to launch a product that competes directly in your space? Or is a funded company going to do the same thing?
There’s all these things that create risk for your business moving forward. For a SaaS app, that risk is heavily reduced because people are already on a subscription and it’s easier to mitigate those types of risks, but it is still a risk. And because of the scale that you’re working at right now, it presents too much of a risk. I suspect that’s why there’s probably that 2½ multiple versus, like what Rob would said, either expect a three or four.
But you would have to keep in mind that something could happen tomorrow and your entire business goes away. You could get sued, or somebody could take the domain, or somebody could say, “Oh well, your app name is actually a trademark and we own that. We’re going to come after you and sue you for $100,000.” For only making $50,000 a year, that’s pushing it in a really tough spot. Those types of events factor in a risk over the next 10 years and you have no idea what those actually come out to be. It may happen, it may not, but there are factors you have to consider.
Rob: Yup, I agree. I think people with a first-time app feel like it will run forever. Ten years is forever in this space. This is why the small business analogy, like when people say, “I’ll just build a business. It’s like a bakery, or like a gymnasium, or a grocery store,” it doesn’t work the same with SaaS apps and technology because the stuff changes so fast. In 10 years, you said it all.
The apps that I had that were making money in 2005–2010, I sold all of them and a lot of them have basically shut down, not because of the code didn’t still work but it was often because the code is so out of date that no one can maintain it now. It’s a classic ASP or it’s like ASP.NET version 3.0 and you have to completely rewrite the product to keep it updated. If you don’t do that, then you just ran out of the ability to find developers.
Or Google makes an SEO change that completely decimates your product. I had this happen multiple times. I know dozens and dozens of founders who’ve have their business just turned upside-down overnight after years of building it into a five-, six-, or seven-figure annual business.
You can have new competitors, the market can change, you can have industries that get wiped out. Let’s say you have a job board for truckers. I’m just making stuff up here. The trucking industry is going to have a real issue, or at least truckers are, over the next 10–20 years as self-driving trucks come around.
There’s all these factors that you don’t think when you have your first app and you feel like no one can touch it. “There’s no chance that this Twitter client or this Facebook client that I’ve built is going to get completely decimated when they decide that they’re not going to support my API calls anymore,” which they do all the time. We’ve seen people within our community have apps, have to do layoffs, and get hit pretty hard revenue-wise by people churning out because you can’t provide the value anymore. Or if you run an ESP. If you don’t maintain it, you get on blacklist. Now your deliverability is not as good. On and on and on. You and I could sit here and name your name to getting sued. There are all these things that just happen the longer you do it.
I’m not saying that you should sell for 2½ or 3½ or whatever you can get for it. What I’m saying is don’t think that you’re going to run this business for 10 years without a substantial amount of work over that time. You may not have any work right now for six months, maybe nine months, then it will start sliding. Something will change out there.
If you want to put in that work, then great, but don’t think that you can just coast for 10 years and that your business isn’t going to get turned upside-down, let’s say, every 18-48 months. It’s a big range but it depends. I don’t know if you have APIs you’re relying on, who your competitors are, what space you’re in, but every couple of years you’re probably going to get this big curveball and if you’re doing something else and can’t pay attention to it, bad things happen.
That’s really why people sell for those “lower” multiples, is because there’s risk and because you want to take that cash flow ahead of time. Take this several years of cash flow and just put it into your next thing. Typically, it’s buy that next thing or buy out your own time so that you can then build the next bigger idea that can last longer. That’s what a lot of people do. Not necessarily bigger in terms of head count but bigger in terms of net profit, I think.
Mike: Yeah. I want to second that. I was not saying that you should take this because of all the risk involved. It’s more of, just be aware that that’s why some people do it and, to Rob’s point, sometimes where people will just want to take that money off the table and take a year or two of net earnings in order to be able to do other things. If that’s something you want to do, then great. If not, then you could continue to run it. Just be aware that there’s risks no matter what you do. There’s risk if you sell it. It could become huge and blow up or it may not. You may decide to run it for 10 years and it never grows beyond having a net profit of $60,000–$70,000. It’s high enough that you don’t want to get rid of it, but low enough that it’s hard to live off of that based on where you’re currently settled down.
Rob: Yeah and I think the idea of public companies are valued at 10 or 100 times, yeah, that’s true. Most are not of 100. Those are the outliers. We look at Amazon. Let’s get rid of Amazon because they […] special way. Let’s not look at the hot-hot, hyper growth, 50 million subscriber tech companies. They’re completely outliers. Look at the median price-to-earnings ratio or look at the bottom 50% and it starts to become a little more realistic. It still doesn’t tend to be down around 2–4 in the range that we’re talking about, but you’ll see a lot that are in that more 5–10 times annual earnings, which is in the ballpark. It’s within the order of magnitude we’re talking about.
And there’s the public companies. To be a public company, you have […] and all this crazy stuff you have to apply to, so you’re not going to do it if it’s going to be the same multiple. There’s so much scrutiny and all the stuff that comes along with it, so unless it had some type of premium, then you wouldn’t do it.
These are good things to think about. I think the other thing I drew out is, Mike, when I started buying apps in, let’s say, 2005–2011 time frame when it was really the heyday of me acquiring a bunch of stuff, the multiples were 12–18 months of net profit. There really was no FE International, there was no Quiet Light, there is no Empire Flippers. If they were around, we didn’t know about them.
It was all like Flippa, it was like deals on forums, it was called email, and that was the multiple. There was so much risk. There was potential for fraud, which I think has been greatly removed in our space and that is why I like the fact that we have these brokers now. I like the fact that the multiples have risen. It’s certainly a bummer from an acquirer’s perspective but I do think the whole community benefits by the fact that the multiples are where they are today.
Mike: We were just talking about how things were different then. Those were also the days where you had a Blockbuster card.
Rob: That’s true.
Mike: I’m just saying. That how old you are.
Rob: Exactly. No. That’s such a good point because you know, Mike, Blockbuster could have thought, “Why don’t we just run this thing for 20 years and just collect the revenue off of Blockbuster?” and now they’re bankrupt because Netflix came in and ate their lunch. It’s a perfect example. Blockbuster, I believe, was a public company. It’s just another example of how quickly things are eaten up by technology these days.
Mike: That’s actually exactly what happened to them because they had the opportunity to buy Netflix for $1 million or I forget how much it was, but they had an opportunity to buy Netflix at one point and they decided not to because they’re like, “Oh yeah, this is not going to fly and we’ll eat their lunch,” and it turned out it went the other way.
Rob: Yeah. Cool. So, good question. Thanks for sending that in. Our next question talks about what a SaaS app should look like at $10,000 MRR, $20,000 MRR, and beyond.
Adam: Hi guys. This is Adam again. I have a second question. I heard you say in one of your old podcast that the goal for probably Startups For The Rest Of Us listeners is to get your app to $10,000, or $20,000, or $30,000 MRR. Could you guys discuss what your business should look like at different MRRs, like when do you hire your first employee? When you do hire a customer support person?
Right now, I’m just doing everything myself with an offshore developer. That’s like $8300 MRR. What do you recommend at $5000 MRR? Could you say like, “$5000 MRR your company probably is like you have a full-time job and you’re in your basement weekends.” And then $10,000 and $15,000 and at $20,000 like the stages of growth based on the MRR, that would help a lot for me to get some kind of benchmark. Thanks so much guys for what you do. You’re awesome.
Rob: Mike, I will let you kick this off, but I think the answer is, “It depends.” It depends pretty heavily. There are people that can live on $5000 MRR. In that case, you’re not in your basement work the day job. But if you live in California, then maybe you are.
I also think it depends a lot on the app. Some apps need a ton of support. If you’re building an ESP, people have a ton of questions. It’s like Baremetrics where you just opt-in to Stripe and you […] off and then you have charts.
I bet in the early days, Josh didn’t need very many support people and could take that way, way further. And if you’re building a complicated app, it takes a lot of stuff to get set-up. Preface that and then kick it over to you.
Mike: I agree with you on the ‘it depends,’ and I think part of the problem is that we don’t necessarily have a lot of data points because so many different businesses are different from one another. For example, you Rob Walling. Your starting resources are going to be very different than the listener, or myself, or pretty much anybody else on the planet because it’s not just about the money that you have available. It’s also about the relationships the you have, the code or technology that you already have, the experiences that you have, and sometimes the relationships you have with certain people allow you to get into channels that other people would not.
By virtue of talking about those, you’re going to have to hire for different things than somebody like me or any given listener is going to have to hire for different things. The restraints on each individual are going to be different, based on whether you have a spouse, whether you have kids, whether you have a sick parent that you have to take care of on Thursday afternoons. All those things factor into it. It makes it hard to come up with a over reaching generalization that is globally applicable.
That said, you can come to certain, as you said, revenue benchmarks of $5000 and $10,000 and say this is probably where you might want to start thinking about this. It doesn’t mean you do it. It just means you start thinking about those things. I think when it gets to that stuff, anywhere between, I’d say, $3000–$5000 you probably want to start thinking about outsourcing support, when you get up to $10,000, you should probably be full-time on it, but again, it depends on whether or not you’re going to be able to support yourself when you are full-time on it.
I heard probably from Balsamic talk about this and I think it was at a business and software talk where he said that he held off on his first first hire until after he got to a point where he was just literally not sleeping because he could not possibly do all the stuff that was required of him. It’s interesting because its almost 10 years ago where that happened. It was around the beginning of 2009 and he was getting to the point of 2500 customers on a weekly basis. He was getting so much money coming in but he just could not keep up with the business. He’s like, “I have to hire somebody.”
If you do the math on it, 2500 customers in a week, I don’t remember how much Balsamic was selling for at the time. I’ll say $40 or $50 but at that rate, that’s a substantial amount of money. And that’s on a weekly basis. Not even a monthly basis. So you can figure $60,000-$80,000 on a monthly basis, something like that. That’s where he got to before he started bringing in one person and it’s because he didn’t want to hire. At some point you have to. Certain scales of problems are so large you have to do things that maybe you don’t want to. But at the same time, those things are sometimes good for the business.
Rob, I’ll let you jump in. Where do you think? At $10,000 it’s pretty not standard but that’s kind of the benchmark most people use for going full-time on it. But what does $15,000 mean? What does $20,000? What does $25,000 mean?
Rob: It really does depend on where you live, how far you can take that in, where you’re hiring out of. Let’s say you’re in Chiang Mai, Thailand, you can live on $2500 a month, you can hire people there or in your same time zone, full-time developers for $1500–$2000 a month, then you can move way faster if you want to. Or you can just bank money like crazy.
So, it does depend on are you doing this as a lifestyle thing? When I think back to my experience, I had some apps where I didn’t really want them to grow. I just wanted to rake in the $3000-$20,000 a month they were throwing off and just maintain that. I had no aspirations to 5X or 10X that, and that’s a great lifestyle business. If that’s your goal, then do that.
But if you do want to get as big as possible, you want to create as much value financially for yourself as possible, you want to grow it to $100,000 a month, and when you get into this seven figures and you have a SaaS app in a seven-figure revenue range, even high six figures but certainly if you get into seven figures, that is where the exit multiples change because there’s private equity that is willing to start talking about revenue multiples instead of net profit. So, it doesn’t become this 2½–3½ range. It can be 1½–3 times your top line revenue. But you have to get big enough that it’s worth them even having a conversation with you.
All that to say, there’s two totally different paths. I would say do support as long as humanly possible and don’t hire a support person until you feel like, “I’m either really tired of this, I’ve learned all I can from my customers, or I don’t want to do this anymore.” I can see hiring a support person well before $10,000. I can see hiring when you’re at $5000 if you just can move faster by not doing the support.
At $15,000 or $20,000 I would probably remove myself from development as much as possible, unless it’s something you really want to do. But if you want to maximize growth, stop doing it, hire someone who’s good. You have budget to do that. If you want to do it, that’s fine. You’re not going to grow as fast. Just know that that’s what you’re doing. You don’t have to. That’s the beauty of what we’re doing. We’re bootstrapping. You can do what you want.
When you get into the $30,000 or $40,000 that’s when you can either just be raking in buckets of money, which is awesome, or you can start thinking long term about, “Okay, now how do I double from here?” because I think it’s $83,333 is where you hit that $1 million a year. How do I get from $30,000 or $40,000 to $80,000, where are my plateaus up ahead and who do I need to hire to stay out ahead of that?
That’s typically when you start thinking about hiring someone to head up marketing or growth because the founders are often doing it up until that point. If that’s what you want to do, then focus. But if you want to rise up that one level to where you’re managing product, engineering, marketing, customer success, and sales, then that’s in that range where I think you have budget to hire someone who’s good at growth and is not someone junior you’re going to have to train, is expensive, much like a knowledgeable developer is expensive.
So those are the trade-offs. We could walk through a hypothetical example. I don’t know that it’s any more helpful than that. I think to me it’s like keep the team duty opposite to what’s venture fund companies do, which they try to grow headcount super fast and spend the money.
I think keep the team as small as possible, unless you’re putting yourself under undue stress, unless you’re more stressed than you should be, unless things are falling through the cracks. That’s where you’ve taken it too far. But in general, the more profit, the better because it just gives your optionality. It gives you optionality is take more money off the top. It gives you optionality to hire someone when you need it.
If you have $10,000 a month that you’re just throwing into that business bank account, that’s great. If you decide to […], “Oh my gosh, our competitor’s doing this and we really need a head of sales or a head of customer success or whatever,” you have the option to do that.
Mike: And I think that’s the entire point of the whole question is what are the different options? I think Rob just laid out a bunch of different places where, at those points you have those options, and it really boils down to what you want to do with the business, where you see it going, and what you don’t want to actually do inside the business. Those are the things you hire out at whatever those points along the way are.
Rob: So thanks for those two questions, Adam. I hope our discussion was helpful.
Mike: I think that about wraps us up for the day. If you have a question, you can call it into us at our voicemail number at 1-888-801-9690 or you can email it to us at email@example.com. Our theme music is an excerpt from We’re Outta Control by MoOt, used under Creative Commons. Subscribe to us on iTunes by searching for ‘startups’ and visit startupsfortherestofus.com for a full transcript to 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 how to take your SaaS upmarket. Some of the steps they discuss include, raising prices, modifying your pricing page, asking for annual contracts, and how to give demos.
Items mentioned in this episode:
- Better Cater
- Product Demos That Sell Book
- Anna Jacobsen attendee talk from MicroConf 2016
Rob [00:00]: In this episode of ‘Startups for the Rest of Us,’ Mike and I discuss how to take your SaaS up market. This is ‘Startups for the Rest of Us’ episode 321.
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.
Mike [00:27]: And I’m Mike.
Rob [00:28]: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week, Mike?
Mike [00:32]: Well, I added another paying customer to Bluetick this past week. It’s been a little bit of a challenge just because the automation pieces are starting to become much more integral and important to the whole thing. I’ve been looking into Zapier Integration and how we can put that in place, and going through the different documentation and stuff that Zapier has out there you can create a private Zap that you can just share with certain people. But in looking through it it seems like there are probably a bunch of places where we need to make these minor tweaks here and there in order to make it easier to use with Zapier and make our API a little bit better.
We’re looking at those things right now. There’s lots of tiny details to iron out but things are looking well so far.
Rob [01:14]: Yeah, adding a new customer is always good. With the Zapier integration, we have rolled at least two different versions – maybe a third – to ours. We ran into some struggles early on with wrestling with Zapier around. It wasn’t as intuitive as we found some other systems to be. I think they’ve done some good things. I don’t know that they’ve corrected it, but they’ve at least improved that over the past year or two since we integrated. It is more complicated than you want it to be. You have to think about a lot of stuff. It’s not just a typical hidden API endpoint. There’s almost like client-end stuff, and your passing [?] back and forth to power their UI. It makes sense, given the tool they’ve built, but it’s a lot more work than the standard integrations that we have done.
Mike [01:56]: Yeah. The other thing I’ve noticed is that when it comes to objects that have lists of things in them then it – I won’t say it completely falls down – but it definitely makes things a lot more challenging when you have situations like that.
Rob [02:08]: Sure. We received a voicemail from someone who wanted to stay anonymous, so I’m not going to play the voicemail but he works at a health insurance company and he also listens to the podcast. He had a comment about your comment from, I think, a couple of episodes ago where you were mentioning insurance premiums and how it seemed like the insurance companies are price testing and just increasing to test to see how much people will pay. He had a good point as an insider at a company, he sees how these things work. He said that the regulation on them is so tight that they have a really tough time. They’re not supposed to make more than X-dollars. They get penalized if they make more than a certain amount of money. I don’t know how that’s all regulated, but it was really interesting. He said that premiums just are going up. But they have been going up for a long time. It’s funny. I was thinking back to when I first became self-employed – right around, I think, it was around 2001 – when I became a consultant. I went and I got Kaiser, which is a U.S. based HMO. I got coverage for myself and my wife and, if I recall, it was like $130 a month, and it was quite good coverage. If you look for the same coverage now I bet it’s like $1,000 a month. So it’s been going up for 16 years, and some folks will blame it on the Affordable Care Act, but it was a disaster before that. Since the late ‘90’s it’s just been – or maybe it’s like 2000, 2001 – it’s been ratcheting up 10%, 20% every couple of years. All that to say, it was kind of cool to hear his perspective in the sense of the costs are going up. Our healthcare system is kind of jacked up, but that, in his experience, he said his company and the people there they really do care about helping people stay healthy and trying to help them. He said that’s the general inside. It’s not this big conspiracy theory that a lot of us think it is, is what he was saying – at least at his company.
Mike [03:53]: Yeah. I can totally see that. My experience with it was really just looking for health insurance over the course of three or four years, where literally every year it was going up by what seemed like massive amounts. I could go out through an insurance broker and the differences between them would be literally $300 or $400 in the same year for the same type of coverage from a different company. It didn’t really make a lot of sense. And because everything’s so obscure it’s really hard to make apples to apples comparisons between some of those companies. I would trust his judgment over mine just because I was totally speculating about it. It is very frustrating to be a business owner and have to spend your time trying to figure those things out.
Rob [04:31]: I agree. It has always been a headache, and I’d say it’s even more of a headache now and costlier than it has been in the past. So the only other tidbit of news I have is that me and my family are heading to California for the holidays, and it’s just in time. We had a day yesterday here in Minneapolis where the “feels-like” was 30 below, and that was really interesting. What’s interesting is the day before it was probably 15 below, I think, 15 to 17, but the sun was out and we were all outside on and off for an hour or two. We just had to gear up, there wasn’t a ton of wind – it was humidity that caused it to be really that cold – and we were building snow forts and doing all that stuff. But the 30 below, that was different. That air temperature was pretty gnarly, so we were only outdoors as much as me absolutely needed to be. I think we’re going to enjoy our seven-day trip out here to Santa Cruz, California.
Mike [05:24]: I think I did warn you about the temperatures there.
Rob [05:28]: Oh, yeah. The weather almanac warned me about the temperatures there. Alright. So today we’re talking about how to take your SaaS app up market. It is a listener question from Anthony Franco, and he’s from bettercater.com. He says, “Thanks for the podcasts and for MicroConf. Looking forward to attending my second one this year. I have a question about enterprise sales. We’ve launched a SaaS and had a good amount of mom-and-pop small businesses sign up, but now we’re looking to expand into more enterprise level customers. What are your tips and suggestions on how to target larger enterprise level customers compared to small businesses? Specifically, what are some changes you’d recommend on the sales side and the sales process, or maybe even general features enterprise companies expect?”
That’s what we’re going to do here. We’re going to take the next 15, 20 minutes to talk through this. A clarification I want to make is this episode is about taking your SaaS up market in general. It’s not about shifting from $20 a month customers to true enterprise customers. When I think of enterprise, I think of fortune 1,000 or fortune 2,000. You know, $50, $100, $200 million companies. And I don’t think that’s relevant to a lot of us, and I actually don’t think that’s probably what Anthony was thinking. But the idea of going up market – so maybe now your selling $20 or $50 a month plans, but you want to also sell to customers who might pay you $200 or $500 or $1,000 a month, I think it’s a really good thought experiment, and I think there’s a lot of questions we can ask about whether you should make that move, things you should be aware of, and then some steps to take to make that shift. Because going up market, there’s a lot of pros to it in terms of your just going to grow faster. You need a lot fewer customers to grow a lot faster.
Mike [07:01]: I think this is a really interesting question, and very cool topic to dive into. Let’s talk about some of the questions you would have before you would even decide to make this move. What are some of the questions that somebody might ask themselves?
Rob [07:11]: Sure. I have a handful of questions here. The first one to ask yourself is, “Can your technology scale to support larger customers?” In a lot of instances this answer will be “yes”. If you have just kind of basic crud app that’s used to manage finances or something, and doesn’t have a lot of external integrations, doesn’t have a lot of queues, doesn’t have a lot of moving parts, you’re going to be fine. But if you run an email marketing app, or you run something that has to do a lot of data crunching, moving from customers who mostly have 100 or 200 records in your database to customers who have 10,000 or a 100,000, it’s going to be a big shift. We’ve seen this as DRIP has grown that our largest customers are the ones that put, by far, the biggest strain, and it’s exponentially more of a strain on everything; all the infrastructure and the queues. This is the first thing to think about as you’re thinking about bringing on larger customers.
Mike [08:00]: I think going along with that you kind of have to have a basic understanding of where the choke points in your app are right now, and what sorts of thing that an enterprise customer would need – or a larger customer would need – that would essentially stress those areas. Are there customizations that could go in there? Are there other integrations that are going to cause places to start to fall down? There’s a very big difference between when you’re displaying data when your customer only has, let’s say, 50 or 100 contacts in there versus a 1,000 or 10,000. Those are two entirely different mechanisms that you need to account for when you’re displaying information to the customer. It’s not even just, “Can the technology itself scale, and can your backend, but also are you able to continue presenting the data from your app back to the customer in a way that’s easy for them to understand and get around. Because if they can’t find what it is that they’re looking for just because they’ve dumped so much data into it, then it’s going to make it difficult for them to even use your app moving forward.
Rob [08:58]: Right. The answer to this one may be, “Well, we don’t know if we can scale. We think we can, and if we get an enterprise customer then we’re going to throw a bunch of money at new servers, and a bunch of time at making sure stuff works once they’re in.” That’s okay, as long as you don’t have weeks or months of work to do once they get in. I don’t want to tell you to over-engineer or go in and gold plate your entire app at the thought that someday you may have an enterprise customer. It’s more about just thinking through, “Where are the places where this is probably going to break, both from a UX perspective and from a performance and scaling perspective.” The second question you should think about – and this one may be the most important actually – is do you have the staff to handle an enterprise sales process, or a process where you’re selling to larger customers? You’re going to need to be doing lots of demos. You’re going to need to be doing phone calls, video chat, and you’re probably going to have additional support burden from selling to larger customers.
Mike [09:52]: I think this stuff that’s extremely challenging when you’re running it just by yourself, or maybe you’ve got a couple of contractors who are either doing development or support. It’s very difficult to scale up to that point and be able to continue juggling all the different things, especially if you’re early on and you’re really not making a fair amount of money from it, and you’re not fulltime on it. If you’re looking to do this before you even get to the point where you are fulltime on it, it’s probably going to be very difficult, because let’s say that a customer has to have a call in the middle of the day. Unless your schedule can allow for that then it’s going to be difficult for you to get away and start scheduling those. In addition, if you have some strict time schedules, in terms of like when you spend on development or marketing, it’s going to be difficult to be able to have your days divided up by those different sales calls or those different support calls. If those are forcing themselves into your schedule, it makes it difficult to give the appropriate amount of tension to all the different things that you need to as well as grow the business.
Rob [10:51]: The third question you should ask yourself before making the move is: Do you want to deal with the negatives of selling to larger companies? Because, obviously, the higher price point and the ability to grow faster are the positives, and the negatives are things like longer sales cycle, a lot more handholding throughout the whole process. Having to convince multiple people to purchase often. Instead of just having a single point of contact, you’ll have a committee who’s trying to make the decision, or it’s two or three people on a team. It’s just more headache to go through. They’re going to have questions about things like your Terms of Service, legal structure, privacy, security and on and on that you never received from small vendors, or from small customers, I should say. People who, again, are paying you $40 or $50 a month, they don’t tend to ask these kinds of questions, and so you’ll have to spend a lot of time up front figuring out the right answers. Again, they expect a lot more handholding, and more calls and meetings that someone is going to need to handle, because this sales process you kind of have to earn these higher price points. They don’t tend to just come and hit your pricing page and self-onboard like a lot of the lower-end customers are used to. The fourth question you should think about is: Do you have any case studies that you can use during this process? You may not be able to jump up to customers who are paying you $2,000 or $3,000 a month if you don’t have anyone paying you more than $59 a month, as an example. So you may want to ratchet your way up and look for customers in the $100 to $500 range, and get one or two that are in there, and then look up from there at $500 to $1,000, or $500 to $1,500. You can gradually move your way up, because if you’re talking to someone who is in essence going to be your biggest customer and they ask you point blank who is your biggest customer now, it’s really tough to tell them it’s someone that’s 1/50th your size, but it’s not as bad to say, “Someone who’s half your size, or three quarter your size.” It’s a lot easier to do.
Mike [12:38]: Even if they don’t ask directly who your largest customer is, they’ll very often have questions about how have other customers who are our size, or have done X, Y and Z, been able to scale the services inside of your product, or accomplish such and such solution to a problem they may particularly have. If you don’t have examples of those types of things based on a larger customer base – and by larger I mean customers who are larger in size – then it’s difficult to answer those questions in a way that you’re not being deceitful. You really don’t want to start stretching the truth or, obviously, outright lying to customers, because that’s just going to put you in a bad situation later on. For whatever reason, it always seems to come back, and you will have to answer questions later on, or there’s going to be misunderstandings. That’s not a position you want to be in. You’d rather be in a position where you’re collaborating with them and being honest and upfront with them, and letting them know exactly what it is that they can expect, and what sorts of things that you’re not going to be able to do for them. The first steps are being about to, kind of, as Rob said, stair-step your way up with some larger customers to help answer questions down the road of those other larger customers.
Rob [13:46]: The fifth question you should ask yourself is: Do you have the cash runway to make this happen? Going through this enterprise, or this large company, sales cycle, these things can take three months, six months, nine months and from a standing stop it can be a lot of manpower and effort and time, which is money, that you’re basically spending before you get that first check. So think about whether you have the runway to make it work.
Mike [14:11]: I think that goes just back to the point that this isn’t something that you want to try and do on day one. I think this is something you gradually grow into when you’re trying to expand the market for your product or your trying to increase the rate of growth, and increase the revenue that’s coming in, and those types of things. This is not something that you want to really tackle on day one, or even day 30, when you really don’t necessary have the app or the marketing itself straightened out, and you can’t go to those customers and have a legitimate face on the business such that it’s going to be able to solve their problems. If you don’t have the cash runway in order to get out three months, six months, nine months where you’re actually landing those customers on a regular basis, then it’s very difficult to make ends meet in between that time, not just beyond that.
Rob [14:55]: The sixth question is: Will you offer phone support to your larger customers? My take has always been that we don’t offer phone support. Sometimes we have a few priority queues where people can get it via email, but this is a tough decision, and it’s going to be to each business owner to decide this. The hard part is if you go through this whole demo sales process, and then you’re handholding, and you’re getting them in and you’re getting them on boarded, then they have another questions and they Skype you, or they, “Hey, could we just jump on a call so you can explain this?” Then it’s really a support thing. You have to be able to make that transition at that point, and have them not feel like you let them down or misled them. At that point you’re like, “You know what? You got email support at myapp.com and they’re going to help you out.” That’s something you need to think about how to handle up front, because people get an expectation if they’ve talked to you three or four times, you’ve answered all their questions, you’ve helped them get set up, that they’re a liaison, and they want to go to you every time they have any questions about the app.
Mike [15:43]: There’s a few different ways I think you can handle this. When you are giving demos, a lot of times the question of support will come up and you can probably just be blunt with them and say, “Look, we don’t offer phone support. At least not a “call in and you can talk directly to somebody”, but there’s the email line and you can send it in. We answer them pretty readily. If we need to get on a phone call with you because it’s warranted then we will, but at the same time – in order to help reduce the cost that our customers are paying – then we start with email and it can be escalated from there.” I think that that’s a good way to at least address that issue but, again, there’s going to be customers out there who, if you don’t have a phone number that they can call then that’s going to be a deal breaker for them. You have to just understand what your customer base looks like, and whether or not that’s going to be acceptable to them.
Rob [16:29]: And our seventh and final question you should think about before the move – and then we’ll dive into some steps of actually making this move – is how do you repeatedly get in front of larger customers? Do you already have a funnel, or already have channels where larger customers are arriving at your site and they’re asking for phone calls? Then you’re golden. This actually was the situation we were in with Drip when I hired Anna about 18 months ago. She became basically sales and customer success. She also did some marketing at the time. She handled the demo and the sales process, and I knew that we were getting – I don’t remember, maybe one a week, two a week – of people who said, “Hey, I’m interested in using it. Can I jump on the phone with somebody?” But if you’re not in that situation, and you’re not already getting inbound interest, it’s probably good to think about how are you going to get in front of these larger buyers?
Mike [17:15]: That brings up another interesting point. If you’re not able to get in front of those people on a repeated basis, or they’re not already coming to you through whatever inbound marketing efforts that you have, then you have to make a decision. One, are you going to shift your business to do more outbound efforts to reach out and directly contact these larger customers? Because that, in itself, can be a fairly large endeavor. Are you trying to pursue something that your marketing campaigns are simply not set up to handle? And if that’s the case then you’re going to have to change a lot of the things that you’re currently doing. I think it’s a very different story if you’re going and trying to move your product to up-market but you’re not getting any sort of interest, versus you already have that inbound interest and you’re essentially just trying to remarket your SaaS app a little bit and tweak some things in order to be able to serve those and not automatically turn them away based on what your marketing collateral on your website says.
Rob [18:09]: All right. Now that we’ve talked through those, let’s look at seven steps for making this move; for taking your SaaS app up market. The first one is to raise your prices, or, at a minimum, have an expensive tier that these larger customers will kind of automatically fall into. With usage based pricing like let’s say CRM, let’s say Close.io, it’s going to be based on the number of logins; the number of sales people, or people who need access. A larger customer should almost, by definition, have a larger team, and they’re going to have 10, 20, 30 people, so if you just price it based on that you’re going to be golden. Similar with if you run support software, anything where the stuff that your users see is different for each user, then it’s a no-brainer to charge based on the number of logins. If you have something where it’s more usage based – let’s think about email service providers or proposal software, or invoicing or whatever – you’re going to want to find what the metric is. An email service provider will charge based on the number of subscribers, and larger customers tend to have bigger lists, so this makes sense. You have to find that level where you can either have that high end tier that they automatically fall into, or, if you’re going to go after this, you have to raise your prices across the board just to be able to afford everything we’ve said above. You can’t be selling to large customers and charging them $30 or $50 a month. There’s just not ROI in it, because the time it takes to work with them is so substantial.
Mike [19:29]: I think it was at last year’s MicroConf – not the one six months ago, but a year and a half ago – when Lars Lofgren had been talking about different ways that people are selling their software and services and how they’re, essentially, packaging together what the different pricing tiers are, and what the different switches are. I think that this is an interesting area to get into, especially if you don’t have a product where there are going to be a lot of people using it and you don’t have that per user pricing that you can toggle. The one that comes to mind that I distinctly remember was something like WebEx, where a large company that wants to use WebEx for their sales team, they are naturally going to have more people on their sales team, but it’s difficult to justify charging, let’s say $150 per person when you have this per user pricing tier and really the sales reps can actually just share a login and share an account. In those situations, it really doesn’t make sense to do a per user pricing model just because a $50 or a $75 a month plan can support three or four or five different people. It makes it very difficult for you to make more money when you’re trying to charge based on that particular feature.
Rob [20:40]: The second step for moving up-market is to modify your pricing page, and to basically add a tier – typically to the far right, depending on how your page is structured – that is the “Call Us.” The high volume tier, where it says, “Call us for pricing.” You can call this enterprise if you want. We’ve found in our space there are people with really large lists that are not enterprises, which is why I’m differentiating that and just talking about larger customers here. So figure out a good name for it, and get a phone number on there, because if you are going to do this you’re going to need to be able to connect with folks, these larger customers, over calls.
Mike [21:13]: I think the interesting point here is to try and figure out how to best guide people towards that. When you have a pricing page, or even just talking a little bit more broadly in general about your website, you have to be a little bit careful about the types of examples you use even. One thing that had come to mind was that if, for example, your pricing, if you have a $9 a month pricing plan, that can immediately turn people away who are large, because they say, “Oh, well, there’s this $9 pricing plan here, and the highest plan is only $35” for example. Those customers are going to look at that say, “We’re far too big for this company to even be able to handle us, so we’re just not even going to bother.” They won’t even talk to you. They won’t reach out for a sales demo or anything, because they look at the pricing page and they say, “This is just obviously not for us.” The opposite of that can actually be true as well. If you have prices that start at $100 a month, then a lot of your customers right now are only really able to afford $30 a month or $40 a month, they’re going to look at that high price and they’re going to say, “This is too expensive for us.” You really have to be a little bit careful about how you’re positioning the product, and how you’re putting your pricing page together, and the types of examples that you’re using inside the images and examples that you have on the website. Those are a couple of different things to keep in mind. You want to appeal to most of them, but at the same time that can be very difficult based on what it is that you’re selling because you don’t want to exclude anyone either. At least not exclude anyone who would be a good fit for using the software.
Rob [22:42]: The third step is to consider adding your phone number to the top of your website. You may want to say, “For sales questions, call this.” and if someone calls and asks for support, you may need to tell them, “We’re not able to do that. You’re going to have to email support queue.” I’ve heard having your phone number at the top of your page is a good thing.
Mike [22:58]: There’s a bunch of different services you can use for this. Skype has its own “Skype In” number, so that’s one option. There’s also a service called Grasshopper, and you can get virtual phone numbers for that as well. People can call those, and you could either route it to a voicemail, for example, during certain hours of the day, or you can route it to different team members depending on how it is that you have your team set up. So there’s a bunch of different ways that you can accomplish this. Another one that you could also use is Kall8.com. You can just purchase a phone number there, and when people call into that number you can just have it go directly to voicemail, take the number, and then have it sent over to you via email. Then you can call the person back at your own time. I think that in some cases, just having a phone number there, even if nobody calls it, that can help with sales. But there is the opposite of that scenario, as well, where somebody might call that and then be turned off by the fact that nobody ever answers. You do have to be a little bit careful about that but, again, there are options for having a phone number there if you don’t want to use your own cellphone number or your home line or business line or whatever.
Rob [24:03]: Right. The idea here is you’re trying to generate this inbound interest. It’s trying to get people on the phone, because that’s the way that you are going to sell these larger priced plans. The fourth step for going up-market is adding a “requested demo” button all over the place. You’re going to ask for some basic contact information, then you’re going to ask one or two qualifying questions, such as, “How many users do you expect? How many subscribers are in your email list?” Something that can define that they’re in that top tier, because if they request a demo and they’re not in that top tier, it very well is not worth, in essence, the time investment to give a demo to people who are going to pay you $30 or $50 a month. You want to have something in there to qualify them, otherwise you’re not going to know which of these demo requests to respond to. The way that we’ve scaled this at Drip is if people are below a certain number of subscribers then they do see a demo but it’s a prerecorded demo. It walks through the app and then it offers to bring them in for a trial. Of course, if they’re above a certain subscriber rate then they get a call from us, or they get an email with a Calendly link, and it sends them into the demo flow. We have this link on our homepage, we have it in the global top nav and that’s what I’d recommend for you as well if you’re going to go after these types of customers. Our fifth step is to learn how to give demos if you haven’t already. I have two recommendations for this. There’s a lot of good information on this, but I’d recommend you read Steli Efti’s book. He’s the founder of Close.io and he knows a lot about how to give demos. His book is called ‘Product Demos That Sell.’ We will link that up in our show notes. I think the book is very inexpensive. It might even be free; somewhere between zero and $10. It’s a complete no-brainer, and it’s one of the best books I’ve seen on this topic. The other recommendation I would say is to watch Anna’s video. Anna’s on my Drip team. She did an attendee talk just about six, seven months ago here in MicroConf 2016 in Las Vegas. We’re going to link that video link up in the show notes. She basically walked through how we developed the Drip demo process. I think it went through four or five different versions. She talks about why we made certain changes at certain points. It’s a short watch, about 12 minutes. She gave us a lot of thoughts about how we structured things and why.
Mike [26:13]: There’s two different types of demos. Going back the previous step in this which was step four, adding the “Request a Demo” all over the place. There are the demos that you give that are simply prerecorded, and then there’s demos that you give in person. When you’re giving a demo in person a lot of times you will have these questions that come up either at the end of the demo or in the middle of it. Those are the types of things that you probably want to write down, so that when those questions come up you can have a better answer for them. When you’re at the end of the call, if you’ve hopefully recorded it so you can get better at them over time, you write down the questions that were asked of you and then come up with, essentially, standard, boilerplate answers that you will give to those that will improve over time as your offering gets better, and as you give more of the demos. You don’t want to start making up answers to people’s questions on the fly and have them sound like they’re unrehearsed or like you’ve never been asked before. You have to answer every questions and you have to think of answer on the spot then it becomes a little bit less believable and less, obviously like you have answered that question before. If you write them down you can come up with those answers and it sounds like it’s off the cuff, even though it’s not, even though you’ve actually heavily thought about those things before.
Rob [27:27]: And just to clarify, when you said video versus in person, you meant video versus live, right?
Mike [27:32]: Oh, yes.
Rob [27:33]: Yeah.
Mike [27:34]: Yes. That is what I meant. That’s correct.
Rob [27:35]: Both of them are over video, but one is prerecorded, in essence.
Mike [27:39]: Yeah, that’s what I meant. It was prerecorded versus live and not in person but yes.
Rob [27:44]: Cool. So step six is to ask large customers for annual contracts. As you’re doing this sales process it’s pretty standard to get 12 months’ payment up front. This is great for your cash flow. You’re going to get a really big check. Typically, they won’t balk at it. Sometimes they’ll say, “Let’s do six months, or let’s do a quarter.” You can work with them on that. But since it is something that’s somewhat standard with these guys it’s kind of a no-brainer to do this, because the worst thing you can do is go through this whole process, you invest a lot of time, you get them signed up, and then they cancel a month or two later. That’s unlikely to happen, but it’s a real bummer to do that. If you can get that whole year of cash up front, it’s really something to consider with your larger customers. Our seventh and final step for moving your SaaS up market is not a hard and fast rule, but it’s something that I would recommend, because it’s going to be super tempting to do, and it’s: don’t do custom work, because pretty much every call you get on is going to be a company asking for something custom for them. They’re going to say, “This looks great, and we would just use it if you could wire up some code to hit our API and put it into our custom CRM system.” You know that that’s like eight hours of work, and you know that you could pull it off but it really, really is a danger zone to do this, because then you’re on the hook for a lot of stuff. You’re on someone else’s timeline, and you need a consulting contract, so you’re going to have to go spend time to do that. Then you’re going to find out their API is really buggy, and they’re going to blame you, and you’re going to blame their developers. Everything goes wrong and it’s a huge waste of time. I’ll just say that. So don’t do custom one off work that is really more like consulting stuff. Again, not a totally hard and fast rule, but I think probably more than half the calls you get on someone’s going to ask you for something like this. If you’re building a product company, you want to stay away from this. The other thing that is kind of on the fence we hear a lot is, “Yeah, if you’d just build this one feature, and all your customers could use it, then we would become customers.” For the most part, we don’t do this. We sometimes, if they actually are requesting something that is already on our roadmap, we will tell them that. We will say, “We could bump it up a little bit for you. If you’re willing to, in essence, sign a contract and not send us the check yet, but that you’ve agreed to do it we will,” move up the priority. Move it sooner in the roadmap. Again, if we were going to build it already. But if it’s something that someone suggests that really no other customer is going to use, you’re a product company now. It’s just not something that I would recommend, unless – and here are the exceptions, right, and this is where it depends – unless you’re in very early stage and you’re trying to get a big name customer on who you think can do a lot for your brand and they’re going to pay you buckets of money, then I would consider building a one-off feature and probably “feature gating” it, so that you have a checkbox in an admin console somewhere where only that customer sees it, because you don’t want to support that for everybody. You have to make a call at a certain point. Is it worth this however many hours of work to get this customer on board based on the amount of money they’re going to pay you and perhaps the amount of prestige they can lend to your brand. You have other thoughts on doing custom work?
Mike [30:45]: I think I agree with you in general. You really want to avoid the custom work if at all possible, and I think that it’s probably a good realization to have that even if somebody says that they will sign up for something, if you build that one feature and it sounds like something that a lot of your customers could use, then you have to heavily weight that on whether or not you do it. It’s up to you as to which way you go on that. One thing I would say to keep in mind about all of this though is that there are some questions that companies will ask solely because they want to hear an answer, and not because they actually care about what the answer is, or whether you do that. For example, they might ask, “Can you implement feature X, Y, Z?” And they don’t actually care if you can implement that but it’s hard to tell just from the conversation without directly asking them is that something they really need or is that a deal breaker. You can turn that back around and the question you can ask is, “Is that important to you?” From there that’s where you take the conversation. Sometimes it’s just curiosity. They just want to know, “Hey, can you do this?” And it doesn’t matter what the answer. They just wanted to know. I’ve had this conversation with people before, and I’ve had them ask me stuff like that and I’ve asked, “Is that important to you?” “No. I was just curious if you could do that.” In your mind, it’s very easy to go down the path of, “Okay, well they asked me this question. How would I go about doing this? How would I implement this?” Then you start talking, essentially, you’re talking yourself into implementing it for them, and they didn’t even care. That’s a very fine line that you have to ride and just keep in mind that sometimes the customers actually don’t care. They’re just asking because they want to ask, or because it was something that came up in some other meeting.
Rob [32:21]: Thanks for the question, Anthony. I hope that helps give you some ideas on how you can go after larger customers.
Mike [32:27]: I think that about wraps us up for the day. If you have a question for us you can call it into our voicemail number at 1-888-801-9690 or you can email it to us at firstname.lastname@example.org. Our theme music is an excerpt from ‘We’re Outta Control’ by MoOt 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. We’ll see you next time.