In this episode of Startups For The Rest Of Us, Rob and Mike answer a number of listener questions on topics including trials versus money back guarantees, product founder fit, the stair-step approach, and more.
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Rob: In this episode of Startups For The Rest Of Us, Mike and I talk about product founder fit, stair stepping, free trials versus money-back guarantees, and more listener questions. This is Startups For The Rest Of Us episode 415.
Welcome to Startups For The Rest Of Us. The podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products, whether you’ve build your first product or you’re just thinking about it. I’m Rob.
Mike: And I’m Mike.
Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. Croatia, sir. When this goes live, you and I are at MicroConf Europe.
Mike: Yes, that should definitely be fun. People have asked numerous times like, “What was it that made you select Croatia?” and it’s like, “Well, we’ve never been there before and it becomes a business expense.” Seems like a good reason as any.
Rob: And it’s hard for us to get to from the States but it’s reasonably easy to get there from within the EU. It’s gorgeous. It’s where they filmed a lot of Game of Thrones like the exterior scenes. Obviously, we do MicroConf Europe because we love to see everybody and it’s fun to get the people together and offer the value that we do through the MicroConfs, but we have always been pretty deliberate about where to place it.
First couple of years, we’re in Prague, and that was actually suggested by our coordinator at the time, Dan Taylor, and it turned out really cool because Prague was a fun city to be in. And then next, we picked Barcelona because you and I hadn’t been there and people want to go there. Then we went to Lisbon last year. Croatia is I think a nice next step. We’ve looked at Berlin and Greece, and a bunch of other cities and countries, and I think someday we’ll obviously move it to another place but I, for one, am very excited about this.
I’m going there with my family, wife and kids for two-and-a-half weeks. We’ll be in Dubrovnik itself for about a week but we will be surrounding cities kind of exploring. I don’t know if you’ve looked at images of Croatia or even just read up on it but there’s a lot to do there.
Mike: Yeah, definitely. I did look into it a little bit and there’s way more than you would actually think for a small country like that. It would be cool to just hang around. I’m personally looking forward to go and around looking at Dubrovnik itself just because it kind of mentally overlap between the stuff I’ve seen on Game of Thrones and then what the actual city looks like but I did hear that there’s a Game of Throne tour or something like that. I don’t know. I’m hoping I’ll have time to do that but we’ll see.
Rob: I agree. That’s going to be a no brainer for me for sure. This week we are answering some listener questions that have come in. With this episode, if we get through all of these, I believe that clears out our question queue. If you have a question for us you want to answered soon in the next couple of weeks, send it into us. Email us at firstname.lastname@example.org or call our voicemail number. As always, voicemails and audio questions go to the top of the queue.
Our first question is about how many commitments you need to validate an idea, it’s a follow-up question to episode 410, it’s from Chris Palmer. He says, “Hey, I have a question for you. You say you should find 30 people to validate your idea. I’m working on an enterprise software concept with what I would pitch at an ARR, it’s annual run rate or annual cost, of between $10,000 and $150,000 plus. In other words, roughly based on company population plus paid-for seats. What I want to know, in your opinion, is 30 people or 30 companies still a good target number for validation? I used to work in a team. The company had 80,000 people and they will use the product. I’ve spoken to two other companies. One of the people who’s really interested is the director of communication at a large company. I’m going through my network to speak to more people. Cold contacting has not worked.”
It sounds like he has three companies that he’s at least in conversation with. Back to the question. “Given the income per customer, what number should I set? I’m confident with my validation statement and the concept’s possible success. Also, I just wanted to say thank you for your advice last year regarding a situation I was in. Your advice was super helpful. Thanks, Chris.” What do you think, Mike?
Mike: I don’t want to call it an edge case, but this is one of those situations where there’s general guidelines that you can follow, and then there’s cases like this where things fall so far out of what is normal in those situations that they don’t tend to apply. Most of the guidance that I’ve talked about in terms of how many people should you really talk to, it kind of assumes that people are paying a reasonable low monthly rate for it.
Enterprise sales are very, very different and depending on who it is you’re selling inside the company, it’s going to be a very different sales. If you’re selling to the IT director, it’s a different sale than if you were selling to the marketing director. The marketing director is only concerned about their own team versus if you’re selling to the IT director, you have to convince them not just that it is good for their team but also for the entire company, too. That’s what it sounds like this situation is because it’s based on company population versus the size of the IT team.
Rob: That’s why I’m glad he sent this in because it makes me question assumptions that we might have when we kind of call out rules of thumb. There’s always going to be an edge case with the rule of thumb and it’s neat when we can hear about one and then actually talk about, “Well, this is how we would think through that.”
Mike: Right. I think in this case it sounds to me the product is aimed at the entire company. I don’t want to use WinZip as an example, but I’m going to. WinZip is typically installed on every computer in most organizations just because—not almost all organizations—people who have it, they’re going to install it everywhere. You’re not going to buy it for just one team, for example, because it’s going to be used by pretty much the entire organization.
If you’re licensing like that, then it is a much more difficult sale because you have to convince them not only can you deliver on whatever the promises are but there’s value there for everybody and they’re going to be able to get around the training issues, any support problems, those are going to need to be taken cared of, and they’re going to want to probably test it inside of their environment.
In addition, you mentioned that you used to work on a team in a company of 80,000 people and when you have software like that that gets installed and deployed across the entire environment, what you end up with every single day of the week, there are people whose hard drive fail and they need to have either the hard drive replaced or the machine replaced and they’re re-imaging machines left and right. You have to be able to deploy that software in some way. Now, if that software can be remotely pushed, great. Otherwise, it needs to be embedded into the software image. You also need to figure out how’s that licensing stuff going to work.
Back to your question about how many people you need to validate it, it depends on how much money do you need. I would think you’d want to get commitments from enough companies that you’re able to basically do this full-time because I think it’s going to be hard to do it part time especially when you’re trying to make commitments to an enterprise company and if you’re trying to roll it out to the entire organization site unseen, I don’t know how you would get the commitment from them to buy it or maybe even an upfront payment for it without having something actually deliver to them. I feel there’s a lot of landmines here and it’s just going to be hard. Rob, why don’t you chime in here because maybe we can pass some ideas around for that.
Rob: Yeah. This is a tough one. To be honest, I don’t know if Chris is a single founder. I’m going to assume he’s bootstrapping and either single or maybe has one co-founder. It’s really, really hard to sell into the enterprise. You experienced this with AuditShark, right? It’s a lot of work, it’s a long lead time, and you kind of live or die by two customers or three customers because, again, if you’re going to sell it for $100,000 for an annual license, you only need one or two of those to go full-time on it. But landing one or two can take you a year or two years of just conversations.
It’s definitely an all-or-nothing. It’s riskier than trying to do this $10 or $30 or $50 a month thing where you can just cobble people together. I don’t know if it’s easier or harder, but I do think that there is a big barrier if you don’t already have that list of logos at your back to show you, “Hey, this is where we’ve implemented it.” because enterprises are slow-moving and they’re not very trusting of new technology in general, and rightfully so, because they’ve probably been burned by a bunch in the past.
I think that, that’s a challenge that you’ll face so know that going into it. I would recommend against this approach. But with that said, you have an idea and you are talking to three companies. I guess I feel similar to you that if you get yeses from all three, but you need more than just a yes. You need some type of written LOI, letter of intent, that if you can deliver this, they’ll go through with it because the problem is, how long is it going to take you to build this? You can get these verbal commitments and then is it going to take you six months or a year to build it? Are even the same people still going to be in the same roles at that company? Are they going to follow through on this verbal commitment they forgot about, most likely, to pay you $100,000 To that, I think that’s a challenge. How does he overcome that?
Mike: Well, you said letter of intent. I think an enterprise company is going to shy away from that just because it’s going to have to involve the legal team. You could ask them for a purchase order, you can send them an invoice, for example, that can’t be paid until 30 days or 60 days after delivery or sign-off or something like that. You’re going to have to put lines on the sand for you to be able to deliver. If you can’t meet them, then either it gets pushed out or if it gets pushed out too far, then the whole thing is dead.
One other thing that I did think of is that you could essentially treat it as a consulting engagement because if you can find enough companies to pay you on a consulting basis to deliver a solution, it doesn’t have to be yours, it can be something you cobbled together from a bunch of different places, and then you gradually morph it into your own code and your own full-blown product and then pull all the data over.
I would probably approach it from that side of things. Maybe you deliver it as a virtual machine that you give to them and then they can host it in their own environment. That’s probably more likely to succeed, but again, it’s a matter of getting them to sign off on, “Hey, we know we’re going to pay more for this than otherwise,” but there’s nothing here that says that this is a desktop application or a hosted web app. I don’t know if that would actually be viable.
Rob: Yeah. I do like the idea of consulting, actually. That’s a nice way to get that revenue upfront, the consulting revenue that you’re billing, and then be able to build that product, you have to write in the code and repurpose it to other people. I think with enterprise, that’s not a terrible way to go. You’re going to be plotting along as you go anyway. That’s going to take awhile to get these approvals.
So, yeah, it’s certainly not 30. I mean, back to his original question, he said you said to find 30 in order to validate. That is with lower-priced bootstrap SaaS in mind. This is a different case. I don’t know that I even have that. I could take a guess of if you get three commitments or five commitments, that sounds right. But then again, just as we’ve said, those commitments, what are they worth unless they’ve sign something. I don’t even know if verbal commitments from enterprise companies is worth doing.
I would venture to say that the approach needs to be something entirely different. I can see this consulting idea—he kind of call that—where start consulting with one or two of them, build that out and see if the feature sets overlap, you may get to the point where enterprise stuff is so tough because you can build a feature set and then every enterprise wants something different and they’re used to getting customizations so you really are not building a repeatable product. You’re building a code base that you then augment and do customer consulting for each one. I’ve read a […] so that maybe the road you’re going down here.
Mike: The other nice thing that can offer as consulting where offers you is that it gets you into that enterprise sales process and teaches you how to negotiate it, and you’re more likely to get somebody to sign off on consulting engagement in an enterprise company than you are to have them purchase a piece of software for every user in the organization when they don’t necessarily know for sure if it’s going to work out for them or not. But for whatever reason, they’re more than willing to pay large sums of consulting dollars for that kind of stuff.
Then based on that, you establish this list of people that you came in and did consulting for, and then maybe come back to them later and say, “Hey, we’ve left and you’re now on your own. Is this working out for you?” It’s probably not because most of those consulting engagements they get down once and then that’s it, and then people just let it drop because they’ve got other priorities, but if there’s software in place, it will help them because then they don’t have to manually do things.
Rob: Thanks for the question, Chris, always good to hear from you. Our next question is about stair stepping and where does stair step from where they are. It’s from Will Gant. He says, “Long time listener, three-time MicroConf attendee. Trying to figure out how to stair step my way out of a current situation. I thought it might be a question to discuss. A buddy of mine and I have built a podcast, The Complete Developer Podcast, completedeveloperpodcast.com. In the software development space, it’s taken us three years, we just got our 250,000th download. We’ve got about 15,000 downloads a month and we generate about 2000 downloads in the first six weeks of an episode release. We also have a meetup group, it gets 10-40 attendees once a month, and on meetup.com, the group has about 850 developers in it. It’s only in Nashville, but we’re considering expanding.”
“We’ve tried a bunch of ways to monetize this. We’ve tried sponsorships but the CPM cost per thousand rates for podcast are so low, it doesn’t seem worthwhile. We’ve tried Patreon. Our email list is very small but we’re working on it. We both have full-time jobs. I plan to stay at mine for at least three years, but I like to consider having something else to transition to if it comes time to move along.”
“We’re in the process of putting together an audio book that we’ll sell under the podcast brand. I’ve personally written a small ebook, took a couple of weeks to write. We plan to continue podcasting. We’re getting everything done with 8-12 hours of work each week apiece. That’s 16-24 person-hours. We could cut some of that by outsourcing and process improvements. My question is, what’s a good next step for stair stepping from here?”
“I feel there are four options. First thing, of course, is to build the email list and then we could, number one, try to ramp up ads sponsorships. Number two, build affiliate websites and get commissions or do affiliates stuff in the podcast itself. Number three, create digital products like ebooks, video courses, and sell those. Number four, coaching developers on their careers. How would you evaluate the above? We’ve been leaning towards products, put together individually. Given the constraints above, if you were me, how would you proceed over the next six months? Thanks.”
This is a big one. A lot of aspects to it. A lot of ways to think about it.
Mike: Yeah and I think that the fact that he’s tried a bunch of different things gives a little bit more information to work off of.
Rob: Super helpful.
Mike: Yeah. The four options there, the first one was try to ramp up on ad sponsorships. He’s already said that that’s difficult, and then Patreon has been even less lucrative, and the email list is rather small. The thing about ad sponsorships is they’re going to scale linearly with your audience. If the money that your getting from them now is relatively small, let’s say it’s a hundredth of what you need, you would need to 100x your traffic based of the your audience in order to get that to the level that you need to. It doesn’t sound to me like that is probably going to work out.
I would say roughly the same thing with affiliates and giving commissions or selling affiliate stuff on the podcast. You’re going to get some revenue from it, but it’s probably only going to be—depending on the type of product—it can be anywhere from 15% to 50% of whatever the product is. But it doesn’t seem to me like that is going to pay the bills either.
The third option was creating digital products such as books, video courses, etc, and then the fourth option was coaching developers. I think if you’re going to coach developers, you need to have something very specific that you are coaching them on. I would question how many of them would be able to pay a rate that is going to get you out of a situation that you’re in. Individually, they’re probably not going to be able to pay more than $100 an hour or $150.
You could use something like a group coaching session. I have seen that work out. My wife joined up with a business coach who basically went that route and instead of coaching people one-on-one, we’re coaching them in a group. That’s sort of like a course, but not really. You really want to have everybody starting at the same time. You’re going to have to find the right people and catch them at the right time in order to coach them on that. You’re also going to want to say like, “This is what we are coaching on.” Whether it’s how to get higher salaries or how to program in this particular language or how to deal with these types of situations, you’re going to have to think really, really hard about that.
The third option he just said is digital products. Seems to me like the better bet. I think that there’s a lot of opportunities there for books and video courses tiered info product format. That provides a significant advantage over doing affiliate stuff where your only getting a small fraction of it which is split because there’s two people in the business versus creating your own digital products and then you guys get to keep 100%.
Rob: When I initially read this question, the feeling is 2000 downloads per episode, it’s obviously a great milestone to reach, but it really isn’t enough to monetize directly. If he had written in and said they hadn’t tried Patreon or ads, I would have said, “Don’t try them.” I don’t think they’re going to work. The money is really going to be in the email list and if you don’t have much of a list, I don’t know that there is a direct way to monetize this podcast.
I mean, you and I have never directly monetized this podcast. We’ve talked recently about doing sponsorships, but we’re essentially more than 10 times the size of their podcast. One of the reasons we haven’t wanted to do it today is because we’ve gone down other roads and monetize it with mostly MicroConf and FounderCafe. That’s really what pays our time and editing and all that to put the podcast together.
You and I also sold books and stuff independently, but at that size of an audience, I’m thinking back to Sherry. Sherry started ZenFounder. She and I started ZenFounder podcast. As it’s grown, she did small info product. She did her retreat ebook, The Zen Founder Guide To Founder Retreats, and I don’t know how many copies exactly, but it’s a $20 book and she sold a few hundred copies.
It took time to write, as Will said, took him a couple of weeks to write, but that’s not a bad way to go. What’s nice is that if you release it, you make a few hundred bucks from it, you learn a lot about launching, then you have this thing that’s valuable, and you can give that away as a lead magnet in the future, you can discount it on Black Friday, and you start building up this portfolio of products. Now still, with 2000 downloads, if you don’t grow that email list, it’s never going to be something huge. It’s not going to be a full-time living unless you can grow all of that.
I think that’s the thing to think about. Is this space big enough? We know John Sonmez who comes to MicroConf and runs Simple Programmer or used to run simpleprogrammer.com. I know he’s doing a much different stuff now but he built a big audience. If I recall, it was through blogging and videos, it wasn’t through podcasting. That either says it the audience isn’t there in podcasting or maybe it’s still untapped and you haven’t hit directly on that value proposition yet.
I’d be curious if how much you’ve promoted your podcast, like have you gone on every other podcast in the space? To be interviewed not just about your podcast but just about things and then talk about your podcast and how it helps people? What are the other avenues to grow that podcast listener base and then have more calls to action to your emails list. If you want to go full-time on this, I would not do that without an email list that could support this, which is let’s say 10,000 or tens of thousands of subscribers, depending on how much they buy from you and how much content you can put out.
While coaching is a short-term thing, I think at this size, it’s just so hard to monetize. It’s so hard to get a lot of value out of a couple of thousand listeners. Those are my thoughts. Do you have any other thoughts, Mike?
Mike: No. I mean, I agree with you like the idea of putting together a small portfolio of digital products that you can offer. Some of you may relegate to using this as a lead magnet later on. That’s probably a way to go. As an example, you said that there’s was one that took him about two weeks or so to put together and then plus there is editing time after that. Call it 6-8 weeks total. If each work on one, you can probably put out five, ten of them per year? That’s pretty good. That seems that would give you a fairly significant base to work from and you can have them about very specific topics and then if you promote the podcast more and then you maybe talk about them or get them on your email list. But again, you have to grow everything and you have to have products to offer.
Rob: Right and the nice part is once you’ve written that, well, you can then put it on Amazon as a Kindle ebook and you can even buy ads for that on Amazon now. There are other ways to promote it from there and then you could use that as a way to generate leads and just generate listeners or generate email subscribers. You now have multiple things out there. It’s a tough problem to have. It’s hard to work this much and not having enough of an audience to basically make a full-time living, but it’s a problem all of us have had at one point or another. So, totally get it.
I think the last thing I want to touch on is the 16-24 person-hours a week that you’re spending on a podcast. In contrast, what do we spend, Mike? Between the two of us, it’s four person-hours every two weeks? You think? Five?
Mike: There’s the obvious time spent actually recording. But then beyond that, we’ve outsourced pretty much everything else.
Rob: That’s what I’m saying is it’s not that expensive to outsource everything else. If you get even one of these ebooks that’s selling reasonably well, you could pay for an editor, our editor posts to WordPress and does all the stuff. Given that, again, you and I, let’s say 2 ½ hours a week total person hours versus the 16-24 they’re spending. If they could get all that time back, it would be a big deal. They could put that towards doing other things whether it’s towards growing a list, towards growing another podcast, towards building these products out, I think that’s something to think about.
No, I don’t know the format of their podcast. Maybe it’s just a lot more labor-intensive than ours is. Maybe it’s scheduling guests and it’s doing a bunch of things. But I would guess that a lot of that could still be outsourceable. Chicken and egg, right?
Mike: Yeah, it is. I wonder if there’s other options as well. If you could reclaim eight hours per week, that’s a full day. If you’re doing consulting or other stuff that is able to generate even remotely enough money to cover time or cost or something else, you could definitely outsource that. Let’s sa, you did four hours of consulting work per week. Finding that is a completely different topic, but you get paid $100 an hour for each of those. If you’re each doing that, that’s an extra $800 a week, $1600 between the two of you. It costs a lot less than $6400 a month to edit a podcast. Now, you’re cutting your time in half and you’re adding that money in.
I’m not saying consulting is the answer, but there are other ways to get that done. I would think more consciously about that 8-12 hours that your spending and how much value you’re actually providing. Are there other ways to pay for that, is what really comes down to and then to reclaim that time and use that time to generate revenue as opposed to do stuff that’s essentially a cost sink.
Rob: Thanks for the question. I hope that was helpful. Our next question is about derisking product founder fit and it’s from Heather. She says, “My day job is all about finding product market fit. I can usually figure out a way to test my side project ideas but I struggle to commit to any because I’m not sure if I’ll end up hating the everyday tasks. Do you have any idea for a lean approach for finding product finder fit or to de-risk that side of the equation?” It’s a good question. We’ve never had this before.
Mike: This is a good question and I actually addressed this to some extent in my book, The Single Founder Handbook, and it’s in Chapter 12. It’s on Idea Filtering. I did not call it this at the time because I don’t think I was either well aware of the term but it basically talks about that to some extent in terms of filtering out ideas that you’re brainstorming and trying to figure out if you should go after one idea or another based on your personality and interest.
I laid it out in terms of, there’s pros and then there’s cons, and then there’s also disqualifiers. In terms of the disqualifiers, I put things in there like two-sided markets or difficult customers or indirect revenue streams because it’s just difficult to get those businesses off the ground.
But there’s also the idea that some of your ideas are things that are going to require things of you that you are simply not going to want to do. For example, when it comes to enterprise sales, I’m good at it but I’m not good at finding the enterprise deals to actually then go in and do the sales stuff. I can do the sales stuff but I’m not good at all the prospecting stuff and I hate that stuff. There’s a difference in being good at it versus not enjoying it. Could I find somebody else and hire to do that stuff? Sure, I could. Could I do it temporarily? Yeah, I could. But at the same time, I know that I wouldn’t want to do that long term or manage that entire process.
I think I would come up with a short list of things that you absolutely, under no circumstances, ever want to have to do, and those become your list of disqualifiers. Every idea that you come up with, fit them up against that list and your can throw it into a spreadsheet, see if it’s going to work for you. If it’s not, then don’t do it. You can also test things to some extent and do it a little bit to see if you would be able to do them long term. For everyday tasks that you have to do, a lot of them you can outsource but there’s certain ones that you simply can’t. Again, for enterprise sales like that prospecting, you have to be the one to do it initially and if you hate it that much, the business is never going to work.
Rob: I like the way you framed that. I think that’s super helpful. I think that’s one reason why I never launched a super sales-intensive application is I’ve just known that I want to be low touch or mid touch. Later into the lifecycle, Drip became of higher touch app once we started getting these big contracts to get $20,000, $30,000, $40,000 a year and up. You’re going to talk face-to-face with people, but I always aim for lower touch and that’s because that’s one of my deal breakers is I don’t want to be doing sales in the early days. Later, I can hire people to do that once we grew to a team, it was fine. But if that’s the main driver of sales, you have to do that in the early days. Typically, you want the founder doing that.
Maybe it’s a good framework. What are your deal breakers? What do you like and dislike? This is hard to answer if it’s your first project because it’s hard to know what you like and dislike. You can take a guess but the more experience you have, the more you learn about yourself. I would totally go and take StrengthsFinder and maybe even the Enneagram. These are just personality test that give you more insight into who you are and I think those can help you determine some more things about what you like and dislike, but then it’s also, like you said, singlefounderhandbook.com, if you want to read that section on de-risking it from a product founder fit perspective.
I like this question. I actually want to think on it more. I would bet in a future episode it will come back around and we’ll have more thought. This is one of those that, one the spot, I don’t have the entire framework mapped out, but I know that I’m going to mull on it while doing dishes and kind of come back to it. Thanks for the question, Heather.
Our next question is a voicemail and you know what, Mike? This should have been top of the show. I messed up because voicemails typically go to the top of the queue but I kind of forgot. This is from Tim Burgen. He called in a couple of episodes ago from Brisbane, Australia and we could hear the audio. I did a call out and he basically emailed us a very high quality WAV file. Let’s listen to that now.
“Hi, Mike and Rob. It’s Tim Burgen from Brisbane, Australia. My question is around offering a free trial. Is offering a free trial the only recommended next step to bring prospects into the fold? Or are there alternatives that you’ve also seen work? Most discussions that I’ve read just seem to assume that offering a free trial is given. The only exception that I’ve ever heard was Jason Cohen talking about the early days of the WPEngine where he removed trial for a money-back guarantee. What’s your impression of that approach and are there other options that you’ve seen too? I look forward to hearing your thoughts.”
Mike: I’ve tried the money-back guarantee instead of a free trial and it does work but the problem that you do run into is that if you’re selling—and this is specifically with Bluetick I saw this, where somebody wanted to sign up and they decided against it because it was going to require a credit card, and they didn’t want to use their personal credit card even though there is a money-back guarantee because then afterwards they would have to go to their boss and if they liked it, they said, “Oh, I need to be reimbursed for this.” it was extra paperwork they didn’t want to have to do.
Going with the trial route was a better option than the money-back guarantee. Again, who you’re selling to is going to make a difference there. If you’re selling more to consumers then a money-back guarantee is probably going to work better, but if you’re selling to somebody who’s on a team, then they don’t want to expend their own social capital in front of the eyes of their boss by signing up with the company credit card when it’s something that they don’t know if it’s going to work. There’s pluses and minuses of both approaches.
I was actually just talking to my wife about this the other day. There was a time where money-back guarantee was a fantastic option because you could also just refund somebody’s money, and it didn’t cost you anything. Stripe used to eat those costs, for example, and then they stopped doing that because it just got to be too costly because there were info marketers out there that were selling $1000-$2000 products, and then they’d have to issue refunds for 50% of them, so Stripe basically, just killed that. Depending on how many of those refunds you have to do, it may or may not work. You may just want to eat those costs, but it may not be viable for you to do.
Another option I’ve seen people try is having an onboarding fee. Instead of just saying, “Hey, here’s a free trial,” or whatever, say that there’s also an onboarding fee of $300 or $500 or something like that, which sounds outrageous like, “Why would you ask somebody to pay more when you’re just trying to get them in the door.” But it’s a prequalification process. You’re saying, “Hey, if somebody’s willing to sign-up and they’re willing to pay this extra $750 just to get on-boarded, that’s a great way to do it,” just because you’re going to filter out the people who aren’t necessarily serious about the product.
Rob: I know that you get a chargeback fee if you’re charged back, if it’s a dispute, but I don’t believe there’s any expense for refunds unless you have an unusually high refund rate.
Mike: I have seen that there were. I could be wrong. I could be misremembering this.
Rob: Maybe someone can write in and let us know. I’m on their pricing page, and it’s talking about chargebacks, but if the chargeback dispute is in your favor, you don’t have a fee. If it’s a chargeback and you lose it, then it’s $15. I’ve been on services every 25 or 30 for chargebacks. The only articles that mentions that I can find on Stripe refunds talk about how the entire fee, and it says right here in the docs, “There’s no fee to refund a charge.” Someone write in if you know because Mike and I have different memory. There’s always a chance that this stuff is out-of-date. I’m looking at a page that hasn’t been updated, and they just changed that.
That’s one thing. It’s kind of beside the point if it’s a couple percent. It’s not a big deal. Your refund rat will be higher if you do a money-back guarantee upfront, but it’s not going to bankrupt you as a SaaS app. Your margins are high enough that they can handle it even if there is a a cost.
I think there are a handful of apps that I’ve seen do the money-back guarantee. WP Engine was one, I remember. Pluggio, Justin Vincent did that. I believe, ConvertKit used to do that. I’m not sure. I think they still do. They charge you right up front, there’s no trial, and then they have a money-back guarantee there. There are certainly other apps that do it.
I think the default and normal assumption is to have a free trial rather than money-back guarantee for exactly the reason that you mentioned. If you’re at a company, and you put your own credit card on, and then it gets charged, you need to go reimbursed. It’s kind of a hassle. It’s just one more piece of friction.
Like I said, it really depends on who you’re selling to because if you’re selling to individuals or nascent entrepreneurs or people who it’s like, “Hey, they’re pulling up their personal credit card to buy this and they are convinced that it’s the tool. It’s being recommended by some expert they know and they think it’s going to help them start their business,” then yeah, maybe this isn’t an issue.
But if you’re selling B2B, money-back guarantee will be a blocker. I’ll tell you that right now. Even just asking for credit card upfront for a free trial can be a blocker and you will get a lot of people who won’t go through with the sign-up because of that. You have to look around. There’s a couple of things. Figure out who you’re selling to and if it’s truly your business says, I would shy away from a money-back guarantee, not saying I won’t do it, but the added friction will eliminate actual prospects who probably would buy from you because it can just become a deal breaker of some.
I would also look around at competition and actually in Tim’s email, he mentions that some of his competitors offer a one-year money-back guarantee and a discount for the first year because the churn is very low and because the switching cost are high. That right there tells me, “Oh, that’s interesting.” Could there even be a really limited free plan much like MailChimp, kind of one that ESP space early on because they were the only one that can get a free plan to work.
It’s risky as a bootstrapper, but if the switching cost are high, you can just get this massive funnel coming in. There can be value there. But even if you don’t do free plan, I would say I would lean towards as little friction as possible to get someone into that trial because the more people you get in if the switching cost are high, that’s how you’re going to build value in your SaaS app.
He says another competitor is actually seen to be free but then they have back-end per-transaction charges. What these competitors have figured out is since churn is low and you’re all fighting for new customers, that the least amount of friction upfront is the way to go. That’s where again, I would personally—as a rule of thumb that could be broken—I would lean away from money-back guarantees and I would look much more at a trial.
Then you have to ask yourself, “Do I have to do credit card upfront or not?” If you don’t do credit card upfront, you’re going to get a lot more people in that trial. Can you convert them? Are they still qualified? This is an experiment I would run. I may start with lower friction, given the load churn and the fact that people don’t switch out after they become customers.
Mike: Just a confirmation on that last piece where, in terms of Stripe, right on their refunds page they say, “There are no fees to refund a charge but the fees from the original charge are not returned,” so whatever the percentage is. That changed I think in 2017 because they couldn’t afford to do that.
Rob: Which is 3% plus 29 cents or something?
Rob: Okay. If it’s $100, you’re to pay him $3, essentially you’re eating $3.30 per refund and with the SaaS app, with the margins you have, that’s probably trivial. That wouldn’t be the reason I wouldn’t do it. If would be the other reasons I think I talked about.
Awesome. That’s a good question. Thanks for the question, Tim.
Mike: I think that about wraps us up for the day. If you have a question for us, you can call into our voicemail number at 1-888-801-9690 and Rob will put it to the top of the queue or be fired.
Rob: Next time, yeah.
Mike: Or you can email it to us at email@example.com. Our theme music is an excerpt from We’re Outta Control by MoOt, used under creative commons. Subscribe to us on iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening. We’ll see you next time.
In this episode of Startups For The Rest Of Us, Rob and Mike answer a number of listener questions on topics including SaaS revenue patterns, annual renewals, and choosing a tech stack.
Items mentioned in this episode:
Rob: In this episode of the Startups For The Rest Of Us, Mike and I talk about SaaS revenue patterns, increasing annual renewals and answer more listener questions. This is Startups For The Rest Of Us episode 376.
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: And I’m Mike.
Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. What is the word this week, sir?
Mike: There’s no word this week but next week I will be headed to BIG SNOW Tiny Conf East. Spending a couple of days up there. There’s about a dozen people or so that go up each year and just hang out and hit the slopes every day and then talk business in the evening. That’s definitely a good time, and I’m really looking forward to it. It’s been a while since I’ve been skiing.
Rob: Yeah. You go there every year, you just come away with a lot of motivation and a lot of good ideas. It seems to really, really work for you. I’m glad that you’re able to go back again this year.
Mike: Yeah. I definitely need the time away from my computer, to be honest at this point. I’ve been heads down for the past several months straight. Haven’t really had any time to come up to breathe.
Rob: It’s always good to get away whether it’s to go on a retreat, or to do something like this. I think it’s a good call, man. I actually wish I could go this year. I won’t be able to, obviously, it’s sold out and stuff but I don’t ski, so I would show up to drink hot cocoa, and I don’t know what I’d do, watch movies or something, just snow shoe or something. I do think it’d be a lot of fun to go to one of them. At one point there were three each year, but I don’t know if there’s a Europe one this year, I think it might be just East and West?
Mike: Yes, just East and West this year. I think the Europe one, they couldn’t get enough people committed to going. There was interest but just nobody stepped up and said, “Hey, we’re definitely in.”
Rob: Yeah, that makes sense. Cool. Hey, we got a note from a listener. His name is Francois Lagier. He says, “I just wanted to reach out and say thank you. Rob and Mike, I’m a co-founder of a new SaaS company called cloudforecast.io. I wanted to reach out and say thank you for a few things.” He has a bulleted list of thanks, which is cool to get this detailed stuff.
“First, thank you for all the good content in Startups For The Rest Of Us. I recently started listening to your podcast, and I’ve been searching the archive for any episodes mentioning the word “SaaS”. As a new entrepreneur, I’m learning so much. Second, you mentioned Perfect Audience many times for your retargeting strategy. Both my co-founders and I were part of the early [00:02:35] of Perfect Audience.” Interesting. “And we are very proud of our work there. Thank you for putting a smile on my face every time you mention it.”
I’ve been a fan of Perfect Audience for a long time and Brad, one of the founders, I’ve spoken with him on the phone several times. In fact, I called him, he was one of the founders that I called during the Drip acquisition because he’s gone through an acquisition. I just wanted to get his sense of dos and don’ts and how it went there. I always appreciate being able to talk to him.
And then back to Francois’s email. “Third, I listened to episode 319 a few days ago and Rob literally mentioned the problem we are trying to solve.” He quotes me, and I say, I had a counter reminder every two weeks. It would ping us and it would say, “Check AWS spelling.” “Thank you for confirming that our idea is not completely crazy, since cloudforecast.io is a daily email report that breaks down your forecasted AWS spending by products tags and regions allowing you to understand where your money’s going. Once again, thank you for everything, have a great week.”
Mike: That’s awesome. Thanks, Francos. I really appreciate the email. It’s very interesting looking at the report that he had sent over as well. Just seen the forecast of the cloud computing spend. It’s interesting seeing it broken down like this. I don’t have nearly the expenses that are shown here. I don’t have to worry about it as much, but I can definitely see how large our installations using cloud services would definitely find that appealing.
Rob: Yeah. Thanks for the email, Francois. I really appreciate it. What else is going on with you? What’s the update on Bluetick?
Mike: I’m working on a couple of minor bugs but right now I’m trying to close out the final testing process for deploying the latest release I’ve been working on. I’m hoping that that will go up by the end of today. It’s basically a series of major improvements to test ability, and test coverage, and then overall resilience of the app in different error conditions and performance scalability, etc. The big thing is that it makes it easier and safer for me to make a bunch of updates moving forward just because the increased test coverage makes it obviously less prone to error. When things go wrong, I’ll be able to see them before it hits the production server because there are certain sections of the app that were critical to the entire thing running and being able to send out the emails and recognize when replies came in.
I won’t say that they were completely hacked together, but there was a lot of code in there that handled specific edge cases that needed to be separated out a little bit, I’ll say. Just the refactoring will make it easier to make changes in a way that does not terrify me to do so.
Rob: Yeah, it’s such a luxury. I say it’s a luxury, it’s now a must have. I think I’ve said this before, never again will I run an app that does not have full test coverage. That’s cool. Did that take you a few weeks?
Mike: Yeah, it’s taken me probably four or five weeks at this point. There were a couple places where I thought it was done a few weeks ago and then ran into a couple of issues. I have one entire section of the app completely taken care of and then I didn’t realize that there was implications of the changes that I made over in the job scheduler. I had to basically refactor a lot of that code as well. Of course, once you do that, then you got to go through all the tests. But in doing so, I’ve realized that it made things a lot easier to write a suite of tests. I was able to do that and I basically doubled the number of unit tests that are in the app based on this set of changes.
Rob: That’s cool. Time well spent, I think. It’s one of those trade-offs of you’re trying to move fast so you don’t write the test and then it will eventually come back to bite you. It tends to come back in delayed features later on, or decreased feature velocity because you start pricking things or a lot of bugs, quality, that’s my experience with test is that they had that 20%, 25% upfront. But with Drip, have been able to continue moving at a pace that a lot of apps that are 5 years old are not, it’s because of that. Derek and I have commented many times that having a software company with no technical founders is a tough way to go. I bring this up because I’ve seen several companies do it. Unless you find that contractor or the salary employee number one who is just really hell bent on writing the test, it’s easy to just push that aside and I think it’s still a detriment of a lot of software companies that are trying to do it.
Mike: Yeah. It’s definitely a tough position to be in. I can’t stress, the unit test side of things, it’s always a trade-off because you want to move faster but if you don’t take the time to write those tests and have them in place, then later on you’ll get to a point where things are breaking left and right and you have no choice but to stop and go back and in some way shape or form, put them in place because otherwise, you really can’t make any progress forward. There’s always that balancing act between how quickly you’re moving versus how many tests you’re implementing.
Rob: For sure. Let’s dive into our listener questions today. The first one is about SaaS revenue patterns. It’s from Basil Abbas from clockit.io. And he says, “Hey, Mike and Rob. Huge fan of your show, and I’ve been religiously following it for two years. It has provided ton of value in each episode and helped us launch our SaaS app to $2,500 in MRR in the first year. In year one of the operation, I’ve noticed there are some patterns to how the MRR grows month to month. For example, in the month of January, February, and March, we are growing at roughly 30% or 40% and then we failed to 15% to 20% for the rest of the year. November was a fantastic month with 40% growth until Thanksgiving and now we have 0% growth in December. We also noticed that one week before and after major holidays in the US, our growth flat lines, but it picks up after. In your experience, have you come across such patterns?”
Mike: I think in B2B SaaS, yes. I’ve definitely seen this with Bluetick lately where in December things are more or less flatlined and that was probably due to a combination of things, mostly me stepping away from the marketing but I’ve heard from various other founders that the same kind of thing tends to happen to them as well. Rob, I think you commented on this in the past where you just take December off because it’s not really worth doing anything except preparation for January and February. I have seen things dip in the summer months as well, and then they pick up after the summer.
In terms of B2C stuff, I don’t know. I would imagine in December, you can probably count on some sort of a revenue bump because you’re going into the holiday season, you can get people to buy stuff for either as gifts or gifts for themselves, to be honest. Definitely done that with my book as well. That’s what I’ve seen. Rob, what about you?
Rob: Yeah. I definitely have seen patterns. The pattern you mentioned is odd. He says the first three months of the year, they grew a ton, and then half that rate for the rest of the year. Obviously it’s going to depend on the app. I remember when I had a [00:09:20] jobs, which is a job board, tons of traffic on Sunday evening because everyone was dreading going to work the next day. Or they didn’t have a job and they pissed away a weekend and they were scrambling thinking like, “I really need to gear up in this.” It’s this fascinating pattern of that.
With just straight ahead SaaS, when I think about HitTail and Drip, I remember it was either April and May were always sketchy. I attributed it to being tax time here in the US. December was always a train wreck, flat at best. Sometimes you’d lose customers. Other than that though, all the rest of the months were pretty similar, and I don’t remember there being anything, any kind of summer slowdown. I don’t know. There are definitely some patterns but I think that you want to look once you have two or three years, you can really see more of a recurring pattern to find out. Because some months would just be slower but it wasn’t year to year that it was the same, it’s just randomness. These things can be somewhat random.
Basil had a second question and I’m going to rephrase it slightly because if I read exactly what he says, folks will be confused but he says, could you also touch on if it’s okay to consider a 5% weekly MRR growth rate? Should I think about this as percentage or should I think about it more as like a dollar amount? I think is really what he’s getting at. Because if you think about it, let’s say you’re doing $5,000 MRR and 5% weekly growth rate would you put at $250 each week. Do you think of we wanna grow by percentage each week or we’re going to continue to grow by percentage each week or are we going to grow by $250 each week, so that when you hit $10,000 you’re actually now growing at 2 1/2% a week.
The way I think about this, and there’s a few ways to think about this. I think that what you have in place today will continue to add the dollar amounts. Let’s say you have a bunch of existing traffic from SEO or you’re doing Outbound or you’re doing paid ads or whatever, that is going to continue to give you a dollar amount in general and not a percentage. As your revenue goes up, you’re not going to necessarily see that you’re going to keep up with the percentage growth. If you want to keep growing at 5% week over week, you have to either increase those traffic channels or you have to add new ones to keep it at 5%. If you think about it, if you go to $20,000 or $30,000 growing at 5% week over week is really, really hard whereas if you’re at $2,000, growing 5% is not that much. You’re just adding a small trickle of revenue.
Mike: I was going to point it out. It depends on what you’re total amount is right now, because going from 5 customers to 10 is a lot easier than going from a 1000 customers to 10,000. The amount of time that it takes is going to make a big difference based on how many customers you currently have.
Rob: For sure. I do like to think about it in percentages because it’s more aggressive. But realize if you do just have linear traffic coming in, linear conversion rate all the same, it’s that dollar amount is what’s going to stay. There’s another factor that comes into this, it’s the bigger you get, the more churn hurts. Because you’ll plateau eventually. When you have 1000 or 10,000 customers, a 5% churn rate is a hell of a lot of people that you have to replace. When you only have 20 customers, 5% churn rate is 1 person. You got to think about all this. As you scale, you do come into new problems to continue to grow.
Alright, our next question is about annual renewals and how to encourage more of them. It’s from [Gareth Helsall 00:12:59] from driverguardian.co.uk. He says, “Hope you’re doing well. I get a ton of value from the podcast. Thanks for the output. Our business is not SaaS, but I would love your input. We have an annual product that our members pay for once a year. At the minute we send three renewal email reminders. One month before, one week before, and three days before. We also send a letter that is designed to arrive after the last email. We’re considering sending text messages that go out before the letter as it would save on postage cost if we could get a response. I would appreciate any input or discussion on about what you think, [00:13:33] for renewal should be for a single time annual recurring payments products.” What do you think?
Mike: If anyone who’s not at a computer is not familiar with driverguardian.co.uk. Essentially, looks a lot like AAA here in the US where you get this membership and provide you various discounts for just showing your AAA card, but at the same time, it also give you coverage if you ran out of gas or if your car breaks down or you blow a tire or something along those lines. There you can call AAA and they’ll come and they will help you out. They’ll send you a tow truck, it’s kind of like having insurance to the point that if your car breaks down, they’ll come help you and you don’t have to pay the emergency towing rates at that time whenever that happens.
I have my own AAA membership, and what they do is they just automatically bill me at that point. They have my credit card on file and they don’t even really ask for renewal. It’s just your honest automatic renewal. That works obviously if your credit card is not expired, but even if it is, depending on what company you have that is doing your credit card processing, it may still work after the fact. If for example, Stripe I know in certain situations, if a credit card expires, it will still bill properly even though the credit card itself is expired. That’s something you might want to take a look at.
The other things is AAA does send a letter in the mail that basically says, hey here is all the information. But again, they already bill me for it and I don’t actually have to pay that invoice. It just automatically gets paid anyway. I feel it’s just a reminder that hey, we’re about to bill you for this. I think that sending out those renewal email reminders is helpful, but definitely taking a look at sending them physical letters is probably a good strategy to go after. Just because you’re putting something physical in front of them and if it’s not going to the right place it may very well be returned or it will get forwarded over versus email. Email delivery can be hit and miss, I’ll say. Especially depending on how many emails you’re sending them on a regular basis anyway. That’s the big question I would raise at this point is how many emails are you sending them throughout the course of the year to begin with and do you know that you’re getting into their mailboxes.
Rob: Yeah. I think the approach I would take or I know the approach I would take is what you said with AAA. As a customer, the fact that I set it up once and they notify me, they’re like, “Hey! We’re going to rebill you in a month.” I don’t have to go log in or click any buttons or anything, it’s just done and it’s always there. I would move the whole business model to automatically renew every year and you’re very upfront about this, when they sign up, “Hey. This will renew automatically.” Maybe it’s a checkbox that’s checked by default. “Hey, do you want us to bill you each year?” And some people will uncheck it, and then you have a different thing if that makes you feel more comfortable.
Personally, I would just say this auto renews every year. That’s the point, and you can easily cancel it with one click and we’re going to notify you multiple times before we do it, and then do the parts that you mentioned, which is these three emails but instead of saying, “Hey, renew.” It should say, “Hey, we’re going to bill you and it’s this much. Just click right here if you want to make any changes to this. If you want to opt out, we won’t bill you.” I do love the idea of SMS as well. I think that if postage costs are a killer, then you could send SMS and avoid sending letter altogether.
I think moving towards an opt out model is the way I would go with this and then still notify the people to make sure that they do receive the stuff.
Mike: I did notice on their site they have one of the selling points is that it says “no auto renewal” and it actually puts you in a tough spot because of this side of it. I don’t know whether that’s because specifically laws over in the UK or in Europe that say that you can’t do that or if it’s just something that you guys came up with that you want to pitch to people because you were tired of being auto billed for stuff that you didn’t really want or need.
But really, I view it almost like the donor cards here in the US where it’s statistically proven that if you have a opt out model versus an opt in model, you’re opt out rate is going to be substantially lower than if you reverse it. People will basically just choose the path of least resistance and they’re not going to bother to go through that actual work in order to opt out but the reverse is true as well.
Rob: I would bet that if they pull the “does not auto renew” off the marketing site, there would be almost zero impact to their conversion rate. Unless this is some big competitive advantage and I don’t feel like it is, I think that that shouldn’t impact most things especially if you really want to do it and give people the option.
Obviously, going backwards, if you have 5000 existing customers, you’re going to grandfather them into what you do now. But I would consider, to be honest, adding in this as a feature and emailing everybody and saying, “Hey, we’ve set up this thing for your convenience. By popular request.” I’m sure someone has requested this at some point. Because I use services, when they don’t auto renew me, and I say, why didn’t you bill this? I actually don’t want to have to go in and re-enter my credit card every 6 months or every 12 months. Certainly, someone has requested at some point. Bill it and see how many existing customers you can get on auto renew and go from there. I’ll bet it’ll have an impact on your bottom line for sure.
Alright, our next question is from Ovi Negrean. His company is socialbee.io. It says, “Hey guys. In a recent episode, you talked about how there are not as many productized services that have been turned into SaaS as you thought. As another data point, socialbee.io has also started with a large service component and I wrote why it’s good to start with a service first in Medium,” and we’ll include that link. “I think it’s indeed an under utilized technique they can turn more wanna-preneurs and entrepreneurs.” There we go, Mike, anther data point.
I think I was the one who made that comment and I still think it’s a lot fewer productized services to SaaS have been done as I think perhaps should be done. I still see so many people shooting for the fences. I also think far few people use this stair step approach too. These are both lower risk, more repeatable, higher chance of success. These are approaches that do that for you and I still think that it’s not as popular as it probably should be.
Mike: This is one of my 2017 predictions. We covered this in the Predictions Episode back in episode 370. The comment I had made was that I didn’t have very many data points. I felt like the bar for launching the SaaS was going to continue to become harder to reach but startups who were going to go the route of offering a service as a first based approach followed by implementing SaaS was going to become more prevalent. I didn’t see a lot of data points is really the problem. We really appreciate you sending that in.
Rob: Our next email is from Calvin. It’s about choosing your text stack. He says, “Hey guys, I’m not a software developer, I’m more of a marketer, but my question is this: As a non technical founder, how do you choose what type of code to build your app on?” He’s asking about the text stack. “I’m trying to build a rank tracker.” What do you think, Mike?
Mike: It’s so heavily dependent on what it is that you’re trying to do. It’s hard to just give a general answer for that. You really need to have somebody who has that technical background to be able to make the decisions because depending on what you’re building, certain types of technical decisions can back you into a corner that’s really hard to get out of or the entire thing could end up falling down at some point because it just can’t scale or do the types of things that you need it to do.
A rank tracker is probably one of those things where you need to choose the right technology because if you don’t, it’s not going to scale the way that you need it too and you’re not going to be able to create things in a distributed manner or spread out the jobs and the spidering that needs to go with it on order to be able to do what you need to do.
The other thing to consider especially in this particular case is that if you are scraping websites in order to do any sort of a rank tracker, you have to be a little bit careful because you can get banned from them. I know of at least two people who had to deal with issues where their scraping techniques were noticed and their app was essentially banned from those websites. They looked at it as, oh, you’re basically DDOS-ing our site. It’s like, oh no, I’m spidering it but they don’t see it that way. If your entire business rests on doing that, then it’s significant risk if that vendor or that company decides to take action to prevent you from doing it.
I ran into this 12-15 years ago with McAfee. I was scraping their website using a Perl Script and then they kept changing things around on their websites so it made it difficult to find what the anti-virus definition numbers were. Because that was what I was trying to pull. They kept changing things around and eventually I wrote a script that would pull it down and it would parse it in five different ways and try and get to what the ID was because they just kept changing the HTML and I noticed that they were alternating it between them. I just figured I do that.
This is a hard question to answer just because it depends so heavily on what it is that you’re building.
Rob: I like the points you brought up. I think that building a rank tracker has some dangers to it. I don’t think you shouldn’t do it because of that but know that there are substantial risks. A rank tracker, this is not for search engines you mentioned specifically. It’s a rank tracker for another ecosystem and it’s going to almost always be against the terms of service. If you do it, you’re going to have to do it on the down low like Mike said. It’s going to be a part of your process that A) rank trackers are brutal because anytime the UI changes, it’s going to break everything and so you’re going to have a fire drill. Know that going in. So you’re going to want to developer who doesn’t have a 1-2 week delay to get back to you. You’re going to want someone who’s able to hop on things.
Second thing is you will likely need to get a bunch of cheap servers with different IPs because at any given time, some of them are going to get blacklisted just like you said, Mike. You can’t do this at scale without that. The people I know who have built these had to do these massive server farms and at any given time, all running the same code at any given time like 20% of them were banned and blacklisted and they would cycle them through. That will be an operational thing that you will perpetually have.
Again, I’m not saying don’t do this but to think about that up front. His question is how do you decide on what language to use and the way you do that is you learn about the language and which are good at different things. Like Python and Perl are really good at scraping. I would probably use Python in this case. His question wasn’t what technology should he use but that’s probably what I would do. I would look for a Python Django developer and build your scraper and build your web front and all in Python.
But the broader question is if you’re not building a rank tracker, and you’re building a different type of SaaS, what languages should someone consider? These days, I would say Ruby on Rails, Python Django. Those are probably one of the two, those are common, you’re going to be able to find developers. If you ever wanted to sell, they’re not languages that people shun. When I had HitTail in Classic ASP, someone was asking if they could buy it. As soon as I told them it was in Classic ASP, they said they had no interest in it so that they would have to rewrite the whole thing. We eventually rewrote it on Ruby on Rails and it was much more sellable.
.NET and Java also can be looked at that in the startups space. They’re not as appealing because the .NET and Java developers, they’re more enterprisey and it’s not as easy to find startup developers who are going to be into that. It’s going to be easier with these other ecosystems. Now, there are other languages that are up and coming. I think if you really wanted to get ahead of the curve, there’s Elm, Elixir and Phoenix. I think those are going to perhaps pull some market share in terms of startups being built. Those are going to slowly pull market share from Ruby and or Python. This comes from conversations with Derrick, he’s my co-founder at Drip, and then other developers that I’m hearing talking about these things. People are really excited about them and are looking for jobs in them and they’re not that widely available.
If I was a non technical founder, I don’t think I would branch into that because it is too new still, and I’ll probably go with something more tried and true.
Mike: Yeah. The big question there is are the problems that you are likely to run into things that have been solved before and with bleeding edge products or technologies or text stacks, sometimes you’re just blazing new ground yourself and there is no solutions or resources out there and you basically have to do a lot of research and development to solve particular types of problems versus with established products like Ruby on Rails, it makes it easier for you to find a common solution to a common problem.
Rob: One other stack you could consider is PHP. There are obviously a lot of apps built in that and ones that scale as well, I’m pretty sure Facebook is built in PHP. Obviously, WordPress, which scales pretty well. But it is, in my experience of these three languages I’m recommending actually, PHP is the only one I know and it can be a complete cluster. I think I would seek more towards the Python, Ruby part of things. If PHP well written and well structured is a perfectly acceptable web language but there’s so much of it that is not, it’s easy to hang yourself.
Alright, let’s go to our next email. It’s about corporate structures and trademarks from Dylan DiMartino. He says, “Hey guys, two quick questions I’d like your opinion on. Number one, I have a consulting company incorporated in the state of Louisiana but I want to start a SaaS with it’s own name. Would you suggest simply creating it under the umbrella of my current corp or should I start a separate entity? I notice a lot of the big apps share the same name as their parent company, Uber and Snapchat. Is this standard practice? Is it worth it? Does it make marketing easier?”
I think there are two aspects to that. One is does it matter that the product name and the corporation match from a marketing perspective? And then the second thing I think of course is the liability. Do you lump it in with consulting, then those assets are unprotected. What do you think, Mike?
Mike: This is interesting question to me mainly because I’m going through it right now where I am spending off Bluetick into its own separate corporate entity. Having just recently talked to both my CPA and my attorney, I’m spinning it off into its own separate LLC. The question I’m going through right now is does it really matter whether or not the app itself is the same name as the company and I’ve decided that no, it really does matter because the app is the front end facing. I will be likely going with a company name that is different than the product.
The reason I decided against going with product name as the company name is one, there’s already a company out there called Bluetick Incorporated or something like that, Bluetick Outfitters, something along those lines. But bluetick.com and bluetickinc.com are both taken so I didn’t want to run in any sort of trademark infringement problems with that and because it’s a software app and I think that was in the petroleum industry or something like that, it’s different enough that I can call the app that, and it’s not a big deal but calling the company Bluetick would probably be an issue. I’m going to go with something different. I haven’t decided on what yet, I could do that in the next couple of days and then just make sure that you keep in mind all the stuff associated with places where the customer is actually going to see the company name. That’s the big thing to keep in mind. Because you don’t want the company name to be so nonsensical or off the wall that if they read it or happen to glance at it, they don’t look at it and say, “Wait a second, why am I getting this email?” Especially if down the road, the company gets acquired or you sell it or something along those lines.
That leads to the second piece of this which is should you put it underneath your current corporation or spin it off as a separate entity. I decided to spin it off as a separate one just to keep all the books separate so that if later on I do decide to sell it, or if I do any sort of fund raising or anything like that, I want to have the books, at least reasonably decent, from a very early stage as opposed to trying to separate it out much later. I’m past the point where I feel like I needed to do validation because I probably wouldn’t build a product and go incorporate and do all the things that are “necessary” things that you’re supposed to do until after you’ve gotten to the point where you have revenue coming in the door and you know that it’s going to be something that it would be worth spinning it off into its own entity.
Before that you can easily end up in a situation where you get to five to eight customers and then you have to shut it down because it’s just not making enough money. At that point it costs you more to spin up the company and then shut it down than it did for the amount of money that you gather from customers.
Rob: Yeah. I think that’s a good perspective. I think in a perfect world, the corp would match the product name but I don’t think it really matters that much honestly because the only confusion I can imagine is the credit cards. When you get a credit card statement and it’s going to have corp name typically and not the product name, that’s the time where you may get confusion. I’ve seen folks set up their corp.com and all it is is a page that says confused about a charge from us? You probably use one of our apps, and then it has a few of them. I really don’t think it’s that big of a deal from a branding perspective.
One thing to think about is the liability, well, two things, one is liability. If you mix your consulting firm with a product, if one of them were to get sued or something then they are both in the same bucket and there’s no firewall between them. You have to use your judgment as to how big of a concern that is for you. For me, when I had a bunch of products, they were all under the newer group umbrella and that name didn’t match any of the products. That was never an issue for me and I wasn’t concerned about the liability so it’s a bunch of small products that really weren’t likely to have a lawsuit come in. Again, it’s risk tolerance there.
And then the other aspect of it is if you ever want to sell it, if you just sell the technology, that’s one thing but if it ever gets acquired and people really want the financials broken out and if it’s a startup acquisition, strategic, like we did with Drip, they bought all the assets in the company, it would’ve been a disaster. It would’ve been a disaster if Drip was still under the group. I spun it out maybe a year before the acquisition because it was just growing so much that I knew it needed to be its own company. At that point, I started realizing we’re probably between $30,000 and $50,000 MRR. I would hate for liability of Drip or of the group to spill into one another and then there needs to be a firewall.
The process of ripping that out was a pain in the butt. It took several months and I paid a lawyer several thousand dollars to write up all the paperwork and try to make sure everything was transferred. I had to set up separate payroll. The group had to let go all of us, had to fire the employees and then hire them, through Drip. It was pretty crazy. I had two Gusto accounts, two different corporate credit cards, two bank accounts, two stripe accounts, too many things is what it was. But it was the right call. You got to think about that. If you’re just plugging away and starting something you think you’d get to a few grand and hope to eventually sell it, personally, I’ll probably just throw it under the same corporation assuming that you judged the liability and how much risk you’re willing to take on.
Like Mike said, setting up the entire other entity and then never getting the product off the ground, or never getting it past of couple grand in revenue, it is a lot of expense, you don’t think there’s that much expense but there is setting up upfront, if you’re on a state with an annual fee like California charges $800 a year just to have a corporation there and then you need separate software for the books, and then the CPA is going to have to file separate tax return. That’s an extra cost. There’s a lot to think about there, but I do think you’re thinking about it right.
And then his second question was, “Is it worth going through any steps for the legal protection during your early development stages? Specifically a trademark on your app name.” What do you think about that?
Mike: I don’t think so. If you’re not making any money from it, it probably doesn’t make a difference. It’s funny I did recently see this lawsuit of a company called TWiT versus Twitter.
Rob: Yes. TWiT is This Week in Tech, it’s Leo Laporte’s company.
Mike: Yeah, something along those lines. I think that previously they had taken the standpoint oh this is just a couple of techies in the garage building this app on the side for some sort of social things, it’s not a big deal. Now it’s suddenly a big deal.
Rob: TWiT is a podcasting network in essence, video and audio, and they’re located Northern California. Leo Laporte has long time been basically a tech newscaster for decades. He has his network, and maybe 30 shows in there, few dozen employees, and they have a studio up there North of San Francisco. As these guys were coming up, he has the trademark and the stuff for TWiT, and I don’t know if he has Twitter or not but he certainly has things that I think that early on he and Evan Williams had talked. He has some type of written agreement but it’s not super ironclad, and then he definitely had verbal agreements he has talked about on the show before that hey as long as they stay out of streaming audio and video, that we’re in separate areas, but Twitter’s now getting into that.
For Twitter, you know what they’re going to do? They’re going to settle, right? They’ll pay him some money. I think, I don’t know. They’re big enough, they’re a public company. It’s not that they’re doing great but this type of thing is not catastrophic at their scale. These lawsuits are things that you just throw some lawyers on it and then eventually you settle in and you pay someone $5 million or $10 million and it goes away.
Mike: The point is that they got the app to that point without having had all that stuff. And yes, it’s going to cost them, as you said, maybe it’s $5 million or $10 million which sounds like a heck of a lot of money but how much does Twitter pull in in a year. At the end of the day, it’s not really that big a deal to them to have not have that trademark from day one, or have registered it, or have gone with a different one. It’s really just like you’re trying to solve for a problem that you don’t have and you may never have. Because I don’t think that most of us are going to be in a position where we have a business as large as Twitter and are defending against the trademark because we never filed it or we never acquired it very early on in the startup.
Rob: Right. I think I have mixed feelings about this one. Filing a trademark is a couple hundred bucks. It’s not very expensive, it’s not like a patent. Software patents are $15,000-$30,000 if you file one. Whereas a trademark is inexpensive, and it’s fairly easy to do. You can go to LegalZoom or there’s a bunch of services that do this, and it’s pretty straightforward. Now if you do it and you get rejected, then you have to go and justify and do all this stuff.
I’ve only filed for one trademark. Of all the apps and all the stuff that I’ve done, and it was for Drip and I got rejected the first round. I was like, “Oh, good grief.” I don’t know. I wouldn’t say don’t do it, I do think that if you don’t have an app yet, it’s probably jumping the gun. But it isn’t that much time or money to do it. You just got to weigh it out. I don’t know if there’s a right or wrong one here, right or wrong answer.
Mike: I think it depends on how much money you are actually making from it. Because if you haven’t made a dime from it, probably not worth filing the trademark but when you get to the point where you’ve made maybe $1,000 or $2,000, at that point you might consider it once you’ve made $10,000, $20,000, $30,000 maybe really consider it. You can always push it off too because you could file it based on prior usage. There’s that as well. I think with the Twitter issue, Twitter didn’t do it first, it was the TWiT Company. They didn’t file for a trademark until it was a year after Twitter was founded but they had been previously using it. I think that’s why they have that trademark.
Rob: Yeah, you’re probably right. If you haven’t made any money from it, you probably shouldn’t file it but there’s a resonance thing there but I hear you. Cool. I think that wraps us up for the day.
Mike: Yup, I think so too. 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 and we’ll see you next time.
In this episode of Startups For The Rest Of Us, Rob and Mike talk about how to stair-step into a new audience. They define what the stair step approach is, ways to get into a new market, and how to utilize your existing strengths on your new audience.
Items mentioned in this episode:
Mike [00:01]: In this episode of Start Ups for the Rest of Us, Rob and I are going to be talking about stair stepping into a different audience. This is Start Ups for the Rest of us, Episode 283.
Welcome to Start Ups for the Rest of Us, the podcast that helps designers, developers and entrepreneurs be awesome at launching software products, whether you’ve built your first product or you’re just thinking about it. I’m Mike.
Rob [00:24]: And I’m Rob.
Mike [00:25]: 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 [00:28]: I’m doing pretty good. I got an interesting little hack that I heard about on a podcast where if you’re sending your new trial signups into Slack — like we send it into a signups channel so we can see whose signing up. If you’re already doing that, you can wire [Zappier?] up to essentially monitor that channel and pull a domain name, or an email address, out of the Slack chat and then push it into FullContact, and it gets the information so you can actually figure out, ‘Hey, does this person or company have a lot of Twitter followers? Do they have big social media presence? What’s their LinkedIn bio and their Twitter bio?’, just to get more information about them. It was surprisingly difficult to set up. It seems like it should be pretty easy because [Zappier] tends to be pretty easy to use, but there was a bunch of finagling I had to do to get it set up. And then, in the end, it seems to work for less than half the trials that come through and actually retrieve any information from Full Contact. So, it’s an interesting hack if you have an hour to set it up and you’re interested in finding out more about folks who are signing up and can do a lot of follow up. But, to be honestly, in the end, I’m a little disappointed with the amount of effort I had to put into it and the results that I’m getting.
Mike [01:34]: Yes, I’ve looked into those services before and it seems like that, in a way – I’ll draw an analogy with something like ReportOf – where ReportOf seems to gather some of the information from LinkedIn as well, and I don’t know how well FullContact is able to do that? I think there is probably a huge discrepancy between people who are using their work email addresses for their social presence on Twitter or Facebook or wherever, versus people who are using their personal email addresses inside of LinkedIn and you’re able to kind of match that up. A lot of times, people will add in their work email address, for example, into LinkedIn because then it makes it very easy for other people they know, or work with, to find them. I think ReportOf is owned by LinkedIn now, if I’m not mistaken?
Rob [2:19]: I think you’re right. Yup.
Mike [2:21]: Yes, so they probably have all the tools and stuff they need to be able to get that information, versus something like FullContact which is probably a little outside of the box.
Rob [2:30]: Right.
Mike [2:29]: But that’s cool. I think these types services where they’re able to gather additional metidata about people based on their email addresses is nice to have when it works. But obviously, when it falls down it’s a little disappointing.
Rob [02:45]: For sure. What’s going on with you? You have a deadline coming up in the next couple days.
Mike [02:47]: Oh yes, hard at work trying to get all the code out the door. There’s a few–I’ll say minor–sticking points we’re still trying to work around, but I’m pretty sure that we’ll be able to finish this off in the next couple of days and hopefully get it in the hands of our first beta customer that is outside of the four walls of my office, and hopefully see what happens.
Rob [03:05]: There are always a few minor sticking points two days before launch, so no one would be surprised by that.
Mike [03:10]: You mean, getting 90% of the work done so you can work on the other 90 percent?
Rob [03:14]: Exactly. Exactly. Well good for you.
Mike [03:16]: We have an interesting question that actually came in from [ArmonMesic?] and it’s actually a little bit on this topic. He says, ‘ Hi guys, really like your show. You’re providing so much value, and after listening to an episode, my motivation is always going up. I’ve got a question for you. I’m launching my first product, and right now I’m sending cold emails to people. Do you have a suggestion of how I can track open rates on individuals? I didn’t find an easy way to do it. Thanks for any help in advance.’
I’ve done this before; there’s a couple of different tools that you can use. One of the things that I’ve used before is Sidekick–and there’s a Chrome plug in for that, and they, I believe, have a free plan which allows you to just see who is opening emails and who isn’t. But actually, your question actually leads a little bit more towards what I’m actually working on now with BlueTick, which is not only tracking how many people are opening those emails, but whether or not you’re getting replies to them and then managing that follow-up process beyond it. Hopefully that helps to answer your question. I would probably start with Sidekick, see if it does what you want it to do. There’s other options out there that kind of operate in this space though, and there’s probably a dozen of them. But hopefully that at least gets you on the right track.
Rob [04:17]: Yes. The other two that I’ve seen are Tout, which is at toutapp.com, and YesWare. I think Tout is web-based. It’s a full web interface. And then YesWare integrates with your Gmail account. Those are other ways you can trap opens on cold emails. So one other thing I wanted to toss in. Last week I mentioned listening to ‘Masters of Doom’. I found out this week that there’s not a sequel to it, but there is a book called ‘Prepare to Meet Thy Doom’ and it’s basically a collection of magazine articles. Most of them were published in Wired and maybe some gaming magazines. And it’s actually a collection of different stories about gaming. So there’s a 10 or 15 minute version. I’m listening to this. I’m sure you can buy it, and it’s 10 or 15 pages, band the audio version there’s one of Flappy Bird. There’s the story Atari. There’s a really good story of Gary Gygax, the inventor of Dungeons and Dragons. Then there is an update around 2004 – 2005 with the guys from ID Software. I just discovered this. It was published maybe six months ago, so if you have listened to ‘Masters of Doom’, or read it, and you’re interested in more like that, the same author has published a book called ‘Prepare to Meet Thy Doom’.
And then on another front, I’m listening to the Snowball audio book again, and that’s called ‘The Snowball” It’s the story of Warren Buffett, and it’s a very thick book. It’s a biography, but it’s was as-told by Warren Buffett to a writer. He said he’s never going to write his autobiography, so he wanted someone else to do it. I found this book fascinating in terms of someone who had this unique talent, this unique advantage. And he really, really likes financial reports, and he figured out how to read them better than anyone else. And then he figured out his investing philosophy and the dude just showed up every day for like fifty years, and he calls it “the snowball”. He just built the snowball over the course of that time, and started with a tiny little bit of cash and managed — I think it was parents and friends when it started, and he just built it up, built it up; a fascinating story of being in it for the long haul, and then playing long ball and looking out decades in terms of building wealth, instead of being in a big hurry for it.
Mike [06:15]: Yeah, I’ve caught bits and pieces of his story over the years, and it is kind of fascinating the way he started out with virtually nothing and then he decided to move away. I think he moved out to Omaha and then I’m pretty sure he moved from New York, if I remember correctly?
Rob [06:30]: Yeah. I think you’re right.
Mike [06:31]: It was just like people would say, ‘You’re crazy for leaving New York, because this is where everything happens!’ And he was still able to manage the business and do everything from a completely different location. And he hasn’t really changed his habits. He doesn’t live in this extravagant house. He runs business in order to play the game. iIt’s not because he wants money or needs money. It’s just he likes it.
Rob [06:52]: Yes. That’s the cool part. I like when folks who are in it for the long haul, and who have this one outlier trait, just double down on that and stick with it for so long. When that turns out well it’s a cool story to hear. And what I’ve heard is–I haven’t read the physical book – but there is an unabridged and abridged audio version, and I’ve heard that the abridged version is just fine. Because even the abridged version, I think, is like 20-something hours. I think the unabridged version may be like 35 hours. Personally, I’ve listened to the unabridged and I don’t feel like I missed anything. And folks who reviewed both of them said that the abridged was just fine. So what are we talking about today?
Mike [07:30]: Today what we’re going to be talking about is a thread that came up inside of Founder Cafe, which is our private-user community. It was a question about how to stair step into a different audience. So, essentially going from an existing business that you have that serves the particular niche, or a particular audience, and trying to leverage that audience, or the things that you’ve learned, into a completely different audience. And I think that there’s a bunch of different reasons that you might want to do this, but let’s do a recap approach to what the stair step approach looks like.
Rob [08:02]: Sure. So, the stair step approach is something that I developed over the course of several years. Eventually, I published a blog post on it, and did a talk on it. If you go to — we’ll link this up in the show notes – but it’s at softwarebyRob.com, or you can search on my name plus “stair step”. It’s not been mentioned in a couple of books, and people quote it in articles and stuff. The idea is that I’ve laid out these three steps–and you could call them stages or whatever, but it’s steps of your entrepreneurial journey as you’re trying to launch a product. I have a couple different versions of it, but the one I’ll really stick to today is the one about launching software products. Step one is really thinking about launching a software product with a one-time sale and a single sales channel. So, think about a WordPress plug in or maybe a mobile app, a Magento add on, even an E-book–yes, I realize that’s not software, but that kind of stuff. And you have a single sales channel, which is typically going to be like the WordPress.org plug in repository, or it’s maybe SEO, organic traffic, or maybe the Amazon store or the Android app store; YouTube; you really optimize and you learn that single channel, and the idea here is to get experience and to get some money under your belt and really just learn the game. Step two is to just repeat step one. Because the thought here is that you’re doing step one on the side, right, while you have probably a full-time job or you’re doing consulting. Step two is to repeat step one multiple times until you own your time. So you have multiple plugins. That’s an example; you can have multiple plugins, you can have multiple e-books, you can have e-commerce sites, or whatever it is. The reason that you just repeat those is because you’re just trying to get more experience and trying to get better at all aspects of it, like the copy-writing and the marketing, and once you have multiple then you have the diversification that you’re going to feel okay about quitting your job, and you’ll also have a lot of experience. You’ll have experience on multiple fronts. It’s you’re a single channel, it’s building a product, it’s launching a product, it’s copy-writing, all this stuff. Once you get to step two you also have a bit of experience, you have a lot of time, you have a bit of money coming in. So then you begin moving to step three if that is something that is interesting to you, and that is basically a recurring sales; typically, in our space, that would be SAS. And the reason I have these three steps is because you don’t just want to jump into SAS on day one and try to build it, because it’s complicated, it’s very competitive, it’s hard to do on the side; there’s a number of reasons, you don’t have the experience. Since SAS is competitive a lot of people will out-market you and out-build you. So, step three is to launch that SAS app and get the golden ticket, which is recurring sales.
Mike [10:23]: So now that we’ve talked a little bit about the stair step approach itself, let’s talk about why you would want to do this. Why would you want to move into a completely different audience, especially when you’ve already worked so hard to build up one or several small products such that they are making a full-time income for you. I think the first one is boredom. I mean, some people just get bored with working on the same thing and they get to a point where the money is not insignificant, and they don’t want to lose the money, but, at the same time it’s not it’s not necessarily bringing in the level of revenue that they want it to. So they look around and they say, ‘Well, I could probably do something better or bigger and in a different market, but where I am right now is probably not going to get me there.
Rob [11:05]: Yes, and this is really common. Especially if you’re starting with a step one idea, they tend to have a natural plateau once the sales channel is tapped out. Let’s say you’ve built something for pet sitters, or just a small niche–salons or barber shops or something. Obviously. those niches can be large, but the amount that you can reach through online marketing means is fairly small in those instances. That’s at a point where you should probably start thinking, ‘Huh, is there a larger market online that I want to reach online that I want to switch to for my next step.
Mike [11:36]: Another reason that you might want to switch is that higher lifetime values for your customers might not even be possible in a particular niche. That comes around a lot from products where there’s this one time sale or I would also say in the WordPress business as well. There are a lot of plugins where you can get the one-time sale and it’s not a stretch in order to be able to do that, but getting people to pay on a recurring basis for WordPress plugins right now is, I would say, a little bit difficult. It’s really not common for WordPress plugins to have a subscription model of any kind. I have seen them, I have paid for them myself, but it’s not common. And, for certain types of customers, they’re just simply not willing to spend a lot of money. So what happens is your lifetime values for those customers tends to be low, and it’s very difficult to increase it without going down the route of bundling, or providing completely different products that possibly overlap.
Rob [12:32]: Yes, I think there are a lot of reasons why high lifetime values aren’t going to be possible in certain spaces. If you think about lifetime value, if you have a subscription business then the lifetime value gets higher the longer people stick around. And if you have a one-time sale product, then you really need to either increase the up-front price–and there’s always a natural limit to that. Again, coming back to the example of pet sitters, they just aren’t going to be willing to pay $500 up front for a piece of software, It’s very unlikely. Their price point is going to be more like a consumer or prosumer. Photographers, I would say it would depends on if they are truly a professional studio running a studio. or if they’re, kind of, doing it on the side, that’s another niche that a lot of folks go after, and they are pretty price sensitive. So the lifetime value in these niches can have a cap. Now if you have enough volume, and if there are a ‘bazillion’ of them online, then the LTV has less of an impact because you can just get so many folks signing up, but that’s pretty rare. It’s a pretty rare niche that you can come in and find enough people that a low LTV, in essence, will work for you because then you have to go after the organic traffic, and you can’t do much in terms of paid marketing in that instance.
Mike [13:38]: Let’s talk about a couple of the really bad reasons for switching. You and I discussed this offline a little bit. Trying to come up with a absolute ‘This is a bad reason for switching’ was a little bit difficult. I think the best one that we came up with was the idea that the grass is always greener someplace else. So, if you’re looking around, and you’re looking at your product and you say, ‘Well this is difficult, and I think over there if I try and develop a product in this market with these particular types of people it’s going to be easier.’ I think that that may probably be the most, or I’ll say the worst, reason for trying to switch into a different audience. But at the same time, if you double down on the things that you’re doing now, in many ways, that is a competitive advantage, because it’s going to be difficult for other people to get into your market and replicate the things that you’re doing. So it kind of cuts both ways, which makes it difficult to come up with a lot of reasons that are just absolute and say this is a bad reason for switching. But there are a lot of places where there’s multiple caveats. For example, if you think that another company is going to come in and shush you out of a particular market. Let’s say your product is reliant on Twitter APIs, or reliant on data from Google. There’s this idea of a perceived threat from them doing something that is going to shut you out, versus how likely that is to happen. I mean, if all of your revenue is based on that one product, they have the ability to shut you down and it looks like they’re headed in that direction then it could just be out caution that you say, ‘Well, let me go and do something else in a completely different market so that I don’t have to worry about this problem.’ But, at the same time, you have to weigh that. It’s not a ‘this is absolutely going to happen’. You do have to take those into account, and there’s mitigating factors there.
Rob [15:19]: Yes. I think that certain people – and hopefully you know who you are. Certain people have the personality where they like to start a lot of things, and when things get hard they jump to the next thing. And I think that’s, kind of, what you’re kind of saying with ‘the grass is always greener’. Some folks are good finishers, some folks are good starters. But I think if you have the tendency to jump around, that’s probably a bad reason to just bail on something. If you feel like you haven’t stuck around to grow something to fruition, and you keep bouncing either from idea to idea or from market to market, that’s probably a bad reason. With that said, there are a lot of good reasons that we have outlined here with higher LTV’s, not an ability to grow, difficult market to reach. There are some good reasons to be doing that. I think a good example of this is what Brian Castle did. He had RestaurantEngine, he had Hotel Propeller, and he built and grew those things, and he put in the time, and he grew them for years. And he hit a point where he realized, ‘You know, I have a lot of skills. I now have an audience and a new space.’ He had the podcast and the blog and such. And he, in essence, moved on to AudienceOpps, and that has grown way, way faster, and there’s a number of reasons for that. But he wasn’t jumping around. He wasn’t bouncing from one idea to the next. He had put in his time, he had learned a bunch. That was really, kind of, a step one idea for him, and now he’s moved on to where his AudienceOpps is growing a lot faster, and it’s already larger than the other two combined. I think that’s an interesting case study of thinking about stair stepping your way not only up, but kind of a horizontal move into a different audience as well.
Mike [16:51]: So let’s talk about some of the options for moving into a difference audience. I think there’s three basic mechanisms for going into a different audience. The first one is to move an existing product that you have horizontally into a different market vertical. Essentially you are using the same technology but you’re marketing it towards a different user base. So there’s a couple of different places where you might be able to do this. So if you have a CRM package that is for web designers, you might say, ‘Well, let me try and take this and repackage it a little bit and put a spin on the marketing, and I’m going to market it towards software developers or freelancers, or something along those lines. It’s a slightly different market, or maybe even a radically different market, but the majority of the technology base is going to stay the same. Most of what is going to change is your market positioning, how you do your customer development, gathering the language that they’re using, and the new website that you’re probably going to use for selling that product.
Rob [17:48]: There’s obviously advantages to doing this. I mean, there’s less technical heavy lifting you have to do. You don’t need to build something from scratch. Faster time to market, because your software is already built, in essence. You need to make tweeks to it but you have the bulk of it. The negatives to this are it is a completely new market. You’re going to need to start from scratch. You’re going to have to do customer development. You’re going to have to build a support pipeline and the website from scratch. It could also be really confusing for some customers unless you pick a completely new name with new domain, and in that case, you are looking behind your SCO, your organic inbound links and your reputation, your brand. You leave a lot of stuff behind. So it depends on if you take the code base and move it over, or if you actually shift everything. Because if people are reading every article that’s saying, ‘Hey, this is CRM software for XYZ audience’, and they come there and it’s for a difference audience, that could be confusing. But, all in all, there is this old marketing saying that says, ‘Try and avoid selling a new product to a new market.” What you really want to do is you want to sell a new product to an existing audience that you have, or you want to sell an existing product to a new audience. But doing new to new is really bad. So this is a way to counter that; to take this existing product and migrate it into a new audience.
Mike [18:57]: And that leads us directly into the second one, which is to buy an existing product. This cuts down on your time to market, because there’s going to be less inherent risk with a business that already exists and is paying customers. But the downside of something like this is it does tend to be expensive. And the growth of that business can be something of a gamble, because you don’t have a good handle on what those customers want or what they asked for. You didn’t develop the product with them, so you don’t have a history of what those conversations looked like. You were essentially starting a lot of that marketing from scratch. So similar to the previous product where you’re taking the existing one and moving it to a different market, if you’re purchasing an existing product, hopefully it has some level of overlap with the existing customer base that you have, or the existing email marketing list that you have. But that’s not always going to be the case, and sometimes when you’re buying products you have to take what you can get. It’s something of a lottery when you’re trying to identify a product that’s out there, that’s available and on the sales block, or even if you’re making unsolicited offers to the people who have a product out there which seems to be neglected. You can make those offers. They may or may not take them. But obviously it’s something of a lottery when you’re trying to find a product that is going to overlap with your existing audience. Sometimes you don’t have a choice and you end up going into a completely different audience regardless of what it is that you’re actually looking for.
Rob [20:19]: Yes, and this has historically tended to have been my approach. I’ve acquired a lot of products, a lot more than I have built and launched from scratch. I like the model because, as you said, it does cut down that time to market. It reduces risk, assuming that you do have an audience that was already interested in it, and you do have some type of product-market fit. But these days it is getting more competitive the more folks learn about the opportunity to buy. And so I still think it’s a viable option, especially if you’re in the position where you do have a little bit more cash than you have time. A lot of our consulting friends, or folks who are doing well in their careers, are in exactly that position. So if i was where I am today – as someone who is 41 years old – and I was doing a high-end consulting, and I didn’t have time to build a product, I still would buy one. That would still be my approach for upping the stair step given the situation.
Mike [21:11]: And the last option for moving into a different audience is to create a completely new product from scratch. Obviously, the pros of something like this is that you start with a completely clean slate. You don’t have any previous baggage, there’s no previous customer support problems you have to deal with. But obviously, the downside is that because it’s all green field you’re building a new product from scratch and it’s going to take longer than you think it will. You’re not only just building the product itself, but you’re building an entirely new business from scratch. So there’s probably a lot of things that you’re going to have to learn, not just about the customers but about the space itself, the competitors, all the stuff that goes with it. It’s not just the technology stack and all of the code and the product itself. It’s all of the customer development as well. Which you’re going to have to deal with that stuff anyway, regardless of the previous options you chose. But with creating a new product, it’s going to be compounded by all the technical stuff you have to worry about as well.
Rob [22:05]: And this comes back to what I said about how you really don’t want to do this too many times in your career. When you’re first starting out, you tend to have to sell a new product to a new audience, because you don’t have a unique or unfair advantage that you can utilize. But, if you can help it, try not to build a new product in a new niche where you don’t already have some reach into it, because that is when it takes literally years to get that snowball pushing up the hill.
Mike [22:29]: So now that we’ve talked a little bit about some of the different ways to get into a different audience, let’s talk about how to leverage the existing strengths that you have. The first one is that some of your existing business processes that you’re already using for your other products can generally be duplicated. These types of processes include : how you handle your support, and some of the software development mechanisms and processes that you have in place. Many of the marketing processes that you have in place. So if you’re doing something like marketing Monday, and you have a checklist of things that you go through on a weekly basis, a lot of those things can be reused and just copy-pasted and then tweeked. So it really helps you to move things forward much faster than if you were to try and create them from scratch, because creating them from scratch is going to be extremely time consuming and a lot of times you don’t need to. You can already take the things you know and that you’ve used before and tweeked, and I wouldn’t say perfected, but I would spend a lot of time and effort making better for your existing products, and then translate them over onto the new product and the new audience, and just tweek the things that need to be tweeked. You don’t need to start from scratch for a lot of those things.
Rob [23:36]: Another way to leverage your existing strengths – your existing knowledge – is that a lot of tools, especially marketing tools, they tend to overlap from one business to the next. So an example is if you’re using Drip to send an email, and you already know how to use it, then when you move into this new audience, you can use it. If you’re pretty good at running AdWords and making those profitable using Facebook ads, using Twitter ads, that’s something that you can absolutely leverage because those are “can-be” audience agnostic. Now, you’ve got to make sure you have reach into that audience on that platform, but that’s definitely something you can use. And tools–like [Kismetrics] and [MixPanel?] and [Intercom] and all that staff, it’s like, well, why would you reinvent the wheel? You already have knowledge of them, you know how to use them, and you know that those work for you. So, just moving those into that new space would be worthwhile.
Mike [24:18]: The next way to leverage your existing strengths is to remember that your network today is bigger than it has ever been in the past. You know people today that you didn’t know when you started, and you should not hesitate to ask those people for help. Now, whether those people you’re asking for help are people that are colleagues, or existing customers, or prospects that you have on your mailing list, you can ask those people questions. You can use those lists to help generate questions and help identify additional opportunities that may be in either related or unrelated spaces. So if you’re looking to move into a completely different market, that doesn’t mean that the people who are currently on your list don’t have those types of problems. Let’s say that you’re serving web designers, again, as an example. Well, web designers may overlap in some way with software developers; they’re people who have both sets of skills. So if there’s a subset of those existing customers, or people who are on your list who may have a problem that you’re trying to target, definitely go talk to those people and try and engage with them to ask them questions about what it is that they need, and whether or not they’re currently paying for specific services, are they happy with them, what other products they use? Use those as customer development opportunities, because you already have the list. You’ve done the hard part of getting those people on your list. Make sure that you’re leveraging that.
Rob [25:35]: Odds are pretty good as well that you have practice being a manager, and delegating, probably outsourcing. As we know, if you’re going to be leveling up, you need to take on more responsibility, and the ideas are probably going to be larger, perhaps more competitive, perhaps more complex. And the better you’ve gotten at outsourcing, delegating and essentially being good as a manager – like having skills and being productive at that – that’s totally something you’ll carry with you from niche to niche, even if you decide to move.
Mike [26:08]: And that actually lends itself to using your existing base of contract or outside help that you’ve leveraged for assistance on your existing products. If you hired someone as an SCO as a contractor, if they worked out, definitely go back to them and use them for the new products that you’re trying to leverage into the new audience. There’s nothing that says that you can’t use those same resources for a new product that you’ve used, and have worked for you, in the past. That said, if they did not work out, or if things weren’t going well, you could also use this as an opportunity to find somebody else for a completely new market, without necessarily hurting people’s feelings as well, if you have personal relationships that you don’t want to burn.
Rob [26:45]: Another way to leverage existing strengths, I touched on earlier, but it’s essentially your marketing skills. If you’re SEO skills, PPC skills, content marketing, email marketing, if you’re a speaker and know direct sales, etc., They all lend themselves to certain types of businesses, and I think something to keep in mind here is not to pick that next niche or that next business because it’s interesting. Pick it because your existing competence in these marketing spaces gives you an advantage. So you can actually be deliberate about choosing that next idea, or that next market, based on skills that you’ve already developed and whether or not they’re going to work in that new market.
Mike [27:22]: Something else you can do there is to use that experience to actively avoid any businesses, or markets, or audiences, where the learning curve for it seems exceptionally steep. You are already starting over with a new audience. You don’t want to make it harder on yourself solely for the prospect of making it harder on yourself. There’s no good reason to do that if you don’t have to. So if there are places where your experience, or the relationships that you have, are going to give you the ‘ins’ into that particular market or audience. Make sure to use those, and to avoid the places where it’s going to cause problems for you
Rob [27:58]: Another tip to keep in mind is to take a long-term view. This is obviously going to take a long time, and any time you switch – whether you’re launching a new product or whether switching markets – it’s going to take a long time. And if you’re doing both, it’s going to compound and it’s going to be even longer than you want it to be. So take a long-term view and make sure it’s a direction that you’re going to enjoy, and it’s not something you’re trying to do to get out of your current situation, like we talked about earlier. If it’s just a ‘grass is greener’ mentality, then you’re signing yourself up for a lot of work. This is not something you’re going to be able to just pivot into in a month or two. This is months and months, if not multiple years, depending on how complex the idea is and the market you’re trying to penetrate, and how much of an audience you actually do have in that new market. So think about it long term and don’t just, ‘Ah, I can turn this thing around in 90 days and have this new product and it’s all going to be great.’
Mike [28:46]: And I think the last strength that you can leverage when trying to when trying to move into a new audience is to leverage your experience with the existing products and do not forget the basics of what got you where you are today. There’s all these things that when you look in a new market it’s very easy to forget where you came from, or the things that you learned very early on, or just gloss over certain details of how to do the basics of SEO, and how to optimize different parts of the sales funnel, or email marketing funnel, or anything like that. Don’t ever forget that those things are the pieces that got you to where you are today, and those are generally transferable from one product to the next just because the process of developing a product tends to be the same. The markets are different. The actual context of the marketing and the copy writing and all that stuff is different when you get into the details. But generally speaking the process tends to be very, very similar.
Rob [29:39]: Well 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 email@example.com. Our theme music is an excerpt from ‘We’re Out of Control’ by MoOt used under Creative Commons. Subscribe to us on iTunes by searching ‘start ups’ and visit startupfortherestofus.com for a full transcript of each episode. Thanks for listening and we will see you next time.
In this episode of Startups For The Rest Of Us, Rob and Mike help you answer the question, when is it time to level up? They address how to think through the process and what concerns there might be to leveling up.
Items mentioned in this episode:
Rob: In this episode for Startups for the Rest of Us Mike and I answer the question “When is it time to level up?” This is Startups for the Rest of Us episode two hundred thirty-five.
Welcome to Startups for the Rest of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at launching software products whether you’ve built your first product or are 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. What’s the word this week, sir?
Mike: Chris Kottom who had suggested our episode on stair-stepping had sent us in another link. He’s got a book called Minitest Cookbook and it’s aimed at helping Ruby and Rails developers write maintainable test cases using mini tests. I went over and checked out the website. It’s pretty cool. It’s got a lot of stuff in there. He’s got a nice little eBook that goes along with it and looks like it’s got a lot of good information in there.
Rob: Congratulations, Chris. We’ll make sure to link that up in the show notes. We also received some praise for episode two hundred thirty, which is our fifth anniversary episode where we had our wives come on and do the show. It’s from Patrick [May?] and he says, “Hello, folks. First off, I love the show and it’s real business life theme, no baloney for sure. I’ve never emailed you but after the spouse episode today I had to comment. Ladies, it was so great to hear from the other or better half of an entrepreneurs life. As a small scale farmer and entrepreneur I felt connected with this episode. My future wife and girl friend of eight years supports me, helps me tackle tough decisions, and keeps me focused when I wander. You guys rock and keep it up. Thanks.”
Mike: Thanks, Patrick. We really appreciate that. I’ve heard a lot of people have been pointing their spouses toward that particular episode and having them listen to it.
Rob: I know. It seemed to have resonated to hear that side of it. I’m glad. We were obviously inspired by Techzing’s two hundredth episode where they had their wives come on and Sherry was actually on that episode as well. But the format seems to speak to a lot of people and I think it tells maybe this other side of the story. It’s like the other business partner’s side of the story that isn’t told enough, I think.
Mike: The unsung heroes.
Rob: I think exactly. People who put up with us in the day to day life.
Mike: Well the only other thing I’ve got is my book is coming out for its public launch next week. So that will be out, I think about the time this episode goes live.
Rob: Very cool. So if folks want to check it out where would they go?
Rob: Nice. All right. Well this week’s episode Mike and I are going to be talking about when is it time to level up. And it’s actually based on a question from Simon at Small Farm Central. Simon writes, “I have a couple of products that I feel are pretty mature. They’re growing ten to thirty percent a year but I can’t grow them super fast because the market’s a bit tapped out. The vertical is very small and we rule the vertical pretty well. I have some new products that I’m working on but I’m wondering when is it time to reduce investment in these more mature products and focus on the new ones that probably have more growth potential. Even if I stop investing and pull back on my existing products, they will keep generating cash since they are SaaS apps.”
So the question is how do you know your product is mature, how do you now when to move on, and really we’re boiling it down to when is it time to level up? I’m using that term level up in the context of our stair-step episode a few episodes back, and also in the context of Patrick McKenzie’s talk at MicroConf where he talked about moving from Bingo Card Creator, which was a small price point, one time purchase and most of his traffic was a single channel. It was SEO with some ad words. And then he leveled up to Appointment Reminder, which was SaaS, and now he’s leveling up to [?] Starfighters.io. And it’s really in line with the stair-step approach that I’ve been talking about for awhile and that we’ve covered a few episodes ago. I think there’s more to dig into this, the specifics of when you should think about leveling up and what some of the concerns should be, and how to think through that whole process.
Here’s some thoughts about when to consider leveling up. And by leveling up I mean moving from that step one, which is typically a single purchase priced product up to multiple purchase priced products, and then up to recurring revenue.
Now in Simon’s case in particular he actually owns two small SaaS apps in this same space and he helps small farmer manage their web presence, is one of his apps. Imagine Squarespace for small farms. And the other one helps them manage their CSA programs. CSA is where a consumer you could pay the farm a monthly subscription and you get a basket of fresh produce every week or every other week. It stands for Community Supported Agriculture. But he knows this market really well. It is a very small niche market so it’s not going to be something that grows like an app for marketers or an app for designers. It’s a good point he brings up, says his growth is not super fast. It’s ten to thirty percent a year. Which is slower than a lot of apps that we might hear about. And I think that’s the first point at which you should consider perhaps moving on, is when revenue has essentially flatlined or is growing very slowly. And if you’ve spent six to twelve months trying to increase it and investing time and energy in trying to find new traffic sources or trying to improve conversion rates and they’re not going up, that is, to me, a leading indicator that you might want to think about adding another product to your portfolio or leveling up.
Mike: Yeah, I think that’s all about a balancing act, too. The ten to thirty percent a year, call it twenty percent, and if you try really, really hard and you get twenty percent but then you don’t try hard at all for the next six months, say, and you still get twenty percent growth, then it’s indicative that there’s not a lot of, I’ll say external influence, that you can provide that’s going to push that business forward. It’s going to move on its own but I think a lot of this also boils down to the fact that just certain types of markets, they take a long time to essentially tap into to get those customers onboarded. And I would imagine that this is not a very tech savvy crowd, so you’re probably going to have to do a lot of hand-holding in order to get those people on board. So, even if you are to try and scale those efforts up, it’s not as though you probably have the man power to be able to get as many people onboarded as you would like.
Rob: I think this relates to the law of diminishing returns. Early on as you’re building and you’re starting to market, you’re going to increase revenue month after month. And then at a certain point you’re going to hit a plateau, and we have talked about this in the past about breaking through plateaus, and there can be any number of causes for that, but if you’ve been working on an app for a number of years and you can see the pattern of it has been slow growth all along, and it’s going to continue to be that, then maybe that’s not a time to bail on it, right? Because it’s just the status quo and that is what this market looks like. But if you’ve had years of eighty percent growth, fifty percent growth, and then it’s slowly tapering off and you feel like you’ve peaked in the market and you might be starting to lose interest, then that’s the time where I think that you’re starting to perhaps lose momentum.
That takes us into our second point of when to potentially consider leveling up, is when your momentum has died down for an extended period of time. Basically, when you’re own personal interest is starting to wane. And I find that this often happens around the time when plateaus start to come up. Because when your business is growing like gangbusters, you’re momentum doesn’t tend to die.
Because the problem with losing momentum is that if you don’t care, if you don’t love this business any longer and you’re starting to maybe lose interest, you’re going to start wandering. You’re going to start thinking about other ideas, you’re not all in anymore, and the business is naturally going to suffer because of this. And so that’s the second thing, is if your revenue has peaked or is flatlined, or if your personal momentum and desire to grow the business has flatlined, both for an extended period of time, those are the points where I really start thinking about should I be making a transition out of this.
Mike: Yeah, I think those things are tied pretty well together in terms of the motivation and how fast you’re growing, because if you’re growing fast you’re motivated to keep doing it, but as your returns start diminishing on the same effort, you’re just not as motivated. And I found that even with the stuff I’ve done. I don’t know if there’s a specific name for that, but it almost seems like there should be.
Rob: Yeah, I know. I think there’s a judgement call to this because every business is going to hit some plateaus and every business is going to lose your interest for different periods of time. So you might have two weeks or three weeks or a month where you hit a plateau and where you’re bored with it and you’re fed up. And to me that’s not long enough. It’s got to be something like six months where you’ve tried everything you can think of and nothing is working, and you’ve asked for advice, and you’ve talked to advisers or mastermind forks or whatever community it is that you have, and you’ve tried everything that you can think about and you’re at the end of your rope and you’re still not growing. That’s the point where, I’d say, are pretty solid indicators that you either need to seek more help, like you need to pay a consultant to come in and help, or you need to start thinking about potentially moving on/leveling up.
Mike: I think something else that factors into this is how much money you’re making from it. There’s a difference between whether it’s something you’re doing on the side or versus whether it’s something that it’s completely your full-time income as well.
Rob: Yeah, I agree. And I think this begs the question of do you always have to keep growing, because there’s a lot of talk in the venture funded startup space about growth, and I think there’s also a lot of talk in the bootstrap startup space about growth, and I’m not sure that growth is necessarily an end goal for everybody, nor should it be. I think depending on where you are in your life, let’s say you’ve just had a child, you may not care about growing for a year or two, or you just want to rent a trailer and drive around the country and hang out with your family. Growth is not necessarily the end all be all of all this stuff. I know I talk about it a lot. It’s been a personal goal of mine to grow businesses over the past few years but if you hit the point where you’re making ample money to live on, I don’t think there’s anything wrong with living the life. Like in quotes, “Living the life,” for awhile and really evaluating whether or not you want to start another app.
You and I were discussing this before, not to use the word coast, because coast has a negative connotation, but I coasted on revenue for a solid eighteen months. It was around 2010, maybe, 2011, we had our second child and there was a solid ten months where I worked a day and a half a week, two days a week. Nothing grew but nothing flailed either. And then there was about another six months where I was just enjoying it and doing things and that’s when I wrote the book and that’s when the Academy really got built. I don’t think that a constant push for growth necessarily should be the goal for everyone at all times. I think it depends on your situation.
Mike: Yeah, growth for the sake of growth shouldn’t necessarily be the goal. It’s what are the things that you’re trying to achieve and why. Why is it that you want those things? If you want growth in order to make more money so that you can do X, Y, and Z then that’s fine, but at that point it’s not growth that’s the goal it’s that X, Y, and Z, whatever that happens to be.
Rob: Right. So I think what I’d do if I were in Simon’s shoes is to go on a retreat and I would get the heck out of Dodge for forty-eight or seventy-two hours, try to be alone and basically ponder this decision and its ramifications and ask a bunch of questions. There’s actually a good podcast episode. It’s Sherry and mine’s podcast called ZenFounder. And you go to zenfounder.com, episode two. We outline the things you should ask in a retreat. But one of the questions that I would be asking is do I still have interest in this niche? Do I still want to grow these apps? Do I really want to start over with a new product in a new market? Because I think that’s what Simon’s asking about because he’s saying his market is too small, currently. Because starting over with that new product in a new market is very, very hard and don’t underestimate how much of a challenge and how long that takes. Looking backwards at the past two plus years, that Derek and I have spent building Drip from scratch, it’s a ton of work. I think that’s something to really think about. It sounds great at the beginning and there are going to be some hard times again. So ask yourself, are you in a place in your life, and mentally where you want to take that leap and go through the hardship of starting something new.
Mike: And I think that if you’re going to do that that’s something that you have to really commit to because it can be very easy to become complacent when you’re in a place where you’ve got money coming in, you don’t have to work terribly hard to get that money coming in the door, and you can essentially drag out other things that you’re working on for an extended period of time because there’s no push or drive for you to complete it in a short amount of time. So just be mindful that if you’re going to go in that direction then you need to commit to doing it or not bother because otherwise you’re going to waste a lot of time and something that you could have easily finished in eight or nine months is going to take you three or four years to finish.
Rob: Right. And the good part is that Simon has a lot of experience. He’s basically grown these two SaaS apps to the point of success. I don’t know what his revenue is but I know that he has a few employees and he owns this market. So he definitely has a lot of experience under his belt and the true stair-step approach of learning these things early on. So I think he does have some advantages under his belt. But I do think that going on a retreat and thinking through do you need to keep growing right now, is it time for you to maybe live the life for a little while, take four or six months and coast and enjoy it, or are you geared up to really start something and hammer it out, start a new app. I think this ties into thinking about it, in terms of fast growth versus slow growth. Because every app and every market is not going to be fast growth. The vertical of small farms or catering to restaurants, or selling into hotels. There’s a bunch of niche markets that we can think of, especially if you’re building a niche piece of software for those markets, where I just don’t really think it’s feasible to have this hundred percent or two hundred percent year over year growth every year. Your growth is going to be slow the entire time, and I don’t necessarily think that’s a bad thing as long as you have the patience to do it and it’s not driving you crazy.
Mike: Yeah, and we had an extended conversation about how to essentially present that fast growth versus slow growth. We talked about auto pilot, we talked about coasting. All these different words that have different connotations depending on how you use them. And I don’t know what the end words for them really should be but it comes down to what your growth curve looks like. Fast paced marketing startups, you’re going to have a lot of heavy growth and it’s going to be easier to onboard people, and you’re going to be able to move them through your sales funnel quickly, versus these other things where the growth is significantly slower, in the neighborhood of, as we said earlier in the episode, the ten to thirty percent year over year growth. That is much slower but the question also comes out as to how far down the road does that growth look like it’s going to go? Is it going to tap itself out in a year or is it going to be ten years or twenty-five years? I think there’s a very big difference between some of those different numbers. And it’s going to influence, in some ways, what you decide to do moving forward. I think that ultimately what you do is also going to be heavily influenced by what you’re interested in.
Rob: Yeah, I think it ties into personality as well. Certain folks are more patient and more willing to just hang out an build a successful, highly profitable app but not feel like their always tantalized into going into that next high growth niche market that everybody’s talking about. I have a lot of respect for the folks that are doing that and can stick with one thing for years on end. So I think that’s an interesting way to think about it.
I think the stuff we’ve talked about so far can be summarized under “Is this something that you want to do?” You need to think about it from your personal perspective. I think another question I would ask myself is is there another opportunity that you can think of where each hour of your time will be worth five X, or ten X more than with your current business? Because if that’s not the case and you don’t have your finger already on something, I’d be less inclined to back away from this. Again, unless you’re really fed up with where you are and you want to make a quick exit, I’d be thinking about what’s next and thinking about how that will be different. Without that “What’s next,” it makes it a little harder. I think just leaving a business behind without having an idea of what you’d be up to next maybe leaves a question mark in my mind. For my personality I think it would leave me concerned but maybe that’s not a general feeling.
Mike: One thing that just jumped in my mind was, for this particular business, have you set out everything that you’ve achieved to do?
Mike: And I think that if you have then I think it’s probably definitely time to look around and see what else you could do and maybe move on. But if there are things that you set out to achieve originally that are still within the realm of possibility and you just haven’t done them yet, I think you may very well run into a place down the road where you’re like “Gee, I wish I had done that.” Maybe not. It depends on what those things are but it seems to me like that’s something else to keep in mind.
Rob: Yeah, I think that’s a good point. I think the last thing I’ll throw in here because it tied into my decision when I moved from HitTail and moved onto Drip, was is there an external dependency that could potentially render your product moot like you’re integrated with Twitter and they’re going to jack with your API, or you’re integrated with Google and they keep changing everything every six months. In Simon’s case, I don’t think it is, but in the case of HitTail, if Google’s going to be changing things and breaking your app altogether then it might be a good time to think about diversifying.
So I think those are the thoughts and concerns and the questions that I will be asking. And I know Simon asked a little bit about how do you know when your product is mature or how do you know when you own the market. I feel like you have a better sense of it than we do, just because we don’t know your market. And my guess is if you ask yourself or you look at the data, how many small farms there are and how many you’ve reached, you have a pretty good sense of whether or not you can accelerate growth or whether or not this is just a solid business that is hit maybe a plateau. I do think that I would think of it in terms of a plateau and not as the end all be all of the business because my guess is someone somewhere could take this business to the next level. The question that I would ask is what would it take to [?] X this business and do you think that’s possible? And that can play into this decision of if you think it’s possible and these are the steps then do you want to do those?
Mike: I think my sense of that is just very slightly different, which is just that is there a possibility for this business to double or triple in size within a reduced time frame than what you’re currently looking at? As I said, I think it’s slightly different than what you just said, but it boils down to is it even possible, not just for you but for anybody? And if it’s not that might be your indicator to say okay, let’s go do something else or, as we talked about before, maybe you’re just happy where you are and just keep running this business for the next fifteen, twenty years.
Rob: Right. Which I do not think is a bad thing because the pains of starting over are not to be understated. So if you decide to stick with it, that’s great. We wish you the best of luck. If you decide to use this as a time to have an exit and level up, I thought about three different options for how I’ve seen this done and two of them are good choices and the last one is pretty much a bad idea, but we’ll walk through each of them.
The first choice that I’m throwing out, and these are in no particular order, they’re not in priority or anything, the first option is to sell the app. What’s nice is that there is a market that has started to coalesce over the last couple of years for these higher end SaaS apps, especially, but pretty much bootstrap software. And even eCommerce and product test service and all that stuff. There’s now becoming a bit of a liquid market that is more than just the low end flip of market where everything’s twelve months of revenue or twelve months of profit or whatever. So there are definitely solid website brokers out there that are dealing in this type of stuff and the multiples vary depending on growth and all types of stuff, but frankly with a SaaS app that is fairly systemized I think you can get at least two and a half times your annual net profit and potentially up to three, three and a half. Which it becomes an interesting number at that point. If you’re doing a chunk of change each year and you’re able to get 3X that change then realistically your choice is do I take this money off the table now and give me time to start thinking about what my next idea is, potentially acquire something that is more interesting or build it from scratch, or do I stick around for the next three years and try to manage this thing on the side in order to earn that same amount of money?
The second option that I’ve seen people do successfully, but only a few times, is to actually put someone in charge of the app. [Heaton?] Shaw did this with Crazy Egg where they hired basically a CEO to run it, full-time, that person was not focused on other apps. I attempted to do this with HitTail, and I had Derek working half-time on HitTail, half-time on Drip. This is way back in the early days of Drip. The problem was is that Drip quickly grew. It became a bigger app, bigger opportunity than HitTail so I pulled him off and we both started working on Drip, and as a result it didn’t work out for me because I wasn’t willing or wasn’t able to find someone who I thought could totally run it on their own and run it, but perhaps Simon’s in a different situation here where he could really hire more of a CEO or COL level person who can continue to run the app in his absence.
Mike: Yeah, I think that’s the difference between whether or not you have somebody who is going to be involved in your old business that’s also in your new one. Because I think that with Crazy Egg, I don’t think that [Heaton?] and Neil had had anyone who was actively involved with KISSmetrics when they decided, essentially to relegate that to the back burner. So that may be the deciding factor, I’ll say there. But I think that this route is possible but I think that you also have to do it right. You have to make sure that you’re not stepping on an opportunity either forward or backward when you do it.
Rob: And the last of these three options for putting an app on the side is to try to do both. It’s to try to start your new app and just figure you can manage the old apps on the side and not hire someone who is not fully in charge of them. And this, from what I’ve seen and from what I’ve experienced, is not a good idea. Patrick has mentioned this with Bingo Card Creator that trying to do it on the side basically revenue dropped every year since he did that. I saw this with HitTail when both Derek and I stepped away from it, revenue dropped. It’s really, really hard to do two things well at once. The exception is early on when I had a bunch of small apps, I had little apps like [?] and Voice and Beach Towels and little eBooks here and there, those really didn’t need much management. They didn’t have a high touch sales process like I imagine the Small Farm Central does. They didn’t have nearly the moving parts that a real SaaS business did. They just really got leads through a single channel and they converted those leads and all of the stuff was really an automated process either through a virtual assistant or through code. So that’s an exception that if you have something that really, really can be automated, almost ninety-five percent or whatever, then I think you can put that on the back burner but it’s definitely much, much harder to do and I don’t know of any models I’ve seen successfully doing it with a more complex app like a SaaS app that’s doing five figures a month.
Mike: Yeah, it feels to me like that’s a function of the support and the onboarding. So for example, Bingo Card Creator, the onboarding is not very difficult but the support could potentially be much, much larger so you have to have somebody there who can manage the support side of things. And you have to be able to continue staying on top of the SEO because it’s such a low margin business. Because of the low margins you’re not going to be able to take your focus off of it because if you take your focus off of it, immediately your margins are going to plunge, your support costs are going to overtake everything else. And I think you probably experienced something similar with HitTail where you had Derek working on it half-time and then you pulled him off of it but them there wasn’t really anybody there to backfill that. It just seems like that factors into it heavily.
Rob: Yeah, the thing is most of us are running businesses that change frequently even though it may not feel like that. And if you have a business that relies on SEO for a lot of your traffic or relies on ad words, that stuff is changing every six months, so you can lose a lot of your rankings when Google decides to do an update or ad words get more expensive. Or if your using Facebook ads, as an example, they change algorithms and they change the way things are done and suddenly a main source of your traffic goes away and if it was your main business you would spend the time experimenting and figuring it out. But if you’ve now moved on to something else it’s really hard to shift your focus back and spend the week or two weeks or three weeks, whatever it’s going to take, to completely rediscover another traffic source or to reoptimize an existing traffic source that you’ve lost. And so that’s where, in every case that I can think of, trying to do an old somewhat complex app and to start a new one, it breaks down eventually. It may work for six months, it may work for twelve months, but eventually you’re probably going to hit a roadblock with one of these many changing things that we see that you’re then not going to have the time or desire to go back and fix.
Mike: Well, Simon, I really hope that that helps answer some of your questions. If you have a question for us you can call it into our voicemail number at 1.888.801.9690 or email it to us at firstname.lastname@example.org. Our theme music is an excerpt from We’re Out of Control by MoOt used under Creative Commons. Subscribe to us on iTunes by searching for startups and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening and we’ll see you next time.