Show Notes
In this episode of Startups For The Rest Of Us, Rob and Mike talk about overcoming challenges with subscription pricing models. They dive into how to test selling subscription based products, deciding between one-time, monthly, or annually, how to raise prices, how to lower prices, and how to avoid overpaying for support.
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Transcript
Mike [00:00]: In this episode of Startups for the Rest of Us, Rob and I are going to be talking about overcoming challenges with subscription pricing models. This is Startups for the Rest of Us, episode 316. Welcome to Startups for the Rest of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at building, growing, and launching software products whether you’ve built your first product or you’re just thinking about it. I’m Mike.
Rob [00:26]: And I’m Rob.
Mike [00:27]: We’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s going on this week, Rob?
Rob [00:32]: Well, as I mentioned in last week’s show, I went up to Lake Superior to have my retreat, to do a bunch of thinking, and kind of relax. The day I went to leave Minneapolis to drive up there, I was feeling terrible. Like sore throat and all sorts of stuff, tired. So I drive up there kind of fever-dream-ish. I was in and out of conscious, but it was in a state where you don’t remember how you got there type of thing. So I got there, slept 13 hours that night. I get up in the morning and look at my throat with the mirror on my camera phone and it’s just brutal. White spots all over the place. Turns out I contracted strep throat right before my retreat.
Mike [01:12]: Well, on the bright side you probably didn’t have to talk to anybody.
Rob [01:14]: But this thing is – it was exactly that. I was like, “this is a real bummer that I’m not -” I couldn’t think well enough to actually do retreat work. I pretty much watched TV, slept, and listened to podcasts. But on the bright side, I didn’t have to be at home around everybody. Because you know, when you’re sick and you have two kids that are waking up early. You’re trying to sleep and you want to be helpful with them, but you’re kind of incapacitated. I didn’t have that guilt because I was just in this cabin overlooking Lake Superior. Kind of couldn’t think of a better place to be when you’re that sick. I was up there for three days. I was able to get some medication up there. Hour-round trip to the nearest clinic and I started feeling better by the last day. It was an eventful or uneventful retreat, depending on how you look at it.
Mike [01:55]: Kids running around when you’re sick? I know not what you’re talking about.
Rob [01:58]: Oh, man. It’s the worst. How about you? What’s been going on?
Mike [02:01]: Well, I got an email the other day from John [Salmans?], who is a attendee of MicroConf and he runs MarketTender.com. He published a list of podcasts called “The Ultimate List of Developer Podcasts.” We’ll link that up in the show notes, but there are dozens and dozens of podcasts on here that are aimed at the developer crowd. It breaks them down into different programing languages, and marketing, and front-end, back-end, all sorts of different areas. If you’re interested, definitely check that out. The other thing is that my youngest son has decided that he is going to become a professional YouTuber. So that’s a college savings win, I believe.
Rob [02:38]: Boom. That’s awesome. My son, my ten-year-old, has been talking about that for a long time. I’m like, I don’t know. I don’t want to get everything set up to do that. But I think it’s a good idea for kids to start thinking about that. That’s the future, right? I mean, I know it’s the present for a lot of adults these days, but for a kid to start tackling social media at this age, as long as you can keep them protected from stuff, is a good thing.
Mike [02:59]: As long as they’re 13 years old and can click that button without violating the law.
Rob [03:04]: Yeah. Exactly. So, hey. Circling back to that podcast list from John [Salmans?], there’s an entrepreneurial section, a category, and I just want to read a couple of the podcasts. You’ll probably recognize most of them. One is EntreProgramers, then there’s BoomStrap from Ian and Andre. Although I’m not sure if that’s still going. BootStrap with kids, with Brett and Scott. Although that’s not going anymore. And then we have TechZine, BootStrapWeb, and of course StartUpsForTheRestOfUs, and a couple others. RocketShip and a few others. So you definitely want to check that list out if you have a chance. How about today? What’s our topic for this week?
Mike [03:36]: What we’re going to be doing today is discussing subscription pricing models and some of the challenges associated with coming up with a subscription model. And how do you logistically go about testing a subscription based products? I say “subscription based products” as opposed to a SASS application because a lot of these things are applicable to any sort of subscription pricing model. So whether it’s a membership site, or a coarse that you’re running, or obviously a SASS application falls under that umbrella as well. But there’s a lot of different types of products out there that essentially fall under this umbrella. Productized service, for example, might come under this if you’re doing a recurring service for people over time, on a monthly or weekly basis. All those things kind of fall under this umbrella. So we’re going to kind of talk through some of the different challenges associated with one, just deciding what type of pricing model is appropriate, but then moving on to how do you raise and lower prices, how do you start building up the service while you have all these incoming costs and you’re not making as much money as you’re putting into it, et cetera.
Rob [04:39]: Cool. Let’s dive in.
Mike [04:40]: So the first one is how to go about testing whether you should be charging on a one-time basis or monthly or annual subscriptions. I heard the CEO of [Atlasian?] named Scott – I can’t pronounce his last name. It’s [Farakuar?] or something like that. He talked to businesses about software and he was asked this exact question. He said that if the value of a product goes up over time, then you should charge a subscription. But if it maintains the same level or the value of the products to the customer goes down over time, then charge a one-time fee. That’s actually a very interesting way of looking at it because if something is going up in value for the customer, then it’s something that they’re going to want to keep around for an extended period of time. Whereas like a training course, you buy it once. Or a book, for example. Once you’ve read it, you’ve kind of consumed that information and you’re going to move on. The impetus for you paying on a subscription basis on that is no longer there. So I think using that delineation of whether the value is going up over time or not as a determining factor in whether you charge monthly or on that subscription based one-time fee is a very interesting way to look at it.
Rob [05:43]: Yeah. Obviously there’s a lot of pluses and minuses to this. I mean, I think if you run a software company where you are actually hosting and having a different value over time, then a one-time fee is a terrible idea because you always need new customers to keep the servers on. But if it’s downloadable software, then a one-time fee most likely makes sense because people don’t want to download and host it on their own server and then pay you a recurring fee. I know there are some apps that do this, and frankly, they’re bucking the trend a little bit. Now, if you have a SASS app, then I thinking offering monthly and annual is the way to go. The test that I’ve seen people do is basically run it, test on the pricing page. See default to annual, see how many people go through and default to monthly, see how many people go through. Obviously you’re giving a slight discount. Maybe one or two months free, or 15-20%, whatever you want to give for annual, and then you do the math. Not only are you making more money, but are you getting more cash up-front or not. That’s a big deal if you’re bootstrapped.
[06:40] Now, if you’re running a membership site, it is a little bit different. Unless there’s a lot of ongoing expense, then I have seen some membership sites basically do a one-time fee that’s kind of a lifetime buy-in. Typically you want to have an asterisks there that says it’s the lifetime of the membership site, not the lifetime of the user. Right? Because the membership site may not be around for 40 more years, but the user may. So you have to walk a line there. As long as people get a bunch of value from the membership site, typically membership site lifetimes are between four and six months. These are average numbers I’ve heard based on these large swath of folks I’ve talked to in our own experience running a membership site. And so, if you give them a ton of value in that amount of time and they get their money’s worth, it doesn’t matter. The ongoing access is cool for them to have access to forms and such, but if three years down the road you do decide that they bought a lifetime access and I’m deciding to shut this down, you’re going to have very little push-back. People understand that this stuff has to change. I think that you have a question that is how do you really, logistically test this? And again, with SASS you just change it on the pricing page. With subscription sites or a membership site, I would just look at are you going to tend to want to do launches for membership sites rather than just have an open sign-up process? And you’re going to know your numbers. You’ll do one or two launches, you’ll see the numbers of one and do one or two launches the other way and see the numbers.
[07:56] I would compare and see what cash you’re getting from which one and it’ll be obvious. You will have, in this respect, if you change, you will have different cohorts on different pricing models. That’s okay. It’s a small technical challenge, but it’s not as much of a headache. Everything doesn’t have to be cut and dry with this stuff. It’s not as much of a headache as that probably sounds.
Mike [08:17]: Yeah. And I think that the interesting thing to keep in mind about what he just said there is that when you do a cohort launch like that, most of the stuff that is based around the pricing can be completely hidden. You don’t even need to have that one the website. So, as you said, you can have some people on one pricing plan and some people on another. And really, that’s kind of how you test it. A lot of the pricing information that you’re sending to people or that they’re getting is through their mailbox. It’s not going to be publicly available. It’s not going to be out there until the end of time. Now, something else to kind of keep in mind here is that when you are determining whether or not you’re going to do monthly, quarterly, or annual subscriptions, or just that one-time fee, there’s a difference between charging somebody a subscription and then allowing them to essentially finance the payments over time. So, I’ve seem emails from, for example, Rumi [Sedi?], who runs I Will Teach You To Be Rich. They have several different programs or training courses that they have offered where they will offer quarterly or monthly payments for six months.
[09:18] You’re essentially still paying the full amount for the whole course, it’s just spread out over time. It helps the person who is on the receiving end of it see it in a different light. They will look at that and say, “Well, I’m not willing to pay $1,500 for a training course,” but if they look at it and see that it’s five payments of $300 each, it’s the same amount but they look at that and say, “It’s only $300.” And they kind of mentally put a different spin on it than if it was a $1,500 up-front cost.
Rob [09:46]: Something else to think about here is can customers change pricing models after they purchase? They come on monthly so you can lower their risk and obviously have a 30-day-money-back guarantee or whatever and they’re paying you $30 or $50 a month – getting people in and having them get value and see that your site is legit. Then after one or two months, pitching them on annual is also not a bad way to go just to see how receptive people are to it. This is an approach that I’ve taken with several different apps. The thought of whether someone can change pricing models after they’ve purchased has to kind of play into the picture. I know that you don’t need to do all the selling upfront. You can wait until someone has got a lot of value. It’s kind of an up-sell, if you think about it. Someone is paying you $50 a month and you come in and say, “alright, here’s $500 for a whole year.” If you do that $500 upfront you’re going to get less conversion, right? If you do it after one or two months when you have a lot higher value, you can get a lot higher conversion rate on that.
Mike [10:40]: One of the next challenges with subscription pricing models is how do you go about raising prices? And this is a challenge I think for most subscription based services or products because you don’t really want to put the people who have gotten you to where you are in a position where they have to look at your product and say “I’m really not happy with this particular move or decision that you guys have made to raise your prices and I’m not happy about how you’re treating me. I signed on with the assumption that I was going to get this price for an extended period of time” – or potentially forever in their minds – and some of them may be extremely upset over the fact that you are now raising prices. One of the ways that you can combat this is to communicate in advance to everyone who you are raising prices for. Now, the other thing you can do is you can also grandfather those existing customers in.
[11:34] You can either do in perpetuity or you can do it in a specified time period. I’ve seen some companies where they’ll say, “We’re going to raise prices, but we’re not going to do it on you for the next two years.” So you’re going to maintain your price for the next two years, or maybe it’s six months, or twelve months, whatever you decide. Whatever makes sense for your business based on the lifetime of your customers. You can go about increasing prices for everyone else or everyone new who signs on, as long as you make sure you communicate that to the people who are currently customers. Tell them, “Look, there’s a price increase coming. It does not affect you.” I think that’s the big piece of that. You want to make sure they know that that is not going to affect them.
Rob [12:13]: Yeah, I think that’s a big deal. I’m a big fan of grandfathering. Perpetually, if you can. But obviously, if you look at the way Netflix did it, I think they grandfathered for a year or two and then it went up a dollar or two. I don’t know, it was inconsequential. At the time there was little bit of hubbub upfront, but when it actually happens there are a few people who feel threatened to cancel. You’re always going to get somebody who cancels, so don’t let one out of a thousand people scare you into not changing it. It really is an interesting idea. I’m a big fan of grandfathering. You’re not trying to piss off your existing customer base. We’ve seen this happen. Remember when Intercom was going to raise prices? They were going to double or quadruple their prices. It was a substantial change and they weren’t going to grandfather for like a year. There was a huge uproar and people were coming to Drip and saying, “if you can build this one feature, I’ll move over here.” Because they were so upset about it Intercom actually backed off on that price increase. There was such a backlash. It wasn’t one in a thousand, it was like 20%-30% of their customers that were on Twitter and railing on it. So you do want to be careful and thoughtful on it.
[13:14] Big price increases, I think are really tough even if you grandfather for a year or two if you’re going to do a substantial price increase. It’s going to have some backlash. The other thing to think about that I’ve used pretty successfully a couple of times – actually, several times – is to announce the price increase upfront, let all of your customers know, “you’re grandfathered, thanks for your support, the product keeps getting better, you’re going to keep getting it for the price you have. And if you know anyone who you think could use it, now is the time to get them in. If they start their trial before X date, which will probably be sometime in the next two weeks, as long as they start their trial before X date, then they’ll get the old pricing.” And then you tweet that, you blog post that, and you promote the heck out of that. You’ll get a big spike in trials there. You will kind of suck the air out of the month or the following month because you pull anyone who is even thinking about trying you rushing in. So you’ll have a really good month followed by a mediocre month because you’ve just front-loaded it. But it really is a nice way to get a nice bump of customers. I’ve seen it work both with Drip and with [Hittail?].
Mike [14:13] : And off this particular topic is how do you go about raising prices when your business model for the product or service is going to fundamentally change? If it was, for example, a SASS product before and you’ve come to the conclusion that you really just can’t support people either at that price point or they’re just not being successful with the product and they need a lot more hand-holding, you may need to 5X or 10X the price to make things work and make the product successful for the vast majority of your users. Sometimes this comes into effect because you went down the route of having a free version of the product and your servers just got way too overloaded and there’s so much stuff going through there it’s difficult for your back end systems to keep up. You’re not getting the conversion rate from the free users into paid users to be able to support the infrastructure for the product. In cases like that, you have a fundamental shift in what your business is even offering.
[15:12] I think those are extremely difficult situations. I’ve seen it done in a couple of different ways and I can’t think of one where they did it really well. I think part of that is just the fact that people have signed on with this expectation that you are offering X and that’s what they are there for and you say, “We can’t offer X anymore, we’re going to offer Y instead.” Quite frankly, you’re just going to piss a lot of people off at that point. I mean, you can only do so much in terms of grandfathering or pushing them off on to a different product or service. You can find other substitutes for them or help migrate data to other services that are going to be a better fit. I think the one exception to that where I have seen people do it well recently is with Basecamp where they have come out with additional versions of Basecamp. Basically what they’ve done is they’ve left everyone sitting there with that version of the product and they rewrote it from the ground up. Then they said, “If you want to move to Basecamp 3,” for example, “you can go from two to three, but you can’t go back. So once you’ve gone to version three, you can’t go back to version two. But anyone new is going to get version three. Anyone on the old version can stay there as long as they want.” They’ll continue to support it, but they won’t develop anything new. As a customer you kind of have a choice to migrate everything to the latest version. Maybe that comes with a price increase, but that’s probably one of the best ways I’ve seen it handled. Rob, what have you seen from this?
Rob [16:30]: Yeah, one example that comes to mind that you raised offline is [Indinero?] and what they had launched. It was like a $30 product and they got up to 30K MRR or something and they just couldn’t grow because it was too low of a price. They 10Xed their price and they went with a productized service which, to be honest, would be a fine move. It’s fine to get into a market and then adjust it. The mistake they made is they just stopped supporting their product and it was so buggy and they kind of left their customers out to dry. You and I both used it and we used to recommend it to people. The product just went sideways really bad. They tried to rewrite it but they just didn’t support it well. They were non-communicative. You’d get an email and support would respond two weeks later or something. They didn’t handle the actual logistics of it very well. But the idea of going up market is, I think, a good one. I think doing everything you can to help those existing $30 customers would be what you can do. You don’t want to basically tarnish the reputation of the founders of the product itself.
[17:29] If there’s a way that you can straddle both worlds and grandfather existing, that’s cool. If there’s not a way you can do that, you just have to give people enough time. Because it’s an accounting system. You have to give them six months or a year. If I recall, they gave us 60 days to move off. Which is like, no! I have stuff to move off of here and I have taxes in six months. You kind of want to think this through from a customer’s perspective. Think about how much pain you want to cause everyone and how much do you want to piss people off? Because are they going to give you a chance the next time? This world of startups is not huge and you have a reputation that you’re going to want to kind up uphold.
Mike [18:01]: With [Indinero?] I think the big problem was that they had so many free users that they just couldn’t support them. And I don’t know what the stats they actually had were, but I’m assuming it was one out of ten people were paying customers. Their systems were buggy, as you said, and slow, and there were lots of things going on. They couldn’t keep up with it. In retrospect when you look back at it, what they should have done was say, “Look, if you’re a free user you’ve got 60 days or three months or something like that to get off the system and then we’re going to shut down your account and we’re going to only focus on the people that are actually paying for it.” They did have that free version of it and we were above that. So we were a paying customer, but as you said, they didn’t give us very much time to switch. I think that’s the real issue. When you don’t give your customers enough time to react, depending on how integral the product is to the business of your customers, that’s where things can become the biggest problem.
[18:54] So let’s talk about the opposite of this. How do you go about lowering prices for a subscription model? I think that if you have a subscription based product, if at all possible, this is something you want to avoid, I think instead – Rob, I think you took this approach with Drip at one point. You were looking at the products and looking at Drip and people were saying, “I like it, but it’s not worth it to me at this price point. It’s overpriced for what I feel like I’m getting compared to some of the other things out there.” And instead of lowering the price, you actually looked at it and said, “How can I offer more value for the product instead of lowering the price?” I think that’s a perfectly legitimate and probably the best way to go in this particular situation.
Rob [19:34]: Yeah. The idea of aspirational pricing is what I call it. To realize that if you’re charging $10, $20, $30 a month for a SASS app, it is really hard to get past the 10-20K mark. You just need a lot of customers to do that. You need a really big funnel. So if you are already priced up market and you go $50, $70, $100 a month it just makes it easier to cross that threshold and to start growing at that 5-10K a month mark. Which is when it becomes interesting, in my opinion. So the thought here is lowering pricing – the problem with it is – I can’t imagine lowering pricing and not doing it for all of your existing customers because otherwise you’re screwing all of your customers. Right? If they’re paying $50 a month and new customers can get in for $30 a month, I don’t see a way that you can justify not lowering across the board everyone’s prices. The challenge with that is then you’re decimating some MRR that you spent time building up. That’s actually a move that LeadPages decided to do after they acquired us.
[20:29] Our lowest tier was $49 and Clay wanted to move towards a free plan. Our first kind of toe dip into that water was to do a $1 plan with up to 100 contacts. When we did that we looked at everyone who was under 100 contacts and they were going to be downgraded. It was like $22,000 in MRR that just disappeared overnight. That was a big choice and it was one that Clay had to make because it impacted the bottom line. Later we moved to the free plan, but it was much less of a hit because we had a bunch of people on the $1 plan. But I couldn’t imagine starting a $1 plan and not downgrading everybody. There’s really little justification for doing that. The reason LeadPages could do that is because they’re ‘a big company and they can wait out the massive support burden and all the stuff that comes with $1 or the free plan. But as a bootstrapper, I’m with you, Mike. At any cost try to avoid lowering your prices and instead think about how can I offer more value? Ask you customers. Figure out what you can do to justify the current prices that you’re charging.
Mike [21:28]: I’ve had services where I’ve been a paying customer for them and had an account and I got their website and for whatever reason I’m logged out. I take a look at the pricing page and their current pricing is lower than what I’m paying. And I contacted support at that point and said, “Hey, what’s going on over here?” And they were like, “Oh, we’re testing prices.” I’m like, “Well, that’s great and all, but I’m a paying customer here. You’re charging me three times as much as what you’re advertising here.” What I’m always told is, “If we roll this out to everybody then you can get that pricing.” I’m like, “Can I get it now? Because that’s what you’re advertising.” They said, “No.” So you kind of have to be careful about how you choose to deal with your existing customers because I think you can make them angry if they see that there is that lower price available to anyone new and you’ve been supporting them as a customer for a long time.
[22:18] I think that’s definitely something to keep in mind. The other thing that you can do is offer a credit of some kind to your existing customers. So, if somebody is paying $100 or $200 a month or something like that and you dropped the prices by $50 or $100 a month or something along those lines on the plan that they’re on, you can give them a credit and either drop it by a percentage for the next three to six months or you could just say, “We’ll give you a credit for the next two months,” until you’re back to the point where they’re paying the same amount as the new customers. I think those are two different ways of dealing with it. If you’re offering a percent off as a discount over six months, it’s less of a hit to revenue than if you were to offer them just X number of free months over a time period.
Rob [23:02]: Yeah, I like that. That’s a pretty good way to think about it and I think most customers would likely be okay with that, especially if they’re using the service already and you let them know, “I have to lower prices, this is what’s going on. We’re bootstrapped and we don’t have the cash to just decimate this. Can I give you a credit?” I think that’s a nice kind of in between. And if there is a real pushback you can decide if you want to let some folks truly downgrade versus giving them a refunds or whatever is required. I think that’s a creative way to think about doing this if you do find your back against the wall.
Mike [23:34]: The next challenge is more of a logistical one when you’re building up the product. How do you go about avoiding overpaying for supporting and building your subscription product? This goes along the lines of user subscriptions that you have to purchase in order to just host or build your product or offer it as a service to people. And the money that you’re making doesn’t match or even meet what you’re paying for those other services. Let’s say that you have a product that’s costing you $1,000 a month for hosting costs and you’re only making $500 a month for it. You’re essentially financing your service for the customers. How do you go about dealing with that aspect of building up your service?
Rob [24:15]: I think there’s a couple ways. One, there’s ways to kind of do it on the cheap. I know we talked about [Wistia?] and it’s $100 a month, but there is a service called SproutVideo which, admittedly, does not have all the features of [Wistia?] but it’s like $15 or $20 a month. So you start there. And yes, you’re going to have to migrate later. Yes, that’s going to be a pain. But if that $80 difference is something to you, then you’re just going to have to put in the time to migrate it at a later date if you later want the features. So that’s one way to kind of do it on the cheap.
Mike [24:43]: [Wistia?] changed their pricing, so it’s only like – they actually have a free plan and then they used to have a $25 plan.
Rob [24:50]: That’s interesting. Okay, so maybe [Wistia?] is not a good example, but if you’re spending $1,000 a month on hosting on a membership site, then you’re doing something crazy. My guess is you could do it cheaper. Maybe a less reliable way, but you can find a cheaper alternative. An example is when I launched the Academy. I launched it on WordPress with a WordPress plugin forum on [Dreamo?]. So literally the costs were $10 a month and I think I was embedding the videos there. I don’t know if [Wistia?] was around in 2009 when I was working on this, but I did it really on the cheap. That created some issues later on, three or four years later. Forum stuff was out of date, WordPress was in shambles. WordPress wasn’t in shambles, but the plugins and the stuff that we used was kind of a nightmare. But it did allow me to get out of the gate really inexpensively. Another way is to basically presell it. You’re not putting in all this money in upfront and with a membership site especially, you’re going to be selling based a little bit on your personal brand, a little bit on the promise of the content you have. So go create some content.
[25:50] You can host that for free on YouTube or super cheap on Vimeo. Then you can put it on your blog or put it out as emails or as pdfs. Any way it can be free. Build the list, show what you’re going to do, and then say, “I’m launching a membership site where I’m going to put out awesome stuff like this, but it’s going to be even better.” Paint a picture for them of what it’s going to be and then presell the thing. You know, essentially coming back to the Academy when I launched it, I had two weeks of the content done. I was only two weeks ahead of the people who were at the forefront. When I initially sent those emails I sold I think 100 subscriptions at $50 a month, if I recall. It was a long time ago, so don’t quote me on that. But I’m pretty sure that that was what I presold. It was $5,000 a month. So right then I knew this is what I can put into it. It obviously grew from there, but that was the basis to say, “Okay, I can pay a few hundred dollars a month for hosting or I can afford to hire a designer to do this a little better.” I think that’s another way to think about de-risking this for you. Membership websites are a little easier to do that with. Info products are a little easier than with software.
Mike [26:54]: Yeah, preselling is obviously one of the ways to go with this, but another thing to keep in mind is for the different services that you’re paying for, hosting costs and all that stuff that goes with it. Do you really need them? Or can you go with a lesser version of them? Yes, it can be a painful experience to transform them or change them over to a different system later on, but at the same time you want to [?] your bets a little bit. If you don’t have enough information to really decide how much money you should be putting into it or how many customers you’re likely to get in a certain time frame, you kind of have to [?] your bets a little bit and figure out where you’re going to put your money and how you’re going to invest in the product moving forward. Because you don’t want to be spending a ton of money upfront for three, six, nine months before you get to the point where you are past the break-even-point. That’s something else to keep in mind is that break-even is different than revenue. There’s typically a minimum number of customers that you need to make any product profitable. You need to know roughly what that is. And along with knowing what that is, you need to understand what the time frame and growth trajectory of the product is.
[27:59] If you’re only adding five customers a month at $50 a month, then you’re growing at $250 a month of MRR. But if you’re running at a $3,000 loss every month, it’s going to be a long time before you get to the point where that product is paying for itself. And you’re probably not going to be able to support that. Those are the things that you really need to keep those numbers in mind when you’re building this out and determining what services to pay for. The last thing, I think, here is that when you are trying to figure out what those services are and on what you can spend a little bit less money, you can run it by some of your early alpha customers or people that you’ve talked to or prospects about what is important to them. Use that as a basis to figure out where you should be spending the money. Because a lot of times, you’ll look at something and say, “I really want this,” but at the end of the day it might not actually matter all that much to your customers.
[28:51] As Rob said earlier, when we built the Academy, we built it on WordPress. That’s technically free and there’s obviously a lot of work that goes into building all the different modules and stuff that went into the Academy, but that’s not something that you should probably be paying a heck of a lot of money for right out of the gate. I think we made this mistake ourselves when we switched over to a different platform and we were paying $1,000 a month for it at one point. Quite frankly, it didn’t work out. We thought that it would and fortunately this was much further down the road when the revenue was there. Had we made that mistake early on from day one, I don’t know if the Academy would have ever succeeded.
Rob [29:29]: Free like a puppy, Mike. It was free like a puppy.
Mike [29:33]: Yes.
Rob [29:36]: It took some work to get us out of there.
Mike [29:38]: So the last challenge to tackle is what is the product itself doesn’t work out? What do you do with your existing customers? Do you guarantee that they’ll get this at the same price and the same service level forever? We talked a little bit already about being able to modify the price, but what we didn’t really talk about is what happens if you go out of business or you just can’t support the product anymore because it’s losing too much money. And businesses stop operations all the time. This sucks, but small business owners understand when other small business owners are having a hard time. If the finances behind a product are not working out, there’s lots of companies and apps out there that have simply shut down and ceased to operate. Now, when you’re forced in that situation you do want to go essentially the same route that we talked about earlier.
[30:26] If you’re going to raise prices or shift your business all dramatically, you have to let people know and give them ways to get their data out. You have to give them other options that they can use. If you just flip the lights off one day, people are going to be pissed and they’re going to remember that later on. Those are things that you absolutely want to avoid. But communicating with people as frequently as possible and helping them either transition to another product or service or getting them the data they need. Whether it’s raw database exports into Excel files or something along those lines, you have to make sure they have what they need in order to be able to take their business elsewhere and take their data with them.
Rob [31:04]: Yeah. Shutting a service down is tough. I think it depends on, again, whether it’s membership site versus software. This does happen and it’s something that we all deal with and it’s disappointing. But I think you’re right. The more notice you can give people and the more reason, if you can really explain to people what happened here – that you’re running out of cash or that it was never a viable business. The more time you can give them and allow them to export their data and giving them instructions on how to import it onto another comparable service. Even talking to that comparable service and letting them know, “Hey, I’m shutting down and I have 70 customers. Is there any way you can help these folks with a transition?” I think you kind of owe it to your reputation, I think you owe it to the customers who believed in you to do everything you can to help them do that. If it’s more information, I feel like allowing folks to basically download everything so they can take it with them. It is something they purchased and they can use it moving forward, but if you need to shut down a service, again, just talking to folks as a person and letting them know what’s going on with you. Is it a health issue that you’ve gone through? Is there a life change? A divorce or a death or something that is just catastrophically wrecking your ability to run a business? Or was it just not a viable and you couldn’t do it?
[32:16] That’s kind of how I would approach it. That wraps us up for the day. Again, this episode was based on a question asked by Marcus [Beale?] in FounderCafe. If you’re interested in joining close to 1,000 bootstrap startup founders around the world, go to FounderCafe.com and apply to join. If you have a question for us, call our voicemail number at 888-801-9690 or email us at questions@startupsfortherestofus.com. Our theme music is an exerpt from Out of Control by Moot. It’s used under creative commons. Subscribe to us in iTunes by searching for startups and visit StartupsForTheRestOfUs.com for a full transcript of each episode. Thanks for listening. We’ll see you next time.
