Show Notes
In this episode of Startups For The Rest Of Us, Rob is joined by Jordan Gal and Tracy Osborn for a roundtable discussion. Some of the topics in this episode including Basecamp reinventing email with Hey.com, Leadpages being acquired by Redbrick, the growing popularity of subscription based pricing and how many active subscriptions a person or business has nowadays.
Items mentioned in this episode:
- Bootstrapped Web Podcast
- CartHook
- Hey.com
- Leadpages acquired by Redbrick
- How a 2 person startup already uses 28 other tools
- Tracy Osborn
I’m excited about this week. I’m diving into this idea of a startup roundtable or a news discussion show. I discussed a few topics with Derek Rhymer a couple weeks ago, but going a little deeper, this is the first essentially roundtable where I invite two guests on and we talk through topics that are relevant to us in the MicroConf, the Startups for the Rest of Us, the self-funded, the indie funded community. I hope you enjoy the show and without further ado let’s dive right in.
Rob: Here we are at Startups for the Rest of Us inaugural startup roundtable discussion. I have some pretty interesting stories to discuss today. Before that, I have two interesting guests I’d like to introduce. First on my right, as no one can see, but we’re in a camera is Jordan Gal, he’s hosted the Bootstrapped Web podcast, as well as founder and CEO of CartHook.
Jordan: Thanks for having me on, Rob. I’m excited for this interesting new format. Let’s see where it goes.
Rob: I’m excited too. Above Jordan in my view is Tracy Osborn, founder of WeddingMarketplace, WeddingLovely that she shut down about a year or two ago, now the TinySeed Program Manager. How are you doing today, Tracy?
Tracy: Doing well, happy to be back. Always excited to join the podcast when I can.
Rob: That’s the cool part is each of you have been on the show now several times: interviews, Q&A episodes, all that kind of stuff. Hopefully, folks are familiar enough with where you come from. That’s what I wanted to do with the show is get different perspectives from different people coming from different directions. I’m pretty stoked to talk through a few of these things.
As you listen to this episode, if you have thoughts on whether I should do it again in a couple of months—what was interesting is I went back to a month’s worth of startup news and tried to pick out stuff that I think is interesting to our little space, kind of the MicroConf Startups for the Rest of Us community. There just aren’t that many stories that are interesting to talk about, and I think we can get going on.
Every month or two, or even two or three months, is what I consider doing. If you like the show, if you don’t like the show, please contact us at questions@startupsfortherestofus.com.
Our first story is about Basecamp watching Hey, it’s at hey.com. They’re essentially reinventing email, they are saying they’re not going to allow tracking pixels so people can track opens. I’m curious, Jordan, have you been following this? Is Basecamp basically potentially taking it too far by blocking tracking pixels? D and J said they’re going to shame people who send with tracking pixels.
Jordan: I have been following it. I think it’s very interesting. We saw Superhuman come out of the gate on fire. Everyone’s talking about how they’re going to be the biggest thing ever. I think that excitement has waned a little bit, they’re not that obsessed with it anymore. Then Basecamp taking on emails is super interesting, but like most things with Basecamp it’s very difficult to separate the people, and Basecamp, and the controversy they create from the actual product. They’re really close to the edge of making themselves too much of the story right now.
These guys are very clever. It’s starting to feel a touch manipulative on what they’re doing with Twitter to get attention. I love their ideological approach. I love that they are unique in their opinions. They take it strongly and they’re not afraid to say it. That’s all awesome, but I think they almost need to chill a little bit and then let the product speak for itself because there’s a lot of talk and it’s constant controversy. It’s a little bit grating.
The latest tweet that Jason put out, I forgot exactly what the context was, but he kind of felt that it went a little too far. I think he was making a comment on another company. People are starting to push back on it where they really have a huge halo effect to their products, but I think they’re right on the edge. Now it’s time to let the products start to speak for itself. I’m definitely interested, I want to see what they do. Because my email, that landing page and the copy that they wrote resonated. My email is an unhappy place. It didn’t used to be, but it’s been so long you forgot that it used to be this cool thing that you communicated with people on and it’s no longer that. They definitely nailed that part of it for me.
Rob: If you go to hey.com, you can read their manifesto where they say exactly that. I’m a big fan of their products, they’re genius product builders, they’re great content marketers. They wouldn’t call themselves that but they are exceptional, some of the best there are. They have this massive audience. It’s been fascinating to watch. What are your thoughts on this, Tracy?
Tracy: I find it funny that you mentioned the Twitter stuff. I feel like they’re using Twitter effectively. It’s how Twitter is meant to be used nowadays, which is annoying. It’s one of the reasons why I’m not on Twitter very often, but I feel like I can’t hate on them for doing this kind of launch because that’s marketing. That’s the way that they’re going to differentiate themselves from say Superhuman or these other ones that are very email marketer focused where Superhuman’s like, “Oh, you’re going to see the location. You’re going to see the tracking pixel. You’re going to track the people that open and close it. We’re giving you all those rates and data and whatnot.” They’re at the opposite end of the spectrum to Superhuman.
I’m personally very excited for it because I think that we do need to have more privacy-focused email clients. Gmail was the king for so long. The average user would use Gmail at a default. We’ve had, as email marketers, this superpower that we were able to see when people open their emails, we were able to see those open rates. I want to say it’s great for email marketers, but for the average person and privacy and whatnot, I want to give people more choice. I think that Basecamp is doing that.
It’s funny to think about email and the superpower and all this data that we had and how it’s hard to give up that data. If you look back to just paper marketing, pay per mail marketing, you didn’t know how many people opened up that envelope that you sent or how many people threw it right into the recycling. I agree that it’s going to hurt email marketers, but for the average user or at least the privacy focusing technologists who need those privacy features, I think it’s something that’s necessary. Basecamp is simply using Twitter the way it’s meant to be used.
Rob: I signed up when I first heard about hey.com. I am curious to use it. They have a list of 25 things that they are saying is wrong with email. I don’t understand how they could possibly fix all those things, but that would tend to be—it’s all these problems with email. You screen your calls, you can’t screen your emails. Some emails are worth your immediate attention, most are not. Files are attached to email rather than the other way around. You don’t need to be told to check your email. I don’t even know, that’s like 5 of the 25. I don’t even know how you go about fixing that. Like you said, Jordan, that’s when it’s time to think about getting into the product and watching it speak for itself.
My take on it, I built Drip. I like the idea and I’m going to be a user of the product, I assume, if it works and has unified inbox and has all the stuff I need, but I feel like railing against the open tracking is taking it a little too far. I like open rates, I think having aggregated open rates of an email is something that is just fine for a marketer to have. Knowing when and where and how many times people open an email could be taking it a little too far, I would admit.
Here’s the thing, they can come out and say, “We don’t use any tracking. We don’t use Google Analytics. We don’t track open rates.” If you have $100 million business throwing off tens of million a year in net profit with 50 employees you can do that too, but if you’re a bootstrap startup and you’re trying to get to $10,000 or $50,000 or just trying to pay the bills, like you’re in such a different position that I would caution against taking that as advice or as something you should do as a business person because I think it can be dangerous.
You’ve heard the mentality of like, “Hey, you build a great product. That’s what we did.” and everyone uses it. I’m not saying Basecamp has said that but there are people who come out and say, “Look, I just built a great product and never marketed it and magic.” Everyone wants that to be the case and it almost never is, it’s the exception. That’s potential danger with coming out against that kind of stuff.
Jordan: We may be looking at it backwards because we are business people, and we build technology products, and we are looking at it from that point of view. In reality, it matters a lot less what is right for a business, and it matters a lot more to give the choice to the actual consumer, to the user. That’s really their perspective on it. I have an Amazon Alexa in my house, I have three of them. I have made the choice. I know what’s happening and I have made the decision that in the balance between privacy and convenience, that’s where I land on that product.
What they’re looking at in email is taking it back to the user’s control and saying, “If I don’t want tracking pixels, this is my inbox, not yours marketer. If I choose to degrade the experience of email with your company by blocking pixels, that’s my choice.” What Basecamp is kind of yelling about is it’s not okay that you don’t have the choice. It’s not okay that someone else decides what happens in your inbox because that’s not normally what happens other places in your life. In your home, you get to decide if you want an Alexa or not. People can make that choice once their right journalist do that work to uncover what was happening there. If looked at that perspective and it’s not a black and white tracking no tracking, it’s simply giving people the option, that’s tough to argue with.
Rob: That’s a good perspective. Tracy, do you feel like this blocking of tracking pixels will become a trend? Do you think it should become a trend?
Tracy: I think privacy, in general, is becoming a trend. I find it interesting you brought up Alexa because I feel like that was the start when people started realizing that this really great convenience in their homes could potentially be used for other reasons. I feel like those stories happened and then it evolved and some other internet communities are very privacy focused, almost to the extreme side of railing against all the things that are happening.
I personally had an Alexa and I ended up removing them from my house. That tells you a little bit about my own perspective. I want one, I want to have all these privacy tools but I personally have decided that the convenience is not worth it for me. I’m happy to see that it’s becoming a trend.
As the Internet has grown, I’m going to refer back to that word I used before, we have these superpowers. We start adding all these superpowers, all this technology, and all these things we could do. Now it’s like okay cool, we’ve reached this point where we need a lot of people to draw back a little bit and decide if it’s convenient for them.
Rob: Like a pendulum swinging different directions. That’s a good perspective.
Jordan: I was going to say you can see the email market has been around a long time and it’s mature. It’s gotten to the point that it’s so mature that this type of option makes sense. The in-home robot assistant isn’t very mature, but you can see how if someone came out with an Alexa-like device that you had more control over the privacy, that would be attractive.
It’s the same thing with the iPhone. People started freaking out where I just had a conversation in person about this topic and now I’m seeing ads on it, that’s creepy. The pendulum swung all the way toward maximum freedom and then we all realized, “Oh, I guess we’re the business model.” Now it’s coming back and that’s a healthy thing.
Rob: For the record, I have five Alexas in my house, maybe six. I think it’s hilarious that if you go to thisishey.com, it’s a business I presume has been around for a while. It’s an influencer marketplace, which is something I’m sure Basecamp would hate. What are the folks at This is Hey thinking right now? Where it’s like, “They just took our name and they have the dot-com.”
Let’s swing into our second story. Leadpages was acquired by Redbrick. By the way, all of these stories we will link up in the show notes. To clarify, because I actually had some people asking this, Leadpages was sold to Redbrick, which is like a software—it’s a holding company. I would almost phrase it as private equity, I don’t think they said that in the news story. You know with these private equity funds, they get together then they buy software companies and manage them. Leadpages was sold, Drip was not. In fact, to say that Leadpages acquired Drip is actually not technically accurate.
Leadpages and Drip are two products: Leadpages Landing Pages, and Drip is an ESP marketing automation. They were owned by a single holding company called The Avenue 81. Avenue 81, that’s the company that raised funding and stuff. It was synonymous with Leadpages but then it is what acquired Drip. Essentially, they’ve sold Leadpages. A quote from the CEO of Drip, John Tedesco, who I know personally, I actually worked for him before I left Drip a couple of years ago. He said, “The acquisition is allowing us to now ruthlessly focus on pursuing our markets. We have a clear capital base in which to execute. We’re flush with capital, so we’re going to use it with discretion. Use it intelligently.”
Obviously, the play here was to put dry powder in the coffers. If you have an asset, you can sell it in lieu of say raising a round of funding. It gives you not only the focus—I am conjecturing here, I will admit. I have not worked at Drip for two years and I have very, very little inside information at this point. If I were in Drip’s shoes, and I really see this marketing automation as a multi, many, many billion-dollar opportunity in the landing page market, it’s not; it’s a very small market.
That just kind of gives folks background. The first question I’d have for Tracy is MailChimp has launched free landing pages, in essence, with your email account. I know a few other providers that are making them very free or very cheap. Does it seem to you the landing page space is becoming commoditized?
Tracy: That’s an excellent question. The more options the better. I’m happy to hear that MailChimp is doing this. MailChimp has a really, really huge reach. Happy to hear that they’re making this stride because they also did—I can’t remember what happened with MailChimp but they had a controversy where they raised the prices or they took away their free tier. Do you recall what happened about a few months ago, six months ago?
Rob: I think it was if you unsubscribed, you were still charged for those subscribers because they’re moving a little more towards commerce.
Tracy: That came out and I think that kind of have hurt a lot of people’s usage of MailChimp. Now they have these free landing pages. You see that in ConvertKit as well. They have a whole landing page system and whatnot. It’s kind of a silly thing to say but I’m like, “I’m a fan.” Would love to hear what you guys say.
Rob: What do you think about this, Jordan?
Jordan: I think they’re commoditized. I think they’re lead gen. The business model is subscribers, so if landing pages help you get more subscribers, then the company whose pricing is based on the number of subscribers you have has a very vested interest in giving you the ability to add more subscribers. It makes sense with the business model, it’s also been commoditized. Just to clarify, the statement that you just quoted from the CEO, that’s the CEO of Avenue 81, the company that’s still-
Rob: Correct.
Jordan: Okay, cool. Just want to make sure of that.
I love this corporate-level strategy stuff. It’s my favorite. A lot of people are going to look at it and say, “Oh, Leadpages failed,” or, “It wasn’t able to do what it wanted to.” I think this is brilliant. This is an asset that will only decrease in value moving forward. They’re able to effectively raise money for their email marketing product, which is Drip. They don’t need to sell equity in it because they had this other asset. It’s great.
They basically just raised, I don’t know how much they’ve sold it for but my assumption is they raised tens of millions of dollars in non-dilutive capital to go after a much bigger email marketing. It’ll be interesting to see what they do and which playbook they run. Are they going to run upmarket and hire salespeople and go after the Marketo version of things, or are they going to go with quantity and long tail and go after MailChimp?
I’m going to assume they’re going to go high-end with an enterprise sales team and run that playbook. They have the money to do it. They didn’t need to sell any equity in it. It’s great. Acquiring Drip was a very smart move, it worked out nicely for you. It looks like it might work out really nicely for them also. Especially if they thought this through over the past few years, then it was brilliantly executed. Let’s bring in a product, let’s make it the focus of the company, let’s sell-off this asset then we have our coffers ready. Now we can go after a much bigger market. That’s an optimistic view of it, but that’s an exciting version of things.
Tracy: The CEO that gave that quote, that’s the new CEO because the one that was around when Drip was acquired, that was a different person, right?
Rob: Yeah. Clay Collins was around when we were acquired. About a year after we were acquired, he stepped down and John Tedesco, who was the COO at the time, took over as CEO.
Jordan: I was going to ask if we’d look at John Tedesco’s history and what playbook he has been able to run successfully in the past, that’s going to tell us a lot about the future. Because it was an internal hire, it’s less clear.
Rob: He’s been part of multiple startups. I would say they are in line with the enterprise approach that you’re talking about, very much sales folks and that type of stuff.
Tracy: When I was looking at this announcement and the change in CEO, it seems like they had a certain strategy when they had Leadpages and they acquired Drip. From what I was reading into it, it sounded like things would work a little more together, but the strategy changed. The new CEO came on and they’re making this change because the strategy changed. It seems like it all makes sense in terms of the direction of Avenue 81.
Rob: I’m curious, Tracy, when you hear about a SaaS app like this being sold, so the original owner doesn’t have it, it’s now a holding company. Would you be more or less likely to use a product that’s been sold like that or does it matter to you? Do you even care?
Tracy: Interesting. Do you even hear about it too?
Rob: We’ve heard about this now. If you were looking for landing pages, there’s obviously a bunch of competitors to Leadpages. I’m curious if that would impact your decision to sign up as a customer or not?
Tracy: I’m thinking of the average user of how much they follow acquisition news. I’m assuming that Leadpages is going to continue to grow under the company that acquired it. If I was thinking as an average user I would suspect a) they wouldn’t know about it, b) if they did know about it, it sounds like instead of Leadpages being sold, it sounds like Leadpages was acquired. It could be spun in that way. Leadpages is acquired by someone who is going to spend more time and effort or more focus on it, both of those things are positive to me.
Rob: I want to wrap this up with just a funny little story that involves Best Buy and Geek Squad. I don’t know if you guys recall but Best Buy acquired Geek Squad, which is the tech support people who run around in the cars to fix stuff at your home. Geek Squad is now the vast majority of their revenue and profit. They are one of the big drivers that has kept them in business. When Circuit City and everybody else went under, they had this thing.
The CEO of Geek Squad, the founder who sold it, when he does stand up in front and does talks now, he’ll say things like, “When Geek Squad acquired Best Buy,” and everyone laughs. That’s the first thing I thought of with this is like did Leadpages acquire Drip five years or four years ago or did Drip acquire Leadpages? It kind of struck me as funny.
Jordan: Sounds like Avenue 81 is making the best of their situation.
Tracy: Leadpages wasn’t shut down. They spun it out and it still continues to live. It sounds like a win-win situation for everybody.
Rob: Yeah, for sure.
Our next story is about how a two-person start-up already uses 28 other tools. This is from acrossapp.com, it’s from their blog. They’re basically a tiny little two-person startup and they have 28 different subscriptions. I’m curious, ten years ago we may have had one or two subscriptions. You paid for Photoshop as a big package, everything was you buy it once and then you get the upgrades every couple of years. Now, most of us have 20, 30, 40 subscriptions. Tracy, do you feel like this whole movement towards the SaaS subscription economy is a good thing or do you feel like it’s cumbersome and we’re potentially paying more now but than we would have 10 years ago?
Tracy: I have to laugh because this is kind of a Tiny Seeds thesis, right? We’re betting on these business-to-business SaaS apps. We love to see people building things for other businesses to use. We’re part of this trend that’s happening right now. There are lots of little apps that are doing lots of little things for you that you can pay for individually.
Overall, I love it. I love it. I love anything that helps me save time. Ideally, that subscription cost is going to save me as much time and hopefully money that it makes it totally worth it. I love that there’s people out there that are building lots of little things to support themselves as they can create their startup and maybe get into Tiny Seed and all that. Huge fan of the system. I have no problem paying for subscriptions. I just want to make sure I don’t forget which ones I’m paying for because that’s the problem.
Rob: Something you pointed out there is that there are so many tools that could not exist in a non-subscription economy. These tiny little utilities you pay $10 a month for, I just think it’s changed the game. You can’t look at it as, “Oh, I have too many subscriptions or I don’t,” or “I wish there weren’t subscriptions that we just paid one time,” because it’s a completely different system now. All these apps that we use and that we build wouldn’t exist under a non-subscription economy. What are your thoughts, Jordan?
Jordan: I see an analogy to what happened with television. We don’t pay less for television now. Between all the different streaming services: Netflix, YouTube, Hulu, Amazon, everything; I’m paying about the same but the service is far better because I’m in control and I get to choose. I don’t think it’s any cheaper to pay for all these different pieces of software, but you do get a lot better service overall because you’re getting very specific needs for your business addressed.
I have the Google Doc open right now that we just went through a pruning exercise. Every two-three months I ask my assistant, “Okay, give me all the recurring subscriptions that we have in the business.” My CTO and I look at them. I have it in front of me, it is 61 rows long and maybe 10 or 15 of those are not traditional SaaS. It’s a good 40-50 services, if you’ll just excuse me for a minute if I read through a few of them. They’re all very specific and very necessary.
Adobe Creative Cloud, AWS, Atlassian, Atlassian Statuspage, BrowserStack, Calendly, Canva, ClickFunnels, Cloudflare, DigitalOcean, Docker, Drip, Dropbox, Figma. That’s alphabetic order. I could just keep going down to Z. It’s a Frankenstein but it’s a beautiful one. It does ebb and flow in frustration depending on where the market is and where your business is.
At some point last year we said, “Okay, that’s enough of these different systems, let’s go to HubSpot. Let’s go all-in-one.” But in other areas, that doesn’t make sense. For bootstrappers, for people building businesses, it’s a great thing to be able to address one specific need, but you may be caught in that ebb and flow of a larger all-in-one or you might need to go there. I love it as long as the individual services are good. The nice thing about the subscription version of things is if they’re not good, you just leave them.
Rob: That’s a big difference. It’s not like you drop $300 on a piece of software and then you get two months and you stop using it. You still paid the $300 versus the monthly. I’ve also found that the all-in-ones tend to be, it’s like you said, it combines, everything works together. I don’t know if it’s a little more expensive but the tools aren’t as good, the individual pieces aren’t as good. It is what it is. I’m obviously a big fan of this world. Having been around long enough to have several of my early software products were not subscription, they were one-time download. I remember the struggles of the first day of each month, I had zero dollars in revenue for that month. It wasn’t like I had that baseline that I had last time. That’s the big difference that you forget if you’ve never run a non-subscription business is you’re just grinding it out.
In fact, during the financial crisis of 2008/2009, I had one product. It was doing maybe $4000 a month but it was part of my income, it was a chunk of it. Sales dropped 80% overnight, one month to the next. That’s the kind of business that’s going to be—I mean imagine if we were doing $4 million a month and had a bunch of employees and it dropped 80%. That’s where you start laying people off. It’s just such a big difference that the subscription is from our perspective as the business I think they are a safety net. I’m like you two, I don’t mind paying for subscriptions because I like not having to install software and maintain it and do all that. That’s the benefit we get from it.
Jordan: I want to add something. If this is a bit of a news show about things that are relevant right now, I just saw last week a company launched named pipe.com. I jumped on a call with the founder. The reason for bringing it up is because the downside of the subscription economy, and being a developer, and running a company based on subscriptions is that that lifetime value is stretched out. We’re all familiar with Gail Goodman’s Slow SaaS Ramp of Death and the math behind paying to acquire and then collecting over a longer period of time.
This company pipe.com that just launched, what they do is they take MRR, they take your monthly payments, and they will pay you annually. If I have a customer that pays us $500 a month, Pipe will look at that and say, “Okay, we understand your churn rate. We think this is a good bet. You can choose to sell us this customer, we will give you the whole annual amount of money upfront, then you just continue collecting monthly from them.”
The subscription economy is great in a lot of these ways but one of the tricky parts is cash flow, especially for younger companies that aren’t in the only annual, you must pay as an annual contract or you could do business with us. That strength comes later. It is tricky on cash flow but there are additional financing options like pipe.com that are starting to address that. We’ve seen revenue-based finance, we’ve seen other things. Pipe.com is not debt. It’s kind of like factoring but for SaaS. They charge you 15%, which is basically what you would charge people anyway because you would give them two months free. That’s kind of the default.
Rob: If the customer cancels in six months, they eat it, so they have a risk model.
Jordan: No. You pay back the remaining portion.
Rob: Got it. Okay.
Jordan: There’s literally an online portal and you can choose an individual customer. “I know that customer. They’ve been around for two years. They’re not going anywhere. I’ll sell that to you because I’m very confident that they’ll stick around.”
Rob: Fascinating.
Jordan: It’s fascinating. Or you can sign an annual contract, which is something that we do. Our annual contracts are paid monthly. We have annual contracts but we don’t have this big, large chunk so they sign it. That is even less risk. This is an annual contract, they’re paying monthly, and I’ll just choose. I’ll click that and hit sell. I’ll get the money for that entire thing upfront, minus the 15%.
Rob: I love the innovation, all the innovation that’s happening in the financial models around SaaS. You’re right, that is the biggest Achilles heel is the long slow ramp of death.
Jordan: It’s awesome. It’s just the relationship with you and your billing software.
Tracy: When you say sell the customer, is that they’re acquiring the customers’ information for use?
Jordan: They’re still in your Stripe account, you’re collecting money, and you’re charging their card every month like normal. But then they will see, “Oh, that customer paid in Stripe. Cool. We’ll take that much amount from your bank account.”
Rob: Pretty interesting if you need money in the short term. I know folks looking at raising around or doing debt kind of financing their SaaS revenue.
Jordan: I’m looking at the same thing. I looked at them and I’m like, “Oh, that’s basically just taking your MRR and creating a line of revenue off of the MRR, and then not actually putting any debt on the balance sheet and also not selling like equity.” I was like, “What is the catch here because that’s very attractive.”
Rob: I think the catch is like when you think about—
Jordan: Risk.
Rob: There is some risk but I also think you’re basically spending future earnings. It’s almost like when you put money on a credit card now that’s technically debt and this is not. When you put money on a credit card, you basically are spending future earnings before you have them. That’s what this is in essence. There is some danger. If you’re prudent at managing cash and you know where that cash is going to go or you’re in a spot where you do think you need some dry powder in the coffers, I think it’s certainly an interesting avenue to look at.
Wrapping us up for today, I’m curious from each of you what is your favorite podcast right now? I mean right now because sometimes I have a favorite podcast for two months and I binge them all and then I move on. Tracy, you want to go first?
Tracy: Gosh. Don’t go pick me first. I’m the worst at podcasts because I have a hard time with podcasts. I know some people are able to play something at 2x speed and then go through all their backlog. Then for me, it’s like, “Oh my gosh, I only have a certain amount of time. I can only do 1X.”
That said and it’s a dorky one, I’m still a big fan of Adventure Zone. It’s by My Brother, My Brother and Me. It’s their D&D podcast. Also, My Brother, My Brother and Me is another one I listen to. It’s just because I need to turn my brain off from work. I listen to a lot of work when I podcast, Startups for the Rest of Us, Out of Beta, a lot of other ones. It’s really nice to have something that’s just a bunch of people just in a room together having fun. I would say that my answer is the Adventure Zone and by extension My Brother, My Brother and Me.
Rob: How about you, Jordan?
Jordan: I’m just going to reject your premise entirely and mention several of my favorite podcasts.
Rob: I’m not picking five favorites, that’s cool.
Jordan: I need to be generic. I absolutely love the Joe Rogan podcast. It’s interesting, it is just really interesting. It challenges a lot of your thoughts, and assumptions, and is entertaining, it’s funny. There’s so much of it. You don’t have to listen to everyone and you’re fully entertained.
I also love the Dave Chang Show. Chef Dave Chang from Momofuku has a great podcast that is about food but also about creativity. He brings people on from his network in the Bill Simmons world. That’s a very interesting one. I like Brian Koppelman, The Moment. I absolutely love The Story Pirates. That podcast is so good, it’s for kids.
Rob: My kid knows about that.
Jordan: Oh my God. Look, I drive my four-year-old to school every day and it’s about a 20-minute ride. That’s what she wants to listen to and we just laugh our butt off about it. It is these extremely talented actors that take stories that were written by kids and dramatize them and turn them into a story and song and so on. It’s so brilliant and so entertaining. The kids all love it. You don’t mind listening to it. I don’t know how many more times I listen to the Descendants 3 soundtrack before I bang my head up against the wall. Story Pirates, big thumbs up.
Rob: Me as well. They’ve written books that my kids have. We actually saw them live. They came to Minneapolis and performed at the Parkway Theater. We went and saw them in there. They do a bunch of improv. They’re really talented improv actors.
Jordan: You saw Lee, Nimene, and Rachel?
Rob: Oh my gosh, we totally did.
For me, I listen to 40 podcasts so I’m not going to read through them. The one that I’m really digging right now is Reply All from Gimlet Media. You know you have a good podcast when every time I look at the title, typically I’m like, “That sounds totally not interesting. I don’t care about that.” I’ll read the description and by the time I’m three minutes in I’m like, “I care so much about this.” I’m sitting in my driveway waiting for it to finish before I walk in the house type thing. That’s been a big one. I’ve actually been listening—there’s an old D&D podcast that’s been around for 10 years. It’s not actual play. I can’t listen to people playing D&D. I can play it and I like it, but I cannot listen. I can’t do Adventure Zone. I tried and I just, I can’t get into.
There’s one where they talk about the lore and the history and they talk about the books and they talk about rules and how to be a better DM. Just all the stuff around at the meadow, which of course I’m always interested in the meadow. You can’t just start a company, you have to talk about starting companies. I can’t just play guitar I have to learn how they’re made. I can’t play D&D, I have to learn how to create it. Save or Die and Save for Half are the two that I’m really into. One has been around 10 years.
That’s going to wrap us up for today. If folks want to catch up with you, Jordan, you are @JordanGal on Twitter. Hey, do I pronounce your last name right? Is it Gal?
Jordan: It is Gal. Yes.
Rob: I used to call you Jordan Gal, but that’s not. That’s how it’s spelled, right?
Jordan: That’s right.
Rob: I heard you pronounce it differently. @JordanGal on Twitter and Tracy is @tracymakes on Twitter. Her website is tracyosborn.com.
Tracy: If I could get @tracyosborn on Twitter I would, but I did not. Some people might know my old Twitter username and that was a terrible idea and @tracymakes is better than what I had before. That’s what I have.
Rob: It’s all there. If you’re interested in podcasts, check out Jordan on Bootstrapped Web. Thanks so much for joining us today.
Jordan: Thank you, Rob.
Tracy: Thanks.
Rob: I have to be honest, it was a fun show to prep for and record. I hope you enjoyed it. Certainly feel free to reach out. You can reach out privately: questions@startupsfortherestofus.com. If you have constructive feedback, if you want to give some accolades, a thumbs up, hit me up on Twitter, @robwalling. I look forward to hearing from you.
If you have a question for us, you can leave a voicemail at 1-888-801-9690 or you can email it to us at questions@startupsfortherestofus.com. Visit startupsfortherestofus.com for full show notes, transcripts of each episode, all the links that we mentioned in each show. Of course, if you’re not subscribed, go into your podcatcher, search for startups. We should be in the top three or four. Thank you so much for listening. I’ll see you next week.
Episode 479 | Two-Sided Marketplaces, Hotseats, Forgotten Subscriptions, and More Listener Questions
Show Notes
In this episode of Startups For The Rest Of Us, Rob along with Tracy Osborn , answer a number of listener questions on topics including founder hotseats, forgotten subscriptions, two-sided market places and more.
Items mentioned in this episode:
Welcome to Startups for the Rest of Us, the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching, and growing startups, whether you’ve built your fifth startup or you’re thinking about your first. I’m Rob and today with Tracy Osborn, we’re here to share our experiences to help you avoid the mistakes we’ve made.
Welcome back to the show. Each week, on the show, we cover topics relating to building and growing startups. We’re ambitious founders, but we’re not willing to sacrifice our life or health to grow our company. This week, we dig into the mail bag and we answer four or five listener questions. Some good questions came through this week.
I hope you enjoy my conversation with Tracy Osborn, who’s been on the show several times. She’s answered listener questions with me, she’s also was the founder of WeddingLovely, which was a two-sided wedding marketplace. I had interviewed her maybe 20 episodes ago if you want to go back and check that out for her expertise. I always like to save the two-sided marketplace questions for her since she lived that dream (so to speak) for four or five years.
We have several different show formats, oftentimes I will interview a founder and dig into their struggles, their failures, and their victories. We have these listener question episodes, sometimes we have breaking news, we get updates from a founder, Mike Taber, every 4-6 weeks. And of course we have our seats now and again.
The 2020 State of Independent SaaS Report is almost done. I’m putting the finishing touches on that. I’ve commented last episode how much time that’s taken. I’m super proud of what we put together, I’m stoked every revision I get back from the designers, gets me more excited.
I’m doing a live video stream of some key takeaways of that report in about two weeks. If you want to be sure to hear about that, head to stateofindiesaas.com and that’ll redirect you into MicroConf to a landing page. Enter your email and you’ll definitely get an email when that livestream is going to go live. It’s going to be about 20-30 minutes.
I’m doing it kind of a conference doc where I’m really presenting findings and what I think they mean and there has been some surprises that we’ve seen in the data and then some not so surprises. It’s fun to cover both sides of those. I hope you join me for that in just a couple of weeks. With that, let’s dive into this episode.
Tracy, thanks so much for coming back on the show.
Tracy: Happy to be here.
Rob: I am excited to dig into some listener questions today and specifically, I handpicked the first two because they’re about two-sided marketplaces. As people heard in the intro, you ran one for several years. I was saving those for when you’re back on the show.
Tracy: Very cool. I’m really excited to answer those.
Rob: Let’s dive into the first one. Unfortunately, it was a voicemail that we received several months ago and due to some technical glitches, I can no longer get at the audio file. But in essence the caller sent a voicemail in, and he said, “Look, I’m starting a two-sided marketplace. Obviously, we need both sides to be successful and only the businesses pay.” It’s a business on one side and consumers on the other. The business is I believe pay the subscription. Which side should they focus their marketing budget on?
Tracy: This is a fun one. It goes to the problem of marketplaces where the beginning part, the start of a marketplace is really hard because you need to get both sides of the marketplace. For WeddingLovely, the marketplace I’ve ran before, I need to get both the businesses on WeddingLovely, but also the consumers for those businesses so that they would have customers through my marketplace.
What I did to WeddingLovely and this is probably why I recommend to anyone who is running a marketplace, is to focus on bringing in as much revenue as possible, especially if you’re doing a bootstrap business, which means that you need to focus your marketing budget on the business side. But obviously you need to have some way of bringing in the other side of the marketplace.
What I recommend here is to look for ways that you can use, the side that you’re spending your marketing budget on, for instance, the businesses. What can you do to incentivize them to bring in the other side of the marketplace?
For example with WeddingLovely, I worked with the business on WeddingLovely, the wedding businesses, to give them the tools to bring in the people that they worked with, to bring them on the platform and encourage them to use WeddingLovely on the other side. My marketing budget was going to those businesses, but those in essence trickling down the other side by utilizing those businesses to bring in the people that they’re working with.
In essence I would recommend to spend your marketing budget on the people who are bringing you revenue, but do your best to incentivize the people that you’re working with, that you’re spending those revenue dollars on, bring in the customers that they work with, bring in the other side of the marketplace. So that you’re more efficient with the money that you’re spending on the marketing budget, but you’re still bringing in both sides of that marketplace.
Rob: I think that’s a savvy way to do it. The way I think about this is oftentimes, businesses marketing to other businesses need to spend a lot of money. You need to have higher quality content, you need to spend ads, nurture, and convince them why they should pay. There’s a huge job, and that’s just the job of any standard SaaS app.
On the flip side, businesses market to consumers frequently do it with virality, they do it with content, they do it with Instagram posts, giveaways. There’s things that you can do that they’re just so different. They’re so different in terms of the approaches. I think it’s not that you can do it more inexpensively with consumers, but I do think that given that we see people selling B2C ebooks for $10, $20 or $30, there’s obviously ways to acquire customers that are a lot cheaper than there are to acquire that big SaaS customer, where you’re paying $100, $500, or $1000 to close that account versus acquire someone for $10, $20, or $30. It’s such a different game.
In that sense, I agree with you and then I would put marketing budget towards the folks who are going to be paying you. I think there are guerilla, scrappy, bootstrappery ways to go after the consumer side of it. One of them is what you said, it’s to get the businesses to bring their critical mass to you. I think that’s a great way to do it. There’s models for B2C marketing. We won’t go there, but that’s what I would focus on as the cheaper and more expensive ways to get consumers to join up.
Tracy: Next question comes in from Anthony. He says, “Hi. I listen to a bunch of episodes, so I apologize if this was covered. I heard a couple episodes on marketplaces and how to get them going from a cold start, but I don’t think you’ve touched on the ‘come for the tools, stay for the network’ strategy, where you build a SaaS tool for one or both sides of the marketplace, and is useful regardless of the existence of the marketplace.” He also brings in a link to a Strife article that covers a little of this, which is a really cool link and I’m pretty sure you can add it to the show notes. What do you think?
Rob: I think it’s a great idea. In fact, if I personally were to go after a two-sided marketplace, which I tell people not to do, don’t do it. If you’re listening to this, don’t do it. It’s just so hard. Unless you have funding, or unless you’re a second-time founder, or unless you really have a unique insight or unique reach, or you already have an audience that essentially makes it more of a one-sided marketplace.
If you look at how Joel Spolsky and Jeff Atwood started Stack Overflow, that’s very much a two-sided marketplace. You need people asking questions and answering them. It’s both one-sided and two-sided because it’s the same audience, but they’re doing two things. They didn’t just go start from scratch. Community sites, two-sided marketplace is very hard to start, but they brought their massive blog audiences to it.
If you have that type of unique reach into a space, I would say consider doing this. All that said, if I were going to do it, start a two-sided marketplace, I would do it in a space where I have reach. If you think about TinySeed, it’s a two-sided marketplace because you need to bring investors in and get them to put money into a fund, and then you need to have enough reach into the founder space that folks will come to you. You essentially have a deal saying, “Hey, we want to be funded by you.” It’s a tough thing to manage from a cold stop.
I would do it in a space where I have reach or I would do it with a tool like this because having that utility, having a SaaS app that these businesses need, that you either give away just to draw them or that you give at an inexpensive price point in order to get the network effect going, is really an interesting way to do it.
Sean Ellis did this in reverse. He essentially started growthhackers.com and he used his reputation as a marketing expert (and he had a bit of an audience). He got a network effect and built it up—it’s like a social news site for growth hackers in essence—then, he built software on top of that. Actually, I believe later just totally pivoted into the SaaS aspect of it. It’s an interesting reverse model of what the question asker was asking, but I do think there are many ways to go about this.
Tracy: The one thing I would caution, the article on Strife talks about Hipcamp and how Hipcamp now allows you to book private campsites. I’m not totally familiar with Hipcamp. It’s a two-sided marketplace for private campgrounds, but it started out as a tool for people to find what campgrounds are out there, what’s available, and they sounded like they scraped a bunch of publicly available list in order to take all those data into one place.
The two-sided marketplace didn’t exist in the beginning, and we are talking about adding a tool or a launcher of two-sided marketplace. I feel like one needs to come after another, they can’t really do them concurrently because then you’re splitting your focus between two separate products, two different things you have to work about. One leads into the other.
That was one of the problems I had with WeddingLovely. There was a wedding at the marketplace when I launched a tool for people to plan their wedding. Then, all of a sudden I was a solo founder with two products that I was working on, two products to support, and it became really hard to do both. A marketplace is hard on its own. Supporting a tool and a marketplace can be tougher, especially if your tool is pretty significant.
That’s just one thing I want to bring up to caution against. It could be a good way. I agree that marketplaces are really, really hard. It’s part of the reason why WeddingLovely didn’t succeed, especially since I was a semi-bootstrapped founder, trying to run everything myself. Adding a tool on my own plate, did not help the situation actually. That probably significantly hurt it.
Rob: It’s like doing it on hard mode.
Tracy: Totally.
Rob: It’s like, let’s start a SaaS app and have all these other stuff, two-sided marketplace stuff to worry about. Like it’s not hard enough just starting and marketing a SaaS app. With that said, still, that’s what I would do. But I’m a SaaS person. That’s what would draw me to a two-sided marketplace, is the appeal of being able to build a product. There is a little bit of personal preference in there. It’s like know what you’re getting into. I think that’s really the moral.
Tracy: Actually, now that you mentioned this, building the app was me just being frustrated about running the marketplace and being something else to focus on, which leads into it, some of the other issues I had running this business. But it was a fun, different project to work on that would also help my business. I agree on that aspect.
Next question comes in from Simon. Simon writes, “Hey, Rob. I received the TinySeed update. I went through the list of podcast because I was curious about one thing. What is the type of mastermind you’re running with the hot seat implementation? I heard a bit about it on Peter Suhm/Matt Wensing episodes in Croatia, which is out of beta, but it left me curious, maybe you have some more info for me. Thanks and keep rocking.”
I find this question actually really interesting because before I started at TinySeed, I, myself, wasn’t totally aware about hotseats, masterminds, and these other things. I never participated in the mastermind myself. One of the things we’re doing at TinySeed for the next incoming batch is I wrote a little bit of a guide. I thought when I didn’t know what the hotseats were, I’m like, “Oh, but of course. Everyone else knows,” and just rolled with it. But we did find that a few of the founders were also unaware about how they work, so I wrote this little guide. Maybe you can go ahead and give an overview. I just want to say that I feel like it’s not obvious and not completely common that everyone knows how hotseats work.
Rob: Totally, yeah. It’s that shorthand where we get and we talk MRR and LTV, and the first time you listen to this podcast, you’re like, “What are all these acronyms mean? I think masterminds, hotseats, founder treats and all that stuff is the same.”
Mastermind is really just a phrase that we’ve adopted from Internet marketers, to be honest. In that context, there are people that would start these like, “$5000 a month mastermind and you worked with the Internet marketer, and he’s going to help you grow this big business.” I think they have a reputation that I don’t love, but in the startup space, it really does capture this idea of two, three, four founders are getting the other on on a regular basis, whether via Zoom or other video chat or whether it’s in person, really going deep on their businesses and having that implied NDA, confidentiality, and sharing their struggles.
This is especially helpful if you don’t have a co-founder. That someone’s along on the journey that is not your spouse, not your significant other, that you can complain to, that you can rant about, that you can celebrate wins with, who’s there on the journey so you don’t have to call someone and say, “Hey. I’m running this company and here’s the background for the past 12 months on what I’ve been doing and here’s my headspace.” It’s so hard to do that.
In the mastermind context, whether it’s weekly, biweekly, monthly, people know what’s going on and they’re following your story in a way that you can’t share on a podcast, because you need ultra-transparency and that kind of stuff. That’s in general how I think about a startup mastermind, and we actually did a whole episode on what they are. Go to startupsfortherestofus.com, search for startups mastermind, and Mike and I went through that a few years ago.
Within a mastermind, so what do you do? You’re on a call for an hour or 90 minutes. What do you actually do? There’s two formats that I’ve seen. One is just pure round-robin. If there are three people and you’re on it for 45 minutes, then each person gets 15 minutes.
The other format that I’ve experienced with and been familiar with is a hot seat format. That’s where, if there are three people, 45 minutes, two of the founders maybe give five-minute updates; this is what’s going on. Then, the other founder takes the other 35 minutes and go way deep on a single issue or a single problem they’re facing. They ask for advice and thoughts, it’s a white board session, they’re thinking that through, and how can you help. It’s all the stuff. So, a hotseat really just means I have a lot of time to dig into something. You can talk about how we’ve implemented that with the TinySeed batch calls because it’s evolved a little bit over time, but there’s different value from each format, right?
Tracy: Yeah. It’s nice to hear what we do with the TinySeed call formats and we’ve gotten a lot of questions about that actually in the application since how we run our calls. It’s 50%, maybe 70% hotseat format and then 30% the round robin everyone gets a chance to talk. The way I look at it with the round robin is that I want to say people are going to get their problems solved, but really it’s harder in the round robin format because everyone’s concentrating on their own issues, and it’s a way for us to give people a place to talk out loud, to think about their own issues, because there is less feedback when you have short amount of time and everyone is participating. You have less time for people to give feedback.
With the hotseats, that’s when it’s really like, “Okay, cool. We’re going to sit down, we’re actually going to solve the problem.” That doesn’t mean you can’t have that problem solving part on those round robin formats, but it’s a lot harder when you’re telling everybody you have an even small period of time in order to share your problem as compared to being like, “Okay, cool. We’re really going to think over this one thing.”
That’s one of the things that I think about a lot with the TinySeed calls and how they work. Again, I want to emphasize that I totally want people to have their problem solved more on the round robin format, but the shorter amount of time makes it a little bit harder.
Rob: I hope that was helpful. That’s our rundown. We actually have two episodes where we spent the whole episode talking about it. Episode 167 from 2014, How to Organize and Run a Startup Mastermind, and episode 277, Five Ways to Structure Your Startup Mastermind. And I believe that’s when Mike and I went back and forth because I like round robin in general for the weekly or monthly masterminds that I’m in. And he likes a hotseat, I believe. We were going back and forth. Then I’ve since changed my opinions on that as well. If you want to know more about masterminds, head to those episodes.
Tracy: Awesome. Next question comes from Mike and he asks, “Has there ever been any public numbers on how much a SaaS’ monthly revenue comes from forgotten subscriptions or lost users? Those users who are paying, but never use the service/content. As an owner, do you think there’s any moral responsibility for us to stop charging these people at a certain point?”
Rob: Good question, Mike. I’ve never heard of public data. I know that I’ve seen private data across the number of SaaS apps and it really depends on the niche. In all honesty, if you are doing high pressure sales tactics to that Internet marketee, aspiring entrepreneur audience, and you’re selling annual plans, these numbers are 50%–60% of people who have paid for that year, maybe even 70%, and never use that much like the ebooks people buy that they never read, the video courses people buy that they want to get to and never do.
I think a normal range depends on exactly how you measure inactivity, but I’d say between about 15% and 25% is the healthy SaaS app range, which sounds really high. Even right now, I’m paying for a couple of SaaS subscriptions and we’re technically inactive. I believe I have three right now that one I’m leaving for data purposes until we totally transition to a new system, another one I signed up, the trial ended, I’m just extending my trial, so I’m like two months of paying and I haven’t yet flipped the switch in moving something live.
With those, I don’t feel like I wouldn’t want the owner of that SaaS company to come to me and say, “Hey, I want to shut these down because I’m leaving it on purpose.” Obviously, someone forgets about it. Moral responsibility, I guess you could ping people. It’s more about moral responsibility to get people activated. It’s how it think about it.
I build apps to provide value to people, and if they’re not getting that value out of it, then I feel like I’m failing them in the sense that I didn’t educate them well enough to learn how to use it, they don’t know what to do next. That’s how I think about it. I don’t know what you think about it, Tracy.
Tracy: I think this goes from, I can’t remember who, but I feel like there has been a few services out there that have gotten public to say, “We had a certain amount of customers who aren’t using our app. We’re going to do the right thing and make sure they’re not being charged or they’ve been removed or whatnot.” They’re promoting it as, look how moral we are being.
If you want to go that way, then sure, but if you’re a large company, you have the privilege to: (a) remove that revenue and not have to worry about that, and (b) also, we have the analytics and the things in place so they can see who is actively using the app, they have the time to dig into those numbers, they have the time to spend the time to remove those people. Anyone who is a small business who’s bootstrapped or whatnot, that doesn’t have a lot of time, has to be really efficient with our time, I want to say, “Hey, cool. That’s a great moral thing to do,” but I don’t think a lot of small businesses have the time to do that. If that makes sense.
I want to say that it’s totally fine if you don’t feel like you have to spend the time working on those kind of things that is going to lose you revenue when you could be spending the time, like you said, improving your app, improving your activation number, spending your marketing dollars, and working on getting the word out. I just want to reassure that there’s no problem with not having the time to do this moral revenue losing thing as a small app, even though there are people out there who have that ability.
Rob: I think it’s a good point you raised, is just to even look into it, it takes time. And time is the most valuable asset of a founder, especially when you’re a one-person or a three-person team. The revenue is an issue as well. What if you went out and sought everyone out and you email them, and you double check, “Hey, I’m going to cancel your account. Do you want to cancel? Are you sure, are you sure?” That is a campaign on its own. You’re going to do that and then you’re going to lose 15% or 20% of your MRR.
If that’s something you want to do, then go do it. I don’t know anyone that’s done it. You mentioned examples of folks that do it. I certainly don’t think there’s anything wrong with that. It’s interesting just to look across the landscape of the way we used to buy software as paid as a one time fee, and then you had to buy it when the next major version came out.
You bought Microsoft Word and then you had it for three or four years, and it didn’t matter if you used it or not, you paid that fee up front, $100 or $200. Microsoft Office was so cost prohibitive that they have student versions and they’re giving it away in India and Africa and stuff because it is expensive. Whether you paid for it and used it five times, or whether you paid for it and used it solid for three years, you paid the same amount.
We’ve transitioned to subscription things, and I think that’s way better for the consumer, because now we can cancel. That’s why SaaS is so hard to grow. When people aren’t using it, you haven’t got that big chunk of money up front. In my opinion, if you make it easy for people to cancel and with every app I’ve ever had, we email a monthly receipt. Every month, you get an email that you’ve been charged this month, this is your bill date, and this and that. You’re getting notified. I’d imagine there’s some apps out there that don’t do that and they try to hide behind it or they hope you forget and never check your credit card statements. Don’t do that. I don’t think that’s ethical.
But if you’re pinging people, when email receipts go out, we used to get a response and it’s like, “Hey, I meant to cancel this. Can I get a refund?” which we would do. We would definitely get cancellations from receipts. If we’re optimizing for non-cancellation, we would have removed our email receipts, we would have removed the cancellation button in the app and made you email support or you haven’t […] call support like Comcast or whoever does.
That’s the way to game things and that’s where I think you get on the immoral or unethical approach. I think what I’ve outlined, which is you’re notifying them, they’re well aware you’re doing it, you’re trying to get people onboarded, I feel like you’re doing what you can. You can’t force someone to use your app.
Tracy: Totally. Next question comes from Poco. He writes, “Firstly, thank you so much for all the great work and resources you offer. Do you know of any podcast similar to yours that specializes or also covers B2C stuff?”
Rob: Shorter answer is no. The long answer is the reason is because there is really no such thing as B2C SaaS. I think Lars […] said this on an early mentor call, but I’ve thought about this for years. What company can you think of that is not an entertainment company. Netflix and Spotify, I wouldn’t consider SaaS, they’re more content delivery.
Even Dropbox, which started as a consumer company, look at their public filings now. There’s a reason they went after enterprise. They are an enterprise company, the consumers that is lead gen. It’s just so we all are comfortable using their software, so that when you go to the company, and they want to sell to a 10,000-person enterprise, everybody’s already familiar with it.
It’s the same reason Apple computer gave away an Apple IIe back in 1980–1981. They gave an Apple IIe to every public school in California. They did it so that kids could learn computers, but also, they were familiar with the Apple operating system in essence and that when they went home, if their parents said, “Oh, what kind of computer we should get?” The kid would say, “I bought an Apple IIe,” they’re familiar with it.
I’m totally open to listening to this and you know of a B2C software. It’s basically what he’s saying, a podcast that focuses on B2C software, please write in questions@startupsfortherestofus.com or post a comment on this episode. Do you know of any, Tracy?
Tracy: I’m glad that you didn’t because I didn’t as well. I was wracking my brain and hoping that you had a good one to respond with. But yeah, I agree with you on all those points.
Rob: I’m sure there’s someone building mobile apps out there who’s doing a podcast. The B2C side tends to be training courses, information, sometimes it’s dietary stuff like I need a paleo meal planning app, or meditation, wellness. I think that’s the kind of stuff that focus on and I don’t know of any podcast that focus on that. Aside from one-off, like if you listen to This Week In Startups, Jason Calacanis interviews founders and you’ll see B2C founders come through there. That might be the one place that I’d go if I were looking for this.
Tracy: I think that’s all the questions we have.
Rob: We’re wrapped up for the day. That’s great. Short episode. Folks want to find you online, tracymakes.com or @tracymakes on Twitter.
Tracy: I’m off to correct you. It’s tracyosborn.com.
Rob: Oh, good. I’m glad you corrected me. I’m confused when the domain doesn’t match the twitter handle.
Tracy: If I could get @tracyosborn on Twitter, I would. Alas, there is another person.
Rob: There is another Tracy Osborn. I went out and bought robwalling.com two years ago from a different Rob Walling, and one of the bigger reasons is I just wanted all my handles to match and I got tired of saying, no one could remember what my website was softwarebyrob.com, because back in 2005, that was what you did. You didn’t just put your name.com, I don’t know why. It just wasn’t a common thing to do and now it makes so much more sense.
Thanks again to Tracy for joining me on the show today. We answered a lot of listener questions. And if you have a question that you’d like to hear answered on the show whether by me or myself with a guest, leave us a voicemail at (888) 801-9690. You can always email us, it’s questions@startupsfortherestofus.com. You can attach a Dropbox link, what have you.
Our theme music is an excerpt from We’re Outta Control by MoOt. It’s used under Creative Commons. Subscribe to us by searching for startups in any pod catcher. Visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening. I’ll see you next time.
Episode 292 | Moving from One-time to Subscription Revenue, When Your Core Product Has Variable Costs, and More Listener Questions
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Show Notes
In this episode of Startups For The Rest Of Us, Rob and Mike answer a number of listener questions on topics including moving from one-time to subscription revenue, when your core product has variable costs, and how to disrupt the current payment method for a market. Mike also gives some updates and recent challenges with BlueTick.
Items mentioned in this episode:
Transcript
Mike [00:00:00]: In this episode of “Startups for the Rest of Us,” Rob and I are going to be talking about moving from one-time to subscription revenue when your core product has variable costs, and [more, some?] listener questions. This is “Startups for the Rest of Us,” episode 292.
[Theme Music]
Mike [00:00:20]: Welcome to “Startups for the Rest of Us,” the podcast that helps developers, designers and entrepreneurs be awesome at building, launch and growing software products, whether you’ve built your first product or you’re just thinking about it. I’m Mike.
Rob [00:00:28]: And I’m Rob.
Mike [00:00:29]: We’re here to share our experiences to help you avoid the same mistakes we’ve made. What’s the word this week, Rob?
Rob [00:00:33]: Well, MicroConf Europe is less than two months away, so if you’re interested in joining Mike and I in Barcelona with 100, 120 of your favorite bootstrapped friends, go to microconfeurope.com. We have a “buy a ticket” link in the upper right. We’d love to see you there. We have speakers that include Mike and myself and Steli Efti and Peter Coppinger from teamwork.com, and we’re currently working to recruit more speakers to the conference. We’re pretty stoked about it.
Mike [00:01:00]: Yeah, I’m definitely looking forward to it, although the time is going by really, really fast. I looked up the other day, and somebody had sent me an email: “Hey, by the way, see you in a couple of months,” and I’m just like, [groans] “Oh.” [Laugh]
Rob [00:01:09]: Yeah, it came up on us quick, so we have to get our other speakers in line pretty fast.
Mike [00:01:15]: Yeah. I think one of the downsides is just the timeline for us to sell tickets for MicroConf was pushed back a bit because of all the tax implications around accepting that for the conference –
Rob [00:01:25]: Yeah.
Mike [00:01:25]: – which, unfortunately, has to be also pushed onto the people who attend. We didn’t change the ticket pricing at all, but the tickets are priced higher now because we have to charge [VAT?] on everything.
Rob [00:01:35]: But then they can get refunds of [VAT?] –
Mike [00:01:38]: That is true.
Rob [00:01:38]: – so, ultimately, it won’t be more expensive. Almost everyone across the board will be able to get refunds, although I’m not an accountant. Don’t consider my advice concrete here, but that’s my understanding based on the consultants. It’s so complicated. We have to work with [VAT?] consultants. It’s crazy. You know you’ve grown up when you are hiring consultants just to deal with taxes.
What have you been doing the last couple weeks?
Mike [00:01:59]: Well, I’ve been working on on-boarding people into Bluetick, and I’m at the point where I’ve on-boarded over half of the prepaid customers so far. That’s good to see, but the downside is I ran into a bit of a minor setback. We ended up hitting a bug that caused a pretty major performance issue on my server. It was about three days or so – three, full days – and it was really hard to replicate in a local test environment, so we basically just bypassed the issue for a little while and said, “This functionality isn’t going to be available for you guys for a couple of days, or a week, or whatever until we get this straightened out.” We’ve had to refactor just a ton of code in order to get to the point where we can replicate those types of things locally. It just sucks to have to go through that, but I’d rather do it with under 20 customers than 200-plus.
Rob [00:02:49]: Yeah, now’s the time to do it. It is so painful early on, because you just want to move fast, because you’re just trying to prove things out and get that early revenue. But if you don’t make some good decisions here and eliminate that technical debt, not make the fast decisions where you have something hanging out there that later on can sting you, it’ll be brutal when you get into the hundreds; because having a major outage at that point sucks.
Mike [00:03:12]: Right. And it wasn’t even just that there would’ve been an outage. There’re things that, because of this bug, it just didn’t work. Or, at least there were parts of it that didn’t work. The rest of the application was still working, but it was causing certain jobs to be reprocessed over and over again, and it just pegs the CPU because of that. So, unfortunately, they just were never going to finish, which sucks. Having to take that step back and essentially put all forward progress on hold for close to two weeks – it really sucks, to be honest.
Rob [00:03:43]: Yeah, I know the feeling. It seems like with any app of any complexity these days, you’re going to run into this a lot in the early days because the code is just trying to ramp up. As you scale and you get more customers, we’ve found that about every – I’m trying to think. It’s probably every four to six months with Drip that we hit the point where we need to stop all feature development for a couple of weeks and just focus on fixing performance of individual – whether it’s queries, or whether it’s pages, adding caching, even upgrading the entire database to a bigger box with more RAM and all that stuff. We’ve cycled back on that to maybe three times a year, because you outgrow stuff. We’re not building these basic crud apps [laugh] like we used to be able to and compete. The stuff’s too competitive now. I think of a project management tool, or even time tracking, or invoicing software or something, you obviously want a lot of UX. There’s a lot that goes into building the product; but on the back-end the performance implications of it are really small compared to something that is sending a lot of email, or doing a lot of analytics, tracking opens, tracking clicks. Both of our apps do that, and any type of – I can’t even imagine what apps, like Mixpanel and Kissmetrics have to do on the back-end because they are the next level. Now I understand why those types of businesses had to raise funding. You just couldn’t get enough boxes and enough people to scale that up without having a big outlay in advance, even with a tool like Amazon EC2 or Rackspace Cloud.
Mike [00:05:12]: Yeah, I remember talking to Heaton at one point a while back about Kissmetrics, and one of the first versions of that that came out. I may have these numbers mixed up, but I think that he said that for 20 customers they had 12 servers, and it was just because of all the processing that they did.
Rob [00:05:29]: Yeah, I remember that. Obviously, they got better at scaling as it went out, but I do remember in some interview someone had said just the basic infrastructure, the fixed cost of their infrastructure – and I don’t remember if it was Kissmetrics or Mixpanel – was more than a quarter million a year. It might even have been half million. It was somewhere in that range just to keep everything running, and that wasn’t even to scale up as they got really big. That’s the kind of thing you have to think about. It’s getting easier and easier these days to build really cool tools, but the performance implications of those and the complexity of them as you scale up – it’s a real thing. I know that some startups have entire teams just devoted to keeping that stuff moving fast, and it’s a team of both Dev ops folks, DBAs and developers who are in modifying code just to keep things performing. You can imagine something real-time, like Uber, and how hard that would be since it’s worldwide and there’re so many incoming datapoints at any given time. The order of magnitude of complexity – that’s got to be incredible.
Mike [00:06:26]: The other side of that is that you have to have tools or systems in place such that you can test it and put it under artificial stress, and that’s something that we just haven’t really paid a whole lot of attention to because we were trying to move fast and trying to get the app out the door as quick as possible. We were able to do that, but the cost of doing so was that we didn’t have good mechanisms in place for us to be able to run absolutely everything locally and to integrate a lot of testing into the system. So, a lot of it’s been done manually, or there’re certain places that are much better-tested than others. It’s the places where we don’t have a lot of tests that really bit us, so right now we’re working on refactoring a lot of that code. Like I said, it’s been a full week. It’ll probably be another week before we get things settled down to the point that we can actually go back and start working on more features.
Rob [00:07:15]: Well, congratulations on getting half your folks on-boarded. I feel like this bump in the road that you’re hitting – that’s just the other shoe dropping. It had to happen eventually. You can’t get through this stuff without having something like that.
Mike [00:07:26]: Right, and these bugs are things that probably would have come up anyway. I would expect that the two we specifically ran into are ones that we would’ve come up with across other customers as well – eventually. Maybe not tomorrow, or the week after, but it would’ve been soon, and I’d rather find out now than later.
Rob [00:07:41]: So, what are we talking about today?
Mike [00:07:43]: Today, what we’re going to do is go through a bunch of listener questions that have come in. If you’re interested in having us answer any of your questions, you can email them to us at questions@startupsfortherestofus.com. Our first question comes in from Dan Gravel, and he says, “Hi, guys. I’ve been listening to the podcast since its launch, so thanks so much for all the tactical, actionable and practical advice you give. I’ve been running my business for almost seven years, and I’ve been full-time on it for six. The first product, called ‘Bliss,’ which you can find at www.blisshq.com, is still a bestseller, but it plateaued a few years ago. It’s a B-to-C, downloadable software product which automates the management of large music libraries. Arguably, the reason for stagnation is a drop in interest in self-stored music collections with the mainstream move to streaming. I’m considering moving all or most of the app into the Cloud and adopting a subscription payment model. I can’t move it 100 percent because a small software agent will always be required to perform the work on the music files. I think moving to the Cloud should lower friction in on-boarding, allow easier life cycle emailing and a higher LTV due to subscription payments that may enable a paid acquisition. How would you go about deciding whether to go ahead with this? Dan.”
What are your thoughts on this, Rob?
Rob [00:08:45]: Well, I think there’s two markets for moving to the Cloud. One is your existing customer base, and they’re easy because you can just ask them – right? You could do a survey, some one-on-one phone calls, and you could say, “Would this be of interest to you if we had a subscription version of this?” You can talk about the price point. You can talk about the benefits and find out if any of those folks are interested. Then the second market is everyone else – right? It’s all the audiophiles. You said you have an existing market. It’s some audio files, and there’s integration’s, and there’s certain customers who aren’t your customer yet, but who could potentially be. Those guys are a little harder to reach, but you could certainly survey your email marketing list. I’m assuming you have some type of list that is folks who’ve signed up to hear about updates, or maybe they follow some content you produce or something; and that would tend to be a much larger swath than folks who are actually paying you. That’s a good place to start.
[00:09:38] The other option is something I heard about from Patrick and Price Intelligently. He mentioned this in his MicroConf talk this year, and it’s a website called aytm.com. It’s AskYourTargetMarket.com, and you basically define all these demographics. I would imagine by this point you have a pretty good idea of where these folks live and if there’s any type of gender bias, if more of them are men versus women; what they do for a living; how they think about stuff. You can basically just define this at aytm.com, and then you pay per survey responded, and you could basically present the product as it is today and ask if they’d be interested in a Cloud version and try to do some market research that way. So, that’s the most data-driven way that I can think of and probably where I’d start to at least start getting some insight into whether or not this is a good move for you.
Mike [00:10:24]: Yeah, I’d have to agree with you that going back to your existing customers and asking them whether or not that’s something that they’d be interested in is probably a better bet, especially if you’ve been full-time and this has been the major source of income for the business for the past six years. The downside, I think, to doing that is that you have probably attracted a certain number of customers, or a certain type of customer because of the fact that it’s one-time, downloadable purchase and they can just buy it once, install it. Then they don’t have to worry about it ever again. There’s a certain profile of person you’ve probably attracted because of that, so I think that the data is probably going to give you at least some mixed messages there, because a lot of the people who fit that particular profile are not going to want to pay for a subscription service – not unless you can come up with solid justifications for what your service is going to allow them to do. Obviously, those are things that you’re going to have to work with those people to figure out what is it that they actually want and what would the Cloud service really do for them.
[00:11:18] One thing that I can think of off the top of my head is to be able to stream their music to any of their devices from anywhere; but then, of course, you’re going to rely on being able to take their own music and then replay it back to them through the Cloud, or through a streaming service of some kind that you would have to offer on the backend. I would imagine that all that’s possible. It’s just a question of whether or not the people actually want that and whether or not the existing services through Pandora, or Amazon, or any of the other ones already overlap enough with what you’re doing to be able to replace it and serve as a solid competitor; because they’re going to be heavily funded and already have access to a large market of people, but those types of people are probably not the same ones that are in your market.
Rob [00:12:00]: The nice part is that there are so many B-to-C services that are paving the way for you. As we know, B-to-C tends to be a tougher market, because you’re going to have lower price points, higher support, just a lot of things that aren’t as ideal with B-to-B market; but Apple, with iCloud and with iTunes Match and the Spotify subscription stuff; people are used to Netflix and Hulu. There’re just so many more subscription services than there were even two or three years ago, and consumers are getting more used to paying for these. I do think there’s at least some precedent for you to ride on the coattails as folks are getting used to more of these subscription pricing structures.
Mike [00:12:40]: So, Dan, hopefully that helps answer your question.
Our next question comes from Zachary Kesson. He says, “Hi, guys. I’m starting up a SaaS product and having a problem. I don’t have any traffic. My best day, I had 31 visitors to my blog, but they stayed an average of seven seconds each. It seems that all the sales advice I hear for SaaS founders assumes that the founder has a mailing list, and I don’t have one; and without some traffic to my webpage, I don’t see myself creating on in a realistic timeframe. At this rate, I should have a 5,000-person mailing list by September 2031, or something like that. I’ve put links in Reddit, tweeted them, put them in LinkedIn, but nothing seems to generate more than two to four clicks. Paid advertising is outside of my budget right now. What would you suggest? Zach.”
Rob [00:13:16]: This is saying, “How do I market a SaaS app with no audience?” The answer is you don’t want to. You want to have had a landing page up since you had the initial idea and to have at least been talking about it for a longer period of time so that you get some interest. Even an email list of 50 people is incredibly powerful at this stage. You don’t need 5,000, because having 50 people will allow you to get feedback and to do some type of customer research and figure out who wants to use it and for what, and talk to them about value propositions. That is much more valuable. I think that the fact, Zach, that you haven’t done that yet really puts you in a tougher position; because now you have to start from a dead-cold stop, and you’re saying paid advertising is outside your budget right now.
[00:14:11] AdWords is obviously very expensive, so you’re not going to do that, but you can get super-cheap clicks on something like You Tube; or, in Facebook you can get 10- and 20-cent clicks if you’re doing targeting. So, I would instantly put the Facebook retargeting pixel on your site even with 500 visitors per month. You said your biggest day was 31 visitors in a day, so if you do the math and it’s 900; and I’m assuming, since that was your biggest day, you don’t get that many every day. Even with 500 uniques a month, you can start some retargeting. I would also put an email capture widget on your blog. You’re not trying to build a massive list to market to, but you’re just trying to get some human beings that you can talk one-on-one with. You could test that versus, like, a Koalaroo survey box, or one of those other types of things. You’re trying to get information why are people leaving after seven seconds, because you have a problem if they’re leaving after seven seconds. Either your current traffic sources are garbage, or you’re not a fit for what people expect when they come to the site.
[00:15:08] You’re not going to get [out of this?] with split testing. This has to be a one-on-one effort, because you’re so early in the game. The fact that you don’t have a mailing list – and, again, even a mailing list of 50 or 100 – it puts you behind the eight ball. You have a product now, and it’s not going to market itself. You’re going to have to hustle. These days, you’re going to have to do everything under the sun that doesn’t scale just to get people using this app. So, putting a link on Reddit or tweeting it when you have 100 or 200 followers – that isn’t going to cut it. There’s too many people doing this these days to really be able to just do it with this kind of cold, random traffic. So, I would try to do a lot of one-one-one stuff to figure out who’s coming, why, what they expect, why they’re leaving quickly. That average number of seven seconds per visit is worthless. You don’t care about that, because a bunch of people are leaving after one second, and then some people are leaving after hundreds of seconds, and you want to focus on the people who are staying for those minutes. So, figure out how to differentiate those, whether you use Mixpanel, or whether you use Kissmetrics, or whatever it is you use – free trial of Crazy Egg, or Inspectlet. These are things that can show you what people are doing on your site, but don’t rely on the tools to do it. You’re going to have to dig in and do a lot of one-one-one stuff.
[00:16:17] The last thing I would say is if you have an idea of who should be buying your software, figure out where are they; because being on Reddit and Twitter is too generic. Using your tool relates to other CRMs, it looks like, so I’m assuming you integrate with something like maybe Salesforce, or Closeout iO, or [Bay?] CRM, or whatever. So, how do you get into those integration repositories? How do you get those guys to co-promote? You promote on your end when you finish integrating, and they co-promote to their audience via a blogpost. That’s integration marketing. Ruben Gomez was the first person I ever saw do it, and then I coined this term “integration marketing” and talked about it at a MicroConf talk a few years ago. It’s to get marketing done via these integrations, and in order to do that you have to hustle. It’s not going do it on its own. You need to communicate with them and convince them. You have to have some type of blog at that point if they’re going to blog about it, because you have to have something to offer them. They’re not going to email their list if you don’t email yours. Since you don’t have that, you don’t have that asset. An asset doesn’t build itself overnight. This is stuff that you need to be thinking about well in advance of when you need it. If you haven’t to date, then today is the day to start building that. It’s going to take you longer than if you’d gone about it in the correct order, or in a more optimal order; but you can’t really look back at this point. I think you’ve just got to get started building these assets as of today.
Mike [00:17:39]: I went over and took a look at his site. It’s yourcrm.link. It looks to me like the product itself is aimed at SaaS businesses who want to connect with CRMs, and that was just my initial idea of what the product does based on what I read there. If that’s the case, what I would probably do is move much more towards an [out?]-[?] model where you’re directly contacting those people that you think are going to be a good fit. So, sit down and make a list of the 25 companies that you think would be a good fit for using your product and then contact them. You just go through the list and talk to every, single one of them just to get a yes or no as to whether or not they’ll talk to you and see if it actually is a good fit. It sounds to me like if you’re not getting targeted traffic to your website, then you’re not posting things in the right places. If you don’t know what that target is going to look like, then it’s going to be very difficult to figure out where you should even post it. Is Twitter a good place to be posting those? I don’t know. It really depends on what the people who are interested in your product have to say and where they actually hang out. I can’t answer that, but I think that you should be able to after you have some of those conversations, and I think that’s the bottom line at this point. Because you haven’t had those conversations, it’s very difficult to figure out where you should be marketing your product to and who is an ideal customer for it.
Rob [00:18:55]: Yeah, that’s actually a really good answer. I think I may have liked your answer better than mine, because yours really is doing the one-on-one work and the outreach. It’s just a matter of getting in these one-on-one conversations and figuring out who can use it and why would they. His price point starts – I hadn’t even noticed that part, because I didn’t scroll down to the bottom. His price point starts at $149 a month and goes up from there. It’s like $149, $499 and up, so there’s definitely enough room to do some medium-touch sales and some high-touch stuff. I think that’s a really good start. The other stuff I talked about is probably as you want to drive more traffic down the line. I think these one-one-conversations are more critical up front.
Mike [00:19:34]: Yeah, and I think your point about not worrying about trying to do any sort of split testing or anything like that is also valid because of the fact that you just aren’t going to have enough traffic to be able to do that. It’s those one-on-one conversations that are going to be the single most valuable thing to you at this point. What I would probably recommend is visualizing what your sales funnel is going to look like just from a conceptual standpoint. You don’t have to be exact, but you could just set it up as a simple three-, or four-, or five-stage sales funnel where you say, “These are the 25 people that I would like to see as customers,” and they’re at stage 1. You haven’t even actually reached out to them. Then stage 2, you’ve reached out them. Stage 3, you’ve had a conversation or scheduled a meeting. Step 4, you’ve had the meeting; and then Step 5 is whether they are actually going to trial the service or sign up for it. At that point, if they pay for it, or they’ve decided that they’re going to evaluate paying for it, then they drop off that particular sales funnel right there; and then they maybe enter into another one.
[00:20:31] Those are the basic steps that you should probably go through. If you’re just doing things quick and dirty because you don’t have any of this traffic or any stats, just set up a Google doc or something like that, or a series of them. Every, single conversation that you have, you put that conversation into the Google doc. If you have a second conversation with somebody, maybe because they’re further down on your sales pipeline, you add that conversation into that Google doc. That way, you end up with a series of four or five different Google docs that are in line with what your sales funnel looks like, and you can always go back and you can refer to all the conversations that you had at stage 1 of your sales funnel, then at stage 2 and stage 3. It lets you look back at those down the road to see if there are any conversations that had a lot of overlap, or a lot of questions that specifically came up at a certain stage of your sales funnel. Then you can take that stuff and translate it back onto your website to help gather trust and answer questions for people that you are not directly talking to. So, that’s essentially the customer development process that I would go through for this.
Rob [00:21:30]: And if you need software to help you do that cold outreach, I would look at Bluetick.iO.
Mike [00:21:36]: [Laugh] Ah, yes, thank you for the plug there. So, Zach, hopefully that helps you out.
Our next question comes in from Corey Moss, and Corey’s been a long-time listener of the show. Corey left a message on our voicemail number, so we’ll play that for you now.
Corey [00:21:47]: Hey, guys. This is Corey Moss. Over the last year, I’ve stepped back from SaaS apps to concentrate on my Kanban board plugin for WordPress. You can check it out and the paid add-ons at kanban nwp.com. In the SaaS world, the holy grail is monthly recurring revenue, but in the WordPress ecosystem, most licenses are annual, and most don’t even auto-renew, if you can believe it. I want to apply SaaS best practices, but I’m nervous about doing things too differently from how people expect it. Mike, have you run into this in dealing with enterprise? Have either of you had experience with this disrupting the status quo when it comes to monetizing patterns? Thanks.
Mike [00:22:25]: Corey, if I understand you correctly, you’re essentially asking how to disrupt the current payment that a market is used to in standard practice today. So, your question to me specifically was did I run into that sort of thing in the enterprise market. Yes, I did. It was very difficult to get them to change their ways and, looking back on it, it was probably foolish of me to even try, and I would not recommend that somebody else try to do that. So, if you’re going after the WordPress space and you’re trying to convince them to pay for a subscription to something that they’re used to paying for once as a downloadable product, and potentially a yearly maintenance fee or something like that after that, I would be very hesitant to say that you should try and modify that model in such a way that they are not comfortable with or they’re not used to.
[00:23:10] I’ve talked to other people who are in the WordPress space, and they said that selling subscriptions in WordPress is a very difficult way to go, because people are just not used to it, so they don’t do it. I think Rob had one of his yearly predictions that this is going to change in the future, but I think that there’s also going to be a huge subsection of the market that is not willing to change, and it’s going to be years before they are convinced that that’s the only way to go because they are forced to do that. Even if you look at today, it’s 2016, and there is still a ton of downloadable software that’s sold out there. What we tend to see is mostly the recurring revenue, but there are huge number of downloadable products that are still available for sale; and people still buy them every, single day because they only have to pay for them once. I think that you’re probably going to run up against that roadblock in the WordPress space for several years to come. If I had to put a number on it, I’d probably say between five and ten. So, I would not bank on trying to do that overnight, and I almost certainly wouldn’t even recommend going in that direction if you can help it. I would probably double down on trying to figure out what people are willing to pay more for and try to increase your lifetime value that way as opposed to trying to change the way that they fundamentally buy their software.
Rob [00:24:19]: I know that there are some knowledgeable WordPress folks who are trying to attack this problem, and they haven’t really been able to break through yet. I don’t know of any WordPress plugins that don’t rely on an external service that are able to pull off a monthly pricing tier, because if you do have an external service – let’s say it’s backup to a Cloud server, and you’re maintaining the Cloud server, or it’s some other thing like – I think Jetpack doesn’t have external stuff that WordPress runs. They’d be able to charge a monthly fee. But in terms of just doing it for the sake of doing it and not having a strong justification? I agree with Mike. I think it’s going to be an uphill battle.
[00:24:53] I think the other thing to think about is, while monthly subscription is the holy grail of SaaS, that’s also its biggest drawback. It takes you years to get through the “long, slow SaaS ramp of death” – right? It’s just years of toiling away to build up any type of monthly, recurring revenue. The nice part about WordPress plugins is you can charge more up front. You do get a one-time fee. Let’s say you’re charging 49 bucks for the annual license, which a lot of people are doing. I think auto-renewing with advance notice – let’s say a five-day, or a three-day, or even a week notice before you auto-renew should be perfectly acceptable. I do know that some folks are moving in that direction. I think the more savvy WordPress business folks are doing that, and I would as well. The nice part is that, since most of the traffic that you generate will come from these recurring sources like a Google, or a WordPress.org plugin repo, you can ramp up your revenue to a couple grand a month really quickly; whereas SaaS is just going to take forever to get there. While SaaS will grow over time, I’m not so sure that’s what you want at this point. I personally would be going for that early revenue. Let’s try to get to between 2 and 5 grand a month as quickly as possible, and then you can start thinking about either adding add-on services that could potentially become subscription; or, using that money to stair-step your way up with either a second plugin, buying out all your time and then thinking about something long-term that is more of a monthly subscription model. Whether that’s in the WordPress space, or you just go straight for SaaS, that’s something to think about.
[00:26:21] But I am not bullish on the fact that, as a relative newcomer to the space, that you’re going to be able to come in and just charge monthly without a major justification; because so many WordPress users, the reason they’re using it is because it’s cheap and because there aren’t subscription fees. A lot of consultants use it because they know that their clients don’t want to pay subscription fees for things. They don’t want to pay for Shopify or Squarespace. So, if you come in and want to charge this 9 bucks a month or whatever it is that you could get for it, it’s going to be a deal breaker for a lot of folks.
So, that’s my advice as of now, the middle of 2016 here. I do believe that over time this will change. I think most things are going to move toward subscription. We see it happening in B-to-C entertainment, which was unfathomable a few years ago to think that millions of people would be paying for Spotify, for essentially music subscriptions; and even 15 years ago, to think that tens of millions of people would be paying for Netflix, for movies by subscription; but it’s happening. Do you think that WordPress will eventually go? I think it’s years out, and I think you’re ahead of the curve.
[00:27:22] So, my prediction Mike called out. As we’re talking through it, I’m realizing there’s just no chance that’s going to happen in this year. I think what my prediction was was that one person would figure it out pretty well; and that, of course, remains to be seen. I guess we’ve got another six months.
Mike [00:27:35]: I’ve seen one company that has done this, which I think they’ve done pretty effectively, Optin Monster. They have a little widget that you can install on your website, and they do charge a subscription fee for it, but they also have – as you pointed out, unless you have some sort of external service that integrates with, like for WordPress backups, or security checking, or things like that, where it needs that external service in order to function, and that external service needs to be up and running at all times, maintained and everything else. Optin Monster can do that because, one, the types of things that they integrate with are types of services that you’re going to pay for. So, it really sits on the front of that funnel and is aimed at those people who are used to paying for those things.
[00:28:16] The other thing is that I think they charge $50 or $100 per year, and it is that subscription fee; but they also keep the widgets up-to-date. So, if there are changes made in MailChimp, or Drip, or Aweber, or whoever, they will update the plugin so that when it comes down to your site, it is all up-to-date and you don’t have to worry about keeping your own plugins up-to-date. So, there are some advantages there, but they also made that switchover after they hit, like, 200, 300,000 customers or something like that. They’re not going from ground zero and trying to build a SaaS pricing model out of it. They already had a pretty substantial user base before they made that change.
So, Corey, hopefully that helps answer your question.
[00:28:54] Our last question for the day comes from Brian Kenry, and he says, “Hi, guys. Love the show, and it’s been a big help in getting my startup off the ground. I’m building a platform that will be monetized by generating leads and selling them to a private agency. I’ve assumed that I will partner with one agency and turn over leads at a cost per lead, but I’m wondering if I should consider a different dynamic. I realize this is a vague question, but is there any benefit to pursuing a subscription model or a marketplace for leads? It seems like a cost per lead is the most logical way to approach this, but I want to make sure I’ve considered all avenues. As always, thanks for your input.”
Rob [00:29:21]: I think I would stick with cost per lead, because that’s the most granular, and it’s the easiest to understand both from your and your customer’s perspective. Your costs are going to be variable, but you’ll be able to lock them down below a certain amount and then know what your margin is.
One thing I would consider is having customers – they could pay on a subscription basis so that they pay in advance. Here’s what I’m thinking. Instead of delivering a bunch of leads to them and having them pay at the end of the month or something, you really want to get that payment at the start of the month, knowing that you’re going to deliver those leads over time during the month. So, you could think about having tiers of, like, “Do you want 100 leads? Then it’s 1,000 bucks,” or whatever. If you want 200 leads, then it’s either $2,000, or you can give them some type of discount. Do $1,800 or something a month. The nice part about that is you don’t have to chase after them for money. They can either sign up for the PayPal subscription, or through Stripe, or whatever; and you’re automatically billing them, and you’re getting paid in advance. If their payment doesn’t go through, then you don’t deliver the leads. You’re not out the money. I think that is beneficial for you from a business perspective, and it’s going to save you time. That still works out to a cost per lead, but they’re basically committing up front to buying a certain amount of leads, and you’re getting that payment up front.
[00:30:34] Those are my thoughts off the top of my head. I can’t think of any way to get more complex without just making things hard to understand, and I know in the lead industry things are typically sold per lead. Do you have any other thoughts on it, Mike?
Mike [00:30:46]: I have a few that go into different places on this. As you said, the one that’s easiest to understand is just selling them directly cost per lead. The problem there is that you don’t know how much time and effort it’s going to take you to do the work to get a lead. As you said, if you do it enough, you’re going to able to figure that out and you’re going to be able to do some averages there and then tell people, “Yeah, I can get you X number of leads for Y dollars.” Then eventually, they’ll be able to make that mathematical calculation in their head or just look at it and say, “Yeah, that totally makes sense for us to do that.”
The other thing that I can think of that might be an option is to have them pay you for a specific service based on a flat fee. Whether it gives them results or not is a risk that you’re pushing on them. I don’t like this idea nearly as much because of that very thing, but you could say, “For $500 a month, we’re going to do X, Y and Z for you. We’ll reach out to X number of people with your emails, or with your script,” from whatever the call is, whether you’re doing cold calling or cold emailing. You can do something like that and put together different packages.
[00:31:51] I do agree that you should probably charge people up front so that you have the capital on hand to go do that, so that you’re not paying for or funding it up front only to have somebody cancel later on, and then essentially eat the costs associated with that. I’d definitely collect the money up front. Those are the things that come to mind for me. The real big there, I think, is who is assuming the risk for doing this. I think that you probably want to assume as little of the risk as possible, but I also think that you probably don’t want to go down the road of saying, “We’re going to do X amount of work for you,” but then basically push all of the risk onto them if it doesn’t deliver; because it could reflect very poorly on you if you go through a month, or two months, or something like that and, for whatever reason, you’re just not getting the results that you used to. I think that you’re better off evening those out for the customer and letting them look at the raw numbers and say, “Yeah, we expect to pay $10 a lead, and that’s what we’ll get.”
Well, Brian, I hope that answers your question.
Rob [00:32:45]: And that wraps up our episode for the day. 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 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, and we’ll see you next time.
Episode 263 | Per User Pricing for SaaS, Drip Email Sequences for Freemium, and SaaS Subscription vs. Commission Pricing
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Show Notes
In this episode of Startups For The Rest Of Us, Rob and Mike take a group of listener questions including Per User Pricing for SaaS, Drip Email Sequences for Freemium, and SaaS Subscription vs. Commission Pricing.
Items mentioned in this episode:
Transcript
Rob [00:00:00]: In this episode of “Startups for the Rest of Us,” Mike and I discuss per-user pricing for SaaS apps, Drip email sequences for Freemium and SaaS subscription versus commission pricing. This is “Startups for the Rest of Us,” episode 263.
[Theme Music]
Rob [00:00:21]: “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 you’re just thinking about it. I’m Rob.
Mike [00:00:30]: And I’m Mike.
Rob [00:00:30]: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. So, where you this week, sir?
Mike [00:00:35]: Well, I’ve been spending the past couple of weeks working on getting the Founder Café data migrated over into Discourse and been working with a DBA who’s been extremely helpful on that front. I think you kind of referred him over to me, and his name is Creston. He runs Ruby Tree Software, so you can go to rubytreesoftware.com if you’re looking for a DBA. He’s done a really fantastic job of getting a lot of the data converted over into a format that we can use inside of Discourse using the [postgreSQL?] back end. I’m really happy with how things stand right now, and right now it’s just a matter of working on a lot of the mundane stuff like onboarding instructions, the terms of service, privacy policy, CSS and things like that. So, things are looking good.
Rob [00:01:13]: Yeah, and so far, so good with Discourse, huh? I mean it seems to be a pretty good platform. We had looked at it – was it two and-a-half years ago when we moved from basically WordPress forms over to our current platform, which is Communifire? I think it was –
Mike [00:01:25]: Yeah, it was about that.
Rob [00:01:26]: – a while ago.
Mike [00:01:26]: Yeah, it was –
Rob [00:01:27]: At the time, Discourse was, like – I don’t know – an alpha or something, because it was pretty early-stage. But we had our eye on it, and we actually looked at it at that point, and our experience with Communifire has been mixed, and it isn’t exactly meeting the needs of what we want to do. So, we feel like moving over to Discourse is a good choice. A lot of people are familiar with it, and the usability is really good, right? Jeff Howard has done a good job making really usable forms.
Mike [00:01:50]: Yeah, so definitely looking forward to that. Hopefully, we’ll be done by the end of the month.
Rob [00:01:53]: Awesome.
Mike [00:01:54]: What about you?
Rob [00:01:54]: Well, we have two job openings right now with Drip. If you’re a content marketer and you want to help us with the blog and help crank out content – it’s not just about writing, but it’s about promotion and all that stuff – definitely get in touch with me. I’m hiring in the next couple weeks, soon as I find someone. It’s pretty much, I would say, anywhere in the world. Ideally, it’s within three hours of Pacific time zone either way, but we’re looking for someone with experience. You can email me directly, or hit the Start Ups for the Rest of Us site and contact me through there. The other thing we’re looking for is someone with a lot of UX experience, like a mid-level to senior UX person. Some Rails experience would be ideal, but we can work. If you know Python or know some type of service ad language, even if you’re not an expert, what we really need is heavy UX experience.
[00:02:39] So, things are growing and moving, and I think we’re going to probably have some more job openings here in the next few months as well.
Mike [00:02:45]: Very cool. So, what are we talking about this week?
Rob [00:02:47]: Well, we’re going to answer a group of listener questions. They continue to stack up, and we have some pretty good ones related to SaaS – pricing and development platforms and stuff like that. So, let’s dive into our first one. This first question is from Vincent Pruyer [phonetic], and he’s from wearewizards.io. He says, “Hey, guys. Thanks for the podcast. Lots of interesting stuff every week. We currently have a side project. It’s a password manager called ‘Passopolis.com.’ It was originally from another company, and then they open-sourced it when they shut down, and we’re currently running it for free and thinking about how we can monetize it. Our main competitor is LastPass, and it’s around $24 per user per year, and this kind of pricing only seems sustainable once you get to 100,000 users because the pricing is so low. If we decide to monetize it, we’d need to invest in design and do some other stuff.”
[00:03:34] To summarize Vincent’s question, he’s wondering if they should do this low per-user pricing, if they could compete at that – looking at, like, 10 to 12 British pounds per user per year – or, doing tiers, where it’s like one to five users is 30 pounds a year and six to ten is 100 pounds. But, really, his question is, “Should we just keep running it for free and not try to actually monetize this? Or, do you see a way to make this work?”
Mike [00:03:57]: Well, I think this is a pretty hard question to answer. One of the things that I see here is that it’s definitely aimed at the consumer market, or at least it feels that way; because in order to monetize it, especially if you’re going to try and compete against LastPass, the pricing on LastPass is just so low that you’re going to need a ton of users in order to be able to make ends meet. You could run it as a side project, but that’s probably all it’s ever going to be; and your number of users still has to be very, very high in order for it to just work, in general, for you.
[00:04:26] I think that it’d probably make a little bit more sense to look at other ways that you can solve similar, but related, problems using the same type of technology and possibly target businesses instead. So, if you’re looking, for example, at – your main competitor’s LastPass at this point. I think I might try and compete against something like Passpack, where you are instead selling it to teams of people and specifically at teams of, let’s say, five people or more and then charge those people on a monthly basis and give them team management of accounts. You could use that in situations where you have a bunch of people who are working together, and they need shared credentials to different machines, for example; or, to different websites for a variety of different reasons. But I think that competing head-to-head against LastPass is probably not the wisest choice in this situation.
Rob [00:05:12]: Because you’re not just competing against LastPass. There’s one password and a bazillion other of these password managers; and trying to make money, if you’re bootstrapping, charging $10 or, I guess in this case, 10 pounds sterling per year is insane. I mean the price points just aren’t there, and as Vincent pointed out, you need 10,000 paying users to make $100,000 a year; and just trying to find 10,000 users, unless you have just this enormous funnel and enormous channel of people using it now, there’s just no way you’re going to get there. You don’t have the team. You don’t have the traffic sources to get that many people.
[00:05:48] The worst thing I think you could do is to try out that pricing and get 100 or 500 paying customers. The problem with that is once you’ve done that, now you kind of owe them something. They’ve paid for a year, and you’re stuck to supporting them, and you really haven’t made much money. If you got 10,000 customers, that’d be great. If you have zero paying customers, then you’re home free; but once you make this leap into this really cheap pricing and you have to support these people for a year, and you’ve only made hundreds or a few thousand bucks, it’s not going to be worth it.
[00:06:15] I agree with Mike. There’s no way I would try to compete directly with LastPass on this. They’re just so far ahead. Unless you have a major differentiator, that’s where I would look for – is the competitive advantage you have is that, since it’s open source, I imagine you have some type of user base. Well, what is that user base contributing or asking to be built that’s different than LastPass that would allow you, in one sentence or one headline, to describe how we are the opposite of LastPass, how we’re way better, or way different.
[00:06:40]: You look at how Gabriel Weinberg is competing with Google. He has DuckDuckGo as a search engine, and he’s been on the podcast a couple times, I think, now. He didn’t do it by trying to compete head-to-head with Google. He figured out “how can I be different than Google in a way that I can sum up in one sentence?” And, typically, he uses the phrase, “Google tracks you. We don’t.” Right? It’s about privacy and tracking. Now, there’s also some other points: where they’re only going to have one ad at the top. They do some other stuff, but that’s been his big focus, and that’s the only way he’s competing with Google. It’s not by trying to be better than Google, or cheaper than Google, or faster than Google; because you can’t out-Google them.
[00:07:13] I think the same goes with LastPass. They’re just too big. You can’t out-LastPass LastPass. Figure out a major differentiator, whether it’s what Mike said, where you’re actually pivoting into another space; or, that you just pick a niche and you are the best password manager for web designers, or whatever. Maybe you add something that allows them to share with their clients, that no one else does, then you have a real differentiator. Then you don’t charge 10 pounds per year. That’s when you charge 50 or 100, or you charge monthly because you are so much better for that small group of people, that it’s warranted and they’re willing to pay for it. I hope that helps, Vincent.
[00:07:46] Our next question is from Chris Sciora [phonetic]. He’s from gomobileiq.com. and he says, “Hey, guys. It sounds like both of you started with a handful of different languages in the past. Maybe C# for Mike, and Rob has also definitely used .NET. Rob recently using Rails for developing the last, two web applications; and he’s indicated he doesn’t have much experience with it, certainly not enough to actually write the apps. Without arguing about the merits of the different frameworks, I’m curious what benefits you saw by making that change. It effectively removes you permanently from the development review process, while adding another layer of complexity. What were the reasons for dropping a familiar platform and effectively starting from scratch?”
Mike [00:08:24]: Well, I think this is mainly aimed at you. My take on the different languages is, in most cases, you’re going to use the best tool for the job; and I think that if you’re going to go in a direction for using something where you don’t know the technology at all, then it would probably be an intentional choice to help keep you out of the technology. That would probably be the main reason that I would go in that direction; but, Rob, obviously you have your own reasons for having chosen Rails. Was it based on pricing? Just finding people who knew that technology? What was it?
Rob [00:08:53]: Your first point of intentionally keeping yourself out of the development is actually a good one. That was part of the reason, is that I found with all the products I had – from Dot Invoice to HitTail to WeddingToolbox and the other ones that I was managing – that I kept getting pulled into these little fixes and these little issues and these little bugs, and I would kill half a day troubleshooting something in PHP or, heaven forbid, in ColdFusion with WeddingToolbox. Not being able to do it is actually a benefit to me, because it means that I just can’t these days. That’s giving something up. You have to get over the fact that you can’t go in and do it.
[00:09:33] At the same time, though, I was able to find a trusted resource who I knew could help support it, and that was Derek, right? He was contracting for me at the time. He’s now cofounder of Drip, and early on, we discussed what language should we build Drip in. He knows Rails like the back of his hand. He’s very knowledgeable and just a senior, senior dev in it; knows about architecture and how it works. So, that was kind of a no-brainer, right – the fact that he knew it so well. Then, you can find Rails developers. Rails developers have heavy UX emphasis, typically, and wanted to make it very UX-friendly.
[00:10:04] Finally, I had run into real issues. I got an acquisition offer on HitTail several years ago, and since it was written in ASP.net stuff, the person didn’t want it. They really wanted something in PHP, Python, or Rails. If you’re going to build line-of-business enterprise apps, then, yeah, Java.net – those are great. But if you’re going to build startups, essentially; or web applications, and you want to be able to find developers that aren’t really expensive, find developers that have the startup mentality in general and maybe someday be able to sell it, or transition it to another company – whether that’s your plan from the start, or not – building in an enterprise language like a .NET or a Java will be to your detriment. That’s where I’d say Python and Rails would be my top two choices. I think PHP would be another one that’s perfectly reasonable. We can go into the merits of doing everything in node and using bits and that, but it probably isn’t worth the time of it.
[00:10:56] The bottom line is the reason that I dropped the platform is: 1) so that I wouldn’t get sucked into development; 2) because Derek knew the language really well; and 3) because it makes it easier to find people to work on; and if someday there was some exit event, or someone merged, or there was ever that need to transition it to another team, it’s just an easier transition when you’re using a language like this.
Mike [00:11:17]: I’ll just interject here to point out that I’ve heard that as well in terms of using something like Rails, or Python, or anything like that. Those types of languages, it’s easier to find the developers, especially the ones who are motivated to self-teach and are in the startup space. The pricing for apps that are built with those tends to be a little bit higher, so if you’re looking longer-term, I’ve heard that as well. It’s just the types of technologies that people tend to be more interested in acquiring then the C#s and Javas of the world.
Rob 00:11:50]: All right. Our next question is from Nathan Rimmer. His subject line was “20 percent of IT spending creates no value. I need your advice on how to fix that.” He says, “I’m a requirements analyst and a startup fanatic. I’m a huge fan of the podcast. Studies show that about 20 percent of IT spending creates no value. It’s like throwing a fifth of your IT budget out the window. This is a huge problem for startups who have limited funding, which is pretty much everyone. Reclaiming the lost value would allow startups to employ more people,” et cetera, et cetera.
[00:12:18] As you know, there are frameworks for coding and product development, like Bootstrap [?] startup, but there’s no framework for creating, communicating and managing business requirements. I see there’s a fundamental need in reclaiming the lost 20 percent. I’d love to hear any thoughts you have on what a business requirements framework should contain or take into account. I’d even be interested to hear if you think it isn’t needed.” So, what do you think?
Mike [00:12:37]: I think the first mistake here is assuming that startups and enterprise companies that have a full-blown IT department are the same, and that’s just a blatant falsehood. I don’t think that those two things are even remotely close to each other, so when you start looking at studies like this that come back and say 20 percent of IT spending creates no value, my inclination would be to believe that something like that comes from Gartner or Forester. Those are wildly different environments than a startup that’s got less than ten employees, for example. So, to try and equate them is just a nonstarter. There’s just no equivalence there.
[00:13:12] The other inclination I have is that when you’re looking at this type of spending, that 20 percent of IT spending is probably on technologies that are purchased because they are – either this person was sold on a dream of – some sales rep came in and said, “Hey, buy this software, and these particular problems will go away.” Or, they purchased a bunch of consulting, and the project was mismanaged, so all that money basically went out the window. Those are very, very common things that I’ve seen when I’ve been doing consulting, so those are the types of things that would factor into studies like this. I think that, honestly, this is just probably bad data. Maybe that’s a gross assumption on my part; but my guess is that, because it’s not applicable to startups, you can’t really draw a line of equivalency between them.
Rob [00:13:56]: Yeah, I would second that. I also think that, since the environments are so different, that this requirements framework that Nathan was asking about is much, much less applicable, if not totally inapplicable. It depends on what you mean by “startup,” but let’s just say it’s someone that’s less than 20 employees or a company that’s less than 30 employees. At that level, basically just a kanban process, where you’re writing stuff down on notecards and you’re sticking them up on a wall, or you’re using a Trello board, is a really good way to get requirements across; or, simply using an issue tracker. We use Codetree, which is over GitHub issues, and there has not been a single feature that we have released in Drip that has required more than a few paragraphs of discussion and description in our issue tracker.
[00:14:40] We don’t spec out these massive, waterfall projects like you do in IT, where you have these requirements that you have to manage, and you have this – you know, you used to have the 300-page spec doc. None of that is done in the startups that I know that are moving quickly. We release multiple features per week, sometimes multiple per day, and so each is individually specked out and is its own, little, tiny micro issue. So, for startups, honestly, I just don’t see the need. Maybe for enterprise IT there needs to be some framework, but I wouldn’t even be able to speak to that now. I’ve been out of that so long.
I hope that helps, Nathan. Thanks for sending in your question.
[00:15:12] Our next question is from Christopher Gimmer, and he says, “Hi, Mike and Rob. Huge fan of the show. I had a question about auto responders for freemium SaaS products. With a typical SaaS trial, you’re hoping to help users find value and convert to paid before the trial runs out. With a freemium product, there’s no time limit and not everyone will be interested in a paid version. Just wondering what kind of advice you would give on how to set up an auto responder for a freemium product. Would it be any different than a normal trial sequence?”
Mike [00:15:39] Yeah, I think that there’s a couple of different things that you can do – different approaches, I’ll say. The first approach is when you have somebody come into a funnel like that, are you trying to sell them directly on the higher-level version of the product, or are you just trying to get them in the door to start using it? I think the answer to that depends a little bit on how complicated your product is to get up and running for people and how valuable it becomes to them over time. Obviously, in a SaaS scenario, you want to be charging people on a recurring basis if the value of your product goes up over time. So, something like – to throw to an example here, bug tracking software, or anything where you’re aggregating data over a time period. Over time, hopefully, the users are sending more data into that system so that as they use it more and more, it becomes more valuable to them.
[00:16:27] Now, if you’re trying to get them to just use the product, then you probably want to get them onto a paid version, assuming that they’re a big enough customer that they’re going to be using it extensively. Or, if they’re on the smaller side, you just want to encourage them to use it in case they end up larger companies later on and be able to bring it in the door. In each of those situations, you’re going to do one of two things. You’re going to try to get them onto a paid plan first and then essentially back off if they end up going into the freemium plan for the product and then over time, try and pitch them on the benefits.
[00:17:00] I think that when you start seeing their usage of the product over time, you can check to see whether or not they’re going to run up against any of your internal barriers for that freemium product. So, let’s say that you’ve got BugTracker. You only allow them to track 100 bugs, for example; or, only manage two or three projects at a time; or, only have a certain number of users. When they get close to that user limit, you hit them with an email that says, “Hey, you’re getting close to this limit. Would you like to upgrade?” That’s a trick that came from Patrick McKinsey at one of the previous MicroConfs, but there’s lots of ways that you can monitor what their usage is and then perform specific, targeted emails to identify those people and try and get them to upgrade; but I don’t think that you want to beat them over the head with it every, single week. Then just on a rolling basis, maybe every three or six months, try and pitch them on the benefits of upgrading to a paid plan.
[00:17:49] What about you, Rob? What do you think?
Rob [00:17:50] Yeah, the sequence is worlds different than free trial. When you have a free trial that runs out, you have a time pressure there, and you are trying to get them on board before the end of that free trial. With a freemium product, like you said, you’re trying to get them to activate. That’s the first thing I’d focus on – is just hitting them up once, twice a week and saying, “Hey, you haven’t done this yet.” “Hey, you haven’t set that up,” because if they never do that, then they’re never going to use the product, and they’re never going to upgrade to free. So, you really want to get them to use the product, or get them to say, “Stop emailing me.” It’s kind of like that follow-up thing from Steli. If you’re getting this big traffic of freemium and no one’s activating, that’s a real problem, so the email should gently nudge them to do that. Then as their usage increases, touch base with them via these point-in-time emails based on actions or based on levels in their account. Then let them know that, “Hey, we do have these extra features,” or, “We have more that you can get by using our paid plan.”
[00:18:40] Just like you said, I’d probably pitch it more often than every three to six months. I would think about, say, every six weeks to three months. If you do have this free user base and you really do have something that’s much more valuable to them, I feel like it’s worth mentioning. And you don’t do it directly. Maybe every six weeks you don’t pitch them with this direct hard sales pitch. Maybe that is every three to six months, but in between there you want to touch base with them about new stuff you’re releasing and then have just a little pitch. You know, if you’re using marketing automation and you have tags, then you’ll know that they’re freemium, and you can actually put something different in there than if they’re an actual paying customer. In even a feature announcement email, you can basically include a paragraph only if they’re on the free plan and say, “Hey, this stuff’s only available to paying customers.”
Rob [00:19:20] Yeah, I definitely think this trial sequence is quite a bit different than freemium. You really just need to think through what their journey is and how different it is from a typical paid trial. I hope that helps, Christopher.
[00:19:33] Our next question is from Caesar, and he asks about when to show pricing. He says, “I’m struggling a bit about when should I show pricing on my marketing website. Should I do this right from the beta? Should I do it after the beta? Should I show the cheapest tier first and for the rest have people contact us? Should I start inviting testers even if they don’t know about pricing? I realize most of the answers will be ‘it depends,’ but it’d probably be interesting to hear your experience about it.”
Mike [00:19:59]: I think when you’re early on and you’re still trying to figure out what the value of the product that you’re billing is worth to people, it’s a lot harder to figure out what to charge people. One thing that you might want to try is essentially just asking those people who are early on, “What is this worth to your business?” “Is it going to cost you to not use this particular software?” That will help give you an idea of what the value proposition is going to be to them in terms of dollars for the product.
[00:20:27] Once you’ve done that, you can start showing that information, but I think that you need to start taking orders from people. It can just be maybe your first 20, or 30, or even 50 customers. Maybe every, single one of them pays something different; but if you don’t post the pricing, then you can have each one of them pay something completely different, and nobody’s going to know anyone – not unless they start talking to each other and say, “Hey, I’m only paying this,” or, “I’m paying that.” You want to figure out what it is that people are willing to pay for it, and why; because your feelings of what the value are of the product are probably going to be different than what your customers feel it’s worth. That’s a common theme among people in the startup world – is that they’re essentially undercharging for their products because they don’t understand the value that it provides to their customers.
[00:21:12] Then there’s also – the flipside of it is maybe you think that it’s worth a lot more than it is, and the only people who are going to be able to tell you that is the people who are cutting you a check. So, charging them different amounts for the first 50 or 100 people is probably fine. Maybe it’s only the first ten or 15 people, but if you can get an idea of what those prices are and talk through why those beta customers think that those prices are justified, then it gives you a better idea of what to put on your home page.
Rob [00:21:37]: Yeah. If you’re pre-launch and you’re still hand-holding folks into your app – at that point with Drip, we didn’t even have a marketing website. I don’t even think we had placeholder text. We were literally just getting people in. I had told them in an early email, “I think our pricing for this long-term is going to be between 49 and 99 a month for our lowest plan.” That was kind of the first thing we said, but I did let them know up front that we were going to be charging. This was not going to be some free-forever plan. So, if you’re still handholding, you have the luxury of being able to do that one on one.
[00:22:11] If you’re not and you’re starting to let larger groups in, I would be charging by that point. If you’re starting to let 100, 200, 500 people in, that’s the point where I know my pricing; or, at least I have an idea of it, and I’ve picked a price. Then I’m going to test it with that first group. I don’t believe betas should be free. I think beta testing is you’re building it. You’re doing unit testing. Then you do integration testing with everything together. Then you test the crap out of it with your own stuff, and then you get maybe ten people who you one-on-one handhold through the app, and you get them all set up. You’re going to have worked out a ton of stuff by that point, and from then on you’re done. Beta’s done. This is not something where you let 100 people use it for free until you decide on pricing.
[00:22:52] Maybe you give them a really long trial, if that’s what it takes. We were doing – if I recall, with our early beta testers, I didn’t know how long the trial would be at all, and some people got months and months to try it out; because we just didn’t know. We were trying to build features to make it valuable enough for them. Once we got out of that, it’s pretty much been a 21-day trial since day one. A few people have asked for extensions based on extenuating circumstances, but that’s it.
[00:23:15] Then in terms of the other part of this question, he asked if you should show pricing on the marketing site, or just show the cheapest tier and have “Contact Us.” If you’re selling to enterprise and you’re going to do the whole figure out how much people can spend and negotiate pricing, then, yeah, everything should be “Contact Us.” But if you are just selling a typical SaaS app or a downloadable app, I think you should have all your tiers up there and then a big enterprise tier that says, “Contact Us” for people who do want to spend a lot of money and get more. There’s always a need for someone who wants to spend $10,000 on your software, but aside from that, I don’t see a ton of value in trying to obfuscate your tiers or hide pricing from people.
So, thanks for the question, Caesar. I hope that was helpful.
[00:23:53] Our next question is from Jeff, and he asks about SaaS subscriptions versus commission pricing. He says, “Hi, guys. I’ve listened to a couple shows where you discuss SaaS pricing models, and I haven’t heard you mention commission-based pricing at all. We recently launched our SaaS offering, which is a marketplace platform around the wedding industry.”
[00:24:11] So, stepping in here, I think what he’s saying is they have kind of a two-sided marketplace where they have brides and grooms who are about to get married, and then they have providers. I would guess it’s like people who sell wedding cakes and flowers and maybe wedding planning services and venues and that kind of stuff. So, I wouldn’t actually call this really a SaaS offering as much as it’s just a wedding marketplace. Now back to his email.
[00:24:32] He says, “We’ve had great traffic to the site, but our conversion rates have been pretty low. Our packages include a percentage commission on sales, and I’m wondering if that is turning people off to the product. We’ve tried emailing our customers along with everyone that’s expressed interest, but we didn’t get much of a response. I’m curious to hear your thoughts on commission-based pricing for a marketplace site like this. My gut is telling me that it must not work in most instances since there doesn’t appear to be many SaaS offerings out there that are using this pricing model.”
Mike [00:24:59] If I understand this correctly, what he’s essentially saying is they have a marketplace platform for the wedding industry, and they have brides and grooms who’re getting married on one side of it and then the vendors on the other side. One of the two complaints, or issues, that they have is they’ve got a lot of traffic, but their conversion rates have been really low.
If you’re charging the vendors, but not the brides and grooms, then that would almost be expected; because the brides and grooms that are visiting the website are probably going to outnumber the vendors by a pretty wide margin. That’s going to drive your apparent conversion rate pretty far lower than it probably otherwise should be counted. You might have, let’s say, 10,000 brides and grooms who visit, but you only have 200 vendors that visit. Well –
Rob [00:25:43]: Right.
Mike [00:25:43]: – how do you know which 200 vendors there are versus the 10,000 people? And what number are you going to count it against?
Rob [00:25:48]: I would agree –
Mike [00:25:49]: So, I think that –
Rob [00:25:49]: – and I think we should clarify here he says, “We’ve had great traffic, but our conversion rate has been pretty low.” We’re making the assumption that he means that it’s the vendor conversion rate.
Mike [00:26:01]: Yeah, so that’s –
Rob [00:26:01]: And I’m not 100 percent sure.
Mike [00:26:03]: Yeah, I’m not either, so – that’s just a point for him to take home, though, is that might be an issue if that’s what he’s looking at and he’s just not thinking about that piece of that – that division between the two – as one issue.
[00:26:15] The other thing is that if you are charging the vendors and you’re charging them on a commission basis, essentially what you’re doing is – let’s say that somebody buys a $50,000 wedding package and you’re charging the vendor, let’s say, 5 percent, something like that. Well, that becomes a $2500 fee that that vendor has to pay versus if you have a static pricing tier for each of these things, then it would be, let’s say, $500 for them.
[00:26:42] Since you and I run MicroConf, one of the things that we really don’t like is having to deal with any sort of variable costs. It is a lot easier to run an event when you know exactly how many people are going to show up, because you know exactly what your budget is, and you can plan and anticipate things in advance. You can make decisions about what you’re going to spend and what you’re not going to spend. But if you’re a vendor, and you’re on this marketplace, and your costs are going to be variable, it makes it much more difficult to get a handle on some of that stuff. Quite frankly, there’s a lot to be said for just avoiding the hassle of even bothering.
[00:27:19] I would wonder whether or not a commission-based pricing structure is even the way to go here. Maybe it’s a flat fee on a per-event basis. That would be my thought; but, again, if you’re having a hard time seeking feedback from people and getting responses from them, then it seems to me like there’s a completely different problem that you actually have to tackle, which is why are you even not getting feedback from these people?
Rob [00:27:43]: Yeah. Let’s just be clear here. In no circumstance should you charge the consumers here, because they’re going to be super price-sensitive. It’s the vendors that you should be charging, so I think we’re just making the assumption that that’s going on. If not, then you should definitely do that. I can’t imagine at this stage charging a subscription fee to the vendors, because I can’t imagine a vendor that’s going to want to pay for a completely unproven solution. Maybe if you have millions of people coming and you have tons of money going through your system, you can move to subscription fees; but at this point, you’re probably going to need either a flat fee per event like Mike said, or a flat commission.
[00:28:18] I think a flat commission is fine. I probably wouldn’t call it a “commission,” though. I typically call it, like, a “transaction fee.” If you look at Gumroad, or another platform like this, that’s what they add on. If you’re going to pick 5 percent or 10 percent, that’s fine. Mike’s objection to it being variable, I think, is a valid one; and I think the way you could get around that is have a maximum. You could say it’s 5 or 10 percent, and it’s capped at 250 bucks, or 500 bucks – just a maximum somewhere. Maybe for different vendor types, it’s different amounts because, obviously, flowers might only be a few thousand and a venue might be more than that.
[00:28:51] To be honest, it doesn’t sound to me like this is the major issue, if you have all this in place. I would guess that there’s something else at play here, and that people aren’t engaged – or, that none of the people who visited were actually vendors and that everybody who came in was a consumer, and that’s why you got a lot of traffic and no one converted. So, this is a tricky one. There’s a lot to dig in here.
[00:29:11] I think, in general, my advice would be don’t try to bootstrap a marketplace; because they’re really, really hard. Even if you make this work and you start getting people signed up, making 5 or 10 percent on a fraction of these transactions, you have to be at scale to make any money at it. We just saw last week Gumroad laid off 90 percent of their employees. If you go to Tech [?] and search for it, you can see that even them, who – everybody in our space knows who they are, but they’re trying to take these tiny, tiny, little snippets of fees from these transactions; and it seems to me that they just couldn’t get enough volume, because unless you’re doing Uber-level, or Stripe-level volumes of transactions, then you’re not making any real money. You’re making thousands or tens of thousands a month, and that’s not enough to justify all the employees and all the support you need to handle a set like this.
[00:29:59] So, that’s our two cents. Hope that’s helpful, Jeff.
[00:30:01] Our last question for the day is from Ely Gescheit [phonetic], and he says, “I’m a big fan of the show. I’ve listened to you for the past couple years. My startup is focused on helping the building industry, such as town planners, architects, et cetera. However, the app could also be applied to the legal profession, because it essentially converts boring legislation into a more user-friendly format. There are around 600 town planners listed in Sydney, Australia, on Yellow Pages and around 10,000 lawyers. My initial idea was to focus the app on the building industry and later pivot to the legal profession. The idea behind this was to test the waters with a smaller target market. Given the app will be more scalable in the legal profession, I’m thinking of switching my strategy and focusing on legal first and then moving into building.”
[00:30:43] To me, the risk trying to target a smaller market is really high, and I’m not sure whether it will even be worth all the effort for just a small market. What are your thoughts?
Mike [00:30:51]: I think I’d be very hesitant to target either town planners or lawyers, regardless of the numbers. Essentially, when you start weighing these against each other – the numbers he throws out are 600 town planners versus 10,000 lawyers that he’s identified. With town planners, you’re going to be dealing with government paperwork and government budgets, and they’re going to be on strict timelines. They’re going to have to plan it in advance, and your sales cycle is probably going to be longer for most of them. That’s a blatant assumption, but you could just make some phone calls to five or ten town planners and ask what their purchasing process looks like and find out pretty quickly how long it’s going to take to onboard them as a customer based on however much it is that you’re going to be charging them.
[00:31:31] For the lawyers, I know people who have startups in the legal space, and it’s not always easy to get customers. Sometimes it is. Sometimes you can get to the right people very quickly and they are willing to talk to you as long as you are going to be providing a service to them that you can essentially pitch very quickly and that they can see a justifiable ROI on it; but you’re still probably going to do a lot of handholding, because those types of customers are probably not searching online for stuff. The legal profession is – in a way, they’re stuck in the ‘80s. They use fax machines for everything. They’re somewhat technology-averse, and you’re probably going to have to find a way to gather them as customers, and it’s not going to be through a lot of the things that we talk about on this podcast, like SEO and online marketing and things like that. You’re going to have to really go after them.
[00:32:19] With those things said, I don’t know if it actually makes a heck of a lot of difference which one you go after. What I would do is, if you’re still in this early stage, talk to ten, or 15, or 20 of them and test the waters a little bit and see which one of those two things is going to do better for you. Come up with a short list of identifying factors or traits that you would like to see and then ask those questions and find out if those are actually present in that particular market. If they’re not, maybe you kill the idea and move on to something else, or move over to the other market instead. Come up with a list of pros and cons for each of them, iterate through them and then see what the numbers come out; because it seems like you can get a lot of the information you need just by talking to ten or 15 people in each of those two industries.
Rob [00:33:03]: Yeah, I’m also pretty bearish on this idea, especially if it’s your first app. I would go for a smaller, easier win that you can market online. But if you really enjoy high-tech sales and you’re willing to do six-month sales cycles, and you’re building something that either of these niches would pay – let’s say $12,000 a year is probably the smallest annual contract value I would do when targeting these niches. I’m pulling that out of the air a little bit, but if you build something that’s 50 bucks a month or 99 bucks a month, you’re nuts to try to go after these markets. They’re just too hard to sell into when you’re getting started, especially if it’s your first time doing it. You don’t have any competitive advantage in these markets.
[00:33:42] So, all that to say I would think really hard if not all of those things are in place. If you’re thinking that you can set up a marketing side and drive SEO traffic and pay-per-click traffic and convert on an app that’s 20, 50, $100 a month, this does not sound like that idea.
Mike [00:33:59] Thanks for the question, Ely. Hope you found it helpful.
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