I recently watched Jason Cohen's excellent presentation from MicroConf in 2013. Jason is a successful entrepreneur and has founded several companies including WP Engine and Smart Bear. His presentation was chock full of great information.
Here are my notes. Hopefully you'll find them useful.
Most companies don't work. They either fail to build a product that people want, or they build something that doesn't embrace the constraints of a small company.
The Self-Funded Startup
A self-funded startup is a cash machine with predictable acquisition of recurring revenue that offers annual prepay in a good market.
- 🚫 One Offs - Every month starts at zero and requires new sales efforts... the opposite of a cash machine.
- 🚫 Picking Up Pennies - Skimming a percentage from other financial activity i.e. donations, transactions, etc... an inefficient cash machine.
- ✅ Recurring Revenue - The only way to build a cash machine.
Getting 1,000 customers at any price point is really hard. 150 customers is more realistic to start.
- 50 from scratching and clawing
- 25 from social media marketing
- 75 from standard marketing
Average Revenue per User (ARPU) is the most important metric that you can track while you're small. Set a goal to hit $10,000 in monthly recurring revenue with 150 customers. That means your pricing should average $66/mo per customer.
Founders are hesitant to charge enough because they know their product is shitty in the beginning. Find ways to justify a higher price. Also, embrace the fact that you're running a boutique business. People are willing to pay more to help small companies they believe in.
- Tiers - monthly/quarterly/yearly
- Specials - higher monthly price with various coupons and discounts
Annual Prepay - will solve cash flow problems
If just 25% of your customers elect annual prepay, it will yield over 3x the cash flow that monthly plans provide. Here are some tactics to convince more customers to opt for annual prepay.
- Annual Only Coupons - 3 months off
- High Monthly + 1/2 off Annual - raise monthly prices & offer steep annual discounts
- Business Tier - name the most expensive plan "Business"... some will opt for this simply because they want to spend the most
- Money Back Guarantee - will produce more revenue than free trials.
- Premium Support - paid offer to move a customer's support tickets to a priority position in the queue. Doesn't require additional labor but is very much a value add for the customer.
- 🚫 Consumer (B2C) - Extremely low price and very high maintenance.
- 🚫 Point-in-Time - Pain points are temporary and not recurring or sustainable. Weddings, events, etc...
- 🚫 Viral - Very low probability of actual virality or revenue.
- 🚫 Marketplace - Difficult to build. Requires creating two different businesses and balancing their growth.
- ✅ Naturally Recurring - Anything tied to regular cycles or underlying volatility. Hosting costs, marketing tools, invoicing, reporting, SEO, HR/compliance, etc...
- ✅ Naturally Latent Anything without real-time requirements. Decision support (analytics & reports), content, project management, etc...
- ✅ Completable - Smaller product scope mitigates feature creep and allow you to focus on customers without racing to add every competitor's features.
- ✅ After Market - Add ons to an existing product or service.
Choose a big market. Product validation already exists and customers are easier to find. There's plenty of money and room for competition. Servicing a niche in a big market provides the flexibility to pivot or expand as needed.
- 🚫 Social Media - Very expensive (time and money) and doesn't produce predictable recurring revenue.
- ✅ Paid Advertising - Very predictable and repeatable.
Rules of thumb for acquisition costs.
- Low bar is a $300 spend for $50/mo in revenue.
- Basic CPC (Cost per Click) Formula:
CPC = Monthly ARPU / 25
Your formulas will become more sophisticated as you experiment and gather data.
Successful companies continue to grow. They don't stop. You need a plan.
- Sell and take your exit
- Deliberately limit growth (raise prices, waiting list, etc... will change your clientele)
- Raise money to fuel accelerated growth
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