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Kalzumeus Podcast 4: Apps That Matter, Angel Investing, and B2B Sales with Matt Wensing of Stormpulse

Matt Wensing from Stormpulse (disclaimer: I’m an investor, long story below) generously took some time off of managing the nation’s severe weather risks to appear on our podcast.  (Keith Perhac couldn’t be with us when we taped this, as he was celebrating the birth of his second daughter.)  It’s been about six months since our last episode but I think this probably makes up for it, as it’s a cracker of an episode.

I apologize in advance for my audio quality — I was calling internationally from an iPhone.  If you’re an audiophile, we have a transcript below, as per the usual.  As always, the transcript includes notes from me [Patrick notes: called out like this.]

What you’ll learn in this podcast:

  • The long arc of Stormpulse’s transition from a bootstrapped freemium weather site to being one of the four links on Obama’s dashboard
  • Why Stormpulse had a difficult time raising funding early, and how they eventually overcame this
  • Some actionable tips on how you can avoid Valley pathologies if raising is in your future
  • How to think about pricing and selling a critical B2B application, and how to move from scalable low-touch sales to high-touch Big Freaking Enterprise sales

If You Want To Listen To It

MP3 Download (~96 minutes, ~88MB) : Right-click here and click Save As.

Podcast format: either subscribe to http://www.kalzumeus.com/category/podcasts/feed in your podcast reader of choice or you can search for Kalzumeus Podcast in the iTunes Store.

Transcript: Growing Stormpulse From Humble Beginnings To The White House And Beyond

Patrick McKenzie:  Hi, this is Patrick McKenzie for the the Kalzumeus Podcast. Keith Perhac can’t be with us today, because he’s celebrating the birth of his second daughter. I’m here with Matt Wensing, who’s the founder and CEO of Stormpulse.

Matt Wensing:  Hey, how you doing, Patrick?

Patrick:  I’m doing great, Matt. Thank you so much for taking the time to have a podcast with us today. I was just looking back at Hacker News today, because I gave it up for Lent, but now that I’m back and can check [on the thread we met on], I realized I have known you for exactly 1,300 days.

Matt:  [laughs]

Patrick:  You had your first HN post of Stormpulse about three years ago or so, give or take, and it was a like, “Rate my brief elevator pitch,” and I gave you some advice on that.  We started our email correspondence after that. For those of us who have not been following you obsessively for the last 1,300 days, what is Stormpulse?

Matt:  [laughs] Yeah, first of all, thanks. The HN connection is definitely fun. Stormpulse, it started out really just as a project and an idea that I couldn’t get out of my head, because a bunch of hurricanes had hit south Florida, which is where I was born and raised. It ended up growing up from just being a project that I worked on in nights and weekends, into a fully fledged organic startup idea, as Paul Graham would say. What it is today is for business, particularly those that have a lot of assets all over the United States. We do real time weather monitoring for them. You think of it for this crowd, maybe as server monitoring, where obviously, you want to watch and see how your servers are doing. Well obviously big companies, especially those in logistics and supply chain spaces, want to watch over their infrastructure and physical goods.

We created a tool which is what Stormpulse evolved into that lets them add all their assets to a home grown, we built it from scratch, weather map, and monitor how the weather is going to potentially impact those locations over the next three to five days in particular. That could be anything from hurricanes to tornadoes to flash floods, or even just a lot of rainfall on some afternoon that delays a shipment.

Patrick:  The first time I heard this idea, I was really, really taken with it because I lived in Japan throughout my adult life. We have a very particular understanding of the dangers of severe weather here, but I know some folks from the US did not connect to it as strongly as I do. Can you just briefly give me a description of “why would somebody who has billions of dollars of capital in the path of a hurricane care?”  [Patrick notes: I am paraphrasing a few comments Matt received earlier.]

[laughter]

Patrick:  What are the decisions they are going to make happen based on the information Stormpulse give them?

Matt:  Yeah. Obviously the knee jerk reaction is, “Well, of course they care.” To get into a little bit more depth, there’s really three phases to it you can think, was really the before, during and after phases. Before an event like that, you want to take every precaution you can to not only put things into safety and out of harm’s way, but also optimally position things that you’re going to need during the event or after the event. Then, of course, during the event you need information so you can make decisions about who is doing what right now, how bad really is it, what are the effects, and should I really be worried about what’s going on under that red or purple cyclone over there? Then after the fact there’s businesses who, entire businesses only after one of these events goes through, you have everything from rebuilding to restoration to optimally moving in disaster relief efforts, and frankly even just plain old capitalism.

You have people like Wal‑Mart who come in after a disaster and say, “If we come in there with a boatload of chainsaws and a stockpile of cash, we can do business with a bunch of people who need chainsaws and don’t have electricity.” There’s just a lot of economic implications for these kinds of events, and we just love digging into all of them.

Patrick:  Mm‑hmm, yeah, and that totally tracks with my experience. I’ve blogged previously about my very minor experience with Japanese disaster management before.  I worked in back end systems for a Japanese university. We’re largely concerned about getting the information to people before the tsunami makes landfall, is pretty much priority number one. Weather risk management is software that obviously makes a huge difference, both for protecting people’s lives and property. Because we have lots of tech folks who listen to this podcast, let me just talk to you briefly about the technology behind it. I loved the idea when I heard about it, and the moment that this really dropped my jaw about the technological aspect of it was when you said you wrote your own JavaScript mapping engine.

Matt:  [laughs] Yeah, yeah. We approached this as a labor of love, which meant that we wanted to do everything the quote/unquote “right way.” We took a look when we started out at Google Maps, and Google Maps really did not cut it for us because we wanted to create a weather map. While Google Maps is a fantastic map for everything from bike tours to self‑driving cars and all that stuff, it really isn’t the best cartography for displaying the weather. That left us with two choices. Either compromise on the initial vision, which we were just starting out, so why would you ever do that? Or create our own mapping, so that’s what we did. I spent a fair amount of time just getting my head around…

I’m not one of those math comp sci major, so I’m not super fluent in a lot of mathematics, geometry, trigonometry, but I got up to speed really quick. Spent a lot of time on Wolfram Alpha and learned how to get my head around map projections, and got the imagery from NASA and compiled it with some clouds that I found from a guy at Cal Tech. Yeah, we actually built an entire mapping stack from nothing.

I still remember sitting there staring at my editor, which was basically blank, going, [laughs] “This is the start of a very large application, and it’s totally blank.” But I was fueled by passion and got up really early, and the rest is relatively recent history.

Patrick:  Yeah, you’ve been doing this for, what is it now? It’s almost as old as Bingo Card Creator so seven or eight years‑ish, I think?

Matt:  Yeah. I had the idea in…Those storms were going through Florida in October of 2004, and that meant that I was…Yeah. I had the idea in October 2004. I still have the blog post actually on Blogspot, where I was mulling this over and just had this idea of, “Yeah, I’m going to work on this thing.” October 2004, coming up to in a few months October 2013, which will be nine years since I had the idea.

Patrick:  Oh, wow, so actually even older than my business.

Matt:  [laughs]

Patrick:  It’s funny that I am comparing our two businesses, because yours saves people’s lives, and mine makes bingo cards for elementary schoolteachers.

Matt:  [laughs]

Patrick:  The Internet is a funny, funny thing.

Matt:  It is.

The Best Startup Customer Acquisition Anecdote You’ll Hear In 2013

Patrick:  I’ve got to admit, every time I hear about your business I have the, “I wish I was working on a bigger problem,” pangs of envy, something I’ve heard from other people. Then, of course, there’s the other pangs of envy inducing story. You have a very famous customer of Stormpulse, right?

Matt:  Yeah.

Patrick:  Every time I tell this story to people they don’t even believe it, so let’s get it on the record, so I can refer people to it in the future.

Matt:  Yeah.

Patrick:  The way I remember the story, and like my father I often embellish on stories I’ve heard once, so feel free to tell me if I’m lying about this. You were sitting at the kitchen table with your son one day doing the bootstrapper dream of sales call with one hand and a bowl of cereal in the other, and you got a phone call from somebody, and called him back. That was Dan.  Where did Dan work at?

Matt:  Yeah. I got a voicemail. I read the voicemail and I could hardly believe it. I told my child that I had got this phone call, and they said they never heard that before. That sounded pretty outrageous to even them, and I think they were probably six or seven at the time. Then before I could even call them back they called me back, and so I ran upstairs to my home office so that I could have some peace and quiet and sound professional. Sure enough it was the White House Situation Room, which meant that it was literally the basement of the White House. [laughs]

Patrick:  Yeah. For folks who are not the American audience, the White House Situation Room is the nerve center of the White House when they’re doing something that is breaking real time related generally to national security. That’s where President Obama and the team were when they caught Osama Bin Laden. It’s where they command disaster relief efforts and what not, so it is a big deal.

Matt:  Yeah, and the amazing part, Patrick, was that they left me their phone number as if it was my neighbor next door, I guess, with all the confidence in the world that if I abused that phone number there would be easy tracing and repercussions. But I called them back, because actually, when they called me back, I didn’t get to ask them if I could somehow capture an image or something that proved that they used it. Then I’m spending all afternoon here, I remember sitting at the lunch table with my wife and telling her this story. Her thought was, “Well, you should have figured out some way to get their name or get proof that they used it.” I built up the gumption to call them back, and sure enough, it rang. I was expecting them to say, “Thank you for calling the White House. For gift shop, press 1. For tours, press 2.”

But sure enough it just rang and rang. I think it was one and a half rings and somebody picks up the phone and says, “Situation room.” [laughs] At that point I thought maybe I had called the red phone. The very first thought I had was black helicopters. The second thought I had was “This is not urgent, so please don’t…”

I wanted to somehow explain that I’m not really trying to prank you by calling you from my bootstrap SaaS business, I just have a genuine question. The person I was calling wasn’t there, but he said she could call me back. Sure enough, she did.

But between the time between the time I hung up with him and she called me back, I found out on the White House blog, at WhiteHouse.gov, there is indeed a tour of the situation room that they have recorded in public domain mpeg, and I was able to capture a screen shot of that tour, and put it on our website. Since it’s public domain, I think I can have free conscience and liberties to use it as much as we want.

You can actually see our product being used in the basement of the White House. Which, yeah, it’s hard to explain, really. [laughs]

Patrick:  For those of you keeping track at home, not only has Matt bootstrapped a company with the rest of his team which protects life and property using a SaaS application, but they bootstrapped it to the point where rather than going to NOAA, National Ocean and Aeronautics Administration, getting data directly from them, the folks at the White House preferred to consume that and make consequence and decisions affecting millions of Americans directly through Stormpulse.  [Patrick notes: Stormpulse owns no satellites or weather monitoring stations.  They consume NOAA data which is available in the public domain, and transform it from GBs of opaque CSV files into predictions like "The factory which makes the widget that you're running low on has a high probability of closure three days from now as a result of this hurricane", which lets the user take consequential actions like "Put in a rush order at our alternate supplier so our main production line doesn't block on lack of input 6 days from now."  When factory lines go down that can cost in the $X00,000 region an hour.]

Matt:  [laughs]

Patrick:  Man, it’s like I’m doing a sales pitch.

Matt:  [laughs]

Patrick:  If I wasn’t totally convinced that Stormpulse was going to take over the world when I first met Matt and was talking to him the last couple of years, when I heard the White House story, didn’t the White House initially send you a feature request?

Matt:  Well, what they did was they just really had a question about…Oh, that’s right. I did see them come into our database as, what was it, it was somebody’s name at NSC.EOP.GOV, which went right over my head at first, but when, when I was trolling through our records, sure enough. I figured out what those acronyms mean, which was National Security Council, dot Executive Office of the President, dot gov. Then I believe it. [laughs]

Patrick:  Let’s see, so there’s again, feed you the stories. The one I heard from you is that there’s a particular user of the Stormpulse application that has to remember a lot of passwords and didn’t like having to remember one more, so there was a feature request made with regards to that user.  Can you tell us the story?

Matt:  Yeah.  We had just done a new release of the software which bumped the price, and a customer called to ask if they could get a feature request as part of the upgrade.  They wanted to know if we could make sure that it did not automatically sign the user out. They wanted the login cookie to persist indefinitely. I said, “Well, good news is our application already works that way because we have a lot of people in enterprises that don’t want to have to remember all these passwords, and it’s up to them to sign out.” He said, “Well that’s good because, if the guy goes to use it and it signs him out and he has to remember a password, that would not be good.”

I dug into this about the guy and I learned that it’s outside a conference room in the White House, and so I said, “Well, I’m imaging there’s quite a lot of conference rooms.” He said, “No, this is the only conference room that he uses. There’s a kiosk outside, and Stormpulse is one of the three or four short quick link applications on that, and they just want to make sure that it’s always signed in for *cough* Mr. Sir.” [laughs]

Patrick:  You heard it here first, guys. This is Traction with a capital T even if you don’t have two hundred million free users, which we’ll talk about later. Every time I tell this Stormpulse story to people, they can’t believe it. I’ve been called a liar to my face by people, so hah, there you go. In addition to various highly-placed users in the United States government and folks all over a bunch of industries that really care about stuff not being destroyed, Stormpulse is a B2B application right now, so anyone can sign up on the website to start using it in their business.

You’re doing really well in that since last year, right? We’ll talk a little in the call maybe about the difference between premium and the pricing model, but up until last year, you had a premium model where the vast majority of people paid you nothing and then you were trying to sell it to business. You switched completely to a business model and how’s that been working out for you?

Matt:  Yeah, we put up a paywall very quickly last April. Quickly because it was two guys and things were under crunch. We put up this paywall not knowing what would happen. We had about 6.5 million unique visitors in 2011, and out of those 6.5 million, we had almost 1,000 customers sign up. So, 6.5 million freebies was nice and all, but having a customer base is even more exciting, I’ll say. Certainly a different phase, there’s lot of stories that come from the free, and there’s actually lots of benefits in terms of distribution, so I won’t say it doesn’t have its benefits, but there does come a time where you should make money, and that’s the phase we’re in now.

It’s definitely turned a good corner, you might even say pivot, and yeah, here we are now in this pay‑only model. We have a free trial, but the freemium product has been retired.

Patrick:  Great. Because this is largely targeted to large businesses, government organizations that, again, lives and property are on the line, so this isn’t exactly like a project management application that you sign up with your credit card and pay $20 a month for it. Your price point start at the high hundreds a year region and go up drastically from there for the enterprise stuff, right?

Matt:  Our single‑seed price this year is $750 for the year for the year, for one user, which is like a mid‑grade SalesForce subscription if you wanted to do it monthly, although we bill annually which is good for cashflow. Our pricing goes all the way up into five figures depending on how many seats you want to get and now we’re starting to think and talk about enterprise which is even bigger than that. That’s all of our whole breadth.

Patrick:  Switching gears a little moment: I keep wanting to claim credit for something about Stormpulse so I’ll claim credit on the prognostication that I knew you guys were going to take over the world a few years ago.

Matt:  [laughs]

How Stormpulse Got Angel Investing After Having A Bit Of Difficulty Raising It

Patrick:  Apparently, the rest of the world did not, and it sucks to be them. [Patrick notes: I let a bit of anger in here, as there's a long, long story about Matt and company getting treated shabbily in their first fundraising attempts, and I view their subsequent success as a rich comeuppance.] Sorry, maybe that’s a little negative. Let’s talk about angel investing. I think this is a time to put a disclaimer. I’ve never been an angel investor before, but we talked quite a bit about angel investing last year, and in the process you eventually letting me put money into the company. Thanks.

You had been bootstrapping this for quite a while now and tried raising a few years ago and I think largely it’s because you were not in the Valley that did not exactly go over as wonderfully as you would expect given the success of Stormpulse.

Many of the folks who are listening on the call aren’t as up on angel investing as the two of us are. Why don’t we talk a little about what it is? Why you would want to take it for your business? What your experience was trying to raise outside of the Valley and what your experience is now. Also let’s talk about how the mechanics work.

Matt:  Sure. Yeah, sounds great.

Patrick:  Basically, angel investing is typically people investing on an individual basis, largely, wealthier individuals, called accredited investors usually, who are independently wealthy, often in the tech industry as a result of running their own tech businesses, who give money in return for equity in growth‑oriented businesses.  Angel investors have the expectation that that business is eventually going to exit, either by selling to a larger enterprise or either by IPOing on the stock market and they hope that they’ll get their money back when that happens. This is more of what Paul Graham would describe as a startup where you’re aiming for growth, and going to get very big rather than aiming for a consistent return over…like so many compounded returns over the long term and returning dividends. We talked extensively over the last couple of years prior to you making the decision to seek angel funding over like what it would do for you personally and what it would do for the business. But from your point of view, why did you think taking angel investing was a great choice for Stormpulse?

Matt:  Yeah, just to clarify and make sure I understood in there, why do I think it was or was not originally or…?

Patrick:  Both of those, I guess.

Matt:  [laughs] Sure.

Patrick:  Why did you bootstrap when you started it and what changed?

Matt:  We did bootstrap initially. I guess it wasn’t for total lack of trying to raise some money. We went to friends and family first and we actually raised about $100,000 from friends and family who you could also call accredited.  [Patrick notes: For the very persnickety people who would claim that this makes them not "bootstrapped", your objection is noted but I have very little desire to argue about the peripheral meanings of words.] But those friends and families supported us in the early years of bootstrapping where we had no business model whatsoever. We were just two guys with a product and no distribution. Then we ended up getting the distribution. Like I said we had the six and a half million visitors and we started seeking our first round of real angel funding. I know that there’s a lot of people who are bootstrap only, bootstrap forever.

I think that’s fine. I think it can become this religious war over who’s right. Which way is the right path? I do think there is a time when you sit there and you look at a business and you say, there’s no reason this couldn’t grow faster other than I need capital upfront to fund faster growth. In that case, raising money makes a lot of sense rather than looking for that linear growth to come through charging more customers more money and watching it grow.

It just grows much slowly that way. Of course, obviously, raising money at the same time implies that you’re going to grow fast, so if that’s not for you, if you don’t like the thought of growing 50%+ year over year, and by growing I mean, so you take last year and you double it, or so, then it’s not really for you. But if you have a huge market and a product people love, it makes a lot of sense. I always believed in Stormpulse certainly had a big market.

Took me a while to figure out exactly what corners of the massive world’s enterprises I wanted to go after but once we started figuring that out, then it made sense for us to go and try and to raise some money. We did a couple rounds of seeking. The first one didn’t work out too well but the second one did.  There are different reasons for that which we could get into but I’ll pause there and you can ask the next question if you want.

Patrick:  I’ll give you some of the thoughts on the bootstrapping thing.  Most of the folks listening on the call know this but I’ve bootstrapped all my businesses for the last seven or eight years now since 2006. If feel old. I perpetually have like one toe in the water of the funded startup world, which 99.95 percent is a result of Hacker News, if you spend all of your time talking to people who talked about it a lot, it will eventually pull you in.

Matt:  [laughs]

Patrick:  But, yeah… I love bootstrapping.  It iswhere my heart is. I always think that in the future, it’s possible that I continue bootstrapping forever and it’s possible that I can eventually choose to take funding for either Appointment Reminder or one of my other, perhaps future, businesses. We’ll see where the road takes me but again, it’s a decision most based on where you business is, where you want it to go, and what your personal goals are. In particular,one of the reasons that I’ve never taken it, despite several compelling offers to, is that there’s a lot of freedom associated with bootstrapping in that you are in control of roadmaps for the business both in terms of the technical roadmap, the marketing roadmap, etc.

Obviously, you have to satisfy your customers and if you have employees, you have to satisfy your employees but there aren’t other major stakeholders that you really have to keep happy. After you have any sort of professional money involved, folks can theoretically call you up and say, hey, what has my money being doing lately.

Matt:  Sure.

Patrick:  Investors might push you towards options that you might not have otherwise gone for. Not that I would call Matt up in the middle of the night and say, “Hey Matt, where’s my money at?”

Just generic advise for people trying to get money from people: attempt to raise from people who understand the business you are in. Not always an option for friends and family but if you were going to take money for investing in a tech business, from angels, like, all flowers are not created equal, it’s probably better to get money from somebody who’s in tech themselves, because they understand it, and to the extent, possible from somebody who brings knowledge to the table about your market or your industry or particular topics of interest for you.

If somebody had made their millions on Facebook games or whatever, they might not be the ideal investors for Stormpulse, simply because they don’t really have all that much to tell you about the distribution story for getting into more places like the White House Situation Room.  Come to think of it, scratch my head a little bit, I wonder how much I had to add to that equation. But I do hope that I give good advice every once in a while.

Matt:  Yes. I think you’re absolutely right. One thing about investing that people who haven’t, well, I say fundraising, because really we’re on this side of the table, that people might not have thought about before if this is their first time around is, there’s genuine value ad and there’s a fellow by the name of Patrick Vlaskovits who wrote a great post on this about what is real value ad, you can find him on Twitter @PV. But value add can actually be genuine, helpful advice or insight or rolling‑up‑the‑sleeves help. Or, there is a value ad which is the total absence of any involvement.  The derogatory way of saying it is “dumb money”, but really that means that that’s money that gets involved, that tries the meddle and mess things up.

It’s really laissez‑faire money which can also be very valuable if you just need money and a bank isn’t the answer and you’re just looking to fund something if the person is just willing to make an investment and not make a lot of demands or get involved which is to say, pretty much be silent if that’s the way they like to invest and manage things, that can also be really good for the entrepreneur. I would say you really want to be on either side of the spectrum. Either somebody who’s genuinely helpful, or somebody who just completely stays out of the way.

The worst thing is obviously people who think they’re adding value but really aren’t. Then they’re just wasting your time and theirs and adding stress. None of those are going to help you.

Patrick:  We talked from your perspective as the entrepreneur of what you wanted to do about getting angel investing.  From my perspective as the angel investor, here’s what I get out of this relationship. Primarily for me, it’s not an opportunity to make a lot of money because I have a fairly successful software business and that’s the  numbers would work out for me. My software business is going to dwarf returns from any investing I do. I really believe in the vision of Stormpulse. I’ve lived in Japan my entire adult life. There has to be better technological approaches to severe weather risk management and also we’ve been corresponding for the last three years and when I heard you were raising an angel round I wanted to do anything possible to accelerate the success of the business.  I thought in my little, sometimes accurate, sometimes perhaps not so much estimation, that the most credible statement I could make to Silicon Valley investors when I was trying to introduce you to was “By the way guys, my money is already in this.”

That’s my endorsement. You can do it too. Would you mind us saying publicly who I introduced you to?

Matt:  Yes. No, that’s completely fine. Yeah, that’s a good story.

Patrick:  I’m peripherally involved in 500 Startups which is a well regarded super angel… actually they’re closer to a mini-VC fund mini‑VC funds these days, but it’s a fund in Silicon Valley run byDave McClure, Paul Singh, and a group of other partners including  Christine [Tsai] and some folks who I haven’t met yet. Anyhow, they’re a good people. Paul Singh knew me over the Internet, and so you would be amazed how many people I could say, “Oh yeah, I’m Internet buddies with him these days,” far too much time on Hacker News, what can I say. We had swapped some thoughts about selling software which is something he used to do and something that I do on a fairly regular basis.

I went there to just say hi one time when I was in the Valley, for whatever reason. I think probably to a conference or something. He asked if I wanted to be a mentor at 500 Startups, which is all the fun of being a consultant without the complication of actually taking money for anything. [Patrick notes: If it isn't obvious from the context, that's a joke. Obviously I was happy to do it or I would have politely declined.] You just talk to people that they are invested in, or incubating, and I give them advice.

That sounded like a pretty fun thing for me, because give me a text area, and I’m physically incapable of not typing in it. Talking to startups is like having a text area with less HTML involved.

One of the nice things about having social connections like that is that, Silicon Valley is a place I have a complicated relationship with, because there’s wonderful things about it, and not so wonderful things about it.

One which straddles the line of those two, is that it’s a very relationship oriented place. It’s very difficult to raise money in Silicon Valley, if you don’t know anybody. On the other end of the ledger is, if you happen to know lots of people, you can raise money in Silicon Valley, perhaps, independent of the quality of the thing you are raising money for.

The nice part is that since I have a social “in” with 500 Startups, and with other folks in the Valley, I can do one of the Valley’s little social rituals, which is called “an introduction”, which is basically, “You, person X, should know this other person Y, I vouch for Y, ergo you should rub off some of your trust for me onto them.”

Which is pretty much the only way to get investments from most VC funds, and savvy angel investors, because otherwise they’d have 5,000 people coming out of the woodwork, talking about their new Facebook for dogs. I introduced Matt to 500 Startups, and told them that if they didn’t come to terms I would come over to the office and pound their faces in if they did not invest in you.  [Patrick notes: I didn't actually threaten anybody... but I was mentally when choosing very, very strong language in my recommendation.] Obviously you had the numbers, and the story to support it. So they did, which is awesome.

Matt:  Yeah. I think it’s worth highlighting just how important that introduction is, or is to their mechanics of 500 Startups. Dave McClure said, “If you can’t get an intro to us, you’re not really trying hard enough,” to paraphrase. In other words, it shouldn’t be that hard. It’s a test of the entrepreneur, of whether or not you can make these kinds of connections. At first, especially if you’ve never raised money before, and you’re totally outside of the Silicon Valley world, I don’t live there, so I can’t speak from direct exposure experience, but it can definitely feel, obviously, insulated, and nepotistic, and there’s all these pejoratives for it obviously. At the same time, like you said, with all the quantity of people with ideas, and napkins. Social proof in that sense goes back a long, long time, in terms of trust, and referrals.

I was just going to say, what 500 Startups is doing, by and large, is scaling social proof behind the scenes, and actually quantifying it, and using it in investment decisions much more quantitatively than say, a traditional VC, or angel. [Patrick notes: See especially the increasing use of AngelList, which does a lot of social proof based on essentially graph algorithms and some secret sauce.] Getting a hat tip from someone like Patio here is a really big deal, getting other ones from other people. Having that social network, work for you as an entrepreneur, is probably the best way to get their attention. Yes. I am greatly indebted to you Patrick, for that introduction, and I appreciate it.

Paul Singh ended up being the partner I spoke to, and just to give you the dramatic ending to that story, obviously he really liked our numbers, he thought we were, in one sense, undervalued for the amount of traction that we had, similar to you.

Patrick: I so strongly agree with that.

Matt:  Stormpulse, the reaction has been very polarized. Maybe polarized isn’t the right word, because I don’t get anybody that is strongly negative, but it’s either no reaction whatsoever, or just a dead stare, or somebody’s just foaming at the mouth excited, so if you can take that as a compliment. [laughs] You, and the other 12, or 13 angel investors in the last round, were obviously on that side. Some of them took a little bit more cajoling, convincing, proof, but they were just all really excited about the business. I find it really interesting, because what it tells me, is that when you combine that element of social proof, or trust, and you combine great traction, it just goes a really long way to making it a decision where the investor does not feel like they’re taking a huge risk. From the entrepreneurs stand point you think, “Well, I want to get investors because I want to have some risk takers on my side.” [laughs]

Then you talk to them, and the first thing you realize is, hopefully it’s not the first thing realize, hopefully you’ve listen to this podcast, and you realize it, but they don’t really want to take risks if at all possible. That’s not why they’re investing, is too take risks. They are engaging in the worlds riskiest form of investment, so that they can make some of the world’s best returns [Patrick notes: An overstatement, see below!], but taking risks is not what they’re all about.

Your job as an entrepreneur is to remove every possible risk from the equation, before you ever present it to them. Getting referrals, and thumbs up from people that they already have credibility in their network, and then having great traction, I think those are the most important. I honestly believe that once you do those, you still may find yourself in a lurch, so for us, say in 2012, before we put up the paywall, actually that was 2011, before we put up the paywall, we talked to VCs, and it was just really hard to get them to that “yes.”

They’re always looking for ways to say no. No is the default, it has to be. [Patrick notes: The default is even more insidious: it's just not getting an email in your inbox when you have been lead to expect one.] To get a yes, you have to get those referrals, so we get introductions, but our traction, because we weren’t charging money of everybody, left something to be desired, and because of that, I don’t think we were able to transition into the realm of yes.

I think the realm of yes, is that stage where the person allows themselves to get excited about the business, to the point that they, I might even say, “overlook some of the flaws of the start‑up,” because they just believe so much in what they see, in the positive trends they see. It’s obviously a very nuanced thing, and for the entrepreneur who’s going through it, I can totally identify with just how difficult, and frustrating it can be.

In order to raise just over half a million dollars in convertible debt, I think I ended up speaking to almost 80 people. I’d say out of those first 50, 49 were no, and there was maybe one yes. Then out of the other 30, we got a increasing frequency of yes’s, and toward the end it was all yes’s. [Patrick notes: This is an incredibly important point about the nature of social proof, by the way.  Matt has previously described his funding round in a single tweet: "Our seed round in 65 characters: NNNNNNNNNNNNNNNNNNNNNNNNNNNNYNNNNNNNNNNNNNNNNYNNNNYNNYYYYYYYYYYY"]

For the entrepreneur that can be a incredibly emotionally, trying experience, so part of what I offer, and if anybody wants to reach out to me after this Podcast, is [laughs] I would love to help anyone navigate that a little bit, because it is very emotional. I think the key is, the key I had inside was, how do you get the investor as well to the point, where they are emotionally excited about your business?

That’s where they fall in love with the girl, so to speak, and they say, “Yes, she doesn’t know how to cook, and yes, she also has a really annoying way that she laughs, but I don’t care, because I love her, because of this, this, this, and this.” Until you get to that point, what you find is, all the investors want to do is point out your flaws, and say, “Well, that’s why I’m not investing.”

I think that’s a little bit of a red herring, because if an entrepreneur can get investors to the point that they’re genuinely excited about your business, I think that actually atones for a multitude of problems, because no start‑up is perfect, right?

Patrick:  Almost like selling a product, right? In that, if you totally nail the emotional connection of the user to your product, the fact that it doesn’t have a sexy UI or isn’t the cheapest in the market, or what not, will be details to the customer.

Matt:  Exactly.

Patrick:  There’s so many interesting things that we just brought up there. Why don’t we start with this commentary on the Valley, and the Valley’s little peculiarities, by two people who are very outside of the Valley. Like you said, it’s a pretty insular place. Where are you currently physically located right now when you’re doing this call?

Matt:  I’m in my office in Austin, Texas. Yes.

Patrick:  Matt’s coming from Austin, I’m physically in Osaka right now which is a nice big city in Japan, which is not the usual small town in Japan [Ogaki, Gifu] that I’m broadcasting from. Clearly it’s possible to make connections to the Valley, and not physically being in the Valley. Intent by the way, there are people on the Twitters don’t dislike talking to small entrepreneur’s, hint, hint… anyhow. I could go back, and forth on how much of a barrier I think that necessarily creating a connection in the Valley is to a determined entrepreneur. My personal experience, having done sales to enterprises, and having made a bit of a name for myself over the years in the Valley is that selling to enterprises is so much harder than getting someone to make a coffee date with you. If you think you’re going to be successful in business. Getting on the radar of people in Silicon Valley, not quite as hard as you would think.

If you write three blog posts of a particular topic of interest to a start‑ups with money is enough to get you on the right peoples radar screens. Suddenly you get some sort of distribution through those blog posts, which can be an entire podcast by itself.

What Is This “Traction” Which Silicon Valley Seems So Beholden To?

I mentioned the magic of Silicon Valley where no one ever defines. I want to dig into it a little bit. “Traction.” You have traction. “We can’t invest in you, because you don’t have enough traction.” “Call us back when you have more traction”, or the most insidious form of a VC “no”, which is just, “We’d love to see a little more traction, before deciding on looking at the start‑up again.”

I will link it in the notes, but there’s a great talk between Naval [Ravikant]  and Dave McClure on what counts as traction in the Valley.  We’ll talk about it from our biased and narrower perspectives on the matter.  [Patrick notes: Much of the talk between Naval and Dave focused on B2C startups aiming at truly massive distribution via mobile apps rather than B2B SaaS companies like Matt and I run, where your user numbers are at a thousandth of the scale and your revenues are infinity percent higher.] I think folks might be intimated a bit by the “6.5 million visits a year” stats from earlier, but that is totally an achievable number.

Bingo Card Creator craters the approach to 6.5 million a year [Patrick notes: the main site is at 1.X million a year, give or take], but Bingo Card reader doesn’t have traction, because it’s not going very fast, and the market is not ginormous, and because unfortunately Bingo Card Creator has revenue, and after you have revenue, the salience of large visitor numbers drops a little bit, and then people will look at the revenue.  [Patrick notes: Also, if you tried to look at metrics of high interest to e.g. broad B2C apps, the "new normal" is 10 million monthly active users and BCC has only 10,000 or so.]

For revenue based traction, for recurring SaaS-model businesses, if you’re bootstrapping a business, and you get up to $8,000 a month, you’re in a wonderful place to be in life. $8,000 a month craters the approach of where you start getting angel investment, as long as it’s growing.

After you start to get into the low to high five figures a month, of your recurring revenue, you will start to get on progressively larger angel/VC firms radar screens. If you need a number to shoot at, that’s your number. Low five figures, and then that will quickly get you into the right place.

It can even be lower than that, if it’s growing very fast, or you have a particularly good story about the market. Like, “Everybody will be using this technology in five years.” “We grew revenues from $2,000 to $3,000 over the last month. We don’t see it slowing down.” Does that match your understanding of it?

Matt:  Yeah. It’s interesting. I agree with that, and yet obviously I would add to it, first of all, probably in the world you’re looking at, you have more experience in the month to month revenue business than I do. We charge yearly, and our business is very yearly, just because we’re B2B. I tend to think in more yearly numbers, than monthly numbers, but you’re probably right on the quantities.

My definition of traction, if I can throw it out there, is evidence that you can capture value at a rate that moves the business forward. Then the next question is, moving forward into what? Are you about to max out at $100,000 a year, or is this a $10 million a year business?

That is also proving this feedback loop, where the more traction you get, the more evidence you have that the market may be bigger than you originally thought. It’s a virtuous cycle, or spiral if it’s working out. If it’s not working out, or if it’s flat, you may say, “Well, we have six and a half million users” “Yeah, but they’re all free.”

You don’t have evidence that, that’s a business. You have evidence that you have a much smaller version of the Weather channel. [Patrick notes: I love that line.] For us traction was not until we had strong evidence that we could collect money at a rate, that let us move the business forward, which meant pursuing enterprise, hiring more people, growing a business that was on course to do in the millions of revenue, rather than in the hundreds of thousands forever, and ever.

I say captured value, because really what you’re also doing is, if you had enough free traffic, then you can make the, “Ye olde advertising argument”, which is, “We’re going to place a tax on the attention that we’re capturing, so the value you’re capturing thereand, “We’re going to tax it with these advertisements”, or “We’re not going to tax it very much with these AdWords, and make a ton of money.”

It’s shifting. Sometimes it’s eyeballs, sometimes it’s dollars, but like you said, sometimes eyeballs are better than dollars, because when we were a $195,000 per year business, people gave us the blank stare. [laughs]

Patrick:  The reason, by the way, for that, for folks playing along at home, is for an individual person, $195,000 is a wonderful, wonderful outcome, but if you’re an investor in Silicon Valley, you know that $195,000 does not even cover a single engineer. [Patrick notes: Ballpark $20,000 per month, fully loaded.] If you do not see that growing explosively, then it doesn’t have any potential, in terms of, strategic value leading towards an exit, which again is what people are aiming for at the end of the day.

Matt:  Exactly, so in our case, traction with a capital T. In hindsight we can apply the narrative, and say, “Look the President was using it, isn’t that awesome?” VC’s, believe it or not, not so excited about the President using it, as much as, “Well, how much did he pay you?” because now you’re in the post‑revenue zone. [Patrick notes: I respectfully disagree with Matt and strongly suggest that if you have the line "if @current_user.is_president_obama? {...}" anywhere in your codebase you mention that early and often in pitches. It got quite a lot of attention when I was talking Stormpulse up to people.]  If you’re going to do it on eyeballs, then I suggest you stay in the pre‑revenue zone, or be prepared to quickly accelerate the revenue aspects. We basically poured six and a half million people through a very large funnel, and 1,000 customers came out the other end. Then when you have a conversation with somebody, and you say, “Yes, we have 195 customers”, or you say, “We have close to 1,000 customers,” totally different order of magnitude.

Speaking of which, Gabriel Weinberg wrote a recent blog post on, “Orders of Magnitude”, and I think that’s really, in many ways, what getting VC’s excited is about, is proving that you hit that next order of magnitude, and the next order of magnitude is just around the corner, so this 195,000 is about to become 1.95 million, and soon after that, in two years, we can see it being 19.5 million. If you can keep moving the decimal points, on any metric, than you’re probably in good shape. [laughs]

Patrick:  Right, we should talk a little bit about the difference between angels, and VCs. Angels are typically people who are investing their own personal money. A VC, Venture Capitalists have what’s called, “limited partners” (LPs) in the Venture Capital funds. Which are typically extraordinary wealthy families like, Bill Gates wealthy, or institutional investors like, pension funds, or Harvard Endowment, which has billions, and billions of dollars of assets. They take a small portion of those assets, like the majority are in more traditional investments, like stocks and bonds, like that you and I could buy.

A small portion of that is their risk capital, that they allocate to quickly growing businesses. The Harvard Endowment does not want to be dealing with entrepreneurs themselves, they write a check for for $10 million or $20 million to a venture capital fund. The venture capital fund takes four of those checks put together, collects $50 million dollars, and then attempts to dribble it out to entrepreneurs in investments in the single-digit millions range.

The incentives in the structure of angels, and VC’s are different, in particular, with regards to scale. Paul Graham has a great essay or two that will teach you the basics [Patrick notes: "basics" relative to what he knows, rather than relative to what I know, since he's forgotten more than I know.  Most relevantly for people listening to this conversation, the scale of exit that can be a win for an angel is orders of magnitude lower than the scale of exit that could be a win for a VC.

Not talking about Stormpulse here, but hypothetically assume I had a second angel investment, which I don't currently.

If I invested at a hypothetical valuation of a million dollars, and it sold for $10 million dollars, then plus or minus some rounding error due to dilution that 10Xes my investment in the company.  That would be a happy result for me, as an angel.  For a VC fund, if a company exits for $10 million, that goes into their books as a loss, because they did not hit the multiple hundreds of millions of dollars exit, that they need to make the numbers in their business model to work out. If they collect a lot of losses like that, they will not be able to close their next fund. It would really suck to be them. [Patrick notes: Important corollary to this: VC firms do not win on acqu-hires, where e.g. a 5-man engineering team gets bought out for $5 million and their project gets scrapped.]

Angels can be pretty happy with exits in millions of dollars to tens of millions of dollars range. The super angels, which are the angels investing other people’s money, like I think 500 Startups themselves might self-identify as one, can be pretty happy with exits in the $10 million, $30 million, $50 million, on up from there, and then once you get into VC land, and have reached that serious investment, you’re shooting for in the hundreds of millions of dollars range.

After you get Series B / Series C / etc VC, and what not, God help you, you better IPO or no soup for you.  Those are for exit valuations, by the way. The interplay between a company’s revenue, and a company’s exit valuation is complicated, depending on who’s doing the buying. For example, if you were Google, and you had strategic reasons to control the Internet, you might pay a heft premium on the revenue of a company like e.g. Youtube.  [Patrick notes: Or Facebook and Instagram, etc etc.]

As a rule of thumb: if you’re trying to meet the victory condition for your investors of the exit in the mid tens of millions range, you should be thinking of having millions of dollars to low tens of millions of dollars in revenue.  Revenue requirements scale up linearly from there with exit requirements. All that sounds fairly on point to you?

Matt:  Yeah, I would say so. [laughs] If I were going out and raising money again for the first time, what I wish I had really understood is very much what you just said. One thing that can help you is, if you’re looking at a VC firm, not all VC firms are the same in terms of fund size. How much money they got from those LPs can vary anywhere from as “tiny” as say $20 million, all the way up to $1 billion or more. That size of their fund is going to greatly influence how much money it takes to, as they say in VC and entrepreneur parlance, “move the needle.”

The needle on the dashboard of the VC’s car does not move if they have a $500 million fund, and they got, let’s see, let’s say you sold your company for $50 million, and they owned 33 percent, then they get their $16.6 million.  That doesn’t really do anything for them whatsoever, like you said.

For that $500 million fund, they want to own a larger stake in a company that sells for $500 million plus. As a rule of thumb which might be controversial: you should aim to sell for more than their fund size.

If you’re approaching a $500 million fund, and you’re thinking your company is a $50 million exit, you are probably are wasting your time. Unless, they get so excited that they convince you that it could be sold for $500 million instead, or there’s just something you don’t know. A $50 million VC fund, which would be a micro VC, could be extremely excited about that, $10, $20, $30, $40 million exit, $50 million even better. Obviously, no VC is going to turn down more than that.

If Sequoia sells a company for a billion dollars, and their fund size is $1.5 billion, they’re pretty happy about that, obviously. You got to know who you’re partnering up with.

Patrick:  Yes, all true advice. Just as a rough rule of thumb for people playing along at home. In VC fund typically invests for a period of 10 years, within that 10 years they want to have experts that approach a particular internal rate of return. It works out to be that, as a rule of thumb, they want to triple their money. If it’s a $50 million funds, then they have to achieve $150 million of return, which, if they own 10 percent of typical company at exit, actually, they have to sell $1.5 billion worth of companies. Do the math there. It doesn’t support many $2 million exits.  [Patrick notes: Especially because the number of investments they can make is limited by the number of board seats they can take up.  Paul Graham can explain why that matters.]

Matt:  One thing to mention as well, which, maybe this fund raising 201, instead of 101, but it’s important when you’re talking about angels and VCs, is that, many angels will often get the opportunity to exit earlier. If the company, you don’t have to go IPO, for example, and many angels won’t. When the company that took an angel investments ends up raising money at triple the valuation of that angel round, some of that money that comes in could very well go into the pockets of angels, so that that VC can buy them out, and own their share of the company. If a VC comes in and says, “I want to own 40 percent of this,” and on the books, there’s 10 percent equity in angels’ pockets, those angels will often be bought out completely, and get their three X, and then take it, and play with again, and the VC is now in for the longer haul.

Of course, some VCs that get in very early in companies that end up going huge, could also do that, if you end up raising a series B, C, or D. Yeah, there’s multiple ways for folks to make money. Angels are, generally not in it for the IPO.

That’s where 500 Startups is really interesting, right, because they’ll put in a very small angel sized check. They’ll wait for the cream to rise. They’ll invest again, in those companies that are winning. They will hold on for a long time. Obviously, it’s a great hybrid model, I think, part of the reason I’m excited to have them involved.

Why You Probably Shouldn’t Be An Angel Investor, via Crowdfunding Or Otherwise

Patrick:  Right, I really liked how 500 Startups and YC are both doing excellent things to bring a  bit more rationality and efficiency, and to the VC markets, so yay capitalism . Some folks listening along to this and might think, “Wow, this is wonderful, I want to be an angel investor.”

Matt:  [laughs]

Patrick:  I want to disabuse you from that notion, right now.  For the vast majority of people listening to this, angel investment is not a good idea.

Matt:  [laughs]

Patrick:  First, there’s a requirement, which might be eased with the crowdfunding legislation coming down the pipe. At the moment, you largely can’t invest in companies unless you are an accredited investor.  You can look up the requirements for being an accredited investor online, but I think it requires $1 million in assets, outside of the value of your primary residence, or $250,000 in income for each of the last two years.

(People might be wondering: “Wait, if this is true, then Patrick must be an accredited investor. How in the heck did he get to one of those [given that it doesn't appear on my yearly reports]?” The answer to that is, well, that gives you one data point on how Appointment Reminder is doing.)

Yeah. Even for people who are clearly in a fairly decent financial position, angel investing is incredibly risky. Most people will get wiped out totally. I don’t expect getting wiped out in Stormpulse obviously, but if a meteor struck Dallas [Patrick notes: Dallas, Austin, whatever, if you can't find Gifu on a map cut me some slack] and was not predicted by the Stormpulse software, it would not compromise the ability of my wife and I to make the rent.

Matt:  Right. [laughs] Thank goodness. [laughs]

Patrick:  Yeah. The vast majority of my investment assets are in nice traditional Roth IRA investing in index funds. Many angels, by the way, are doing it for I’d say primarily non‑economic reasons. Again, structurally you have to be fairly wealthy to invest as an angel investor. The expected returns are terrible. It takes a lot of time to make investments, relative to say an index fund. Since you can only safely invest a small portion of your net worth in it, it’s not likely to really move the needle on your personal portfolio, so “Why do it?” is an interesting question. One of the reasons that there’s lots and lots of angels doing it is it’s a hobby/lifestyle choice of some people.

Particularly in Silicon Valley, there’s lots of angel investors who might have a bit of money because they were in large companies in the Valley that do social networking or search engines at the right time. They have a bit of money, and the culture in the Valley doesn’t really let you blow money on super deluxe sports cars or anything, but blowing money on angel investments is considered a wonderful thing to talk about with your friends. That’s one reason why people might do it.

Again, for me, it’s partly wanting to support Stormpulse. I want it to win.  I’m a capitalist: companies live, companies die, that happens. I liked the guy’s vision for the future, and supporting this guy is my main objective.

Matt:  Yeah.

Patrick:  Obviously I’m not saying the same about Zynga.  Zynga’s vision for the future is humanity enslaved to dopamine treadmills.

Matt:  [laughs] Yes, scary. I was going to add, my one cent on that would be you’re absolutely right. Angel investing, I’m not [laughs] nowhere near being an angel investor. Even though I’m an entrepreneur and I love the risk taking parts, I don’t know that I would ever be interested in angel investing. Simply because in order for it to work economically, you’d have to do it at such a scale, so I guess maybe rephrase that. I don’t think I’d ever be interested for economic reasons either, even just looking forward. Because in order for the economics to work, you would have to invest in so many companies that you would have to take a…Not spray and pray, because that’s negative way to look at it, but a making a lot of bets method.

Yeah, the angel investing that seems to work emotionally, even though it might not economically, would be the, “I’m investing in these guys because I love what they’re doing and I think I can help them.” That’s the more popular choice, like you said. The no man’s land in between is the, “Oh, great, I can invest $20,000,” and you hand it to three people or one person, and there went $20,000.

Hopefully it’s not that. Yeah, we’ll see that whole piece works out on AngelList, where people can invest even if they’re not accredited or down to $1,000.  [Patrick notes: There are a few crowdfunding platforms coming which have this basic business model.] For that really to work economically for somebody, they would need to make a lot of $1,000 investments I think.

Patrick:  Right. I don’t know that crowdfunding is a very wonderful idea to be honest.  The model is that sometimes the business would like money which comes with no involvement with the angels whatsoever, like we were talking about earlier . For a $1,000 investment to be attractive to the firm, you would have to raise that much from each of 200 people, and your service level agreement (SLA) with respect to each of them would be “You should follow our twitter feed, but we’ll never actually talk to you about this”. Otherwise the economics of raising the marginal $1,000 just don’t make sense. [Patrick notes: In particular, the angels would not have any expectation of being able to talk to the founders on a regular basis and would not be given updates which include material non-public information.  Both of those are routine features of angel/startup relationships in the status quo.]

Matt:  Right. There’s a little bit of a, I don’t know, a selection bias that happens though, or availability bias because if you think about it a lot of the best start ups aren’t looking for those dollars. They’re not necessarily desperate for another $1,000 investment or are looking for that kind of crowdsourced funding.

Patrick:  You called it an availability bias, but I might call it a…oh shoot, my English capacity is failing me.

Matt:  Just say it in Japanese. [laughs]

Patrick:  Adverse selection process.

Matt:  Yeah.

Patrick:  The people who have the most compelling businesses can get professional investments by the experts into those most compelling businesses, and people who don’t have quite so compelling businesses, but might still want to raise some money, might go to folks who are wealthy but amateurish with respect to their investment decisions. Again, this isn’t a pronouncement from on high because I am also an amateur here, but one would hope I know a bit more about it than, say, any random software engineer at a company that pays a lot of money.

Matt:  Yeah. [laughs]

Patrick:  If the cream of the crop gets picked by the professional investors and the professional investors don’t do really wonderfully numerically investing, the median return in “VC land” is probably negative.

Matt:  Yeah.

Patrick:  If professional investors who can convince people to give them $20,000,000 checks have a return which is median negative, then amateur investors investing in the non cream of the crop companies are probably not going to do well virtually for themselves.

Matt:  Probably not.

Patrick:  Don’t go angel investing with money you can’t afford to lose. The one positive thing that I’ll say about angel investing is at least it’s better than Bitcoin.  [Patrick notes: I might write a post on that someday.  Long story short: don't buy Bitcoin.]

Matt:  [laughs] Sounds like.

Patrick:  Let’s talk like the mechanics of it because we’ve been talking about investing in high level terms. I think a lot of people will understand it as like me buying stock in your company, but that isn’t really what happens.

Matt:  No. It can be but [laughs] it really depends on the type of raise, right? What you do…Go ahead.

Patrick:  For angel investing these days for decreasing the paper work burden and getting away from needing to price around the, I don’t know if I would call it a standard, but very popular action is called a convertible note. Do you want to explain to the audience what a convertible note is?

Matt:  Yeah, sure. A convertible not is basically a loan with a fancy name and some fancy options, which are the angel investor or the investor loans the start up money, and there’s a maturity date on the loan just like all loans, but prior to that maturity date, since this investor does not just want to get his money back with a per annum interest rate return, before that happens there is what’s called a trigger event or a fund raise that happens, which triggers the conversion, hence the word convertible, of that money into some stock equivalent. What it basically means is, for example somebody gives somebody $25,000 on a convertible note basis, that entrepreneur then will see that $25,000 on their books as a liability [Patrick notes: And, naturally, an asset of $25,000 cash] until the time that, that entrepreneur raises a qualified financing, which could be any amount. Let’s just say it’s $750,000. Once he raises that $750,000 from a VC or from more angels, however it works out for him, then that $25,000 will turn into shares.

Now that investor actually has stock in that company. Until then he really just had a loan against them. Like you said, it definitely decreases the paper work. It also has, for the entrepreneurs benefit, you could have what’s called a rolling close.

Back in the selling-equity world you had more like closing on a house where this is the day they hand over the keys, everything’s done, this is my closing date. In the convertible note world you can have multiple closing dates. You can take money from, if you have a line of 15 angel investors and somebody wants to give you money today, you can take the money from them. If the other people aren’t quite ready yet, or if you’re still warming up some people, you can get them in the door later.

You might end up spending 30 days or 60 days collecting checks, which frees you up from having to have one massive convergence point, which is really hard to do because angels as opposed to VCs often have real lives and jobs and their own things to deal with so it’s not their entire job to make sure they have the bank wire all teed up for the exact day that it’s supposed to be. A lot of things just come easier when go with that method, but obviously it can have its downsides but I think if you understand it well enough the downsides are not shockers.

Patrick:  Right. If you want to hear this subject in a lot more detail, there’s a Paul Graham essay called High Resolution Fundraising, which assesses the benefits in a lot of detail. One of the main benefits is again, investors are “herd creatures”, and what you’ll frequently hear is “I’m willing to invest if everybody else is willing to invest.” Given that angels include a lot of different people on varying levels of enthusiasm and sophistication and ability to access funds quickly, this can cause an unpleasant deadlock situation where “A is willing to invest if B is willing to invest, and B is willing to invest if C is willing to invest, and C is willing to invest if D is willing to invest, and D is currently on vacation to Europe, but then he’s willing to invest if A is willing to invest.”  Then nothing goes forward and you, the entrepreneur, tear your hair out.

Whereas with convertible note, literally the only thing Matt needed to do to raise money from me was we agreed on an amount, he sent over the docs, I signed them, and then I wired money to the Stormpulse account. No collusion with other investors was necessary.  I didn’t even explicitly knew who the other investors were. I was sold, so I didn’t know how many other investors were there at the time and I didn’t really have need of them.

Matt:  Yeah.

Patrick:  Obviously after you have money in the bank you can say, “I have money in the bank from people, so if you want in on this you should move quickly.”

Matt:  Yep.

Patrick:  Which again is a wonderful thing from the entrepreneur’s perspective.

We mentioned the figure $25,000 a few times. Typically, historically in angel investing, like $25,000 is the minimum size of the checks that can get a company interested in you just because of the amount of overhead it takes to bring on an initial investor and the amount of overhead that that entails going forward. That’s kind of like the baseline these days, unless you have something else that can interest the company besides just the dollar value of your investment. Are you OK with putting the number of what our investment was? I’m happy mentioning it, but I don’t know if that’s public or not.

Matt:  I would say this, it’s under the $25,000 number for precisely that reason, because I believe you have incredible value add for us. You made the introduction to 500 Startups and it turns out that you know a thing or two about SEO, SEM and all things Internet marketing. This is one of those cases where the dollar value isn’t the primary concern.

Patrick:  When I told Matt that I wanted to invest with him I said, “I want to invest somewhere between $5,000 and $25,000 with you and after you talk to my wife a bit.” In the process of talking to my wife about it, I got the bill for my wedding and eventually decided to, well, there’s a Macbook with my name on it somewhere.

Matt:  [laughs]

Patrick:  I don’t know. OK, let’s see, so we talked about convertible debt and talked about risk management for angels. I would be negligent in my duties as an investor if I didn’t mention you were trying to close another round, right?  There’s the sales pitch, guys. There is availability. Those of you who can make use of that information, please do.

Matt:  Thanks, Patrick.

Patrick:  You’re also all over AngelList. We could devote an entire podcast to the wonderfulness of angel list, but it’s the emerging standard for people raising early rounds, it helps to get a lot of the necessity of meeting social proof and whatnot. But you have a wonderfully active profile on AngelList and people can easily reach out directly to you if they want to talk about this in more detail, assuming they have a checkbook with lots of zeros in it.

Matt:  Sure. Or know somebody that does.

How To Price Software Which Is Mission Critical For Business Customers

Patrick:  Awesome. I gave a little mini‑sales pitch. Why don’t we talk for folks who might or might not be interested in the whole funded start‑up amusement game, just in terms of running a business, and running a SaaS business at emerging levels of scale? Why don’t we talk about what was learned for pricing for your business and premium versus premium distinction, and maybe some advice on doing high‑touch sales and what many folks listening are doing, which is currently just, “I hope people click over to /pricing and then put in their details into my credit card sign up form.”

Matt:  Sure. [laughs]

Patrick:  Let’s see, how did you pick $750 per user, per year?

Matt:  How about “We are growing the price and that is its current height”. Like I have an adolescent son and he’s getting taller and taller. Seven‑fifty is his current height. I think it can go higher from there. Definitely can go higher from there as we get into more editions, that just ended up being the price that we are experimenting with currently. We actually started out with a business that was $3.95 per month. [laughs] Now we are asking for $749 upfront. Yes, that’s a 200X price increase, more or less, since we started.

Patrick:  One takeaway from this podcast, for anybody attempting to run a business on $3.95 a month, don’t. It won’t work out. It is impossible to make the math work out like that, for any desired scale of the business. Actually, I won’t want to say impossible, there’s people who can do it. [Patrick notes: Backblaze?  Evernote?  That's all I can think of off the top of my head.] But what would be the main challenge for you in your business? You’re providing, again saving people’s lives and property value or even adding a level of value to a business you can justify to people picking that $20 to $30 entrance at the low end and then it goes up from there in a very dramatic direction as you create more value.

Matt:  Yeah, I mean what…

Patrick:  Oh, sorry. You go.

Matt:  Yeah, I was going to add one little psychological touch. As soon as you start running your own business, and I’m sure you’ve experienced this, too, is when you get to something and in your business, you want it or need it, and it says that it’s $100 or $200, I don’t think that’s ever stopped you in your tracks and made you think, “Oh, that’s too expensive. I don’t want that.” Especially in B2B, in other words, B2C, obviously your mileage will vary greatly, but in B2B, there aren’t many business who can’t justify a $500 expense on something they just want or need.

It can be very hard for an entrepreneur who’s only been either employed by BitCo and hasn’t had a budget that they can just spend money willy‑nilly or hasn’t run their own business to get out of that impoverished mindset of “Well, gee, with my bootstrap company, I would never spend $500 on this.” It’s like, “Yes, but you are not your own customer in this case.” [laughs]

Patrick:  I have every love for bootstraped companies in the world. They’re my heart and soul business‑wise, but oh, boy. When we talk about this kind of stuff on Hacker News, people come out of the woodwork, “Oh man, you’re doing this thing for professional programmers that costs as much as $20 a month.” Or, $150. “Who on God’s green earth will pay that?” Yadda, yadda, yadda.

Matt:  [laughs]

Patrick:  Compared to like the budget available to the White House for protecting against hurricanes, Bingo Card Creator, pretty freaking small. Bingo Card Creator can drop $150 without me even noticing it.

Matt:  Take that, yep.

Patrick:  Yep. If KissMetrics costs $150 a month, it’s done. If it increases sales by five percent over the year, it pays for itself in perpetuity, which that might be what I paid for…that might be what I paid for  KissMetrics…I don’t even know what I paid for  KissMetrics, and the reason is, it doesn’t matter.

Matt:  Right. [laughter]

Patrick:  Again, that’s a business that makes what, three, four, five thousand a month or so, somewhere in there. At the smallest possible scale of business, the prices that people want to charge for software don’t matter. Don’t optimize very aggressively for never getting complaints about pricing. It is not the way forward.

You guys have just the one pricing point. We’ll talk about that in more detail at some point, but we might want that conversation to be private. Anyhow, one of the reasons a lot of companies have multiple pricing points is that it helps segment and capture value.

There is a difference in the ability of Bingo Card Creator and the White House to afford things. How do you segment the usage of those two organizations such that the White House pays more for the extra service they are getting out of the software? That’s one of the reasons that you see the four column pricing plan on a lot of SaaS, typically because it prints a lot of money as soon as you introduce it.

Just as an aside, for people I have talked to, SaaS businesses, like it’s my job.  A lot of folks report that those plans generates an absurd portion of revenue. I’ll say, for Appointment Reminder, the top-most plan ($199) generates about 50% of the revenue of the publicly available plans ($9/$29/$79/$199)  [Patrick notes: Closer to 1/3rd when I checked the numbers recently.]

Don’t do a $9 plan either, it’s not practical if you’re selling to businesses. Lesson learned. You might think $200 is pretty rich, but it isn’t for a company, so give people the option to pay at least that much.

Matt:  Sure.

Patrick:  The $200 is not really the ceiling for selling to businesses. For selling to businesses, typically the ceiling for a month‑to‑month plan is generally $500 and they can put that on a credit card without requiring eight or 12 signatures for management. Then after $500 you have to step up your game a little because it’s not being so much of a self‑service model. You actually do have to talk to folks. I have a bit of experience with this. You have much more. There’s adjustments you have to make when it’s no longer just a website. You have to prove yourself, and you’re actually talking to folks. How does that process work for you?

How To Sell Into The Enterprise

Matt:  Yeah, the process for us started by email, just having a simple email address, which hopefully, everybody has, getting those initial queries from people who say, “I want to buy this but I have a few questions first.” Answering those emails is obviously a great way if you can scale it up to a point. But then, at some point, like you said, there is definitely the right time and place to have a actual phone call, maybe a couple, or maybe a lot of them if it’s going to be a large deal. For me, that really started with sending emails to people and responding with, “Hey, call my cell phone number” kind of thing, a typical self‑starter, entrepreneur kind of method. Got a 1‑800 number from Grasshopper.com not soon after that, and ended up routing people through the 1‑800 number which then rings whatever phone we want in the business, and talking to people that way.

With our business, especially since, weather tracking in the abstract is not very emotional but when you apply, like you said, the lives and properties to it, people generally want to have a human being on the end of the line if they’re going to spend a lot of money, just to be assured that it’s going to do what they think it’s going to do. Or just to understand the right way to pay, things of that nature.

We take phone calls. We have a 1‑800 number for our sales line, and I love it when people call because it generally means that we’re going to have an opportunity to make good contact. It increases the likelihood that they’ll be retained. All kinds of good stuff happen when you talk to people on the phone, as long as you can do it profitably.

Patrick:  Right, and again, this is one of the differences between the stuff that you have to do when you’re trying to grow the business like that and stuff you have to do as a bootstrapper. I live in Japan, and so folks calling my cell phone directly or even indirectly through the 800 number that’s on the website would be inconvenient because it would typically land at about 4 AM in the morning. Though I like doing enterprise sales. I don’t love getting woken up at 4 AM in the morning. I drop everybody who calls the sales line straight to voicemail and then attempt to set up a time to call them, typically at about midnight because I keep engineers hours. I apologize to my wife, say I’m going to get on a phone call for half an hour, do it and then go to bed.

Just an FYI, when I do that, half the people will hang up immediately when they get to voicemail. You get no information from them and I have never closed a sale like that. If you’re beholden to investors, don’t do it that way. But if you’re a bootstrapper who can control the pace of growth of your business at whatever you want, it totally does work.

We both come from engineering backgrounds, so this is not exactly in our wheelhouse, constitutionally or by experience. We both learned how to do business to business sales over the years, and it’s amazing. People will actually pay money to people that they’ve only ever met on a phone call.  Lots of money! [laughs]

Matt:  Yes. Yeah, absolutely.

Patrick:  Let’s see, what stories can I tell? Again, never lie to a customer. I always be very up front with people and say, “Hey, I’m a one-man operation operating outside of Japan. I’m a professional at this,” and oft times it’s pretty good. “All the problems like, “My bus number is one, yadda yadda yadda,” if they ask about that. Appointment Reminder is currently operating in, I usually say eight of the top 10 hospitals in the United States. I’m not sure if that’s actually true. A, there’s more than eight now, and B, I’m not sure if my definition of the top 10 is reasonably rigorous. Suffice it to say, if you name a big brand hospital, Appointment Reminder might be running it. Matt, again, from his home office sold into the White House. I will never get tired of telling that story.

Matt:  [laughs] The craziest part about it, Patrick, is that I didn’t do that sale. [laughs] I had no idea that it even happened!

Patrick:  Oh, that’s right. They signed up on your website directly.

Matt:  Yeah. That was self serve, man. [laughter]

Patrick:  Oh, boy. Life is wonderful.

Matt:  Yeah, yeah, yeah. [laughs] Yes.

Patrick:  Just a quick piece of advice that folks listening at home can steal. One of the things that you can do if you’re not at a position where you can jump quick onto a sales call with somebody, maybe they’re not at that point in the relationship: use some incentive on your website to capture their email address. For example, if I were Matt, after you get the other 5,000 things off the plate, create some resource or white paper about managing severe weather events at your business, maybe specific to a particular industry.  Offer a download of this white paper if you give us your email address and say on that form “We’re going to get in touch with you every week with stuff you’ll find interesting, as a risk manager at a retail business.”

Then you will have the opportunity to provide them with stuff they’ll find interesting, and then eventually, after you’ve established credibility, attempt to sell them. That works out very, very well in terms of generating sales.

Matt:  Yeah, and you know what? I’ll say this. Because life is messy and it happens organically whether we like it or not, we’ve done almost everything backwards with Stormpulse. These days, I think somebody who wants to bootstrap a company has so much good advice to rely on.

Patrick:  Every company ever will tell you they did everything  wrong starting out. [laughter]

Matt:  Well, somebody who wants to bootstrap a company these days might say, “OK, here’s what I’m going to do. I’m going to charge from day one. I’m going to build this thing. Here’s the funnel that we’re going to use. Here’s the flow we’re going to use. It’s just this machine.” We are working on the machine right now, but the machine originally was just this tipping point in our distribution with Hurricane Ike hitting Houston, that took us from 1,000 to 1,000,000 visitors in 45 days. Our servers didn’t crash, but all of a sudden we were inundated with interest from people that…We were like the two guys at the hot dog stand that all of the sudden all of Milwaukee wants to come to. How do you handle that?

We didn’t have the great landing pages and stuff I’d like to talk to you about more offline. We didn’t have the great segmented landing page with the white paper download and the free trial thing set up. It was just people loved this product so much that they had to talk to us. They wanted to talk to us and they wanted to buy it, and so they did. Here I am getting emails from people saying, “Send me an invoice,” and I’m going, “I don’t even have a template for that.”

[laughter]

Matt:  I was just slammed with a lot of the operational stuff from the get go. [Patrick notes: Again, after years of working in the trenches.] There was a fair amount of self service, but definitely people…Learning trial by fire in a lot of ways. I’m sitting here looking at in front of me a receipt from, it so happens to be a hospital that uses our software. I’m looking at an invoice number, and it says 36215. What’s great about that, and if this is helpful to anybody, or at least an encouragement, that invoice number is a number that we completely made up. It was like here’s a piece of paper. We’re going to put some numbers on it. We’re going to send it to them. The first time I got a check from somebody that was a real company, like a Fortune 500 company, paying an invoice that I had just made up was like this moment of clarity.

Something came in and something came out. The plumbing works. I guess the encouragement would be don’t freak out when you get these things. In a lot of ways, you’re always in this just‑make‑it‑up stage until it works, and then you can refine it and make it look more professional.

I still have copies of the first invoices I sent out. It was like I don’t even know what I was thinking. I hate to think what the person that received them was thinking. It was the world’s least elegant invoice, but it had a number and it had a price and it had a few other details. That’s all it took. B2B is full of wonder.

Patrick:  That’s the story that you’re going to hear again and again and again, both bootstrapping and funded. There’s a whole lot of making it up as you go along. There’s obviously some folks who sold to the Fortune 500 prior to the two of us living, so some of the stuff you take the knocks and figure out and some of it, you talk to your mentors/buddies/whoever you find credible and figure out. This is one reason why doing things with email is helpful. It’s asynchronous, so when somebody says, “Hey, to buy this, we need proof of insurance from your company,” you can email somebody who has been in business a little while longer would say, “A hospital has asked me for proof of insurance. What does that mean?” It means say that you buy, in my case, $2,000 worth of insurance.

That takes a week of your life to get arranged, and then you can invoice the hospital enough for the software to handily pay for the insurance coverage, to put it mildly. By the way, for folks who are not in business, if you’re talking about, $500 per month is the upper reaches of the self‑serve model over the Internet. The price of software is unbounded. I think it probably wouldn’t be good to mention actual numbers from either of our companies that are the largest contracts.

Let’s say that software sold at low five figures, mid five figures, high five figures, low six figures, mid six figures, high six figures and up, up, up. It all depends on the value you’re offering and getting that customer to “yes.” Astoundingly, one of the reasons that folks don’t put prices on the website for the enterprise plans is that the only thing you need to do to get, pick a number, $100,000, out of a company is to convince them that the thing your selling is worth $100,000. Any truthful and ethical thing you do get this when you do that “yes” is what you need to get that “yes.”

Matt:  Exactly, and I can tell you from some experience now that what is helpful is when you’re selling B2B, there’s obviously the super scalable part. Enterprise is where you get to the point, I think, and I’m not even a true what you call the Palantir Enterprise or like the massive trilogy enterprise. Those are seven figure deals. When you’re talking about even the high five figures, low six figures, you are at that point. You are external to their company, but what you’re trying to do is actually navigate their company and the way they make a decision about whether or not it’s worth the $100,000.  They’re going to have their own way of managing that decision‑making. You are now trying to manage their management of it so that it does not get off course. [laughs]

In some sense, you are like the CEO of the buying process happening internal to your prospective customer, right?

Patrick:  This is probably the most important think that I’ve ever learned about doing the sales at enterprises. Basically, if there’s an internal person who wants to buy it, there’s other people that their management process means they have to convince to be able to buy it. You have to empower them. People call them your “internal champion.” You have to give them anything they need to get those sign‑offs. Which means both, A, figuring out who those people are and, B, figure out what you need to give them to get to “yes.” Your customer might not know these answers, because they aren’t experts at working their own purchasing department. This is the art and science because it’s different for every contract.

Matt:  Yeah.

Patrick:  I’ll tell a quick story from my first big enterprise deal for Appointment Reminder. A hospital sent out 10 requests for proposals to 10 firms who could theoretically provide appointment reminder phone‑calls for their purposes. It was for a low‑budget project, so the larger firms in the industry got that RFP and I imagine that the sales guy’s reaction was “Beep this. I’m only going to make $100 commission off of writing this, so I’m not actually going to write a detailed response to it. I’m just going to send them a brocure and say, ‘Hey, I’ll hop on a call if you’ve got your checkbook out.’”

We’re a little hungrier than those organizations, both because I get more out of the entirety of a sale than the commission a sales guy would make, and because I very urgently wanted the social proof of having landed this contract. So I wrote a detailed 3 page response to the RFP, including quite a bit of detail that the average sales guy wouldn’t know.

Then I got on for an hour-long phone call with a nurse at this hospital, and we talked about every concern she had. After that hour long phone call, I took my (obsessive) notes, typed up a detailed response for every issue raised on the call, and emailed it to her.  I asked if she would please forward it to every stakeholder involved with the purchase, including every name she had mentioned on the call.

“Could you please forward this to Dave and Dr. Larry as well, just so they know the stuff we talked about?” Later when they had a discussion inside the hospital on whether to guy for the safe 800 pound gorilla or the little one-man operation operating outside of Japan, I was the only guy whose name they knew. They had seen emails from me and I sounded knowledgeable and trustworthy.  The nurse I had talked to also had a good impression from our phone calls.

She said a different stakeholder attempted to say, “Well, nobody ever got fired for choosing IBM, or the analog in our industry.” She said, “No, you don’t understand. I don’t know that company. I think they brushed us off, but this is Patrick’s baby. You take care of your baby. If we ever have a problem with it, we know exactly who we’re going to be dealing with, and he’ll fix it for us. I trust him,” and that argument carried the day.

Matt:  Awesome.

Patrick:  That’s how you beat out a company that is a thousand times bigger than you, which is a story that I’m quite certain has gotten Stormpulse a couple of wins along the way.

Matt:  Oh, yeah. Yeah.

Patrick:  Founders have an incredible advantage on sales, by the way, because you’ve got magical founder advantages when you can announce yourself as the founder or CEO or head of product, or whatever you need to be here for the phone call. People will say, “Wow, thanks for taking the time to call me!” It’s amazing. Here’s a hospital who has probably a billion dollars in gross revenue a year or some multiple of that, versus a teeny-tiny little software company whose annual revenue is probably smaller than identifiable surgeries that they do. But if you announce yourself to the hospital as, “Yeah, I’m the founder of the company that you’re talking to,” then the person at the hospital’s like, “Wow. I’m just a little person at this big hospital. This guy is the head honcho — he is really doing me a solid by getting me this phone call.” Despite the fact that I’m the founder, sole employee, and also the guy who empties out the waste paper basket every day.

Matt:  Yeah. [laughs]

Patrick:  Also, especially for founders who have both the technical and business sense, you’re able to talk about whatever they need to talk about. A sales guy will often say, “Oh, let me get back to you about that question because I need to ask the engineers.” Or even worse they’ll say, “Oh yeah, I can totally do that,” and just be lying and sound like they’re lying, because they don’t have the ring of truth in their voice. Whereas if you’re a founder you can say, “OK, the software doesn’t actually do that right now, but it sounds like something that we could get done in about two weeks. How important is this to you vis‑a‑vis your other priorities, or is there some other way we could meet this need?” When you start talking that level of detail, people will be like, “Wow, he knows what he’s talking about, unlike every other sales guy I’ve been talking to this week.”

Matt:  Yeah. Absolutely.

Patrick:  Not that I hate sales guys.

Matt:  [laughs]

Patrick:  Good sales guys are wonderful, but good sales are like good engineers because they’re very rare.

Matt:  Yeah. No, absolutely, absolutely.

Patrick:  Yeah. I think we’re probably pushing the two hour mark for this conversation, so we probably want to be wrapping up now. Matt, is there a blog that people can find you at? What’s the URL for that?

Matt:  Yeah. It’s here. You can also find me on Twitter @MattWensing.

Patrick: My blog is at http://wwww.kalzumeus.com/blog/ and I’m Patio11 all over the Internet. Stormpulse is the website, storm like the weather phenomenon, pulse like the pulse of the nation, dot com. You can take a look at it, attempt to invest in it, etc.  If you’re needing to protect the lives and property of your business, it’s good stuff, consider buying it.

Thanks so much for getting on the podcast, Matt. It was an awesome conversation, and I hope the audience learned something from it.

Matt:  Yeah, absolutely. Thanks a lot, Patrick.

Patrick:  OK, and thanks very much to all you guys who are listening. I know it’s been a long wait since the last one. I really appreciate you taking time out of your day with us. We will see you again next time, hopefully in a shorter timeframe than the six months or so it took for podcast number four. All right, till next time, bye‑bye.

Matt:  Bye.

What The Rails Security Issue Means For Your Startup

January has been a very bad month for Ruby on Rails developers, with two high-severity security bugs permitting remote code execution found in the framework and a separate-but-related compromise on rubygems.org, a community resource which virtually all Ruby on Rails developers sit downstream of.  Many startups use Ruby on Rails.  Other startups don’t but, like the Rails community, may one day find themselves asking What Do We Do When Apocalyptically Bad Things Happen On Our Framework of Choice?  I thought I’d explain that for the general community.

Nota bene: I’m not a professional security researcher.  Mostly, I sell software.  In the course of doing that, I (very occasionally) do original security research.  I did no significant amount for these bugs, aside from mitigating them for my own applications.  I am currently engaged in a Ruby on Rails security safari, and anticipate publishing the results of that in February, after responsible disclosure to the relevant security teams.  If you don’t know enough to know whether I’m trustworthy with regards to generic advice, pay someone you trust to get advice on this.

Don’t skip this post because you’re not a Rails developer.  If you’re reading this blog, this matters to you.

Background: What Has Been Happening in Rails-land?

Ruby on Rails recently released two sets of security patches (announcements here and here), in response to related vulnerabilities discovered in the frameworks.

How bad were those bugs? Severity: Apocalyptic.  They permitted attackers to execute arbitrary code on virtually ever Ruby on Rails application, without requiring that the application do anything to enable the attack other than “be hooked up to the Internet.”

What does “execute arbitrary code” mean?  Literally, it means that the attacker can choose to have your server execute any code they can dream up.  In practice, it means that you lose the server that the code is executing on.  Any further access to that server or applications on should be assumed to be compromised.

What went wrong?  This has been covered in more detail by security researchers, in posts such as here and here.  A brief description: Ruby on Rails makes extensive use of a serialization format called YAML, most commonly (you might think) for reading e.g. configuration files on the server.  The core insight behind the recent spat of Rails issues is that YAML deserialization is extraordinarily dangerous.  YAML has a documented and “obvious” feature to deserialize into arbitrary objects.   Security researchers became aware in late December that just initializing well-crafted objects from well-chosen classes can cause arbitrary code to be executed, without requiring any particular cooperation from the victim application.  Since then, the bug hunt has been on: security researchers have been actively finding lots of ways in the Ruby on Rails code base, and in related code bases, to cause the application to deserialize YAML which is in some way under the control of the attacker.

So far this has included:

  • Rails, for programmer convenience, used YAML to implement JSON deserialization.  JSON is designed to get into Rails quite easily indeed — just POST it at the server, wham, YAML.load(attacker_data) happened.  (The actual mechanics of achieving that were more complicated, but that’s the practical upshot.)
  • Rails allows XML documents to include YAML attributes.  That decision has caused a bit of head scratching, since it seems like a curious choice for most programmers in the community, but be that as it may this allowed posting XML at Rails apps to be trivially exploited.
  • Rubygems used YAML to hold metadata about each gem submitted to it.  An attacker was able to create a malicious gem, cause the Rubygems web application to evaluate the metadata contained in it, and thereby compromise the Rubygems server infrastructure.
  • February will see more compromises, with my certainty of this prediction approaching my certainty that the sun will rise tomorrow.  There exist many, many other code paths in Rails to get to YAML.load().  Some of them will be found to be amenable to attackers, either (worst case) for all or substantially all Rails applications or (still bad case) to Rails applications whose application logic involuntarily cooperates with the attack.  (i.e. In the worst case, attackers root every unpatched Rails app on the Internet.  In the best case, attackers only root some apps and they often have to have an expert do a modicum of marginal work to do so.)

Ruby on Rails security sucks lolz amirite? No.  Well, no to the nuance.  Software security does, in general, suck.  Virtually every production system has security bugs in it.  When you bring pen testers in to audit your app, to a first approximation, your app will lose.  While Ruby on Rails cherishes its Cool-Kid-Not-Lame-Enterprise-Consultingware image, software which is absolutely Big Freaking Enterprise consultingware, like say the J2EE framework or Spring, have seen similar vulnerabilities in the past.  The recent bugs were, contrary to some reporting, not particularly trivial to spot.  They’re being found at breakneck pace right now precisely because they required substantial new security technology to actually exploit, and that new technology has unlocked an exciting new frontier in vulnerability research.  It sucks for users of Rails that Rails is currently on the bleeding edge — believe me, after having lost 3 consecutive nights to patching my own applications, I know — but it would suck much, much worse if the Bad Guys had found these first and just proceeded to remote-own every Rails app on the Internet.  That is, by the way, an achievable scenario.

Was anyone actually compromised?  Yes.  The first reported compromise of a production system was in an industry which hit the trifecta of amateurs-at-the-helm, seedy-industry-by-nature, and under-constant-attack.  It is imperative that you understand that all Rails applications will eventually be targeted by this and similar attacks, and any vulnerable applications will be owned, regardless of absence of these risk factors.

Will anyone else be compromised?  Yes.  Thousands upon thousands of Ruby on Rails applications will be compromised using these vulnerabilities and their spiritual descendants, and this will happen for years.

  • Many Rails developers have not reacted to this news with the alacrity they should have.  (See next question.)  These applications may be compromised already.
  • There are many Rails applications which were created years ago, which are not under active development any more, for whom no-one is responsible for applying security patches.  Any of these applications which are publicly routable on the Internet will be compromised.
  • There are many Rails applications which are installed by end users, some of whom do not have security expertise.  For example, Redmine — an open source developer productivity tool — is commonly installed at individual companies.  Every publicly accessible Redmine instance which is not patched will be compromised.
  • Ruby on Rails lacks a CMS with the mindshare of, say, WordPress, which is good, because every unpatched Ruby on Rails CMS delivered to a non-technical company to serve as their website or backend to their mobile application will be compromised.
  • There are many developers who are not presently active on a Ruby on Rails project who nonetheless have a vulnerable Rails application running on localhost:3000.  If they do, eventually, their local machine will be compromised. (Any page on the Internet which serves Javascript can, currently, root your Macbook if it is running an out-of-date Rails on it. No, it does not matter that the Internet can’t connect to your localhost:3000, because your browser can, and your browser will follow the attacker’s instructions to do so. It will probably be possible to eventually do this with an IMG tag, which means any webpage that can contain a user-supplied cat photo could ALSO contain a user-supplied remote code execution.)
  • Many companies — including ones which do not even consider themselves Ruby on Rails shops — nonetheless have a skunkworks project running somewhere.  For example, they might have a developer who coded a quick one-off analytics app, which is accessible outside the firewall so that sysadmins could check server loads from home.  If the app is on the public Internet, it will be compromised.
  • Many Ruby on Rails shops have good development practices and no longer have the “monorail” anti-pattern, where everything their company does is in one gigantic Rails app.  They have already patched most of their main apps, but they missed one.  Maybe it is the customer support portal at admin.example.com.  Maybe it is a publicly accessible staging server at EC2 spun up by a developer who has since left the company and not shut down because, hey, $20 a month.  Maybe it is a 20% project by a junior engineer which he has on the back burner for the moment.  It doesn’t matter why this app was forgotten: if it is publicly accessible, it will be compromised.

What was the proper way to react to these patches?  Patch immediately, install a workaround immediately, or pull the plug on your application.  (“Pull the plug” means disconnect it from the Internet or shutdown the server while you get a mitigation plan into place.)  You should have distinct memories of you or someone under your employ having at least two separate incidents in the last four weeks in which they dropped everything they were doing and immediately took action to resolve these problems.  Immediately means exactly that: right now, not during the next schedule code spring, not tomorrow, not in an hour.

I was up at 3 AM Japan time applying these patches, twice.  If the next patch drops at 3 AM your local time, someone should be applying it immediately.  Computers can count to big numbers very quickly indeed.  A six hour window between a patch dropping and the start of business the next day is more than enough for an automated scanner running on a botnet to have tried compromising substantially every Rails app on the Internet.  (Do you disagree?  You are overestimating how hard it would be to find your application.)

Aren’t you exaggerating?  Our application isn’t particularly high risk!  We aren’t high-profile, it doesn’t have obvious monetary return for exploiting it, etc etc. Good thing you aren’t really saying that, but you might be at an Internet cafe next to an engineer who has poor reading comprehension, so help me explain this to him: nobody needs to care about your application to compromise it using these vulnerabilities. They can be exploited in a totally automated manner over the open Internet, requiring zero knowledge of e.g. what version of Ruby you are running, what version of Rails you are running, what your URL structure looks like, etc.  (Somebody suggested “How would you determine which servers were running Ruby on Rails?”  Answer: It’s absolutely trivial to detect Rails applications in a scalable fashion, but why bother?  Fire four HTTP requests at every server on the Internet: if the server is added to your botnet, it was running a vulnerable version of Ruby on Rails.)

Aren’t you exaggerating? Clearly this would take a lot of specialized expertise to exploit! Yep… the first time. Now that people know how the exploitation is done, however, you could do it by just copy/pasting one of the proof-of-concept scripts or b) running a browser bookmarklet. (I am not passing out that browser bookmarklet, because I think that would inevitably lead to mischief, but just know that you’re rootable in a click if you didn’t take action on this. And, by the way, have been for three weeks or so now.)

We’re A Startup.  What Happens If We Lose A Server?

If you lose one server, you will lose every server, with very high confidence.  If, for example, you are a Python-using shop which had a Redmine instance running around with no code on it, and you lose that Redmine server, you can expect a skilled attacker to then pivot from that privileged location within your network to start compromising other servers on your network.  At this point, you need to have done absolutely everything right to make it impossible for that skilled attacker to prevail, and you almost certainly have not.  (Compelling evidence that you’re not as good as you think you are: you already had one vulnerable application which could be compromised over the open Internet.  To a certain philosophy, that isn’t your fault, but the attacker gets root regardless of whose fault it is.)

The actual steps a pen-tester would take to root your other boxes are pretty academic after they have one.  (For example, you can start probing other machines on the network for vulnerable services, use credentials found on your compromised machine to suborn other machines, take over routing hardware using vulnerable administration panels and then start intercepting all network traffic, etc etc.)  Just take it as a given, you will lose.  Companies much larger and smarter than you lose everything when this happens, essentially every time it happens.

We’re A Startup.  What Happens If We Lose Every Server?

A short preview of coming attractions:

  • You will lose the next several weeks out of your schedule dealing with this issue.
  • You will have to take down all of your applications and rebuild all your servers from scratch.
  • You can assume the attacker now has a copy of your source code, all credentials you have, all your databases, and all information you had like e.g. log files.
  • Do you take credit cards?  Were you taking credit cards through an exploited application?  You now have a PCI-reportable data breach.
  • Your local jurisdiction may have legal requirements that you notify the people whose data just got exposed.
  • You now have a public relations nightmare on your hand.
  • In addition to compromising any customer data you possessed, you have made it possible for diligent attackers to compromise those customers elsewhere.  The most trivial example is, if you did not implement password storage correctly, you have just handed the attackers a list of email addresses and associated passwords which they can now re-use on higher value targets like e.g. bank accounts or Gmail, because many users re-use their passwords everywhere.  (You use bcrypt?  Wonderful.  Did  the attackers turn it off when they rooted all your applications?  Can you conveniently check that, knowing that you cannot trust the contents of any logs on those compromised servers?  No?  OK, so instead of losing all the passwords, we can upper bound exposure at only all users who logged in since the attack started.  That’s an improvement… sort of.)

Basically, it’s Very Bad, but not the end of the world.  You’ll probably need expert help to get through it, like you would need if e.g. you got sued.  Unfortunately, lawsuits generally give you weeks of notice and progress slowly, but security vulnerabilities often give you negative several hours notice and get worse for every minute left unchecked.

We’re A Startup.  We Don’t Use Ruby on Rails So We’re Totally Cool, Right?

Can you enumerate every account on the Internet where you have a password and also every service consumed by your business?  Go ahead, take as long as you need: it is very important that you don’t miss one.

OK, let’s start with the obvious: Look for analytics providers and other folks on that list who have instructed you to embed JS on your website.  If I do this exercise, I come up with at least three results here.  Do any of them use Ruby on Rails?  (Are you sure?  Remember, if they have at least one Rails app on their network…)  Great.  If they didn’t patch in a timely manner, you should assume that Javascript you’re embedding on your website is in the hands of the enemy.  It is now a cross-site scripting vulnerability against every page it is embedded on.  Do you embed it on e.g. log in pages or anywhere your admins expose their own all-powerful admin cookies?  Boo, now the enemy has your password / cookies / etc.

Alright, let’s move down the line: Look for anybody who implements OAuth/Facebook Connect/etc.  Do any of them use Ruby on Rails?  Are you sure?  If they haven’t patched, you’ve handed the union of all privileges over the linked accounts to the attackers.

Alright, let’s move down the line: Consider everybody who has a copy of a password which you re-use elsewhere.  (You shouldn’t be re-using passwords, or variants of passwords, but I ignored that advice for years so I’m betting a lot of you did, too.  Maybe not you, specifically, but you know that chap in marketing who is great with people but thinks MSWord is complicated?  Consider whether he has access to anything sensitive in your company.  He does?  Well, sucks to be you then, but good on your for password security.)  Do any of them use Ruby on Rails?  Are you sure?  Did they use bcrypt/scrypt/etc to properly secure passwords at rest, and did they patch these vulnerabilities fast enough to prevent attackers from pulling them off of the wire?  Are you sure?  If you’re not sure of all of these things, consider every password compromised and take action appropriately.

One of my friends who is an actual security researcher has deleted all of his accounts on Internet services which he knows to use Ruby on Rails.  That’s not an insane measure.  (It might even be inadequate, because all the folks who are compromised are probably going to lose their database backups as well.  Well, if they have database backups.)

These are just a sample of ways in which these vulnerabilities can ruin your day.  They are very much not an exhaustive list.  If you believe in karma or capricious supernatural agencies which have an active interest in balancing accounts, chortling about Ruby on Rails developers suffering at the moment would be about as well-advised as a classical Roman cursing the gods during a thunderstorm while tapdancing naked in the pool on top of a temple consecrated to Zeus while holding nothing but a bronze rod used for making obscene gestures towards the heavens.

Somebody Dropped A 0-Day On Rubygems. What If It Happens To Me?

Yes, that certainly sucks royally.  Rubygems wasn’t even exploited using the patched Rails vulnerabilities — an attacker just learned something which worked (again, we’re on the leading, bleeding edge of security research here), applied it in a novel fashion, and compromised the Rubygems application.  As of me writing this it looks like we avoided the Ruby-ecosystem-wide apocalypse that would have happened if they had started backdooring gems, but let’s just focus on the immediate fallout: their system got compromised.  What if one of yours did, like that?

The first step is a preventative inoculation: If you run an application on the Internet, you should today establish a security contact page.  It only needs to include two things: a working, monitored email address and a PGP key.  Bonus points for giving some sort of public recognition to people who report security vulnerabilities to you in a responsible matter.  This helps to co-opt some security researchers so that they e.g. get in touch with you about the problem prior to just going ahead an exploiting it.  Software security has a curious system of social norms, where scalp collecting both builds both karma and pseudo-currency.  It’s bizarre, but just take this on faith: having a security page with a working email gives you a certain amount of We Should Avoid #’#(ing Their #()#% Up Without Asking First street cred.  (Naturally, like any social norm, that is a preventative measure rather than a panacea.  However, given that it is a well-understood norm, it gives you a bit of an edge in the PR battle should someone decide to just drop a 0-day on you.)

Good security pages to pattern after: 37signals (I particularly like how this page works for responsible disclosure while, in a dual-audience fashion, also doubles as being great marketing copy), Twilio, Heroku (again, dual audience), etc.

Have a plan for responding to security incidents. I call mine the Big Red Button. Thomas, a security consultant friend of mine, accurately observed that these probably caused the first Big Red Button events that many folks in the Rails community have ever had to deal with. We should learn from our experiences here.

For example: I pushed the Big Red Button at 3 AM in the morning, twice this month, to apply critical security patches and work-arounds.

So did I do a great job of addressing this problem? No, I did a pretty effing atrocious job of addressing this problem. Specifically, I have two old-as-the-hills Rails apps running on 2.3.X at the moment. Waaaaay back in 2010, Mongrel and Rails had a bit of a compatibility issue, and I solved it via a monkeypatch. The monkeypatch relied on a hardcoded version number, which I have been hand-incrementing every time I update Rails. It’s literally on the redeploy checklist, next to a note “TODO: This is stupid and should be fixed when I get a moment.”

I did three Rails app upgrades locally, three test suite runs, and three sets of smoke tests when applying one of these patches. The one in the middle happened to be Appointment Reminder, which is an application that has to be up during the US workday. Unfortunately, because I was exhausted while following my deployment and smoke test checklists, I a) forgot to bump the version number in that monkeypatch and b) did not follow the part of the smoke test which would have clued me on to “This is going to cause log-ins to fail on some browsers.” That resulted in some breaking downtime for some customers during the US workday, and me having to send an apology to all customers. That sucked horribly.

I have now fixed my monkeypatch to not require hard-coding the Rails version, simplified some of my deploy procedures, and am working in the next several months on beefing up my testing suite. Also, lesson learned about resolving “TODO: This is stupid” when it would take 5 minutes to do rather than having it blow up in my face.

There, that’s an experience I went through. Now you know the punchline, so hopefully you don’t have to go through it as well.

Similarly, we can observe:

  • We need an updated list of all applications running on our servers, so that we know when a problem with a technology stack affects them, even though this sounds like a boring Big Freaking Enterprise IT Department requirement. (And gulp their dependencies.)
  • For each tech stack we support, we need at least one expert following the primary source for security news for that tech stack.
  • We need whomever is responsible for product development and/or ops to, effectively, carry a pager for drop-everything-and-do-it-now resolution of security issues, just like we’d do for e.g. the server has fallen over or “our building is, physically, on fire.”
  • These requirements suggest minimizing the number of tech stacks we work with, even if that means passing up the new hotness occasionally.
  • Just like we have e.g. insurance on the building physically burning down, we should have some upfront investment in security. Good forms might include security training, outside consulting, or (if we’ve got a lot of money) contributing work towards securing tech stacks we rely on.

You Should Be At Defcon 2 For Most Of February

Big security vulnerabilities tend to be discovered in bunches.

Why does this happen?

  • Blood in the water attracts sharks. Some of my security friends would hate this phrasing, because “researchers don’t cause vulnerabilities, they find vulnerabilities”, but as a businessman who depends on software for his livelihood, I had exactly zero days of the last six years spent sleepless because of the latent vulnerability in Rails, but two days this month due to the pressing need for immediate mitigation. There are many more eyes pouring over Rails — and related projects — more closely now than typically. Many of them are white hats (yay!). Some aren’t. In general, there is a virtually infinite need for software security expertise, just like there is an infinite need for software, and there is a crushing lack of expertise which can meet it. Some folks who are capable of finding vulnerabilities are, due to attention/topicality/renewed interest/commercial potential/etc, now looking at Rails as of today.
  • Technology marches on. After you have a new exploit vector to play with, you can start applying some of the technology used to discover / develop / exploit it against other code bases, code paths, etc etc. For example, the first Rails vulnerability was parlayed within a day into a similar vulnerability in the MultiXml gem. The same underlying “YAML is very dangerous” realization enabled the Rubygems compromise. If I were working on e.g. Django, I would strongly suspect that security researchers are going to see whether they can find similar patterns on Django — it wouldn’t be the first time, since e.g. HMAC tampering vulnerability disclosures in Rails were followed up by similar findings on Django the same week.

I previously had a version of this post queued up right after the first bug dropped, but didn’t hit Publish because I got busy that weekend and thought it wouldn’t be timely anymore. That post included the lines “I will bet $1,000 at 100-to-1 odds that Rails suffers another code execution vulnerability before the end of January.” If you had hypothetically taken that bet, you would have lost.

You should expect February to be a very trying month for the Rails community and startups in general. Your security team should be at Defcon 2: be ready to respond to patches with particular alacrity, and expect there to be failures in the ecosystem outside of your ability to control them. For example, I’d make sure that you can rebuild systems without requiring access to Github / Rubygems / etc, and that’s (unfortunately) the tip of the iceberg.

This Sounds Like A #$()#%ing Disaster

That is primarily because this is a #$()#%ing disaster.

For my part, in addition to taking steps to fortify my own businesses, I’m (as time permits) doing some pro-bono security work on Rails. I do not have results which can be published yet. I strongly suspect based on early research that I will, in February, and I strongly suspect that other researchers (both white hats and the Bad Guys) are much, much better at this than I am.

Get ready. It will get worse before it gets better.

Bingo Card Creator (and other stuff) Year in Review 2012

I’m Patrick McKenzie (occasionally better known as patio11). When I started my business six years ago, I was greatly inspired by a few other folks who published the minutiae of their software businesses, particularly actual sales and expenses numbers. I resolved to do it for Bingo Card Creator, my (first) software business, and then just kept up the habit. I traditionally post the year’s numbers and my reflections on what worked and what didn’t right before Christmas: see years 2006, 2007, 2008, 2009, 2010, and 2011.  (This year’s installment was slightly delayed.  Merry belated Christmas?)

Obligatory disclaimers: It is a good thing that I’m CEO and not the bookkeeper, because if I were bookkeeper I’d be fired for incompetence. When I do the official accounts for tax purposes I virtually invariably discover a few thousand dollars of extra expenses. (You might reasonably think “Then shouldn’t you outsource this?”, and you’re smart for thinking that, but sadly my part-time bookkeeper can’t always catch problems like “Patrick forgot to hand her a business trip worth of receipts.”)

On transparency: I’m weakly committed to transparency: it is nice to have but not one of my core values. I don’t impose it on other people, so when my business touches a partner or customer I generally err on the side of keeping their details private, absent specific permission to share. I also politely decline to discuss stats for Appointment Reminder, largely justified by “I don’t want this post quoted against me in a partner meeting” should I ever decide to raise money for it.

Capsule summary of 2012: I had a very good year, across all lines of business, in terms of personal satisfaction, value to clients, and profitability.   The big story was meat-and-potatoes execution: taking things which I knew how to do and knew to be effective, and applying them in fun new ways.  Some examples follow.  Profits roughly tripled from ~$70k to ~$200k (on total sales of ~$275k), exclusive of Appointment Reminder.  2013 looks to be very exciting indeed.

The Year In Brief

Bingo Card Creator was in maintenance mode for approximately 48 weeks of the year again, with two experiments done with a site redesign and incorporation of direct ability to charge credit cards (via Stripe) rather than using Paypal or Google Checkout. The experiments were, taken together, a smashing success.

I once again planned on spending most of my time working on Appointment Reminder, and (once again!) life decided to get in the way. Last year it was losing two months of the calendar to immigration issues. This year’s “distractions” were much happier: I took off approximately three months for my wedding and honeymoon, and my consulting business decided to grow like gangbusters. In any event, I was able to repay a lot of AR’s technical debt, fix the occasional technical issues the service had been experiencing, knock off a few new features, close my first enterprise contracts, and approximately triple the paying customer base on the published plans.

Speaking of consulting: As planned, I spent less time on acquiring new clients and assorted promotional activities (conference speaking, etc), and roughly the same amount of time on the boring mechanics of scheduling and delivering engagements. I also walked my rate up a few times.

There was an interesting outgrowth of the consulting business: over the last two years I’ve delivered engagements regarding email strategies for SaaS businesses several times, and had to turn down many more due to lack of availability, so I tried my hand at productizing consulting via creating a video training course about that subject. This worked out very well, both for myself and my customers.

An opportunity fell into my lap to try angel investing (as angel, not as entrepreneur). It’s a bit of a long story, so I’ll probably cover it some other day.  I also wrote a book, as previously covered on the blog.  It launched very late in the year, so I’ve got no interesting numbers to share about it yet.

Bingo Card Creator

Bingo Card Creator makes bingo cards, mostly for elementary schoolteachers. It had far-and-away its best year ever, despite being in maintenance mode. This was largely driven by organic growth of the business and huge increases in conversion rates following the redesign and Stripe integrations, covered here. The differences are very apparent if you look at conversion rates for any month after May and compare it to the year previous, which is necessary since BCC traffic and sales are very heavily seasonal. Or you could, you know, just take a look at the sales graph.

Stats:

Sales: 2,254 (up 55% from last year’s 1,451)

Refunds: 89 (up massively from 14 — the story is so good you’ll have to read it below)

Sales Net of Refunds: $64,791.81 (up 40% from $46,233.68)

Expenses: $26,193.40 (up from $23,003.19)

Profits: $38,598 (up 66% from $23,230)

Wage per Hour: Approximately $1,000, given that I worked for approximately 15 hours integrating the new design and spend approximately 20 minutes a week doing support.

Web Stats:

(All stats are from bingocardcreator.com unless otherwise specified.)

Visits: 1.08 M (up from 821k)

Unique visitors: 875k (up from 670k)

Page views: 3.4 million (up from 2.9 million)

Traffic sources of note: Google (56%), AdWords (12%), Binghoo (11%)

Trial signups for online version: 87,000 (up from 83,000)

Approximate online trial to purchase conversion rate: 2.4% (up from 1.8%)

Narrative version:

Overwhelmingly the best thing that happened in 2012, or for that matter the last several years for BCC, were the A/B tests where I reskinned the application and marketing site and where I introduced Stripe charging individual credit cards. This breathed quite a bit of life into a business that had previously simply been running on autopilot. I’m incredibly happy with how that worked out, particularly as I was able to get the actual design work done by someone else, and only had to do the Rails integration and a few tweaks to get it working.

What Went Right:

  • I’m almost totally superfluous to the day-to-day operation of the business.
  • The aforementioned A/B tests delivered major wins, on top of a half-dozen more minor ones. (A percent here, two percent there, it adds up when you keep doing it for six years.)

What Didn’t Work So Well:

  • I used the Stripe quick-start code to do my integration and did not build in server-side validation to stop duplicate transactions, trusting the client to only submit once, using Javascript to guarantee that. This is reliable as long as your client is not the IE Javascript engine running on a machine while it is being struck by a bolt of lightning. My poor customer got charged 36 times for Bingo Card Creator. I, of course, refunded the purchases when I caught them. (In case you’re worried: while a lot of electronics got melted, my customer was physically unharmed.)
  • In addition to the above, switching from Paypal to credit card orders increased the number of duplicate orders customers put through by more than an order of magnitude. Previously I just trusted people to not do this. Apparently… it is time to algorithmically suggest to customers that just because they didn’t get an email in 30 seconds doesn’t mean they should try the purchase again.
  • At some point in 2012, I started dreading doing customer support. I’m not sure why — I think I’m just really tired of answering the same questions for six years now. I’m going to try to pass off L1 support to a VA in 2013. I probably should have done this 5 years ago.

Appointment Reminder

Appointment Reminder does appointment reminding phone calls, text messages, and emails to customers of professional services businesses. I launched it in December of 2010, so it is just turning 2 years old right now. I go back and forth on whether I want it to be the Next Big Thing for me. Since I want to keep my options open on that score, I refrain from quoting numbers about it publicly.

My idea was that AR would be my primary business focus at the start of the year. That was the plan last year, too. Once again, my execution on it left a little to be desired: I think I got done about 60% of what I wanted to get done. This was partially due to distraction from the rest of the business, and partially from not understanding the difference between “single”, “engaged”, and “married” as well as I thought I did. (That’s not a complaint so much as it is a reflection about reality — marriage is far and away the best thing that ever happened to me.)

Revenue: Undisclosed.  The monthly revenue run rate on the publicly available plans is approximately quadruple what it was in December 2011. Enterprise sales went from “zero” to “non-zero”.

Expenses: Undisclosed.

What Went Right:

  • Technical issues: Last year AR had multiple customer-visible failures, and when AR broke it broke very badly, with failure modes like “DDOS someone’s home phone line” or “Failure to deliver time-sensitive reminders sent to patients by their doctors.” I spent quite a bit of tightening the system up, and had a much, much more stable year. We still had one major incident (the VPS it runs on became unable to boot after a distribution upgrade) which caused six hours of wall-clock downtime, but thankfully maintenance was timed so that this only resulted in about 15 minutes of downtime relevant to customers, and we only dropped ~6 calls. I’ve figured out a lot of architecture / tech stack problems prior to reaching extreme scale, which is probably for the best.
  • Email marketing: AR sent precisely one marketing mail on January 1st of this year: “Thanks for signing up for the free trial.” I frequently do email marketing for clients, and it is always more sophisticated than that, but I figured AR didn’t have trial numbers to justify extra work. When I was writing my video course on email marketing, though, not taking my own advice felt very disingenuous, so I implemented most of what I was advising. Wham, conversion rates and customer happiness up, just like advertised. (Best single win? A checkup at 3 weeks into the trial which, if the account looks likely to convert, tells them how much money they’re saving. If they’re unlikely to convert, it offers a one-month extension to the free trial if they speak to me about it. That single email has been worth low five figures. Want more suggestions? Buy my course about lifecycle email marketing.)
  • Redoing pricing/plans: Appointment Reminder launched with $9/$29/$79/Call Me Maybe pricing. (Hey I just met you / And this is crazy / But pay me ten thousand dollars / It’s enterprise software, this line won’t even rhyme.) The $9 personal plan was a mistake, and I knew that when I created it, and even despite that I suffered a year and a half of it anyhow. D’oh. That wasn’t the worst mistake, though — it turns out there was a substantial market segment who were at above the quotas that the Small Business ($79) plan addressed, but were unwilling to play the Enterprise pricing game. They do, however, fit in the Office plan ($200). The (new) most expensive plan now accounts for over 1/3rd of revenue from the publicly available plans.
  • Enterprise sales: It’s a long story, but surprisingly it isn’t impossible to win them as a one-man firm calling from Japan… you just have to make the most out of the utterly unfair advantages that gives you.  (A trump card I lay early and often: “I’m the founder.”)  If you’re interested in this topic, I recommend signing up for my mailing list, since I seem to write more about B2B topics than on my blog.

What Didn’t Work So Well:

  • My responsiveness: I have not been doing a great job this year at pursuing enterprise sales (i.e. only successfully get a decisionmaker on the phone a low percentage of the time even for inbound leads), partly because I get a lot of leads via voicemail, which I don’t deal with very well. Many of them are poorly qualified, and as a result I find myself dreading listening to voicemail to call back and talk for 10 minutes (at 2 AM in the morning) only to discover that they’re not good fits for AR. This is something which rationally speaking I should want to do, since it the path forward for the business, but I have been only sporadically successful at forcing myself to do it. Ideally, I will systematize the sales process and then offload it to someone, but this requires consistently executing on it myself first, and at the moment my successful sales have been all one-offs rather than anything resulting from a repeatable process. (n.b. Welcome to sales at any early-stage startup.)
  • Technical issues: Did I mention I had six hours of downtime and nearly gave myself a heart attack resolving it prior to the business day starting for my EST-based customers? That isn’t acceptable going forward. I still have more to learn about this (and likely always will).
  • General level of interest: Even in weeks that I have blocked off to work on AR, I often find myself just lacking any desire to do it. The business isn’t intrinsically more boring that e.g. Bingo Card Creator, but the sort of things that I need to do to move it forward seem to hit my desire to work with a damp towel. On the plus side, not having investors or employees means that I have 100% control over the schedule. On the minus side, not having investors or employees means that I have 100% control over the schedule, and AR has frequently lost out to pressing matters like consulting engagements, League of Legends matches, or wonderful opportunities to clean drains around my apartment.

Consulting

Like 2010 and 2011, I did a bit of consulting in 2012 for software companies. I increase sales of SaaS companies, and that’s all. Under that fairly broad brief, I do everything from writing software to support marketing objectives (Fog Creek has a case study coming out eventually, I believe) to doing lifecycle email campaigns to repricing plan offerings to A/B testing copy tweaks to… you get the general idea.

My guests and I on the podcast ended up talking quite a bit about consulting in the last few months, and I wrote an article about it.

Consulting Sales: ~$140,000  (this includes something like $20k of Accounts Receivable, for delivered engagements whose payments I will not constructively receive in 2012)

Consulting Expenses: $~40,000 (travel, conferences, and catch-all for anything which isn’t obviously for another line-of-business, like e.g. buying a business iPad)

Narrative Version

Where do clients come from?  I primarily source engagements by participating on the Internet (Hacker News, my blog, etc), speaking at/attending conferences (most relevantly to consulting, Business of Software), having word-of-mouth from previous happy clients or other folks who know me, and occasionally from nebulous reputational factors.  A new client and I would typically talk for an hour or two, and if they look like a good fit, I send them a one-to-two page mini-proposal for the engagement.  The prototypical “good fit” for me is an established software as a service company with revenues in the eight figure range, a few dozen employees, and a company culture which focuses more on the product/engineering side of things than on the marketing/sales side of things.

What are engagements structured like?  It depends on the engagement, but a fairly typical proposal for a new client would be for a 1 to 3 week engagement, delivered contiguously and on-site.  (I do remote engagements, too, but largely for existing clients.  Being on-site is a bit higher bandwidth, which is helpful in the getting-to-know-you-and-your-systems/products/people stage of a relationship.  People also generally tend to trust folks they’ve met in the flesh and broken bread with a heck of a lot more than they trust an email address with attached wiring instructions.)  I charge a flat weekly rate, generally in the five figure region.  The beautiful thing about the choose-your-engagement-length structure to proposals is that if the client has budgetary issues then we can address them by moving particular deliverables out-of-scope and shortening the engagement, rather than by compromising on the rate itself.

“What is it you do, exactly?”  It varies extensively depending on the engagement, and the specifics are often NDAed.  Broadly speaking, I make software companies money, primarily by increasing the sales of their SaaS products, usually through either a) applying engineering expertise to solve a particular marketing problem or b) just straight-up marketing expertise.  (If a client were to theoretically ask me to just crank out features for their Ruby on Rails app, I could theoretically do that, but more talented programmers are available for cheaper, so I’d advise them against it.)  Some specific tactical examples might be:

  • Designing and implementing the first-run experience for their SaaS application, with the goal of increasing conversion from free trial signups to paying accounts and increasing lifetime value of paying accounts
  • Implementing a drip campaign, such as allowing potential customers to sign up for a free one-month mini-course on $PICK_A_TOPIC, where the mini-course also duals as a sales channel for the SaaS product the company sells  (One of the rare engagements I can actually talk about was doing this for WPEngine — it meaningfully and permanently increased their sales.)
  • Re-writing marketing site copy or re-doing design (I do wireframes, their designers make PSDs and working code, most of the time) to increase conversions to a SaaS product, generally with the new work getting A/B tested versus the old stuff so we know whether it is working or not
  • Re-doing pricing / packaging options, or presenting them in a more effective light, to increase sales, average order value, and average customer lifetime value.
  • Teaching teams at clients to implement A/B testing, email, better pricing/packaging options, etc etc so that clients can get good at these rather than needing to rely on me.
  • Being a sounding board for product / UX / packaging / etc decisions.  (e.g. “We’re considering moving a very successful desktop application sold on a licensed model to the SaaS model.  That will cost us millions of dollars and, if we commit to it, would be our #1 strategic priority for next year, to the exclusion of all others.  Prior to committing to doing that, we’d like to have external confirmation that this isn’t insane.”)

What Went Right:

  • Leveling up: The advice I gave in the podcasts and the above article is largely distilled from my own experience. In general, as compared to earlier in my consulting career, I’m a bit smarter with regards to client selection and to the kind of projects I work on, and I charge to match. The increase in sales is totally driven by an increase in average bill rate — I actually cut down weeks worked. (There are broadly speaking three ways to increase consulting revenue: increase utilization rate (percentage of time you spend doing billable work), increase your bill rate, or hire people. I could schedule as many weeks of work as I wanted, but don’t really feel the urge to do so since it would conflict with my software businesses and life in general, and don’t really see myself managing other consultants… at the moment, anyhow.)
  • Working with great clients: I’m privileged to have had the opportunity to continue working with smart companies, with excellent products, which had good opportunities for applying my skills to our mutual benefit. A lot of the stress of consulting is dealing with client relationships which you shouldn’t be in in the first place. Being picky and choosy has been a major win for me, and as time goes on I’m getting better at it.
  • Delivering for clients: I have my own personal Nagging Doubt Monster. NDM often wonders whether e.g. I’m worth what I charge to clients. On balance, I’ve always thought the answer was Yes, but I have had troubled sleep about it, particularly as my bill rate hit arbitrary threshholds that flipped my “comfortable” bit. Earlier this year, a particular engagement, whose results I’m unfortunately not at liberty to disclose, sent the Nagging Doubt Monster into indefinite hibernation. In addition to that particular engagement, it has in general been a very good year. Clients are generally thrilled with what they got out of working with me, and I feel likewise.

What Didn’t Work So Well:

  • Legal Stuff: You know how every consultant ever tells you “Hire a lawyer to do contract review”? You should hire a lawyer to do contract review. Some clients and I had differences of opinions with regards to the meaning of some boilerplate, which (while they eventually were resolved amicably) caused me way, way more stress than necessary.
  • Scheduling Issues (Client-side): I had about three-ish weeks of availability this year where I intended to be doing consulting work, but didn’t end up billing anybody, because I didn’t move engagements through the pipeline fast enough. (That would be a decent-sized hit if I were a traditional consultant, who generally aim for about 35 weeks of work in the year, but since I generally shoot for about ten-ish…) In the future, I’m going to revise the proposal-and-present-contract dance to decouple it from engagement delivery dates. Previously, I’ve generally gotten the final greenlight within 2 weeks of an engagement starting, and if I blow that date that generally means I blow that week of availability. Random events can delay both contract signing and delivery, so I think decoupling them in the future will result in not having to spin my wheels.
  • Scheduling Issues (My side): Relatedly, I occasionally have anticipated availability evaporate. I took three months off for my wedding, but that was planned. I also had August marked off on the calendar for working on my course, but that ended up swallowing a lot of September, and that delayed contract negotiations scheduled for September and thus cost a week or two of my fall consulting season when that bubbled down the line.

Productized Consulting

I created and sold a video course which teaches SaaS businesses how to use lifecycle emails.

I have, historically, intentionally avoided selling anything to software developers. Partly this was out of wondering whether I had anything of value, partly this was thinking the market was terrible (penny-pinchers with not-invented-here syndrome), and partly this was out of lingering distaste regarding “selling shovels.”

There’s a persistent meme among software developers which says “The way to get rich in a gold rush isn’t to mine for gold, it is to sell shovels to gold miners.”  This meme is often deployed to suggest that shovel-sellers are exploiting naive gold miners.  I want to eventually write an anthropology paper on the gold rush narrative as applied to startups, because it is fascinating, but my brief sketch is that people often use an incorrect syllogism along the lines of “If you sell shovels, then your customer must be a miner, then there must be a gold rush, but gold rushes are either intrinsically bad or there is in fact no gold rush, so your business is either doomed, distasteful, or distastefully doomed.”

After seeing 37signals, Fog Creek, Ramit Sethi, Amy Hoy, and others all produce information products which actually seemed to create customer value (in many of those cases directly to technologists), I started to feel a little more open to the idea of doing it. So early in the year, I created an email list for folks running software businesses, with the idea being that I’d continue cultivating an audience by producing free things that they’d enjoy, and eventually offer them an opportunity to buy something a little more in-depth than my typical writing.

Concurrently with this, I was doing consulting engagements, and I kept my eyes open for recurring customer needs. One major one was that most SaaS companies don’t make effective use of email marketing. In particularly, they send next-to-no lifecycle emails (emails triggered off of customer actions in the software), and those are an incredible opportunity if you execute well on them. I implemented lifecycle campaigns for fivish consulting clients, in some cases making hundreds of thousands of dollars in sales off of individual emails, and thought that rather than hiring out that expertise by the week I could probably package some of it as a training product, so other companies could implement the campaigns without needing to hire a consultant to do it for them.

(Here’s a replicatable strategy for making several hundred thousand dollars with a single email: start with a revenue base of $X million a year.  Email all customers asking them to switch from monthly billing to annual billing, in return for some incentive you can offer, which can range from “a month free” to “15% discount” to “Hey, you can book the expense this calendar year, so that will save you money on taxes.”  Feel free to try this with any client or day-job of yours if they’re already at scale — “We made so much money the accountant/bank called us to complain” will make for a great bullet point at your next contract/salary review.)

Why bother doing a productized consulting offering when I have software businesses and standard consulting to keep me busy? Partially, I love trying new things and just wanted an excuse to experiment. Also, consulting is working out fantastically well, but it routinely requires me to spend multiple weeks abroad on business, and that is less and less attractive to me as I get more and more married. So if I could replace on-site consulting with a consulting-like offering that I could execute on here from Ogaki, that would be a bit of a win.

I eventually decided on making a study-at-your-own-pace video course as opposed to e.g. an ebook or a series of webinars, and then wrote out lesson plans and started recording. I anticipated about two weeks to do the recording (I was shooting for about 5 hours of video after editing, so perhaps six or seven hours of raw video) and two weeks for a freelance video editor to get things ready for me. (I wrote all the courseware and payment processing code myself — rationally speaking that should have been hired out, too, but I was really looking for a programming project at the time.)

The course was eventually delayed a few times (my original estimate was two weeks of work and a three week shipping schedule, but it ended up closer to four weeks of work and an eight week shipping schedule).  Nonetheless, it did successfully ship, and seems to have worked out pretty well for customers.  (Amy Hoy interviewed me about the process in detail, in case you want tactical advice.  I expect that interview to be up in a week or two.)

(You can find the course here.)

Course sales: ~$60,000  (My mental target was $20k, so this was a pleasant surprise.)

Course expenses: ~$6,000 (freelance video editing, payment processing, video hosting, etc)

What Worked Well:

  • Building an email list: About 5,000 folks asked to receive email from me. They mostly get free advice along the lines of what I’ve often blogged, except in a bit more detail. For example, I wrote about SaaS pricing and consulting, and subscribers have told me that they’ve used advice in those emails to substantial effect in their business. My basic brief is “Don’t ever waste their time”, mostly because I respect that people have invited me into their inboxes. (Also, I pay MailChimp about $100 every time I hit the Send button. That would probably change the character of my blog posts a bit…) In any event, when you have a “warmed” email list of people who have pre-existing reasons to like what you have to say, since you’ve been creating value for them for months/years/etc, doing product launches is a lot easier than “Build it and pray that they’ll come.”
  • Value for customers: One of the reasons I avoided doing this for so long was that I was concerned whether customers would actually get value from it or not.  For both genuinely compelling ethical reasons and not-nearly-so-compelling Nagging Doubt Monster reasons, I greatly prefer doing things which have highly obvious ROI for customers over things that don’t.  Feedback about individual companies’ results with lifecycle email has been tremendously positive, ranging from “We had this on the list for 2 years but never knew where to got started, but then we bought your course, gave it to an engineer, and shipped within 3 weeks” to “This made us six figures.”  (Seriously mindblowing: the sales copy made one customer six figures.  An engineer reading it thought one point I mentioned in passing was worth repeating and forwarded the mail to their bizdev guy.  The bizdev guy used it the next day to close a 500 seat license.)
  • Stripe: Despite some issues with, primarily, corporate American Express cards thinking that $2k charges for training materials were a little suspicious, Stripe was extraordinarily easy to integrate and reasonably priced, like usual.  In addition, unlike one might reasonably expect for a merchant account or Paypal, Stripe didn’t require either advance warning or an after-the-fact investigation when I suddenly had a considerable volume spike.  (I was expecting plus-or-minus $20k in sales in a short period of time and, if one goes from $3k a month of sales to $20k a month, Paypal will have words with you, sometimes freezing your account in the process.  This is, I rush to add, totally rational and solvable by e.g. submitting them a bit of documentation and waiting, but I had a lot on my plate, and not worrying about that was a boon.)

What Didn’t Work So Well:

  • Workflow issues with video: I’m a good writer and a fairly decent conference speaker / classroom lecturer.  It turns out that lecturing to a camera is another skillset entirely, both in terms of maintaining pacing / energy / interest / etc and in terms of stupid technical issues like “You need to worry about having scads of hard drive space and, by the way, good lighting for taking the video.”  I’d give the content quality (in terms of advice) an A- or an A, but the presentation was often a B-.  This will probably improve as I get more experience with projects in this form-factor.  For example, while I like my decision to avoid word-for-word scripting the videos, the next time I’ll probably create e.g. Powerpoint slides or something to give people something more meaningful to look at during the lessons than me talking at them.
  • Outsourced video editing: I hired somebody to do all the editing for these videos, which was a tremendous time-saving measure over doing it myself, considering that teaching myself the Adobe toolchain would have been a terrible decision.  Unfortunately, my freelancer (a good friend of mine from high school — and yeah, I hear you and you’re probably right) had a run of “bad luck” with regards to e.g. hardware failures and scheduling issues, which resulted in the work getting delayed quite a bit and only about 90% of the way finished.  (There are, e.g., videos which I shipped with known editing bugs in them, on the theory that shipping today was better than delaying launch by a non-deterministic amount.)
  • Writing my own courseware: The site (which handles both sales and fulfillment) is a built-from-scratch Rails application which probably took a week or two to write (I was doing it concurrently with filming videos so I don’t have a great breakdown of hours used).  It is, basically, the best possible project to ask an intermediate Rails consultant to bang out, since the behavior is very well-specified and there are no surprises.  While I was quite pleased to have the opportunity to write it — you know, it’s like a new car, a new programming project has that smell of fun to it — rationally speaking that was a poor decision which probably cost me time and aggravation versus a) hiring it out and b) doing a totally-for-jollies programming project which wouldn’t need boring-but-important-to-get-correct glue code like user management or Stripe integration.  (Relatedly: what the heck possessed me to put it on a VPS again versus doing Heroku.)

Goals for 2013

Bingo Card Creator

  • Given that I haven’t had a full year at the new-and-improved conversion rates yet, I reasonably expect BCC to coast to approximately $80k in sales on flat costs, for something like $55k in profit.
  • I want to outsource 90% of the customer service load for Bingo Card Creator, because I add zero value to most interactions these days (there’s no reason other than ego to have “Thanks for your email.  Bingo Card Creator doesn’t support pictures and we do not anticipate supporting pictures in the future.” come from me rather than from a freelancer), my response times are getting longer and my patience are getting shorter with each passing year, and the cognitive load of dealing with even trivial amounts of BCC CS email makes me procrastinate about opening my inbox and dealing with (much higher priority) email for my other lines of business.

Appointment Reminder

  • This goal worked out pretty well for me this year, so let’s try it again: 10X sales from 2012.
  • I want to explore flying to an industry conference as a sales channel for AR.  My back of the envelope math suggests that it’s probably straight-up worth it to just show up with an iPad in a target rich environment and take orders for the $200 a month plan on the spot.  (My expected LTV is over $2k and I can demonstrate the product in about seven minutes while standing on my head, so any decent close rate makes that a very good use of a day, right?)  Plus if I successfully execute on that plan two times then I can take the best-converting demo script, write supporting software, and then hire somebody with good interpersonal skills and a desire to spend time on the road to deliver it for me.
  • Now that I have a few marquis clients on enterprise pricing, I’d like to start closing more enterprise deals at true enterprise rates, rather than discounted-heavily-to-win-this-proposal rates.
  • In addition to walking up enterprise rates, I’d like to systematize the enterprise sales process, with the eventual goal of being able to have large parts of it executed by people who are not me.
  • I’ve neglected AR’s systematized marketing (e.g. content creation for the website, A/B testing, etc) horribly.  Need to rectify that.
  • Deliver more features which are needed for higher-end customers, like “upload CSV of appointment data” rather than requiring manual entry, group appointments, etc etc.
  • Continue improving service reliability.
  • Strongly consider whether Appointment Reminder needs to eat more of my business attention pie, given current results and growth prospects.  (e.g. At AR’s 2012 revenue rates, an opportunity which would generate $50k in revenue for a few weeks of work elsewhere made sense.  There are plausible scenarios for AR under which that would be economically irrational after some point in 2013, versus just continuing to execute on AR.)
  • Also, strongly consider gulp hiring.  Which I’ve been saying for two years now, but one of these years it will probably happen.
  • Continue to wrestle with the questions of whether “I devote 100% of my work efforts to AR, take investment, and  take a shot at an eight or nine figure exit five years from now.” sounds like an attractive option and, if so, whether now is the time to pull the trigger on it or not.  I go back and forth on this.

Consulting

  • $300k in sales looks like a decent number to shoot for, assuming I’m actively available for consulting all of 2013, which is not a given.  (That means that I have availability throughout the year, rather than meaning that I have 52 weeks of availability — consulting is a very part-time thing for me.)
  • Continue to adjust rates such that clients and I are mutually happy with engagement outcomes.
  • Schedule things better to pack work more densely into fewer, shorter trips abroad.  (Delta really enjoys me flying 100k miles a year but Mrs. McKenzie doesn’t, particularly when it means six weeks away.)  If this results in less availability, that isn’t an unhappy outcome.

Productized Consulting

  • Do more stuff along these lines, since it worked out pretty well in the experiment, I can only see it working better with improved execution, and the project ended up being a lot of fun.
  • Let’s pluck a number out of thin air for a numeric target: $200k in sales.
  • Offer better packaging options for later products, including some sort of scheduled, scalable live component like webinars, which would provide a lot of value for customers, justify higher price points, and not disrupt family life or the other businesses’ schedules too much.
  • Outsource more of the execution of collateral tasks in the future, like video editing and programming for the sales site.

A Brief Personal Note: Ruriko and I got married on June 23rd.  Words can’t express how wonderful she is, including tolerating my weird little hobbies, like entrepreneurship.

I think that, aspirationally, career/job/business/etc was never supposed to be my #1 priority, but be that as it may it sucked up a disproportionate amount of my twenties.  I have no immediate plans for retiring, but will work on having my stated priorities more closely match my allocation of time and attention in the future.

I Wrote A Book On Conversion Optimization For Software Companies

Long story short: I wrote a book on conversion optimization, SEO, and related topics, for software companies.  You can buy it here (Kindle, iPad, Nook, PDF) or on Amazon (Kindle).

For the last couple of years, folks have been asking for me to write about A/B testing, conversion optimization, and whatnot in book form.  I’ve never done it, simply because the notion of spending months of work with a publisher to write a book that would (all things being equal) likely fail to earn-out a $5,000 advance seemed to be a silly thing to do just to put “published author” on my resume.  I love writing and I like teaching, don’t get me wrong, but writing as a profession always struck me as work, and not even particularly fun work.

The folks at Hyperink convinced me to give it a try, though.  They are basically trying to make Publishing 2.0 work as a business model: provide authors with design/editing/etc using a workflow which was invented by people who grew up on Google Docs rather than manual typewriters, and create books relevant to niche audiences partially by republishing existing essays and partially by supplementing them with new material.  (The upshot for the authors is that royalties are split more equitably than 93-7-but-with-accounting-practices-that-would-make-the-RIAA-proud.)

What It Includes

  • ~ 20 essays that originally appeared on my blog, covering selling software, software pricing, conversion optimization, A/B testing, SEO, and the like, mostly of interest to software companies
  • ~ 4 essays which are totally new, including one on reducing churn rates
  • a follow-up or two on how some experiments worked out after I had written them up… including never-before-seen tales of abysmal failurebecause that sometimes teaches as much as the successes

Who Should Read This

  • Solo entrepreneurs running software businesses.  (I’d suggest actually having a working product — this book doesn’t cover product development, except when it is incidental to optimizing for marketing outcomes.)
  • Marketing / engineering / product folks at SaaS companies looking to synergize get some ideas of things which engineers can build that will make meaningful differences for the business
  • Anybody who has ever thought “Rather than reading through 600 posts in chronological order, could you just distill your blog down into the best twenty posts and categorize them for me?  My time isn’t totally valueless.  And put them on my Kindle/iPad/etc so I can read them on a plane.”)
  • My family.  (“You wrote a book?  I want to read it!  What is it about?”  “Conversion optimization for software websites.”  “I’ll pass!”)

Chapter List

  • Preface
    • Preface (new essay)
  • Selling Your Stuff
    • Introduction (new essay)
    • You Should Probably Send More Email Than You Do
    • Does Your Product Logo Actually Matter?
    • Dropbox-style Two-sided Sharing Incentives
    • Two-sided Referral Incentives Revisited! (new essay)
    • Engineering Your Way To Marketing Success
    • Selling Software To People Who Don’t Buy Software
    • Increase Your Software Sales
    • The Black Arts of SaaS Pricing
  • Increasing Conversions
    • Introduction (new essay)
    • Stripe And A/B Testing Made Me A Small Fortune
    • The Most Radical A/B Test I’ve Ever Done
    • Keeping The User Moving Towards Conversion
    • Practical Conversion Tips For Selling Software
    • Minor Usability Errors In Checkout Funnel = You Lose Lots Of Money
    • 10-Minute Tweaks to Boost Your Conversion
  • All About SEO
    • Introduction (new essay)
    • SEO for Software Companies
    • Strategic SEO for Startups
    • The Big Book of Getting People to Link to You
    • Developing Linkbait For a Non-Technical Audience
    • Why You Shouldn’t Pay Any SEO You Can Afford
  • Conclusion
    • Thanks for Reading, Lets Talk Churn Rates  (new essay)

Luckily, Hyperink Was In Charge Of Design, Not Me

If you’ve followed my blog or products for a while, you’re probably aware that I have the design sense of an addlebrained squirrel who fell into the Christmas eggnog and drowned.  Luckily, Hyperink took care of the book design and typesetting, so that it looks better on your e-reader or screen than anything I would have natively produced.  Here’s a sample (click to enlarge):

Formats Available

In Which I Explicitly Ask For The Sale

If you generally enjoy my writing and think a curated collection of twenty essays on the topic of making more money for your software business is of interest to you, please buy the book.  (It is, as far as I know, $9.99 everywhere you can buy it, but vagaries of the publishing industry mean that I can’t guarantee that this is true for you.)  If you don’t want to buy it, don’t worry, I won’t think any less of you — enjoy the blog, come back for more next year.  If you buy the book and enjoy it, I’d encourage you to leave a review on Amazon, as folks are really keen on seeing them.

Note to other potential authors: the folks at Hyperink are Good People and were a pleasure to work with in the discussion and editing process.  If you’ve considered trying your hand at writing a book but, like me, thought the traditional publishing industry is largely toxic and exploitative by construction, I’d encourage you to give them a whirl.

P.S. I traditionally post a Year In Review for my businesses, covering what worked and what didn’t as well as statistics, shortly before Christmas.  See, for example, 2011′s edition.  I will do it again this year, but owing to some bookkeeping hold-ups, it will be shortly after Christmas rather than before.  May you and your families have peace, love, and health this Christmas and always.

Kalzumeus Podcast 3: Growing Consulting Practices, with Brennan Dunn

Keith Perhac and I recorded our 3rd podcast episode with special guest Brennan Dunn.  Listen to it (or read the transcript) for:

  • why you should increase your freelancing rate
  • how to discuss your value with your clients such that they’re happy to pay your increased rates
  • how to scale to a multi-employee consultancy, without being bankrupted by poorly timed receivables
  • three stories from successful consultants on three very different trajectories in their businesses
  • how you can use drip email to sell more product (and consulting gigs, too)
  • a bit about the business of selling info-products: pricing anchors, marketing tactics, list building, and more

If You Want To Listen To It

MP3 Download (~90 minutes, ~211 MB) : Right-click here and click Save As.

Podcast format: either subscribe to http://www.kalzumeus.com/category/podcasts/feed in your podcast reader of choice or you can search for Kalzumeus Podcast in the iTunes Store.

Transcript: Running a Consulting Business, With Brennan Dunn

Patrick McKenzie:  Hi everybody. My name is Patrick McKenzie, perhaps better known as patio11 on the Internet. This is the, I think, third episode of the Kalzumeus podcast, with my buddy, Keith Perhac.

Keith Perhac:  Hello.

Patrick:  And our special guest, Brennan Dunn, of Planscope and “Double Your Freelancing Rate.”

Keith:  Woo!

Brennan Dunn:  Hey there.

Keith:  That was our live studio audience. Last time, we had a theme song. But I don’t know. Do we have a theme song this time as well?

Patrick:  I think we are totally theme‑song‑less.

Keith:  OK.

Patrick:  This is still a third‑rate podcast.

So, Brennan, recently you had a product launch. Why don’t you tell us a little bit about that, and we’ll segue into the discussion about it.

Brennan:  Absolutely. So, for the last few months, I’m been thinking about putting together an info product, specifically one that is targeting, really, a passion point of mine, which is freelancers who undercharge for their services.

It’s something that really came from my own experience. For way too many years, I charged dramatically less than what I was worth, and only recently have I fixed that. And since I’ve fixed that, not only has my income gone up, but the caliber of client that I work with has gone up also.

And I really wanted to just not only spill the beans as to how I got there but also back it with pricing research that I’ve done. So I’ve done a lot of reading of really executive‑level books on the science of pricing and really targeting factories and massive companies that produce products, and I wanted to find a way to distill that into something consumable for an independent service provider.

So I took that knowledge. I took my background. I interviewed, I think, six or seven what I deem “premium” freelancers, people who either charge a lot or have, really, a very good business around themselves. They’re not just developers. They’re not just designers. They’re true businesspeople. I condensed that into a book that I launched last week.

Three Very Different Consulting Businesses

Patrick:  So, feedback that I frequently get from people when trying to tell them similar things is that “That’s great for you, but you are a coding übermensch. I am merely a PHP coder. How would I ever make that transition into being a business kind of guy?” So I think that’s maybe something that’s worthwhile for us to discuss.

Just for background, for those of you who don’t know, all three of us do consulting work on a semi‑regular basis. And without revealing anyone’s rate cards, they’re pretty up there, versus the, say, $20‑an‑hour commodity PHP coder that you might know or perhaps have in your household somewhere. A good portion of our business success has been that we started out there when we were young and stupid.

[Patrick notes:

I run a solo consultancy focused largely on selling more software for B2B software/SaaS companies, which often involves the sort of marketing-by-building you see on this blog.  Keith runs a development consultancy with several freelancers on staff, and personally does a mix of project management, strategic work, and tactical-level design and development.  Brennan does business consulting with a twist of Ruby/Rails, and has previously run a company with approximately 10 full-time W2 employee consultants.]

But we are no longer young and stupid. And our universal experience, and that of lots of people in our, say, social and professional circles, has been that, just like Brennan said, when you start charging more and you start positioning yourself as being more valuable to your customer’s business, you deal with radically better clients.

Brennan:  Oh, yes.

The Many Benefits Of Charging More

Patrick:  They’re savvier. They are smarter about using a consultant’s services. They’re more respectful of your time. They have less random problems with things. Your advice is more likely to get adopted. Everything about life gets better as you charge more. Also, charging more tends to make you a little more money. I think that’s a mathematical identity or something. Don’t discount having a little more money, because it really makes life better.

Keith:  I want to go off on that a little. You were mentioning, the more you charge, the better your client. And that is completely a perception of how much your time is worth. And I’m sure, Patrick, you’ve had experience like this; I’m sure, Brennan, you have as well; and I know I’m guilty of this as well. We have a tendency to want to give people who we know the “friend rate.”

Or it’s a new client and you’re like, “Oh, I’ll just do it cheaper this once.” And as soon as you say that, your perceived value of your time goes down so much. I’ve had clients call me up for 30 minutes, an hour, just to talk about random shit that they want to talk about, because they don’t value my time. Because they’re paying me $50 an hour and they’re like, “Eh, he’s got time to talk about whatever it is I want to talk about for a half an hour.”

Brennan:  What starts to happen is your standards start slipping when you do that. What you’ll find is clients will then start paying their invoices late. They will start doing a lot of things which hurt your business. This always happens. Oftentimes the relationship basically changes dramatically. Instead of it being a business relationship, it becomes, I don’t want to say a friend relationship, but more of a relationship that’s very fluid and has no standard.

Patrick:  Yeah. I think people treat a given business relationship with a certain, fixed amount of professionalism in it. And if you come in and set the expectation that you are a… The Japanese word is kichin to shita (きちんとした).

Keith, can you help me translate that?

Keith:  Proper? Solid, business?

Patrick:  Yeah, a solid, proper professional, like a lawyer would have with their clients.  People will tend to treat that relationship inside that solid, proper, professional schema. You’ll naturally have a certain amount of human rapport with your clients, but they’re going to expect that if they don’t pay an invoice on time, there will be negative consequences.  They will show up to meetings on time because that’s just the way we do professional things.

Whereas, if you treat yourself like somebody’s kid’s brother who’s been hired as a favor, you will get treated like somebody’s kid’s brother. And if you’re 15 minutes late to a meeting that you’ve got set up with a kid who you’re doing a favor for, well, the kid’s time is kind of worthless and he can wait. It’s no problem. And if you’re a couple of days late on paying him, he lives with his parents. What’s the problem? So, yeah.

Keith:  Right. Nothing, I think, will drive this point home more than, I’m sure any freelancer listening to us has proposed something, any idea about a website or a project that they’re doing, and then a consultant who is paid maybe 100 times more than they are comes in and says the exact same thing, and the boss is like, “Oh, that’s a brilliant idea.

Why didn’t we think of this?” Right? Because having the high‑paid consultant, having the high‑paid person, has a perceived value attached to it, so anything they come up with is generally going to be perceived in a better light.

Brennan:  It’s not only that. Their presentation is usually entirely different. So one of the problems with most freelancers is they talk in code or design. They think that, for instance, I know Ruby, therefore I market myself as a Ruby developer.

I’m doing some work with somebody who wants to kind of rebuild it an all Microsoft Access system that they have that has kind of accumulated over 10 years.

If I were naïve about this, I would market myself to them as a coder, and say: “I’m going to rewrite your code to be Web based instead of using Microsoft Access.” Instead, my positioning is “I’m a business consultant, we’re going to look at what you have currently and see where we can optimize and what that will do long term. It’ll save you a lot of money because I’m focusing on your business.”

I’m not focused on the code necessarily. I’m focused on what code do I need to write and I’m really internalizing this. What code needs to be written in order to make his business more successful? And that’s something that I see so many people mess up. They look at themselves based on what technologies they happen to know and use instead of the outcome that the clients actually hire us for which is make more money than they spend on us.

Patrick:  My buddy Thomas Ptacek, who has a zillion karma on Hacker News, says that one of the differences between freelancers and consultants is that consultants own the business objectives of the code that they write.

[Patrick notes: I am referring to this post in particular ( http://news.ycombinator.com/item?id=4247615 ), which is possibly the most value in the least words of anything ever written on HN.  Seriously, it is an executable roadmap to building a multi-million dollar consultancy, from someone who has done it… in under 500 words. Go read it and come back.]

Imagine you’re building a scalable content generated system or something. That’s basically like the Ruby On Rails five-minute-build-a-blog demo with a slightly different objective. But the slightly different objective is designed to directly create business value for the customer?

Brennan:  Right.

Patrick:  “We’re going to get you more traffic from Google. You are going to convert X percent of the material and a free trial that is going to convert to incremental revenue.” And rather than you delivering these scalable content system and saying, “OK, stuff can now appear on your website, so I guess I’m done,” you instrumented it out so that you can directly measure how much revenue that gets produced.

And then the crucial bit is that when you produce revenue and other meaningful results for clients, and you gain a reputation for doing this at previous clients and for this particular client, then you present yourself as someone who accomplishes these business objectives rather than someone who is coding.

Rather than doing the Underpants Gnome narrative where Step #3 is ????, you fill in the blank. Then your client proceeds directly to Step #4: Profit.  After you demonstrate that you can do this, then you charge numbers that would shock the conscience of commodity programmers.

Brennan:  Right.

Patrick:  So, speaking of numbers that would shock the conscience, all three of us are in kind of in an awkward position because there is absolutely no reason to say your rate publicly. [Patrick notes: I defend this position later in the interview.]

Let me talk about past rates. I think all of us at one point probably charged $100 an hour.

Keith and I used to work for a Japanese megacorps. Well, mine was a little more mega‑corpy than Keith’s. But Japanese engineers make nowhere near $100 bucks an hour. So, I thought $100 an hour was quite a high freelancing rate.

It turns out that if a given software company has, say, $10 million in revenue, and you successfully add a percent to that by improving their conversion funnels, then that is worth a sizable amount of money… virtually regardless of the time taken. $100 an hour no longer makes sense for your services.

[Patrick notes: Some of the things you’ll need to convince people to do to make big, motivational wins for their businesses will be literally placed outside your authority if you charge $100 an hour. My consulting clients are typically on the small and nimble side, but if I was just hired on as a commodity Rails programmer for a few weeks, it would be very difficult to convince the company to let me e.g. redesign the onboarding process. That can, by itself, raise growth in revenues by plural tens of percentage points, so if revenue was otherwise growing by say $100,000 a month, this could add over $X00,000 of revenue just within the first year.]

Brennan:  I think we tend to be very bad at quantifying the amount of success we bring our clients.

Patrick:  Yes.

[Patrick notes: Many of your clients are not set up to measure the success you bring them.  Some are not even aware that such a thing can be measured.  In your messaging to them before and during the engagement you should educate them to the point where they can anticipate the specific change that will happen and then measure the magnitude of that.  Write the reporting logic for this if you need to – it is a great investment in happier clients and higher paychecks. (This can be as simple as convincing them to install off-the-shelf tracking like Google Analytics or KissMetrics.)]

Brennan:  And we’re very bad at charging for that. We look at ourselves as you rent an hour of my time and for that hour I’m going to write code instead of looking at the big picture. The big picture is that we can spend X weeks to build a system that will increase revenue by 1%. If they’re making $100 million, that’s a million dollar increase of revenue. And the amount of time or effort or whatever else that went into that is immaterial as long as it’s less than the net result of that investment.

Patrick:  Right.

Keith:  You pretty much took what I was going to say. I was going to say that one of the key things, and we had talked about this with Amy Hoy as well is rephrasing what you are and what you’re doing.

Brennan really touched on this and he said, “I am not a programmer. I am a business consultant that is doing X.” Reframe your value in a way that the client can understand.  Especially for non-technical customers, programmers are a commodity component which they can buy for $5 an hour on oDesk.

Programmers build tools. Business consultants solve problems. I always felt that I was solving problems with programming. However, the problems I was solving were things that other people were identifying, and the solutions I was delivering had to be adapted by other people to be used by the business.  [Patrick adds: And guess who got the credit? That’s right, the idea guy, who was smart and reported how he transformed cheap labor into a big win for the business.]

I was solving technical hurdles and technical issues. I never made the business 10%.

Brennan:  A good parallel to that is saying to a carpenter that you’re solving problems by cutting wood. The benefit is, to the end consumer, you’re building a comfortable chair or you’re doing a wardrobe that holds all of their clothing. [Patrick adds: I don’t love this analogy.  If I were a high-end carpenter, I would sell my beautifully handcrafted wooden desks as demonstrating success and status and thus helping my lawyer clients win more deals. Since IKEA doesn’t sell anything that does that, I won’t have to compete with them on price anymore!]

The carpenter tasks a lot of craftsman’s pride in how they cut the wood and what tools they use, but it typically doesn’t matter to the end customer.  [Patrick notes: Notice I just positioned the carpenter such that it does, because their desk comes with a narrative – handcrafted by an American with a lifetime of apprenticeship and only the finest sustainably organic hardwoods -- and the IKEA desk does not. I’m not joking about that, by the way, I would call my trees organic trees.]

Patrick used the word commodity, which is something I used throughout the book. If I’m a $100 an hour ruby developer and I market myself as a developer who writes ruby and then a $5 an hour ruby developer comes along on oDesk, there is absolutely no reason, if I’m a commodity, that my potential client should not be hiring the person 20 times less expensive than I am.

It’s like corn. I don’t care what field corn was grown on. I want to eat corn. When we position ourselves as a commodity like corn or oil, or whatever else, it becomes a race to the bottom, which you really can’t escape until you start positioning yourself differently.

[Patrick notes: Have you noticed that people are routinely trying to sell you corn-that-is-better-than-corn?  Organic corn?  Sustainable corn?  Locally grown corn?  This is because they’re searching for a point of competitive differentiation with efficiently raised corn because the price of corn has declined in real terms over time, due to efficiency gains caused by industrialization and improved farming practices, and it will asymptotically approach zero.]

Keith:  This phrase from your book hit home with me: you said we devs have “personal vanity” which causes us to believe that how we work intrinsically matters to our clients.

I like to think that I write clean code. I write extensible code. I write clean HTML. My designs are responsive.

[Patrick notes: Ever had a designer pitch you on code which validates? I’m really glad grocery stores haven’t figured out a corn validator yet. This cheap corn doesn’t validate! You should buy validated corn, it’s like unvalidated corn except it costs three times as much and if you eat it Google will love you more.

(P.S. I am being slightly unfair in this analogy. I apologize, farmers, for suggesting by implication that corn consumption is as ineffective at raising SEO rankings as code validation is.)]

Selling Better Code As A Benefit Rather Than A Feature

Keith: Clean code doesn’t surface any value to the customer.  I know from a technical standpoint, there are a lot of merits to it, especially for people who have to come in later.  Explaining this to a non-technical customer off-the-bat is difficult.

Brennan:  The clean code you’re writing is the feature. You just need to explain the benefit. You need to explain your maintenance cost will go down.

Keith:  Right, exactly.

Brennan:  You won’t be getting as much of having somebody come in a year from now and clean up the mess. We call this technical debt. Oh, by the way, don’t ever use that prahse with your customers. It just sounds bad.

Basically, just say, “I work in such a way that the amount of money you will need to invest in the system after this initial fee as the work is complete, will be less than it would if I didn’t work that way. That’s how you position the benefit.

Patrick:  Honestly, learn the language of your customers. It’s not universal across all customers, but many customers would phrase that as a “lower total cost of ownership.” [Patrick notes: TCO in MBA-speak.] If they talk like that, I understand that you’re a programmer and you hate sounding like a guy that has an MBA. If your customers talk like they have an MBA, perhaps because they are indeed MBAs, then you need to learn to speak that language.

You need to learn to talk like: “We have a lower total cost of ownership. There is lower risk of failing to execute on our strategy in later quarters due to unbudgeted maintenance work required by this system.” Or, “the system will be insufficiently flexible to start handling newer initiatives that you want to bolt on later.” That sort of thing.

In addition to just the money thing, I think there is also a status gain in moving up the ladder from commodity web programmer or designer, or what have you, to business consultants Take a lawyer, for example. A lawyer’s professional competency is writing letters. But no lawyer in the history of mankind has ever described themselves as a “professional letter writer for hire” or a “letter writer, specializing in empty threats.”

Lawyers are smart about law being a profession and having their time and advice be valued. They reliably charge extraordinary rates for that time billed in six‑minute increments. [Patrick notes: Engineers often think this is solely due to licensing requirements and/or the ability of lawyers to drum up demand for legal services by suing people. This is not the sole point of differentiation. After all, lawyers capable of reviewing e.g. a consulting contract are ubiquitous and the work is routine, but they universally charge more than all but the most successful developers.] Also, the notion that they’re providing outsized value for the business with their relationship to the business, allows them to be perceived as more credible and to be at the table when the important decisions are made.

As you level up in consulting, you might reasonably work directly with the CEO at your smaller clients – say, one with about 30 employees.  [Patrick notes: 10 ~ 30 is the sweet spot for my practice.] One level below the CEO, you’re talking to project leads. Even as an outside consultant, you might be in charge of things that are core to the strategic outlook for the business. “With great rewards comes great responsibility” on that, and vice versa.

It’s kind of a nice place to be. You’ll spend less time having the minutia of your craft get micromanaged and more time being able, within reason, to pick the tools/processes/people you want to do your work with. [Patrick notes: Nothing like the notion of a four figure invoice coming in for a meeting to convince people to stop bikeshedding.] You’ll be allowed to succeed in your work in a way that if you’re charging $20 an hour and you’re perceived as somebody’s kid brother, you won’t really be allowed to succeed in the work.

[Patrick notes:

This is incredibly important guys. As an outside consultant, you depend on the cooperation of several people within the company for your projects to have any impact. One of your core professional skills is a) securing their cooperation and b) making them look like geniuses for doing it while c) getting enough of the credit to get invited back. There are several failure modes here, such as “Presenting a worthwhile initiative which would reflect poorly on the employee who did the work closest to that in the company, causing him to torpedo it to avoid looking bad.” You have all the fun of office politics without necessarily having an office.

Resolving political issues is itself a skill clients will pay money for. Your paycheck is, occasionally, a burnt-offering to the gods of Trusted Third Party Opinion, just like it is sometimes a magical talisman against Blowback If This Goes Sour.

In addition to picking clients with an absolute minimum of dysfunctional workplace dynamics to them, one way I like to avoid these issues is making explicit efforts to share credit for everything I do with internal employees. For example, in the (somewhat rare) case where clients don’t arrange for it, I’ll invite employees out to dinner on my nickel. I make a point of praising specific accomplishments to their bosses. When I do post-engagement write-ups internally I give them credit explicitly, by name.]

Brennan:  The really big difference is you go from being an outsourced developer to a really a close advisor that has a huge opportunity, where they can help steer the direction of their client’s company.

If you do a good job and you basically end up creating a very strong ROI, you’ll be able to use that in so many different ways in the future to your advantage, which will make your life easier. Like you said, Patrick, you’ll be able to be more selective. You’ll be able to choose to work with people you really want to work with, instead of just choosing to work with whoever happens to contact you.

Different Business Models For Consulting Companies

Patrick:  Switching gears slightly. We’ve talked about waking up from being a freelancer to being a business consultant which again that’s partially just a semantic difference, but partially not so much. Like words actually do have meaning.

Another related topic, which you two have a bit more of experience from me, is expanding from a consulting practice to a consultancy. That is not actually the right word. Basically, making the leap a solo individual producer of whatever it is that you are awesome and good at, into somebody who manages a firm which produces that thing that you were once good at.

That was a major step for businesses that quite a lot of people take, actually. I think our listeners are probably interested in it, so why don’t you guys just describe how making the leap was for you?

Keith:  I’m still in the middle of leaping, so I’m kind of mid leap. I have four people with me right now, none really doing the consulting side. I have sales and some developers with me, but mainly I’m still at the head of the consulting. [Patrick notes: Keith subcontracts work but is ultimately responsible for deliverables, project management, and client relations.]

I guess the pull of having a consulting agency is being able to do more stuff with your limited time, right? There’s definitely a monetary aspect to it as well. But at the end of the day, there’s only so many hours in a month. That means that there are only so many clients you can take.

If you want to increase that, the only way to do it is to increase the number of people working with you. So that’s where I am in it. I just in the midst of trying to start it. Brendan, I know, has successfully completed that subquest, I guess.

Brennan:  There comes a point, where if you do good work and you’re providing positive benefits for your client or clients, that you’re going to get more work than you can handle. There are two paths you could go down. The first path is to just say, “I’m booked. Maybe we can try to squeeze you in, in a few months after I have some more availability, or I can refer you to some people I know and trust.”

So that’s path number one. That path doesn’t really warrant itself to positive financial growth. [Patrick notes: Slight disagreement with Brennan here. If you’re at capacity, charge more until you aren’t. This really does have substantial financial rewards to it. A lot of the “consulting doesn’t scale!” objections are really “consulting doesn’t scale beyond mid six figures” and, well, at that level many people might say “Scaling, hmm, nice to have but not really a hard requirement.”]

Brennan: You delay the project, which hurts your customers, but you still get the same amount of money as delivering the project immediately.  Instead, you can offer your customers predictable scheduling for more money by going down the second path, which is, “OK, I’m not going to turn you away or delay this project. Let’s try to figure out how I can get subcontractors or even employees to help me handle the surplus of work I have.

So that was the path I went down, that second path, and I went down it at first using what I really do think is the prudent path, which is pull together a network of independent contractors who you trust, who you know, who have the same standards that you have, and basically, strike a deal with them saying, “I’m going to handle the sales and marketing, the invoicing, the money collection.

You will get to focus on your craft. In exchange I will be taking a significant percentage of the project rate, and I will give you the rest.”

That’s the easiest to define because there’s a very clear bottom line. It’s basically they work an hour. You get paid X. They get paid Y. So that’s what I ended up doing for a while.

And then I ended up making the move to basically taking out a lease on an office, which I really didn’t need to do, but I ended up wanting to do that, and you start actually hiring full time employees, which I would not recommend doing if a cash flow issue, where cash flow tends to fluctuate month‑to‑month dramatically, because one thing about employees is they’re fixed expenses.

Patrick:  Huge fixed expenses. [Patrick notes: The fully loaded cost of an American developer can easily be in the $15,000 to $20,000 a month range to keep on the payroll.]

Brennan:  Exactly, with variable income, in October you might have a lot less active projects than you would in September. So that also includes having either yourself or bringing on somebody on who is competent in business development, because you will need to always keep your pipeline full, especially as you scout more billable employees.

And you’re going to quickly realize that you’re really going to need stop wearing the hat of a technician, and start wearing the hat of a business owner. Your life will revolve largely around accounting, and payroll, and possibly even legal things, and maybe even HR…Or really, not maybe HR, definitely HR. It becomes a much different ball game.

Keith:  So was that a hard transition for you, because I know all three of us really started as programmers. I mean we started programming because I assume that’s what we loved to do. I know Patrick and I loved programming. I assume, Brennan, you love programming as well. Was it really hard for you to switch into that more business managerial role?

Brennan:  It was, because I ‘m really not that great of a manager. It’s really never been…

Keith:  I think your success begs to differ, but…

Brennan:  Well, no, I, frankly, there are people significantly better than I am who would have done a much better job than I did at times. You know I made many, many mistakes. I made mistakes hiring. I made the biggest mistake I ever made was thinking everyone works the way I do. Just the mistakes where in the dozens. Mistakes that really ended up costing me a lot of money.

So for the first really year and a half after creating this consultancy, I made less money than I did as a freelancer. That sounds strange, right? How it could be possible that when I have 10 people I’m making less money than I was when it was just myself?

It didn’t make sense on back of the napkin calculations. But I had fixed expenses and highly variable income:for example, I’ve had to cut a refund before due to us basically really messing up when we were hired to do something.

And it is ultimately the consultancy owner’s fault. They’re the ones who need to own up to it, but you’re really responsible for other people’s actions, which I’m really not the best at, but you know it took some time to really get to be comfortable with that.

The Difference Between Charge Out Rates And Employee Wages

Patrick:  So I think folks who might be a little early in their careers or less experienced with this might not have a very reality‑based view on like the difference between, say, charge out rates that a client is getting charged and what the business pays for that. So this was news to me so I’ll go into what I’ve learned about it for the edification of people here.

When I was just getting started with my consulting business back when my rate was $100 an hour, I remember talking with one of my clients who also runs a consulting business, and I said that this math sounds very attractive:

I want to hire someone on at $80 an hour, charge him out at $100 an hour, and pocket the $20 difference.  $20 * 40 = $800 a week profit for doing nothing.  Yay.

This math is catastrophically wrong. [Patrick notes: Hat tip to Thomas and Jason Winder, who warned me off of this.]

It is not possible to have a business be successful on that sort of margin, for a variety of reasons. You’ll have collection issues on invoices. Employees always cost more than the sticker cost even if you’re paying them strictly on an hourly basis. [Patrick notes: Substantially more if they’re salaried employees, because the fully-loaded cost with healthcare, benefits, vacation, employment taxes, etc, can be 150% to 200% of their salary.] It’s unreal.

The actual number that that math works out at is employing someone at $40 to $50 an hour and then charging $100 for their time. If they’re a salaried employee, less than that, since they’ll have to be paid every month regardless of whether you have the pipeline for that or not.

The kind of universal experience of everyone when they first staff up to two people at the company, or three people at the company, is there is a few months where they do sharply less well than when they were doing in their solo practice. As a solo consultant doing very well, you typically have 80% to 100% utilization at the senior partner’s rate.

Then pretend you bring on two guys as full-time employees and pay them market wages.  For a Ruby on Rails developer who is billable [Patrick notes: “Billable” is a term of art meaning “of sufficient quality to be allowed to work on a client project without intensive supervision” – green developers are not billable], that would be $8,000 a month, cash, which – crucially — costs you $12,000 a month, because you have pay for taxes, health insurance, various overheads on paid vacation, all that fun stuff.

So if you staff up to two people, your fixed cost is $24,000 a month for those two people. At 50% utilization, if you’re charging less than $6,000 a week, you’re losing money.

You should be charging north of $6,000 a week, but that is neither here nor there.

So the way that you eventually make money under the model is to consistently get your utilization rate up into like the 70, 80 percent, and then only hire up once you’re basically exhausting everybody.

Keith:  Exactly.

Patrick:  This was not obvious to me, so I’ll tell you what smart people have told me. It is my natural inclination that when the business gets upside it shares a substantial amount of that upside with the employees. This is incorrect: employees trade most of the upside of the business for predictable paychecks every two weeks.

The actual way that successful consultancies work is: If you promise your employee a salary of $100,000 a year, or $8,000 a month, you make payroll come hell or high water.

If you can’t pay payroll then you don’t eat, but you still pay payroll. As far as there is a sure thing in the business world, the sure thing is that you make payroll every month. In return for that, when your business blows it out of the water, your employee does not get an automatic 20 percent raise.

They get the sort of three to five percent raise that salaried employees generally expect, and then you get to take home a bit more money in return for all the risk that you’ve taken earlier in the business.

[Patrick notes:

So, for example, in the case where we have one senior consultant and two employees he has brought on:

Senior consultant: 50% utilization at $10,000 a week, with remainder of time devoted to prospecting

Junior consultants: 75% utilization at $6,000 a week, $12,000 monthly fully-loaded cost

The senior consultant “earns” approximately $32,000 a month.  This math scales straight on up with headcount and utilization.

This has interesting implications.  One fairly obvious one is that two friends who found a consultancy and scale to five employees will, fairly quickly, end up more than modestly wealthy, with (probably) less execution risk than doing a product company.

]

Brennan and Keith: That sounds about right.

Brennan:  I can’t begin to tell you how many times I missed paying myself. When you have a consultancy it is an expanded freelancing operation, and there’s always risk in freelancing with clients paying on time. Many of us, myself included, tend to naively assume that everything will just work well, that I will invoice, and within 30 days I will get a check for that amount, and everything will go smoothly.

What you tend to find is that that is the furthest thing from the truth. Your employees will largely not expect this, especially if you’re recruiting from bigger companies that have massive lines of credit, or a lot of cash in the bank, who have never had any payroll issues.

When you have a small consultancy, you probably will have payroll issues, and it’s very hard to approach an employee and say, “Oh, by the way, I know I’m supposed to pay you twice a month, but you’re going to need to wait.” Even one day really starts to breed… I don’t want to say hostility, but…

[Patrick notes: Cultural side-note: Keith and I, who have largely internalized working at Japanese corporations, both went literally sheet white when we heard Brennan mention missing payroll as a possibility.]

Keith:  Well, it makes them nervous. Not being able to hit payroll, even by a day is like, well, what’s going on? Should I start polishing up my resume, start looking for somewhere else? It’s like it gets really nerve‑wracking.

Brennan:  And that’s exactly what happens, and the thing I wish I would have done in hindsight was have…I heard from a very reputable source that whenever making a hiring decision, even if you know you have the work for them immediately, it’s good to kind of set aside probably about $30,000 in savings just for that one employee just as a buffer.

And the biggest thing that most freelancers who turn to consultants, or consultancy owners mess up on isn’t really having the work, because nowadays there’s more demand than supply, it’s making sure that your cash flow situation is working well, is working fine. And cash flow issues are the biggest way to really mess up a good thing.

Patrick:  Young technologists coming from a consumer background know that PayPal exists, credit cards exist, and therefore expect transaction processing to be more or less instantaneous. It therefore follows that a) the traditional 30‑day terms that you extend to your clients are absurdly generous, because it should be very easy to pay people within 30 days if you have money, and that b) if you actually give people 30‑day terms than they will invariably pay within 30 days.

This is very at odds with how the world actually works. Coming from the three people here, do we want to have a complaining about clients anonymously session? What’s the longest it’s taken for an invoice to get paid?

Keith:  Infinitely.

Brennan:  Yeah, I would have to say never paid is the longest.

Patrick:  Let’s scope it to invoice from clients you are happy to do business with. Good people. What’s the longest it has ever taken to get paid? I think my record is nine months.

Brennan:  And you’re still happy to do business with them?

Patrick:  Yeah.

Brennan:  All right. My record was six months, but I can tell you a pro tip that has basically solved all of my cash flow issues, and the pro tip is to prepay everything.  You simply do not do a week of work unless that week is paid in advance.

I don’t know when it became standard to say, “I’m going to do all this work for you. I’m going to shoulder this risk. And then I’m going to have this window of a month before I see anything, any sort of compensation for that.” And yet that is the standard payment term. [Patrick notes: This is “Net 30” – the client has one month from the invoice date to pay.  It is a very standard payment term.]

Brennan:  I know especially if you’re working with a big organization where your client who you talk to each week probably isn’t the one who signs the check, Net 30 is standard. Smaller clients, though, can be moved.

I made the mistake once where I billed twice a month, so on the 15th and 30th of each month I would send an invoice.

They had 30 days to pay that invoice. With one client I had sent two invoices covering four full-time employees.  Our client ran out of money and stuck us with $60,000 of unpaid invoices.

Sure, you can go the lawsuit route. You can do a lot of that kind of overhead work, but the problem is, according to my attorney, because they’re behind a corporation, all they’re able to do really is request that their business’s bank sends the amount that they owe. You can’t go their house. You can’t go after their personal assets.

[Patrick notes: By the way, has Thomas convinced you to incorporate prior to doing business with serious businesses yet? If that company had not been incorporated, Brennan would have had legal recourse against the owner’s house.]

What I’m starting to do now, positioning‑wise, is telling people, “I’m not in the business of debt collection, and I’ve had to be a debt collector way too many times, so if you want to work with me, you’re going to need pay me a week up-front. If the check clears, then we will work that week.” That solved everything, honestly.

Patrick:  I’ll put a little asterisk on that. If you work at any company which is large enough to have a purchasing department, as a sole consultant or as the owner of a small consultancy, it is highly unlikely that you will have sufficient pull to pull that off. I’m just putting that out there.

Some of my mentors have made that abundantly clear for me. I don’t typically get companies of that size, but my more successful clients are right on the cusp of this: they have a standard contract for consultants, and you get what the contract says. It’s kind of a take it or leave sort of thing. The purchasing cycle is what it is.

On Consulting For Large Companies: Payment Terms Are More A Suggestion Than A Rule, Really

Conversely if you’re working at any company that has a purchasing department, you should be charging more money than you can even countenance.

Keith:  And the other side of that is, and this is in my experience. You guys might have different experience, but I’ve worked with a lot of larger companies, and I’ve never worried about them paying on time. Like the big companies, they have the purchasing department. You send the invoice. They’ll generally pay. Let me rephrase that in saying I have had them dispute the amount of the invoice before, but I’ve never had anyone just completely not pay.

Patrick:  Large companies may not fail to pay, but there are a lot of big companies where the purchasing department as a matter of policy has a understanding of how that 30‑day clock works that is different from the way that, say, a normal human being or a computer understands the way that 30 days is measured.

For example, you might assume that it’s 30 days after the date on the invoice, because that’s what actually printed on the invoice. The purchasing department might assume that’s it’s 30 days from the start of the invoicing cycle after acceptance of delivery, and those two numbers are very, very different things. That can be like a three‑month difference.

Brennan:  Right.

Patrick:  So if you’re dealing with, say hypothetically (not a client), Bank of America, you will not budge the Bank of America purchasing department, because they just don’t care. They’re not graded on paying you in a quick fashion. In fact, to the extent that their department has any KPIs, it’s paying the money that is owed as slowly as possible. As long as they’re not getting sued on a weekly basis, they just don’t care.

Brennan:  Right. Which when you have fixed expenses monthly within your company, and it’s not just your income on the line anymore, that can be very risky, and that’s why make sure you have the cash. Make sure your cash flow situation is good before you start getting reckless is my best advice…

Patrick:  And with large companies like that, they know that dealing with them is a pain in the butt. That’s one of the reasons that they pay so much for this kind of service in the first place.

Man, this is like freelancer tip number one. Never underbid with the goal of getting more business. It never works out well, ever.

Brennan:  Exactly.

Why Businesses Are Happy To Pay More For Contract Labor Than For FTEs

Patrick:  There is a reason that a fulltime developer costs $100,000 a year, but the same developer working on a contract basis costs bare minimum $8,000 a week. Everyone knows that there is overhead and risk involved. You have to make that back somewhere. Conversely, the business, they care more about themselves than they care about your financial situation.

The things they get out of having a person available is that, even in America, which is a very many America states are employment-at-will [Patrick notes: I misspoke and said “right to work”, which is related to unionization]. “At will” means they can fire you at any time for any reason [other than a few exceptions explicitly contrary to the law or public policy]. It generally takes a lot of time to onboard a new employee, both in searching for them, going through the candidates, hiring somebody, training them up, getting them actually productive on the project, evaluating their performance, seeing that it doesn’t work out, and then firing them.

Even though a business can theoretically fire an at-will employee in a day, typically it takes from three to six months after you’ve reached the point where, OK, it’s clear that it’s not working out. You just need to get all your ducks in a row to avoid a possible lawsuit.

One of the reasons that companies come to consultants like us in the first place is that we can credibly promise that the business needs that they have will be delivered like two weeks from now. There is a number that they write that number on a check and, bam, it gets done. And in return for bam, it gets done, the number on that check has zeroes in it, lots of zeroes.

Brennan:  One of the core things I really tried to include in my book is the mistake I see a lot of people making with basically, reverse engineering their prior salary to come up with their rates should be.

Patrick:  Oh, god, yes. Particularly if your prior salary is $2800 bucks a month. High‑five to Keith and I.

Brennan:  I mean there is a ton of these rate calculators where you plug in your mortgage, and you plug in all your living expenses, and then it’ll print out some sort of number. I didn’t want to say it outright in the book, but that’s really the self-centered way. Deducing a rate from your needs ignores how your client receives value from the work you do for them.

And that is why the selfish route, the route based on, “OK, I need $5,000 a month to live, therefore my rate will be whatever that will be.” Many people make this mistake. I get to see many consulting rates because I run PlanScope, a tool for consultants, and folks enter their rates as part of the normal use of the tool.

And with one simple SQL query I was able to really get a grasp of, OK, what are people charging across the board? There is a chasm in rates between $50~75 and $150+.

I wanted to really understand why it was like this. So I reached out to a handful of these different people, some on the high end, and some on the low end, and got to know them and their businesses.

[Patrick notes: The money graph in the money post about money!]

Brennan: It is almost surreal how the people changing three times as much are not three times as better developers. The reason for the huge discrepancy is how they communicate their value and how they refuse to allow fear and uncertainly to rule their businesses.

Patrick:  Keith and I have both been consulting for about two years now.

Keith:  More of a year for me, actually.

Patrick:  I think the difference between my first going rate and my current going rate is more than 7.5x. I think Keith has also ranked up quite a bit. I’m not 7.5 times a better Ruby on Rails programmer or A/B test implementer, or email marketer than I was two years ago. I’m better, but not seven and a half times better.

What I’m seven and half times better is identifying the right clients and then communicating to them that working with me is going to do wonderful things for their business and then actually delivering on that.

And to be honest, I’m probably undercharging by a lot, even at my rate, which is quite healthy. (I won’t say the number out loud, because there’s absolutely no good that can possibly come out of quoting your rate publicly, but it might be shocking to a lot of people who read my blog, which it’s funny.)

It’s like how many times do you read something and it’s like, “OK, I’ve made X company Y percent, which we all know is over a million dollars”, but if I were to say or put a number on what my week cost, a lot of people who like me, and who want me to succeed, would be like, “Oh, wow, that’s way, way, too much for only making people a million bucks.”

Keith: Well, of course, because you’re just the bingo card guy, right? I mean you make bingo cards for teachers.

Brennan:  I don’t agree that rates should be completely private. I found that when I started to publicly put my rates out there it’s helped me really initially get a much better…And it might be different for you because a lot of your referrals they come via referrals through they know about you.

You know I was talking to one of the owners of Thunderbolt Labs last week in Dublin, Randall Thomas, and we were talking about one of the things…I referenced him in my book, and I say they put publicly on the front page of their website. They say, “This is what we charge per hour. You need to book us in pairs of two. And this is how much it’ll cost if you want to train you for a few days.”

And in talking with him regarding this same thing. And in talking with him I realized that it provokes a lot of interest. People see a high number, and they kind of scratch their head and say, “Wow, he must have a lot of cajones to be putting this large dollar sign on the front page of his website.”

Because the traditional way of approaching things is be vague. Get people to contact you. Now you have a lead and then pull their price right at the last moment. And that’s like standard sales, right? You know it’s hard to acquire a lead, therefore don’t put any impediments between you and having a new lead in your CRM.

But what we found is it’s reduced the amount of qualifying we’ve had to do, which is always a good thing, and it’s allowed us to get off the bat a different client who treats us differently than I think they would otherwise.

Keith:  Right.

Brennan:  It’s hard to test a consultancy website because gauging conversions might not be as easy as it would be otherwise for a product site, but it’s something to try out. I’m starting to be swayed in the direction of publicly putting up your rate. It’s like on a menu.

Keith:  You talk about pre-qualifying the customer and vetting the new clients. I’ve had so many clients that because I don’t say my rate upfront, we have the huge discussion. We talk about the proposal and everything, and I’m like, this is how much it’s going to cost, and they’re like, “Oh, we don’t have that type of money.”

And there goes 5, 10 hours, 15 hours of my time, having thought about all this, and you chalk it up to a loss. I mean that’s just how the business runs, but to be able to prevent them, like you said, saves a lot of time, and a lot of headache and heartache.

Patrick:  Not to be persnickety, but: If it takes you five to 10 hours to get to the point where you understand if someone is willing to drop $10,000 bucks, that might be an opportunity to improve your qualification process. Obviously I’m out of the price range of a lot of people who come to talk to me for this, and that’s OK, but I don’t think I’ve ever had a period of longer than an hour where I was totally in the dark about whether someone was a good prospect for a consulting relationship or not.

Keith:  I’ve had clients where I have given a vague estimate at first just to test budgets, and no batting of eyes, no nothing, and then when I come back with the proposal, which is exactly that, they’re like “Oh, by the way, we have no money.” So I think there are people who, maybe not purpose, but they either think that our time is not worth so much or they just want to get a free consultation. [Patrick notes: After a certain level, free consultations are a cost of doing business. This is just non-billable overhead which goes into lining up the 70%ish of your schedule which is billable. This is, again, why you set your rate so high. Proper rates pay for a lot of coffee dates and free proposals.]

Brennan:  So one thing that really helps is when somebody contacts you saying, “I might be interested in hiring you,” have kind of a list of a few questions you send them, one of them being, “Do you have over X amount of dollars for this project?” You’re not publicly putting out your rate, but you would be amazed how many people have contacted us as a consultancy where it’s very obvious that we have a lot of people on payroll, saying, “Hey, what can we get for $1,000? ” (This is clearly unrealistic.)

And unless you want to be putting up with things like that, the quicker you can qualify, the better, because the last thing you want to do is to kind of lead them on and then spend all this time. And one of the reasons I’d do putting my rate public is it makes it less likely that people will try to negotiate that.

It’s a lot like if you have a restaurant, and you charge $10 for a sandwich, it’s rare that people are going to say, “Can you give it to me for 8?” You know you have in effect a set price I’ve found that people stop trying to go lower.

Patrick:  I have the endless respect for both of you. I think it would not really work out very well for me. One reason is that my rate goes up on a fairly regular basis, and I don’t want my rate from three months ago being quoted as evidence against me in a future negotiation. [Patrick notes: For similar reasons, no divulging salary histories.]

And also the client pool is kind of heterogeneous. I don’t know if I actually pronounced that word right, because English is not my native language anymore.

My favorite clients are in the Fog Creek zone: successful, independent, closely held companies. In rough terms, most of my clients have eight figures of revenue and two to four dozen employees.

But that’s not 100 percent of the people I’ll ever do business with, right? Say that, hypothetically, Google decided to call me up one day. If Google calls up and asks for my thoughts on making AdWords 2% more effective, the rate that I quote Google will not be within an order of magnitude of the rate that I quote anybody else.

Keith:  And that goes back to the value, because the amount of value…Google’s about at what, adding two percent to Google’s bottom line is not the same as adding two percent to a company that’s only making a million a year, for example.

Brennan:  Yeah, I think that’s a very valid point, and I think…I mean I know for a fact you and I do very different forms of consulting. I deal with a lot of unknown startups and people who are single founders, or they are the CEO of a smallish company. It’s harder to gauge whether they can afford me, it’s very easy to Google Fog Creek and know who they are. I don’t know, but I think if I were doing more of the consulting you were, I might not publicize it as much or at all.

Patrick:  I think my favorite post that was ever on Hacker News was about this guy who was saying that all the animals get together, and they try to discuss what’s the best way to be an animal, and the lion say, “Oh, you need to run fast, eat things, and spend most of the day sleeping,” and the ants say, “Oh, you need to add 10,000 of us,” and the monkeys say, “you need to eat fruit and live in trees.” [Patrick notes: http://news.ycombinator.com/item?id=469940 ]

What’s the best way to run a consultanc?. There are a lot of successful ways to run a consultancy, a lot of successful offerings that you can have for clients, charging models, yada, yada, yada. With that said, there are some definite failure modes like charging too little money, and there are also things I think are wins for almost everybody.

One which I would like to suggest to both of you, because I know you both charge an hourly basis, the best tip I’ve ever gotten was to start charging weekly. It makes life so much better, both because it tends to make scheduling better. If you charge hourly, you will often end up having weeks that don’t kind of cleanly bucket, right? That decreases your effective utilization rate, which like we discussed earlier has major impacts for the business.

Another being that people have a kind of very constrained dynamic range for the amount of money an hour of someone’s time is worth. They typically know what every hourly salary they’ve ever worked for is, and they’re all low numbers. And they know what every other hourly employees’ numbers are, and those are low numbers, too.

It gets difficult once you get past $100~200 an hour to continue increasing one’s hourly rate, and people feel inclined to make adjustments to that hourly rate in ways that seem reasonable when you’re talking about a number, that low number, but they’re huge with respect to the business.

Like if you quote 250, they might say, “Ah, 250′s a little tough. I can do 225.” And that’s 10 percent off your bottom line right there.

If a client needs a small win to feel good about themselves or to bring back to their bosses, I would much rather have them slice a few hundred dollars off an invoice rather than slice $25 off an hourly rate. [Patrick notes: If a client actually tries this, offer to cut scope rather than cutting rate.]

Brennan:  Right.

Patrick:  If you’re quoting a weekly rate, $25 moves your outcome not at all, whereas if you’re quoting an hourly rate, it moves it quite a bit.

Brennan:  So I’ve actually starting shifting towards a weekly rate also, and one thing I would advise everyone is to A/B test your new leads. ou should always be experimenting with different tactics about whether you’re pricing by the day, the hour, the week, and everything else.

[Patrick notes: I have to be the picky statistician here and complain that it is virtually impossible to A/B test this because unless one is negotiating hundreds of deals in parallel one will not have statistically confident results from this experiment in any reasonable timeframe.]

Brennan:But one of the things I’ve found, and here is kind of a punch list for why weekly is better. First of all, if you’re charging hourly, you might as well just be a contracted employee, and they’re going to get very particular about scheduling. They’re going to…

Patrick:  That is so true.

Brennan:  Look at line items. They’re going to start being very particular, because frankly you don’t have a product. You’re selling time. Whereas when you approach it as a weekly flat rate product, that’s really what you have, and there’s no nitpicking that goes on with, “Well, you know, I actually like the way Bob worked over Jim.”

Or, if you have any product management overhead, every client on earth hates seeing that as a line item, you can include that in that one set price without needing to justify those line items come invoice day.

Patrick:  Right. Here’s a fact of life: clients will not always have their act together. I was working at a particular consulting site, and my point of contact for whatever reason was not going to be available for the next couple days. I said to them, “All right. No problem, I’ll just use your WiFi, and I won’t invoice you for the next two days.

Someone older and wiser said, “Shut up. Never offer free work ever again. If you’re working on a weekly rate, and the client doesn’t have their act together, that’s fine. The client is paying for not having their act together.”

Whereas if you’re working on an hourly rate, if you send someone an invoice that has a line time of 16 hours of “waited for Bob to get back from vacation,” your client is going to be very, very pissed off.

Brennan:  Exactly.

Patrick:  If you’re not well established enough or you’re not comfortable enough to go up to a weekly rate, even going up to a daily rate it will get you all the scheduling benefits and you won’t be micromanaged like you’re a teenager working for a restaurant anymore. [Patrick notes: Ever felt the need to itemize a consulting bill with entries like “Conference call about the email migration: $46”? Why? Do either you or your client really benefit from that level of detail?]

You’ll also tend to catch the benefit of things that were previously getting lost to inefficiencies in the business.

One of our mutual friends, Amy Hoy, runs that time tracking software, so I don’t want to smack on time tracking too much, but I think that time tracking is a technological/process patch on top of a hole in the business model, which is that if you are explicitly selling time then accurately tracking the time is really, really important because you will be leaking time out of your bucket, and then that leaks money for the business.

If you switch to the daily rate then your entire time tracking solution is a calendar that has circles or checks on it. No matter how the business or your particular schedule for that day or importantly your clients schedule for that day works out, you will stop leaking quite so much value in sort of like dead weight loss of the business.

Selling Info-Products

Patrick: So we’re about an hour and ten minutes into the interview, and there’s one more topic that we would like to talk, so let’s move a little bit away from the making awesome consulting businesses thing. So Brennan, you just released a product that is online course/eBook offering. Keith has significant experience working with info products as well, and I am dipping my toes in that water later this month with an online video course offering teaching people how to do lifecycle emails better.

Let’s talk a little bit about what we’ve learned about that, but before we get into what we’ve learned about it I know I had a comfort issue with this before I got started. What’s the difference between what we are doing and the scamming info marketers who are hawking books on AdWorks about how to make money online with the tip that some mom discovered in their spare time?

Keith:  Absolutely nothing. Nothing. We are just as horrible as them.

Patrick:  Stab in the face, Keith, stab in the face.

Brennan:  I remember I posted something that got to Hacker News, on how I had originally sold, I think the first 2000 dollars in sales. It had a link to the sales site. There were people who said, “Wow, you look like a scammer,” because I use bolded fonts and italics in some places and I lead things in with questions like, “Are you unhappy with your rate? Does doubling your rates scare you?”

These are the tried and true marketing tactics that need to be done if you want to quickly capture somebody’s attention and then convince them to keep reading. We joke and we laugh at a lot of these infomercial products that you see on late night television, or you see these little landing pages for “how to work from home and make a million dollars.”

I think the tactics we use tend to be pretty similar. You have a clear call to action. You have a headline that captures people’s attention. I don’t think there’s a clear difference in medium between us and them.

Keith:  I think there’s a difference in product.

Patrick:  Right.

Keith:  I also think we provide value outside the products themselves, by for example educating the community outside the scope of our products. The sleazy marketers, they really don’t give anything back. I know, Brennan, you talked about how you had used your email list and how you had emailed peopled and funneled peopled and made your 2000 dollars in presales.

I mean, Patrick is pretty much famous for always talking about his sales numbers and what he did and what his actual sales numbers have been, as far as Bingo Card Creator.

So I think both of you, and I try to do this as well, are very open with the business aspect of what you’re doing. I mean, info products are info products. There is no way to really draw that clear line between scammy and not scammy, other than how each individual person feels. But at the same time, I feel that you guys give a lot more back to the community, showing how you are building this, showing how this is working, and teaching other people who have not bought your product.

Patrick:  I think that there has to be an element to the discussion: does the product actually provide value? The biggest difference between what we do and what the typical ClickBank funder does is that the “Three Quick Tips for Slimming Down Your Tummy” will not actually work. The big difference between us and them is that our advice actually works.

Keith:  I don’t know. Have you seen my tummy? I have a six‑pack right now.

Patrick:  I do not want to see your tummy, Keith.

Keith:  It’s beer. The six‑pack is beer.

Patrick:  We’re not selling to un‑savvy folks who typically get taken to the cleaners with “Make Money Online.”(99 percent of them will not make a single dollar.)

We’re selling to savvy and, frankly, very, very skeptical professionals, who are capable of evaluating claims that we make on how our advice will make their business better, just like they’re capable of evaluating claims that two weeks of our consulting services will create a software product that will make their businesses better. What we sell works.

Brennan:  I took Amy Hoy’s “30×500″ course, and one of the principles in the course is what are called e‑bombs, which are education bombs.

Especially to the audience that I’m marketing to, you can’t just throw them a sales site, right? What I’ve found to work really well is to basically give a lot of information away for free, whether it be…”If you’re looking at writing a book, here us some of the things I ran into when I was writing my book, and here is what worked and didn’t work.” What you’re doing through that is you’re breaking down any initial trust barriers that people intrinsically erect.

Basically, what we’re doing is we’re getting people to trust us. And then the natural segue is to say, “If you appreciated what I had to say here and this jives with what you’re looking for, I also have a product that will do X, which you might be interested in.” And that’s the proverbial call to action. And you can do this through blogging. You can do this through a lot of different outlets.

I think the biggest instrument to success, both with PlanScope and now the book, has been doing that. I mean, I’ve done articles for freelancers on how to estimate a new project or something, and that will get shared to quite a few people.

And then, basically, what I’m saying is this philosophy that is in this post, if you like this post, it’s represented in this product that I’ve built and you might enjoy it. And I’ve found that to be a huge win in terms of, not only is it a free avenue for sales, because it’s your time that you’re spending writing these educational blog posts, but they really establish yourself as an authority in subject X, and that helps tremendously.

Patrick:  I already hate myself for what I’m about to say. I’m going to say that it’s Content Marketing 101. Why do I hate that?

Number one, because I hate the word “content.” It auto-commoditizes the valuable information and insight you had to share.

And number two, because I think that’s unnecessarily disparaging, because that is a tactic that, indeed, will actually work. Many savvy people don’t necessarily use this to nearly the potential that they could be using it to.

But there are variations on that that have made it more effective, in my experience. One of them is, if you write a post of interest to your market or to people who are adjacent to your target market, a more effective call to action at the end of it is to ask people to sign up for a newsletter rather than asking for a sale.

Offer an immediate incentive for their email address and permission to contact them. Tell them that over the course of the next few weeks you will send you things they will enjoy.

And given that you have just proven that you have some level of expertise in something, people will tend to think that the incentive that you were dangling in front of them it’s likely to be valuable.  (Naturally, you should make it valuable.)

So, you will get their consent to get email from you. And then converting people via email, just absolutely rocks full stops over the conversion rates you will get on websites. [Patrick notes: There is abundant evidence for this in the industry, but I’ll give you a fuller breakdown in a later post about my email course. Spoiler: email converts to purchases 70x higher than… well, wait a few weeks.] And you get to control the entire experience. You get to kind of like be within their decision making cycle over weeks rather than over minutes.

You get to produce more trust with them and ethically and every possible way.

To see more, sign up for my email list.

Keith:  Not too subtle there.

Patrick:  Brennan covered this in his book, but consultancies also benefit from this tactic. “We’ll give you some sort of like report that we’ve prepared about your industry or your use of solving some problem in your business in return for your email address.” This is an epic win for selling services.

Within two hours of starting my email list back in May, I had an email address from a CEO at a company which was, to put it mildly, an awesome prospect. Since he had asked for email from me, I proceeded to – naturally – send him an email. It worked out well for all parties.

Even if I never had a sort of product to offer the list, the list would be worthwhile for my business purely for the lead generation value. [Patrick notes: Much like my blog and HN participation, I’d continue writing even if it was never worth a dollar.  It is one of my favorite hobbies.]

Brennan:  Especially for consultancies, our clients – often MBAs or other business people — tend to not think email is as bad as some of us.

Patrick:  Oh God yes.

Keith:  Oh, yeah.

Patrick:  I think engineers radically over-report their own distaste of email. I have a very like engineer focused audience. A majority of people who are on that blog are kind of squarely in that wheelhouse. Many of them report that “I hate email!”, but 4,000 of them signed up for a weekly email from me. I ask people to reply if they like it, and that nearly breaks my inbox every single time. People routinely tell me things like, “I have never liked getting email from anyone else. But, man this is awesome.”

This is not because I produce emails that are better than anyone else in the world. It’s just because everybody, regardless of whether they say they hate getting email or not or they hate being marketed to, is happy to receive things which produce genuine value for them.

Keith:  Exactly.

Patrick:  So, we are not talking about tricking anyone to sign up for this.

Let me give you a quick pro tip here. If you write a newsletter, where everyone gets the an email at the same time, this puts you on a content treadmill. You constantly have to play “feed the monster”, just like a blog, or your list gets stale and you (and they) lose the value from it.

How To Avoid The Content Treadmill

Patrick: I started with nothing written for the email list. So, the first week I wrote something. I think it was on software as a service pricing. And then the second or third week I wrote something on selling to enterprise businesses.

I then set up an autoresponder where anyone who signs up for the email list today, gets the email about software service pricing, which is totally new to them, tomorrow.  This means that I’m not on the content treadmill with respect to new users: they have several weeks of buffer. I only have to continue producing for existing users, and as I do so, my buffer for new users gets longer.

This means that those “archive” emails (MailChimp’s term, not mine) have created value for thousands of more people than they would if they had been buried in the archive somewhere or, like many of my blog posts, were written once and they’re totally not discoverable unless you had been paging through the archives from 2008.

Speaking of commoditization of content, the perceived value that people get from an email versus a, say, blog post, is very, very different. My experience has been that, over the years, I’ve developed a style that works for me. I typically write 2,000, 4,000, or 8,000 words on a subject at once. I focus more on producing an opus than I do on producing bite-sized easily-consumed daily updates. [Patrick notes: While I do like short-form writing I find that I do it much better on forums than on my own properties. And, obviously, even 8,000 words is substantially less depth than a book.]

The typical reader on my blog will be on the blog for about three minutes, which means they’re either skimming or they’re not reading much of it, or they’re absolutely superhuman with their reading speeds, and then it’s done, and maybe they’ll be back in two weeks. But if I send the same caliber of stuff to the email list, I get lots of really good comments that are both motivational, and I love getting my praised button pushed.

Also, the comments really indicate that they’ve read it, and reacted with that email. I ask people explicitly, “Write me back, and tell me about the change you made in your business as a result of this advice,” and people have written me back and said things like, “As a result of the software and servicing mail, we changed our software pricing. It increased sales by 90 percent,”

I got a blog post out of that one.  That made me happy.  Not that I was happy to get a blog post, I’m happy because a business and its employees benefited from that decision.

Brennan:  When you’re reading a blog post, you know it’s a web page, right? You know you’re looking at something that is sitting up on the Internet. It’s not personalized, it’s not for you at all. Emails are how we communicate directly to people, and when that content shows up in their inbox, especially if you start it with, “Hi, ‘first name,’” or even, “Hey there,” if you don’t have their name, that, I think…

I’m speculating here, but I’m willing to bet that the psychological implications that emails are usually targeted to me makes me more willing to read through it, and to absorb the content, than I would be if I just stumbled upon that same exact email put as a blog post.

Keith:  It also depends on the positioning of the email. I’m on all my clients’ email lists, and I actually work with my clients building email funnels for them. Even though I know it is my client, and I know that I’m signed up on their list, so I’m getting about 10, 12 emails of theirs every day from their blog posts and stuff, really looking at the way that the emails are structured, I feel an emotional response depending on that.

I have some customers who want to put their blog name first, and then the title after that, or whatever, and when I see emails like that, they don’t have the personalization, and the subject line says title of blog, and then blog title, or post title, and it feels like a form letter. Those generally get deleted right away, and then there are other ones that it’s like, “Hi Keith, how are you doing?” Or, “Hi Keith, I just saw this great email or tweet,” or, “I just saw this great blog post.”

I see it coming from my client. It has their name in the center. It has “Great blog post” as the subject, and it says “Hey Keith” in the front. I think, “Oh, they’re emailing me,” and I feel like the email is personalized – even if I wrote it or designed the funnel it is in.

I know that it’s automated, but at the same time, there is just that visceral response, so I think you’re right on with that. Email is the way we communicate with people on a one‑to‑one level, and even if we know that they are for mails, it still connects with us.

Patrick:  Also, people have a much different mindset when they’re in their email client versus being in their browser. If you think what’s probably above and below the email that you’re writing versus what’s above and below the blog post you’re writing, what is above an email that someone is reading is probably important work.

Knowledge workers spend all their day in their inbox because that’s their job. Accordingly, anything in the inbox is, likely, Important Work.

There’ll be their boss asking for a status report above it, and a client asking for feedback on yadda yadda below it, and then your email is sandwiched in between there. It kind of inherits the presumed importance from all the other stuff that’s in their inbox that day, whereas if you write a blog post, people are probably going to be consuming through Twitter, or some sort of aggregator, or an RSS reader.

For example, I like to think that my blog posts are worthwhile. They sometimes show up in aggregators like Hacker news. For the 30 things that are on the top of Hacker News at any given time, if one of my posts is up there, it should be a lot better than 15 of them. It’s probably a lot better than more than 15. If it wasn’t, I shouldn’t have written that article. [Patrick notes: Because attention is a perishable resource and because I don’t like attaching my name to drek, I throw out about one post for every one I publish.]

If your writing is seen in a context where the stuff around it is dross, it is more likely to be perceived as Internet dross that I should bookmark and maybe read if I have extra time to waste. If it’s seen in the context of important work, then it’s going to inherit that aura of being important work itself.

This is why I literally see 10X more engagement for email versus blog posts.  That is an absolute figure: my typical email gets seen by like 3,000, 4,000 people, versus my typical blog post getting seen by 20,000 plus. So 10X engagement on one‑seventh of the audience is, what, a comparable 70X engagement? That isn’t an exact number, but it would blow your mind.

Brennan:  It’s incredible how when I first launched the book, I didn’t launch it into a vacuum, because I had my products mailing list. Within half an hour of the initial email I sent out to everyone on it announcing my book, and letting them to know how it would benefit them, or could benefit their business, and chances are, if they used my product, they’re a consultant.

Within half an hour, there was over $1,500 in sales.

Patrick likes the term “printing money”, and sending an email to a carefully cultivated list is one of the best ways to do that. [Patrick notes: I will provide substantial data on this later, but suffice it to say “Yes!”] I know for a fact I can write an email right now delivering some immediate value to my subscribers, upsell the book through it to a related list, my opt-in mailing list, and it will generate sales. Having a strong, healthy email list that trusts you and is used to engaging with you is a very good thing.

I think the way a lot of people mess up is they build an email list, and then there is silence for months, and then they try to sell you. It’s like, “Silent. Silent. Silent. Sell.” They wonder why MailChimp starts yelling at them about their unsubscribe count being so high. It should be a gradual trip to sales.

Keith:  I don’t want to go too much into that, because that’s one of the big things that Patrick talks about in his product, but…

Patrick:  Let’s go into it.

Keith:  You want to get into it?

Patrick:  Yeah, why not?

Keith:  All right. All right.

Patrick: “Create outstanding amounts of value, and then charge only the two percent of people who want to pay for it.” [Patrick notes: I’m echoing back to a thought from the recent Ramit Sethi interviews here.]

Keith:  Sounds good. Sound good. So we actually talked about this when we did our mentoring talk about email funnels, and…

Patrick:  Backstory on that. Keith and I went to Silicon Valley last year to 500 Startups, where I’m a mentor. We talked with their incubator companies about how to improve their marketing. Many of the founders are from technical backgrounds and just now becoming business owners, and we thought we could help them out a bit about acquiring customers.

One topic we discussed extensively was drip campaigns. Keith, what is a drip email campaign?

Keith:  A drip email campaign is pretty much what you had described. You take emails that you have already, or emails specifically customized for the drip, and when a person signs up to your newsletters, it doles them out over a set period of time. Let’s say you have a two week drip campaign, so the first day they sign up, they get one email. Then on the third, the seventh, the eighth, the 12th, or whatever days you want, they get another email.

The purpose of this is to eventually sell them on a product, but what you do over the drip, like Brennan said, and like Patrick said, if you just are radio silent for a month and then you say, “Hey, buy my product,” no one’s going to buy your product. So what you do is you… Well, you’re the one with the product, Patrick. Why don’t you explain it?

Patrick:  Just for a total avoidance of doubt here, people are only getting these emails because they’ve explicitly asked to get emails from you, typically because you’ve given them some sort of incentive, with the quid pro quo for that incentive being that you are going to get in touch with them. You can position the drip campaign such that the drip campaign is, in itself, very valuable.

A great example of this that I did for a client of mine, which I can talk about publicly, is for WP Engine. They do high‑end WordPress hosting, so there is a page on their website that you can go to for an automated diagnostic of your WordPress site, and they’ll just say, “It took 4.7 seconds to load. You could make it load faster if you turned on gzip. Here’s how to do that,” yadda yadda yadda.

On that page, it will ask you, “Do you want to take a free one month course in improving the speed, scalability, and security of your WordPress site? If so, give us your email address and click “Yes,” and they get a very high opt‑in rate, because it’s clearly aligned with the thing that brought people to the page in the first place.

So what does the drip campaign do? The goal is, we’re going to educate, persuade, and only then sell. We’re going to start by just giving people outstanding amounts of value in terms of educational content that we’re delivering for them.

For example, in the WPEngine thing, we’re going to send you an email about various under‑the‑hood server/code tweaks that you can make to your WordPress site that, since you’re not a technical person, you probably weren’t aware of, and that these things will make your site faster. “gzip is a setting. Here’s how you turn it on, and here’s where you’ll need to make that setting in Apache’s httpd.conf. It will always make a site faster. If gzip is off right now, turn your gzip on. This always wins.”

That sort of thing is a win for the user, and they will see it being a win. Then we come back to them a couple of days later.

“Previously, we talked about increasing the speed of your site. Scalability is subtly different from speed, we’ll explain to you why. Here is the sort of architecture you would use to make a WordPress site more scalable, so that it would stay up.”

For example, Hacker News crushes WordPress sites on a fairly frequent basis, including mine more than once. Grr. Apache KeepAlive needs a stab in the face.

The email will explain that Apache KeepAlive is kind of a stab‑in‑the‑face option if you want your WordPress site to survive.

Anyhow, the idea is that we’re gradually building a trust in the user via educating them about this stuff. They start to trust us as an expert about this, because hey, we are experts about it.  We’re experts who are in their corner.

After we’ve established that we are credible experts on this thing, then we say, “OK, you have these problems. These are connected to this thing we have been talking about. We have a solution to these problems. Let’s talk a little bit about that,” and now you are no longer just some anonymous page they flipped to on the Internet.

You are their trusted expert at this field. You’ve been in their inboxes for the last two weeks making their lives better. They are much more inclined to trust representations that you make about your product. For example, if you just come up to someone and say, “You should probably pay $200 a month for blog hosting,” people will have significant reservations about that. I know I would.

I actually do pay $200 a month for WPEngine, simply because they convinced me, over a period of time, talking to their CEO, that the optimizing the speed and scalability of my site was just a black hole of my time, and that I should just let them take care of that. The drip campaign lets you do that credibility boosting thing in a scalable fashion over many, many thousands of customers without you having to continually do sales discussions.

It leads into sales discussions a lot, because you can tell people in your drip emails, “Hey, do you have any questions about this? We love getting emails from you. Just hit reply.” This is the best of both worlds: a low-touch self-serve offering for customers who can make the decision by themselves, and a low-friction entry into a high-touch sales discussion for customers who require a bit of guidance.

Applying Drip Marketing To Services Businesses

Brennan:  These same exact principles, by the way, apply directly to consulting. I think actually, Patrick, you’re the one who mentioned this as an idea, but if you do something like how to go about hiring your first web developer, or how to make sure that you’re basically business‑centered educational material for people who are on your list and might end up hiring you, the more you do this…

We post to user groups, and conferences, and things like that. I’ve closed six figure deals in 15 minutes because there’s no sales needed. I’ve educated them enough about this arena that they’re entering into, hiring people to build custom software for you. I’ve educated them, and I’ve inadvertently swayed them over into the way I think about that. I become the benchmark.

Patrick:  Star this, guys. It’s probably the most important thing in the interview. If you’re in the position of educating someone, you largely get to determine their outlook on all further things in that space. If you are already someone’s trusted expert on the subject at issue, it really isn’t even a sales discussion anymore. You sit down at a table and you’re just talking. It’s just the natural outgrowth of the discussion you would have earlier.

If we talked for the last couple of weeks, and I’ve explained why A/B testing is a win, and told you how I would structure an A/B test routine for your company, and how you can make your organization do more A/B testing and whatnot; if the CEO sits down with me and opens a page on his laptop, and starts saying, “What would you do on this?”

Then that is suddenly a sales discussion, but nobody at the table perceives it as being a sales discussion. It’s a foregone conclusion. I’m winning that engagement.

Brennan:  I tend to be naturally shy. If you don’t want marketing your freelancing business to be like selling a car, this approach will make it so, like you said, it’s not even sales anymore. It’s then you’re figuring out the details of a transaction, and the need to convince has already been done, and that’s really what sales is, right? You’re convincing somebody to buy your product.

The sales has already been done through valuable material that you’re giving away to these prospective clients, and that has worked wonders for my business.

Patrick:  Same here.

One of the make‑my‑bones steps for my consultancy was publishing so much on my blog about the sort of things I do, first for myself and then on behalf of clients.  My field is largely “ways that engineers can improve marketing outcomes”.

I have a certain amount of expertise in that area, and I am seen as having a certain amount of expertise in the area. (Note: This are, sadly, not co-extensive. There are many underappreciated geniuses who couldn’t sell an engagement to save their lives, and many poseurs. Don’t be either.)

It makes the sales discussion radically easier. It’s not even sales at that point. It’s more like order taking. They’ve come to the decision that they want to do this. You are the natural person that they would want to do this with, because they trust you and feel a bit of soft social obligation to you. If you have a favorite teacher from college, wouldn’t you want to do business with them, versus a random person who happens to be in the same industry?

Also, you’ve so informed their thinking about this subject that you’re the benchmark everybody else up against.

I’ve occasionally won engagements over highly regarded firms in the industry. I have asked, “I’m just curious, can you help me help out my business here? Why did I win engagement over competing firm X?” Clients have literally said, “Oh yeah, we had a talk with that guy, but he kept disagreeing with you.”

Keith:  Oh, that’s awesome.

Patrick:  But the only person who’s going to agree with me 100 percent of the time is me, so that literally means that I’m the only person that can get hired for this job.

“Oh, that’s awesome.”

Brennan:  Well, here’s the thing. Patrick, imagine cloning yourself, and this clone has none of the comments you put on Hacker News, none of the blog posts you’ve written, none of the podcasts, and they are offering the same exact service as you are. The amount of work they would need to put in to get probably the kind of rates you justify would be…

Patrick:  It would never happen.

Brennan:  … A mountain.

Patrick:  I want to clarify this, because this is something that Hacker News‑ers sometimes get wrong. When I say “Internet famous,” that is always tongue-in-cheek . They’re the right couple of thousand people, but only a couple thousand people know who I am. The fact that I have that Internet reputation is not the sole driver of the consulting business.

One of the main things that drives the consulting business is the “hush hush” discussions between CEOs on what happened the last time I got hired for an engagement. Getting in the door at the first couple of high profile companies was helped, quite a bit, by having a bit of a reputation due to publishing/speaking/whatnot.  But these days, people hire the results, they don’t hire the comment history.

Not Internet famous and don’t have a portfolio of results? There are ways you can get around that, for example, by networking. But Keith and I live out in Ogaki, in Gifu prefecture, which is a place that we love, but it’s kind of the middle of nowhere relative to tech companies with 10 to 100 million dollars in revenue, and there are not really solid options for networking with… We’re not exactly rubbing elbows with Joel Spolsky on one hand and Paul Graham on the other here in Ogaki.

So to the extent that networking matters, and guys, capital N, capital M, “Networking Matters,” it’s Internet participation was a major greaser of the wheels that got it going. After and concurrent with that, being able to execute and actually deliver the kind of results that my clients are hoping for is majorly important.

Reputation alone is not sufficient. If I routinely failed to execute my career would fold up like a origami crane, but happens to be case that at least some companies working with me get a substantial amount of value out of that.

BTW, every time the company gets a substantial amount of value out of it, I immediately attempt to get a public case study out of that. You can do this, too, and your customers will often be inclined to say Yes if you present it correctly.

I never ask clients, “You should totally help me get my next 10 engagements.” It’s typically, ” Why don’t we get a mutual win here out of talking about this, such that you get your name in front of my audience, and and I get my name in front of your audience, attached to a number, like, say, I made you a million dollars.”

That sort of thing works.

[Patrick notes: This works even if you have lower profile clients. Even if your largest client is a pizza shop, then do an interview with the owner on how pleased they were about your new website and how often people are ordering the special promoted on the homepage. You can climb the ladder up from pizza shops to insurance agents to real estate brokers to bank branches to…]

Keith:  You say that it is for getting your clients. It is a mutual win, because let’s take WP Engine, for example. I had worked with WP Engine before you started using them, and we had actually talked about that a lot, and I had never seen them on Hacker News until you blogged about them. And now I see them once every week or once every two weeks or so. They get mentioned for something. So there is a huge positive‑feedback loop for getting the case studies up there.

Patrick:  [Patrick notes: Keith just scared me here, because it is easy to listen to that and hear “Hire Patrick, it gets you on Hacker News” rather than “Hire Patrick, the article about you making a million dollars will get you on Hacker News”, and I want to sell results rather than attention.]

I enormously respect the Hacker News audience, so I want to clarify: I have never and will never take money for placing somebody on Hacker News. I do generally talk about things that are interesting to me on my blog. Particularly when clients give me the go‑ahead for actually talking about what we did and how it worked out, I will often blog about that. [Patrick notes: I, similarly, want those posts to rank not because they’re attached to my name but because I’m going to go in-depth about strategies and tactics which actually worked and which are generalizable to other businesses, like those of HN readers.]

There are also lots of clients who we don’t talk about their stuff publicly, either because there’s nothing, really, to talk about [Patrick notes: I can only write “We did an A/B test and it increased sales by 2%” so many times], or, surprisingly for me, given my philosophical take on the matter, some businesses treat my advice as strategic information which they don’t want their competitors to have.

I’m generally a “share all the information and the pie gets bigger” kind of guy. If you’re competing with Bingo Card Creator, you can literally pull an entire business plan for that off my blog, and a couple of people have done that .Some of my consulting clients are not quite copacetic with that kind of open‑source philosophy regarding core business initiatives.

My single biggest win ever for a client will never see the light of day. This saddens me.

This is one of the reasons why I don’t just do consulting full‑time. I was paid wonderfully for that engagement, and it was great fun. We created a lot of value. The world is better off for it having happened.

But there is a clenched fist in my stomach right now. I really want to tell you what we did, because it was awesome, and I can’t. They bought my soul. OK, they didn’t buy my soul. It’s just professionalism/NDA/I want to work in this town again, and as a result, I can’t talk about it. But I really want to talk about it.

I do consulting. I like consulting. I don’t want to have consulting be the focus of my business for forever. Right now, though, consulting is the center of gravity of my business. That’s what I make more money doing. It makes a heck of a lot more money than Bingo Card Creator.

I don’t talk about my Appointment Reminder revenues publicly, for a few reasons. That could be its own episode.

Man, I’m talking way too much about me..

Keith:  We can beep you out. Just beep out every other words.

Patrick:  Let’s talk about something more interesting than me.

Keith:  Yeah, we’re at the two‑hour mark. So yeah, why don’t we start wrapping this one up. I actually just want to mention one more time: Brennan, I just want to say it was great you coming on the show and talking about this. I also want to say, I read your book. I know Patrick read it as well. The book is $39.

Patrick:  I paid for a copy.

Keith:  I paid for mine as well. Yeah, we did not get comped on this. And it was worth every penny.

Patrick:  Man, I tell everybody charge more. But I got to tell you, Brennan, charge more…

Keith:  Charge more. Charge more.

Patrick:  Because it’s absolutely ludicrous. Literally, the value proposition is you’re going to take this and double your freelancing rate. Presuming that your freelancing rate is already above $50 an hour, you’re going to make this back in your first hour. It’s totally a no‑brainer. You should buy it before Brennan gets sane.

Keith:  Right. Yeah. He’s actually mentioned he’s going to raise the price, so before he does that, you should go buy it. And honestly, in the first five pages, I had three new ideas. Right? I got so much value out of that book, and it was only $39. It’s just a no‑brainer. Go buy it, honestly.

Patrick:  Brennan, you want to give out the URL for listeners? We’ll put it in the show notes as well.

Brennan:  Absolutely. It’s http://doubleyourfreelancingrate.com. It’s a very simple, straightforward website.

Yeah. We could talk another two hours on pricing info products. But unfortunately, books have a range attached to them that people are willing to pay because it’s a book, regardless of what they get out of it.

There are a lot of things that I want to do now that I have an audience of people who have, really, the same world view. They’re consultants and they feel they’re undercharging, just like I feel I am undercharging with the book.

And there’s a lot, I think, of value that I can deliver to them, especially since I’ve gone from being a freelancer to, at my peak, having a consultancy of 10 employees. The current lifetime value of these purchasers is $39. But as an aside, there’s a lot more that I think I can give people that will mutually benefit both sides of the equation.

Patrick:  Absolutely.

Brennan:  I do think, possibly even before the podcast is released, that the cost of the book will go up.

Keith:  Well, give them a special price for just this podcast, then.

Brennan:  Patio11 is the coupon code, which will get you the book for $39.

Keith:  Very nice.

Brennan:  We’ll keep the price for the podcast.

Patrick:  I love talking to small businesses, because we can totally make a decision like that without talking to somebody.

Keith:  Brennan, don’t you have to talk with your suppliers and your distributors and everyone about that? You can just make that decision right there?

Brennan:  No, I don’t.

Patrick:  I don’t know if the CEOs are going to approve that, and you have to run it by marketing first. Is that messaging on‑brand? And do we have rights to the “patio11″ name? Maybe we should circle Legal in on this. Let’s get in a meeting.

Brennan:  But no, seriously. I’m extremely passionate about this because, for the first two and a half years, really three years, I charged really low. And the word “free” is in freelancing, and people become freelancers because they want some degree of freedom.

And unfortunately, when you’re trading in a 40‑hour‑a‑week job for a 40‑hour‑a‑week contract that makes you maybe a little bit more but not much compared to your prior life as a salaried employee, you’re not going to get any noticeable freedom. Sure, you can say you own your own company, but at the end of the day, you’re still working full‑time and making not much more than you used to make.

So that’s really what inspired me to really put the pen to paper and get this book out there.

Keith:  It’s a great book, Brennan. It was really good to read.

Brennan:  Thank you.

Patrick:  Awesome podcast as well, I think. Especially, even folks who have no interest in either the marketing of info products or the consumption of info products, go back to the sections on consultancy, as there are some really core stuff there for taking your business to the next level. So, Brennan, thanks so much for making the time and talking to us for almost two hours now. Yeah. So, let’s see. Next time, we will have a different special guest, hopefully, probably within about a month from now.

Keith:  Hopefully, yeah.

Patrick:  So thanks so much, everybody, for sticking with us with this podcast. Please drop Keith or I an email with what you liked, what you didn’t like, and how we can make this better for you.

Keith:  And everyone, honestly, go buy Brennan’s book. No‑brainer. The coupon code is patio11. Good for $39.

Brennan:  I don’t know how to set up coupon codes. I’ll do it before the podcast comes out.

Keith:  Yeah, the podcast will probably be a week or two before it gets up, knowing our schedule.

Patrick:  Well, all right. Thanks, everybody, and we’ll see you next time.

Keith:  All right. Take care, guys.

Brennan:  Bye.

Keith:  Bye.

[Patrick notes:

Easily clickable links:

DoubleYourFreelancingRate (use coupon code “patio11”)

Patrick’s course on Hacking Lifecycle Emails launched after this podcast was recorded but before it was released. A later post will cover the business aspects of that. If you run a B2B SaaS business, it is worth a look. (Some of it can be adapted to a consulting practice, as mentioned by Brennan during our discussion about drip email campaigns, but the ROI isn't nearly as obvious as it is for those of you doing B2B SaaS.)

Want to get a weekly(ish) email for me about the business of software?  Sign up here.  You'll also immediately get a 45 minute video on improving the onboarding experience of your software, which -- let me use a favorite expression -- prints money for many of my clients and confidants.]

Ramit Sethi and Patrick McKenzie On Why Your Customers Would Be Happier If You Charged More

NYT bestselling author Ramit Sethi and I continued our earlier discussion about getting your first consulting client by addressing a common pain point for freelancers/consultants, particularly those just starting out: how do you price your offering?

If you want me to tell you “You’re a Rails developer?  $100 an hour if in Iowa, $150 an hour if in SOMA, best of luck” you’re in the wrong place, because you should have learned in our previous installment that you need to present yourself as someone solving business problems rather than as a mere technologist.

Instead, we’re going to go beyond the tactics and talk about the psychology of customers (and consultants) that poison cheap relationships, why we typically underprice to begin with, how to walk up your rate in such a way that your customers continue to perceive outsized value from your services, and more.

When we recorded this, our agenda was to talk primarily about freelancing/consulting rates, but both Ramit and I have run product businesses for many years, so we couldn’t resist tossing in a bit about pricing for e.g. SaaS companies and info-products as well.

(Want to hear even more about this topic?  There’s a podcast coming up next week with Keith Perhac and Brennan Dunn, where we talk about how we transitioned our three very different freelancing/consulting businesses from where they were when we were young and stupid to three different models which work out fairly well for different reasons.  Subscribe to the podcast to hear it when the audio engineer gets done with the editing.)

If You Want To Listen To It

MP3 download (~40 minutes, ~35 MB)Right click to save.

Podcast format: either subscribe to http://www.kalzumeus.com/category/podcasts/feed in your podcast reader of choice or you can search for Kalzumeus Podcast in the iTunes Store.

Transcript: Ramit Sethi and Patrick McKenzie On Why Your Customers Would Be Happier If You Charged More

[Patrick notes: I have annotated the transcript heavily with my remarks, in this format.]

Patrick McKenzie:  Hey everybody, my name is Patrick McKenzie, perhaps better known as patio11 on the Internets. I’m a small software entrepreneur who has run a series of software as a service businesses for the last six years. Concurrent with that, for the last couple of years, I’ve run a consulting business largely helping software companies make more money by delighting their users and increasing sales. I’m here today with my friend Ramit Sethi to talk about how you can price your freelance or consulting offering better.

Ramit Sethi:  Hey everybody, Ramit Sethi here. Patrick, thanks for having me. I am the creator of a site called iwillteachyoutoberich.com. I also have a New York Times bestselling book by the same name. My background is in psychology and persuasion. I teach people how to use behavioral change, principles to change their own behavior, and to influence other people. That may mean learning how to automate your money, how to earn more money through negotiation or freelancing, or even to find your dream job.

I give away about 98 percent of my material for free and then I offer information products, also known as online courses, and they tend to be premium prices and they tend to be for the right customer.

Today, I’m really excited to talk about pricing, qualifying your customer, and working with the right people. God knows I have contemplated suicide many, many times thanks to the freeloaders who run rampant and wild on the Internet. What do you say, Patrick?

How You’re Collecting Pathological Customers And How To Stop

Patrick:  Yeah, I have a word for them I’ve been calling for the last couple of years, “pathological customers.” The kind of customer that even if, technically speaking, they’re giving you money, they are giving you radically less money than other folks in the space. They feel a sense of entitlement towards you as a result of that.  The general thing that people find both in pricing products and in pricing services is that at the low end of the scale you deal with people who perceive less value from you, less value from your offering, and have more and more unreasonable demands. Like if you’re writing iPhone apps, you’ll receive reviews like “This 99 cent flashlight app didn’t do my taxes, one star!”

[laughter]

Patrick:  Or in a service business, if you make the terrible decision to sell your engineering services for $3,000 a month to a Japanese megacorp (like someone here might have) then you’re going to have people with expectations like, “Oh, you should totally be willing to come in at 3:00 AM in the morning for nothing.” Versus if you get to a better point where customers start perceiving more value out of your services, there will be no talk of 3:00 AM in the morning and also no talk of any number in the general vicinity of $3,000 for a month or anything else. That’s a little brag-y, oh well.

[Ramit laughs]

Patrick:  Yeah, we’re going to talk to you about not under‑pricing things. In particular, I love Ramit’s advice on this. It’s really informed my thinking on the subject.  Ramit’s advice has helped me 7X my consulting rates in the last two years.

Why Ramit Has Happier Customers at $12,000 Than He Had At $4.95

Ramit:  I like that. I like the sound of that. OK. Let me start off with a couple of thoughts on pricing. Some of these seem straightforward and some of them seem a bit controversial. I’ll say this, in terms of consulting rates, I have started my consulting career back when I was in college, I charged approximately $20 an hour. I now rarely do consulting. I turn down the vast majority of clients. When I do charge, I charge $3,000 an hour.

So I have gone up the gamut of consulting rates and I’d like to share some of the findings and insights I had along the way. In terms of products, my first information product was a terribly priced, terribly positioned eBook called Ramit’s 2007 Guide to Kicking Ass, that’s right, and it was $4.95.

[Patrick notes: Let me elaborate on reasons why Ramit and I probably agree that was a poor decision: the eBook is very underpriced, because at $5 it competes with lattes and Ramit’s advice is substantially more valuable than lattes, hurting uptake among people who stand to benefit from it.  Putting 2007 in the title of theBook destroyed any residual value he could hypothetically have gotten out of it in 2008 ~ 2012, whereas his other course offerings go into “evergreen” status after launching successfully and continue contributing meaningful amounts of money to the business every year.  I also feel, audience mostly unseen, that Ramit would attract a less mature audience who would be less likely to make meaningful progress as a result of the advice than if he had positioned it to someone just a little more advanced in their careers.  For example, note that when Ramit talks to young, competitively oriented men these days, he talks less about “kicking ass” (helping college sophomores manage beer money more effectively) and more about “top performers” (helping, let’s pick an example, 27 year old men in professional careers land $15,000 raises).  That's a fairly small change in target audience and messaging but a huge change in customer perceived value.]

Ramit: I had been writing for free on my blog, no ads, no nothing. This was the first thing I ever released and predictably the comments went something like this, “Ramit, you jumped the shark. You’re just trying to make money off us now. I could find this kind of stuff for free online. You suck.”

OK, compare that to a recent course I launched which was $12,000 and compare it to another similar course, which was $2,000 or $3,000. That course called Find Your Dream Job, and over a million people heard about it. I can tell you exactly how many complaints I had about price, because I tracked them. The answer was five. Not five percent, five.

We learned how to change and radically become more sophisticated with our positioning. So today, I want to talk about how you can actually charge more, deliver more value, get better customers, and also choose who not to serve.

One thing I’ll mention is that I have policies that cost me over $1 million a year because I don’t want to serve certain parts of the market. I’m going to tell you about those and tell you about how you can use some of the same principles to choose who you want to work with, charge more, get better clients, help them more, and actually not want to kill yourself every morning when you wake up and look at the kind of emails you have in your inbox.

Patrick, have you got those kinds of clients?

Patrick:  I have had [pathological customers] in the past. I’m largely getting to a point in my business where I don’t have to deal with them anymore.

There are spectrums within spectrums here. My first software product was priced for $24.95, as a one-off purchase, and that’s something I will never, ever actually do again.

[Patrick notes: Don’t ever sell a product without a reoccurring revenue component.  Starting with $0 revenue every month and then having to fight your way back to last month’s numbers sucks.  Words cannot express how much easier it is to grow revenues at Appointment Reminder, which is SaaS on a monthly model, than it was at Bingo Card Creator – equivalent levels of savvy are rewarded vastly better over time with the recurring model, because a $29 account sold once contributes literally almost a thousand bucks in AR when a $29.95 account sold once for BCC contributes, well, $29.95.]

Patrick: Be that as it may, BCC debuted against perhaps six other similar products.  I think the very day I launched I was the second most expensive. [Patrick notes: There was one product sold directly to school districts for 10x the price, and I didn’t want to have to deal with purchase orders and whatnot to address that customer segment.  I was about double the pricing of the next software under me.]

I have a very manageable support load with that product, even though the users are very non‑technical and I occasionally get emails that make me want to gouge my eyes out with a spoon, like, “How do I download the Googles to my printer?”

Ramit:  What? That’s a reasonable ‑‑ [laughs] to your printer?

Patrick:  Yeah.

Ramit:  [laughs] You had me until you said printer. OK, that is ridiculous.

Patrick:  My users occupy a place of love in my heart. So I say this from a position of love, and not to make fun of anyone, but rather to tell you that real people really think like this: I’ve had to convince people that there are not two physically distinct Internets entitled “the blue Googles” and the “the green Googles.”  This means they can use their login on my website regardless of whether they’re on the blue Googles or the green Googles.  Believe it or not, any site that you can reach from the blue Googles is available on the green Googles as well.

(Wondering how someone would come to this misconception?  A particular customer used the Internet using IE opening to MSN at school and IE opening to Google at home.  They did not realize that Microsoft and Google were not the same company.  They interpreted this as “the blue Googles” and the “green Googles”, because the Googles is the Internet to them.  When they typed stuff into the two different boxes on the two different Googles, different results came out.  Their natural inclination for, “Why does this strange, devil box work in different ways?” was, “Oh, they must be two different devil boxes.”)

Yeah, I deal with fairly few people like that these days.

The next time I make a software business, it will intentionally not include that sort of client in the scope of it.

Ramit:  But I feel like there are certain types of people who have really dark senses of humor, and they tend to be people who work in the dark or deal with the general public at large. These people include radiologists. They include anyone who deals in video, and of course, engineers or in particular, system administrators. God bless you all for still existing on this earth, despite the kind of things you have to put up with every day.

Patrick:  Ah, well. I think, honestly, sometimes we could stand to learn a little bit more from the non‑technical customers, particularly about how we pitch them on the value of our services, because we always pitch them as tech services rather than as solving an actual problem they have in their lives.

Ramit:  OK. So let’s…

Patrick:  We talked about that plenty on the last video. Let’s talk about how we can work up our prices to get better customers who are happy to pay the amount of money that we’re actually worth.

Why We Fear Charging What We’re Worth

Ramit:  Yes. So, first of all, in general, we can just stipulate that the basic message of this call is if you charge more and deliver more value, you’re going to get better customers and have better outcomes. OK. That seems fairly obvious. So the question is why don’t we do it? Just like it seems obvious that we all know we need to work out more, we need to eat better, we need to manage our money, we need to call our mom more. All those are obvious. They’re axiomatic. So why don’t we do it?

Primarily, one of the biggest reasons is our own psychological barriers. When it comes to pricing, we are afraid of charging more for all the reasons that I myself went through. When I first charged, I was truly petrified. And you can actually see it. I’ll direct you to the page. Go search for “Ramit’s 2007 Guide to Kicking Ass.” You can actually see the fear in my copy. My copy was rudimentary. It was pedestrian. I even justified why I had to charge.

Do you know when I charge for a twelve or three or four or five or ten thousand dollar course ‑‑ I don’t justify that? I tell the people who I don’t want to leave. And I let the rest come and bubble up to the top.

So you have to understand that if you make an amazing product and you’ve tested it and you know it will help, it is your obligation to get it out to the market as aggressively as possible.

Now, if you have a shitty product ‑‑ you’re just trying to pull the wool over someone’s eyes, or you haven’t tested it at all? Then, of course, it’s going to come across as fearful, because it should be. You don’t know if your product is good or not. If I know my product is good, if I have tested results, it’s my obligation to get it out to the market.

[Patrick notes: I think this is important enough to emphasize, twice. If you got into this business to make peoples’ lives better, and you have produced something which will succeed with that, and you are aware of truth about reality such as “better marketed products beat better engineered products every single bloody time”, then you have an obligation to get better at marketing yourself. To do otherwise is to compromise the value of your offering to the world based on selfish desires such as appeasing your own vanity (“Everyone should realize how great my work is without me needing to tell them”) or indulging your own unspoken fears (“If this were really good, it would sell itself, so if I try selling it, it must not be good.”)]

Ramit: Here are some of the fears I went through when I was first charging. I’m scared of finding out that people won’t pay for this product that I spent 12 months building. I’m scared of making them mad and them calling me a sellout. And my favorite one, which is exclusively the paradigm of engineers: is if I have customers who pay me, then I’m going to have to offer customer support. That is seriously the most crackpot crazy thing I’ve ever heard. If you have people paying you, money solves many problems.

[Patrick notes: Ramit is a very responsive guy, but also has had a team of people working for him for the last few years, answering customer support inquiries.  Can I mention that I also thought that CS would be a major timesuck prior to launching my products?  Turns out, nope, not so much.  I support hundreds of thousands of users, and thousands of customers, by myself.  No CS team or virtual assistants involved.  I even did it when I had a full-time job.  If this notion scares you, read Start Small, Stay Small – Rob Walling gives great ideas on how to systemize the process then ship it off to virtual assistants.]

Patrick:  Yes.

Charge More, Get Less (And Better) Customer Support Email

Ramit:  If you have money, you can hire a customer support rep to deal with your customers.  By the way, when you start charging, you’ll find that paying customers ask for support much less often than free customers do. What do you think, Patrick?

Patrick:  That is absolutely the truth. This is very relevant to people here who run products. You can actually draw a graph versus whether someone is a free user or a paid user of the product, and see the support request decline. I have four tiers for one product of mine. The level of support requests per account per month (lower numbers are, generally, better)  in the various tiers goes something like:

  • The cheapest tier ($9 a month) has 7X
  • The Professional tier ($29) tier has 4X
  • The Small Business tier ($79) has 3X
  • The Office tier ($199) has X

Patrick: Customers who pay more also tend to be more sophisticated in the use of the software. They have more internal resources that they can ask questions to, rather than emailing me “How do I reset my password?” or “The Internet’s aren’t working. Can you get me back the Internet?”

Instead, users on higher tiers tend to ask questions like: “We’re using this to create value for our business. We have this scenario that we don’t know how to work with in your tool. Can you explain to us how we can do that to get the next big win for our business?”

Ramit:  Yeah.

Patrick:  I’d much rather answer that email than “I forgot my password. Can you reset it again? The find account box didn’t work for me.”  Particularly because the problem was likely “I didn’t type my email address correctly.”

Pricing Your Consulting Services Cheaply Does Your Customer No Favors

Patrick:  You talked about mispricing your first product at $4.95 and how it was partially out of a fear of charging people money for value. The first time I ever consciously started working on consulting was I went to visit a business friend of mine in Chicago over Christmas one year. The only thing on the agenda was we were getting coffee. A couple of minutes into the coffee date, he locked me in a conference room with him and one of the cofounders of the company and said, “We just want ask you some questions about the stuff that you do, in terms of search engine optimization, conversion rate optimization, that sort of thing.”

I love talking about this stuff. We talked straight,for the next three hours. Then he said something to me, literally life‑changing words, at the end of that. He said, “I just want you to know that if today had not been a coffee date, you could have charged for this conversation and I would be pulling out my checkbook right now and write you a check for it.” I was a young engineer. I had this mental model that a young engineer’s time is worth a hundred dollars an hour and that is an iron law of nature.

I said, “Well, I’d expect that would be about $300, and $300 doesn’t feel worth worrying about right before Christmas. I don’t even know if I would have been comfortable doing that.”  I was inventing excuses – in real time! – as to why I couldn’t have possibly delivered the value he already reported having gotten from the conversation we just had.

He said, “No, I think I’ve got $15,000 worth of value out of this. I would write you a check for $15,000 right now.”

He asked his cofounder, “Do you think $15,000 is about right?” His cofounder said, “Well, I don’t know about $15,000.” I’m like, “Oh, thank God. Sanity.” His cofounder said, “For $15,000, I would need to see a printed report about it too. But $5,000, yeah. We could pay that out of the petty cash. It blew my mind.”

Ramit:  Yeah.

Patrick:  If you are genuinely creating value for businesses, you are no longer in the “trade defined small units of time for defined small units of money” business model.  This is what most employees do.  This is how you have spent most of your life working.  You have left that life behind.

You’re suddenly judged against the price of other strategic initiatives. Amounts of money that are mind blowing to an individual human’s personal experience are nothing next to what a business pays for even the most trivial of things.

Ramit, you run a pretty motivationally sized business yourself. You have probably spent more on, I don’t know, website hosting in the last year than my Hacker News buddies could countenance spending for the next century.

Would You Rather Work With Successful Businesses Or Bottom Feeders?

Ramit:  [laughs] For me, it’s very simple. It’s not about cost. It’s about value. Let me just tell you all the things I don’t want to do, as a non‑technical guy. I don’t want understand how web hosting works. I don’t care. Just make it work. I don’t want to understand how security works and I certainly don’t want to read textbooks about it. I don’t want to get paged when I’m out to the bar on a Friday night. I don’t want to do all these things. I only want to do a few things.

Let me pay for the rest. Listen, you can find clients who are willing to pay. They are the ones whose businesses are already doing relatively well and they want to do better. Or you can go after bottom feeders, who are going to try to negotiate you at every single turn. They will question the value of what you’re doing. They’ll say, “Can’t I get it cheaper? Can’t you do this? Can’t you do that?” Those are not the clients you want.

We have talked about how to find those. We’ll talk about those on a future call as well. When it comes to pricing, again, we have talked about the main axiom we are covering today, which is deliver a better product, charge more, find the right customers and everybody wins. That’s how you can go from thinking, “Oh, I’m only a hundred dollar an hour engineer,” to actually charging gargantuan amounts, but, more importantly, delivering gargantuan value.

There are a couple of people who have influenced me. I’ll share one. One is Jay Abraham. He is a very, very famous marketing consultant, particularly from the ’80s. He is one of my mentors. He has talked about putting the client at the center of everything you do. One of his books, called Getting Everything You Can Out of All You’ve Got, made me six figures in one month. Then I got on his email list, after buying his $10 book and making six figures a month.

Let me just tell you how I paid Jay a lot of money. I got on his email list. He announced that he was having a course, where you would have to fly out to LA once a month for 15 months. I live in New York. You would have to apply. You would have to get your references checked. By the way, if you doubled your revenue during that time period, you would have to write him a big fat check. Do you know what I said? I said, “I’ll do anything to be in this course.”

I applied. I haven’t written an application like that since college. I had him call my references. I met him. Here’s what I paid for it. I paid thousands a month to fly to LA on my own dime, sit in a chair next to him and asking questions for 45 minutes ‑‑ 45 minutes a month. I paid him thousands. That investment alone, and notice I called it an investment, not a cost, has already paid off in multiples of what I paid.

These are the customers. You want to find the customers, who look at the thing you are charging for, the service or product you are delivering, as an investment. It doesn’t just have to be ROI financially, although that’s the easiest to justify. It could be, “Look, I’m sick and tired of having to wake up in the morning and do all these tasks. I want an assistant.” That’s ROI for me. It could be to take away fear. I fear that my data is going to be lost. Therefore, you have solved my problem by giving me arrayed storage or cloud storage or whatever it is you want to do.

Understanding what it is and who your customer is, which would have covered before and will cover again, can help you determine your price. Just in general, then you want to look at the band of pricing that you have available to you. You want to think, “Am I in that band? Can I be higher than that band? What do I want to format my pricing at? Do I want to charge hourly, weekly, et cetera?”

Working For Free (Don’t!)

Ramit: Patrick, why don’t we talk about working for free? Also, you and I somewhat disagree on how to quote our rates. Let’s talk about that as well. What do you think about free work?

Patrick:  This is largely from the perspective that we are talking about technologists here. If you aren’t aware of it already, the market for people across most of the United States and increasingly other parts of the world too, who can successfully execute technology projects is just absolutely on fire right now. If you have heard the whole “software is eating the world” thesis, it means that the people on the top of the food chain right now are the people who can get software to do what they want.  This is particularly true if you can solve business problems using software. If that is you, the world is your oyster. There is no reason you have to give away the pearls for free.

I understand that there are other people in the world, who might just be getting started or not become comfortable with that, who might actually benefit from building a portfolio of a project or two delivered for free. If you put a gun to my head and said, “You are doing a project for free. Get value out of it,” I might think of telling the client, “OK. Look. As a prerequisite of doing this project for free, I would like the ability to turn it into a case study that I can put on my blog, put in my portfolio, and shop around to other clients as social proof.”

Ramit:  Yeah.

Patrick:  “You, this company that people have respect for, entrusted this part of your business to me. Therefore, they should also feel that it’s less risky for them to entrust a part of the business to me.”

Ramit:  I love that.

[Patrick notes: Let me pull back the curtain on why I use words like “entrusted” and “ownership” when talking to clients. Peons do “work”, where tasks are created by other people, carried out by the peon, and then judged by other people. I have never desired to be a peon, so I have always made a point of not talking like a peon.

Can I tell you a little anecdote?  I was once a $10 an hour CSR for an office supply company (had to pay for college) and was, in actual fact, a peon.  When I applied, I a) very much wanted to get the job and b) wanted to never work as a CSR again.   When I went into that job interview, they walked me to the telephone bank and started going through a sample call, then the CSR started explaining some minor trivia about how to arrange a dropshipped order in their systems.

She started to explain: “A dropshipped order is…”

And I finished “A dropshipped order is when, rather than shipping from your warehouses, you take the order from the customer and transmit it directly to the manufacturer of the product, who ships it to the customer directly.  Most relevantly for our purposes, this means that dropshipped orders don’t use the standard shipping service, and as a result aren’t quite as flexible with regards to delivery options as we generally are.  They can only get delivered to the front door if there is no elevator or, if there is an elevator, to the floor which the customer physically resides on.  For $45 we can instruct the dropshipper’s shipping company to use a dolly and take the order to the customer’s actual location at the site.”

This rather surprised the people who were interviewing a 17 year old for a near-minimum-wage job, so I said “Umm, page 78 of the catalog.  I called up and asked for one last week.  I made it my business to learn your business.”  (I knew, as soon as I said that, that I was a mortal lock for that job.)

They offered to make me head of that department the next year, but I didn’t really want to manage CSRs doing paper sales for the rest of my career, so I passed.]

Things Clients Value More Than Money

Patrick:  That’s a big thing, by the way. Clients pay for two things in the main, either increasing revenue or reducing costs. But they will also pay, in a very direct way, for trust and for the perception of reduced risk. One of the things that allows you to increase your rates over time is think of it that there is a tremendous fear in every client’s mind, when they get into a new technology project (or any kind of project really), that the project is just going to totally blow up and they will get no value out of it. So they discount the rate that they are paying to you, the maximum rate they think they can afford to pay you, by the chance of the project totally blowing up. If a client thinks that, “OK. The last five times I hired a tech guy, I only got one project which created business value,” he is probably going to discount the rate that he could pay you by about 80 percent.

But, if his perception is that you are not a 20 percent chance of success guy, you are a 95 percent chance of success guy, then it’s worth paying you much, much more that he would pay the 20 percent chance of success guy, just for that feeling that you are more likely to actually deliver on this product.  This is true even if the business value you are claiming is the same as the other guy.  It is true even if maybe the other guy is technically superior to you.

There are ways that you can influence that perception of likely success. One is by being able to actually communicate what you are doing, better than the typical engineer can. If you are talking about RAID arrays, performance optimization, HTTP headers, and all the other stuff that engineers love so much, we run the risk of losing business folks.  Instead, we should say things that they understand and will perceive value from, like: “Here are other people in the industry that I have worked with. Here are their problems. Here are the problems that I surmise you have, because you are in this industry. Am I right?  Awesome. Here’s how we can align our work together such that it influences these core things that you care about in your business.”

He is thinking, “He gets it. He can talk with me. When I have a problem, I can talk to him and get it fixed, rather than that other guy I worked with, where I sent off an email and didn’t get a response for two weeks and then it was two lines, “OK. I rebooted the server.”

The Unreasonable Difficulty of Shopping In A World Of Infinite Choices

Ramit:  [laughs] What you are talking about, I love it. It’s really understanding the client’s hopes, fears and dreams, in many ways better than they understand it themselves. With my students, I want to be like the wife, who knows her husband better than he knows himself. She can predict what he’s going to say. We know this from research. People will be reading my sales page and they are about to have an objection. They will say, “Does that work, because I live in a different country?” Right as they are about to consciously think that, they are scrolling down the page and they see, “Yes. This works for international students. In fact, here are 10 from the UK, Spain, everywhere.” What do they think, after that happens two or three times? They think, “This guy understands me. He gets me.”

It is so rare in today’s day and age that someone understands you that you will pay almost anything. I’ll give you an example. Put yourself in the mind of, let’s say, a 30‑year‑old young woman, living in Manhattan. She is shopping at Nordstrom.com. She sees this shirt and it looks incredible. She says, “Oh.” She clicks it to enlarge it. She sees a model wearing it, who is 27 or 28 and looks just like her, walking down the street with her purse. She says, “Yeah.”

Then she clicks the next button. She sees another photo, but this time it’s some 16‑year‑old girl, who has got a punk look to her, wearing the same shirt. Then she clicks the next button and she sees a 78‑year‑old grandmother wearing the same shirt. What’s the first thing she does? She closes the window, because, in a world where something isn’t made exactly for you, in a world of infinite options, if it’s not made for us, if it doesn’t speak our language, if it doesn’t speak to my hopes, fears and dreams, I’m gone.

When you can actually do that, when you can deliver that, pricing really becomes a mere triviality. My competitors will often charge $49 for an e‑book. I’ll charge $3,000. Is my course better? Yes. Not only does it have more in it, it is tested with thousands and thousands of people. But selling a $3,000 information product is difficult no matter what, no matter if you have 80 TB of video. It’s about understanding the customer and client better than they understand themselves.

Why I Go Out Of My Way To Say “This Product Is Not Right For You”

Patrick:  Let’s circle back to a point you just made. The notion that a particular product is not right for other people is a very powerful one in sales. When you are doing client qualification, about which we will be talking in the next talk, you are explicitly telling people that, “I only work with people who stand to get a lot of value out of doing business with me and I stand to get value out of doing business with them. It is entirely possible that we might not be the best fit for each other. So, for example, if X, Y or Z is true, maybe we just shouldn’t do this and I can recommend someone who is better suited to your needs.” When you say something like that, when you tell people that you are upright and ethical and would rather turn down perhaps a motivational amount of money right now, just because it won’t be the best thing for them, if they hear that, “OK. I wouldn’t work with people, whose situation was X or Y or Z. But, when I am listening to your needs, you seem to be totally in the sweet zone. We should do this,” they will think “Hell, yes.”

Ramit:  Yes.

Patrick:  Let me give an example of that. These days, when I’m talking to a new company, basically, if they are not a software company, I’m not interested.

There’s no one thing that I do in my consulting practice. I guess I could call it, “Rent my brain and I make you money.”

[Patrick notes: The CEO at a prospect recently recommended me to someone internally and introduced me as “the [UX design] consultant I was telling you about earlier.”  (It wasn’t actually UX design – think “something that a software company would reasonably want which I have done before, successfully, but I wouldn’t actively seek out engagements for.”)  Pro-tip: “I don’t know if I would call myself a [UX design] consultant, per-se” would not have been good client relations.  Clearly, if the presentation I did for the CEO was impressive enough such that he is recommending me to their UX design team later, they stand to get some value out of working with me, and one should not dissuade happy clients from paying you money for advice which is in their best interests.]

Patrick:

I have previously worked with clients that I didn’t understand as well as the software industry. I couldn’t have that feeling of customer connectedness, when I was talking about them.  For example, I once worked with a company that sells something similar to… high‑end men’s shirts. I don’t really understand the market for high‑end men’s shirts. People in that market don’t tend to think the way I do.

People who have made high‑end men’s shirts their life’s work don’t naturally feel simpatico with me when we sit down at the table and start talking about things. Whereas, software? Man, I love software. I can get everybody at a software company, whether they are the marketer or the CEO or the head of engineering, to like me and feel like working with me will be valuable. When we talk, they’ll enjoy the experience and think that I’m someone they want in the foxhole with them on the next project.

When we are starting the Getting To Know You dance with the client, I just say, “Look, I’ve had client relationships in the past that have been very successful, generally when I’m selling a software product and specifically generally when that software product is sold to businesses. If your company is primarily interested in increasing their B2C sales, that probably isn’t the best fit for us. I have some ideas on how you could take that forward.

“But really, if we’re looking for a big win, the last times I got a 20 to 100% increase in revenue was with a client with parameters X, Y and Z. Does that sound like where you are and the expectations you have with regard to an engagement?”

I’m reasonably competent at using both the green Googles and the blue Googles, so I’ve presumably learned by now what their core product offering is, at this point, they’re like, “Uh huh. uh huh, uh huh. That sounds right. Yeah. Yeah, 20 to 100 percent. That sounds pretty good.”

Ramit:  One of the key takeaways that I am hearing here and that I want to highlight for everyone is study people who have mastered pricing. It’s remarkable to me how many start up websites you go to and it says, “Plans and Pricing.”

[Patrick notes: Copywriting microtip: this is the suckiest possible headline for your Plans and Pricing page.  I know you did that because WordPress put it in my default.  Is WordPress going to go home hungry if you don’t sell anything?  You are.  Get ye to CopyHackers and rephrase with something that your customers actually care about in the headline, like “Start [Core Value Proposition] In 30 Seconds.”]

Ramit: You click on it and it says, “$9 a month for $WHATEVER.” This kills the little Patrick and I have left in our souls, leaving us a vacuous void of what used to be human beings. It’s actually sad, because, first of all, just mathematically, it’s almost impossible to create a serious business on nine dollars a month. Those companies never actually run the models. They never actually say, “Hey, wait a minute. With customer churn and LTV and all these things, how can I ever justify nine dollars a month?” You can’t. It’s very difficult.

By the way, we all know the first dollar problem. Getting people to spend one dollar is the problem.

If you can get them to spend one and you have a very, very good product, you can get them to spend ten. You can get them to spend 100. Now, there are different gradations. For me, there is a taxonomy in my market of information products.

  • eBooks: you can charge roughly $27 to $47
  • eBooks plus video: $47 to $97
  • Video courses: $497 to $997

There is this taxonomy that exists. It exists and it’s real. But it is also malleable. You can move things around. You can know that, to justify $1,000 for a product, there’s certain things that you’re going to have to do.

Patrick:  I love that point about the taxonomy of value. We were talking earlier about having different billing increments for consulting services. I often try to put things as weekly rates, which are roughly aligned to business goals. In a particular week, we will be able to get X, Y and Z accomplished, which accomplishes a meaningful result for the business. The reason I quote weekly rates is that I feel that people have a taxonomy of value for labor, based on how that labor is packaged.

If you quote hourly rates, engineers figure, “OK. A week is 40 hours. This means a weekly rate is mathematically comparable to an hourly rate, trivially. Why make this meaningless semantic distinction, foolish math-averse marketer guy?”

Why?  Because of the taxonomy for labor. People have a preconceived notion of the proper cost of one hour of time. An hour is worth, “Well, OK. Two figures, maybe low three figures at the high‑end,” where the equivalent amount of hours, balled up into a project aimed at accomplishing a business goal, occupies a different level of the taxonomy.

If you are in the taxonomy of strategic initiatives that can increase my business’s sales the next year from 20 to 100 percent, that is not priced against the, “high two figure, low three figure rate” for our wages.

Ramit:  Right. What we know what marketing is, for example, there is a reason why the maximum you can get for an eBook is roughly $97. Because of the race to the bottom in Amazon pricing, people often say, “An eBook? That should just be $13. Why should you charge more?” That is why marketers add video to the equation. It’s difficult to compare an eBook plus video.

However, don’t let this immediately make you think that this is a scam. It’s not like these marketers are just trying to get one over on you. Virtually every information product out there has a money back guarantee. For me, you can take my entire course, which costs thousands of dollars, depending on what course you join and if you don’t like it, just ask for a refund and I give you all your money back, even the credit card processing fees. Why? Because I have to prove myself and so do most of us.

With engineers it works a little differently. You prove yourself up front. Then you probably have milestones. There is rarely a money back guarantee, although that something you could experiment with as well.

[Patrick notes: Customers who ask for a money-back guarantee for consulting services are typically signaling a poor match between you and them, because they have high uncertainty that you will be able to deliver what you claim you can deliver.  In general, I would be hesitant to work for someone who believed this, because even if I successfully execute everything I set out to execute, it is highly likely that a client who is not trusting of me will not perceive that as a win.

Here’s an actual line I use on the few occasions where this comes up in prospecting: “We live in an uncertain world. I’ll be totally honest with you: not every engagement I’ve ever had has been an epic win. You’re a businessman – you know better than anybody that e.g. software development is risky, and sometimes you spend 6 man-months on something and end up with nothing to show for it.  That’s why, when things work out, the business profits way the heck more than what the fully-loaded cost for 6 man-months of engineering time is.  My clients often benefit substantially from the upside to our engagements.  If you need a guarantee from me for results, you’re asking me to shoulder the downside risk for this engagement.  I don’t typically do that, and here’s why: if I shoulder the downside exposure, I should likewise partake of the upside exposure, and my pricing for that upside exposure would sound like ‘Well, if I double your sales, to a first approximation I should end up owning half of the business.’

This is not an offer presented for negotiation.  No successful software business will countenance giving 50% equity to an outside consultant, ever.  It will never happen.  Even an early stage startup, which I virtually never work with, would have a hard time getting sign-off for more than like a 1/4th of 1% equity grant. (Worth mentioning: For a variety of reasons, I would almost certainly not work for that.)

This is a way to frame a discussion. I am just trying to reframe the discussion away from “Risk of a negative outcome” to the (true fact) that I have, in the past, delivered huge wins for my clients, and that next to the enterprise value of a huge win, my consulting paycheck is a tiny, piddling number. The only way that math works out in a mutually satisfactory manner is if the client pays the sticker price. Many do.

For folks who aren’t willing to, oh well.  Things cost what a buyer and a seller mutually agree on: if the buyer can't make the seller a mutually satisfactory offer, no sale takes place.  I enjoyed the conversation and would be happy to introduce you to someone else if I know anyone.  As a consultant, you should be thrilled to let prospects go if they signal that they would not benefit from working with you, such as by not agreeing to your rates.  As the monopoly supplier of your time, you get to be choosy.  (P.S. This directly implies that if you have a more solid situation, via a filled pipeline or external financial resources or what have you, you can get away with charging more.  That's Microecon 101 but people don't seem to apply it, so let me say this for emphasis: If you're scheduled at or near capacity, charge more.  If losing a client would not meaningfully impact your standard of living, charge more.  If you have a product business partially subsidizing consulting, charge more.

]

Ramit: But the point is, when you are pricing your service or product, make it congruent with the market.

Patrick, you know that your customers, on a weekly basis, care about their goals, how much they are allocating and stuff like that. You have properly priced it, as a result, like that.

For my students [of Earn1k, a course where Ramit teaches people to freelance without necessarily quitting the day job], hourly charging is a good way to get their feet wet. [Patrick notes: That’s an important point. I turned down all consulting offers prior to quitting my day job, and literally have never thought of balancing the two at once.]

Ramit: But my most sophisticated people then use other strategies, like retainer models, and packages and things like that. That’s how you can really get really rapid growth in terms of revenue and pricing.

[Patrick notes: That’s really good advice, if you and your clients are mutually amenable to that.  I have a baseline of recurring revenue, and an infinite sink for future hours, as a result of running product businesses.  Retainer models, which might commit me to future work with a particular client, don’t uniquely offer anything to me, and they also might commit me to working with a client while my businesses would really like the first crack at my attention.

But if selling your time is your main source of revenue, retainers are a great thing for you.

How might that work?  Well, let me spitball some numbers.  Say you charge $100 an hour for Rails programming.  You have delivered a project for a client.  You might write them a monthly retainer contract for up to 20 hours of maintenance work.  Crucially, you get paid $1,500 regardless of whether you do any maintenance work at all.  You tell the client that any time above the retainer is available on a new contract at your then-prevailing rate, subject to availability.  The client pays for the certainty that you will be available if they need you, not primarily for actually getting you to code patches.]

Ramit: The main things for everyone here to listen to are that you have to deliver a better product or result than anyone else. Without that, you can’t put lipstick on a pig.

[Patrick notes: Weak disagreement here – I think Ramit is overcorrecting to avoid a common criticism.  You don’t have to be better than everyone else.  Every doctor in America, save one, is not the best doctor.  Every lawyer, save one, is not the best lawyer.  Every Rails programmer, save one, is not the best Rails programmer.  Being the best isn’t a prerequisite to running a successful business.  You need to be capable, and to deliver fantastic value to your customers.  That does not require being a ninjedi gurumensch.  A lot of fantastic value can be delivered with capable, workmanlike coding. Enterprise Java, not exactly a well-known spot to find ninjedi gurumenschen, makes the world go round – planes don’t fall from the sky, cities don’t descend into bedlam, stores don’t run out of food, banks don’t suddenly discover they’re insolvent.  Well, most of the time, and that isn’t really a Java problem so it isn’t here nor there.]

Ramit: Two, make sure that you are charging as high as you can to find the right customers. If I were Target, I wouldn’t charge $500 for a scarf, because no one would pay it. However, if I am Barney’s, you had better believe I’m charging $500. It is strategic. The type of people that walk into a Barney’s are very different than the people that walk into a Target.

Finally, run some goddamn numbers. If you are charging eight dollars a month for your product and you think that’s going to make you a very healthy lifestyle, just run the numbers. Factor in churn. Factor in cancellations. Factor in support costs and realize that that’s a very difficult way. If you can charge eight, maybe you can make a better product and charge $57 or $97.

[Patrick notes: Or re-target the same product at people who will perceive more value from it.  Bitwise identical codebases support 10x to 100x ranges in pricing all the time.]

Patrick:  Yeah. Here’s an admission against interest, given that I actually help companies decide pricing strategies and therefore should be competent about it:

Even knowing that charging nine dollars is a stupid amount for business, I succumbed to my engineer weakness last time I launched a SaaS company and had a nine dollar personal plan at the bottom. I’ll tell you exactly what my self‑serving justification was for putting that nine dollar a month plan there. I thought that I would get blog articles out of productivity bloggers, if I had something that would appeal to their needs.

A) It was a total failure. I never got one single blog article out of a productivity blogger about it.

B) I refused to admit that I was a failure and kept that plan up there for a year. I had ungodly support headaches. That entire pricing tier made less money than individual other clients on the higher tiers.

Ramit:  [laughs]

Patrick:  You don’t even want to hear about the, “I got called at three AM in the morning Japan time, because the text on the website is gray. I think it would look better black. I emailed you about that 20 minutes ago, but you didn’t respond. So I figured I would call you in Japan at three AM in the morning with customer support issues.”

Yeah, don’t underprice your stuff.

Ramit:  Yeah.

Patrick:  It’s the same with services. You will get the most demanding clients, when you’re under‑pricing or when, God forbid, you are trying to compete with people on Elance or the other freelancer sites. Someone asked me why I’m not on Elance.

“Well, I don’t want to compete with people on Elance and the customers that are really in my wheelhouse and get a lot of value out of working with me would run screaming if they saw me on Elance.”

For the same reason that, sorry, what was that high‑fashion place that is not Target that I’ve never heard about?

Ramit:  Barneys?

Patrick:  Barneys. Barneys, if you were some sort of fashion house that’s trying to make a name for yourself and you go to Barneys and you say, “Look, we can get our scarves made in China, so we can afford to sell them to you for $5 and you can put them on your tables for $10, the buyer for Barneys is going to say, “Oh hell no. We’re not interested in that at all. We don’t care if it’s the reincarnation of some famous designer and some other famous designer who had a love child, someone who understands fashion. Please put in names for me here.” But it just would do so much damage to their brand and to their perceived positioning in the market being available for $10 that it is not even worth picking up that revenue for them.

Price For Dear Or Price For Free But Never Price For Cheap

Patrick: Similarly, you can price it for free or you can price it for dear, but never price it for cheap. You will just have lots of headaches and it makes life difficult both with that customer and with any other customer who will ever discover that relationship.

Ramit:  Wow. OK, so Patrick, you just said something that everybody needs to hear again. This was taught to me by my mentor, Jay Abraham as well. My students were clammering for a low price product. I’ll cover this in the qualification talk, but I don’t allow people with credit card debt to join my flagship or very expensive courses. That decision alone cost me over $1 million a year, but it’s the right thing to do.

So people were saying, “Hey, can you give me something low priced? How about something around $9 or maybe $20?” I asked Jay, “What would you do? The market is begging for this.” He said, “You know what? If I were you, I would actually just create something incredible and I would give it away for free. I would make sure that I tell them why.”

I did something very similar, I actually interviewed another one of my mentors, BJ Fogg. I spend 16 hours preparing for that call. I read my old textbooks and I pulled up my notes and we had a great call about behavior change.

Then I wrote an email to my list and I said, “Guys, this interview is incredible and I’m giving it to you for free. But I want to tell you something. I could charge $1,000 for this interview. I would easily sell it. But instead, I’m investing in you. I want you to take it seriously, treat it like a thousand dollar product. Close your computer. Turn off all your other stuff and really treat it with respect. Treat it like a $1,000 purchase because that’s what it is.” The response was incredible.

The point here is do not try to serve everybody and also decide what market you want to play in. You want to play in the high‑end market? Then just give away your stuff for free at the low end and make sure people know why you’re doing that.

Overall, as Patrick said, your pricing is strategic, your pricing will communicate to the market what type of clients and customers you’re willing to put up with and what kind you want.

Patrick:  Right. I turned down potential client work all the time. My minimum engagement is a week, and I’ve only deviated from that once or twice, this time for good strategic reasons. I just don’t want to deal with the overhead of selling a one‑hour, two‑hour engagement. That immediately prices me out of affordability for many, many people… who would largely not be good fits for getting excellent value from working with me.

I’ll often get emails inquiring around my hourly rates and what it would cost to get me on a phone call for an hour or two. I say, “Look, I’m not available for formal consulting for an hour or two. Because I love the space and because I like helping out bootstrapped entrepreneurs, if there is time available in the schedule, I will be happy to get a Skype chat with you or whatever. We’ll talk. I’ll give you some ideas. Then I’ll point you to the right blog post and then you can go execute on those. But I am not going to be the one in charge of your marketing for what you think an hour would be worth.”

If I quoted them a rate for an hour (by taking my weekly rate and dividing by forty), they’d probably think, “Oh God, that’s an insane amount of money.”

Ramit:  Right.

Patrick:  In addition to there being a karmic benefit here [Patrick notes: I’m using karma here in the loosely metaphorical sense to mean “one should act in the service of others; this will be rewarded / this is its own reward”], there are occasionally knock-on effects for the business.  For example, somebody told that in one context will occasionally mention that they got really, really good results to someone who does have the resources to pay for a week of my time.

I can’t tell you what clients that’s gotten me in the door with, but you know their names.

Ramit:  Love it. So Patrick, Let’s wrap here. Where can people find you? What’s your URL and what will they find there?

Patrick:  I’m at www.kalzumeus.com/blog for my blog [Patrick notes: you're here!]. It’s mostly about topics of making and selling software. Generally what I’m talking about in any given blog post is whatever I’ve been working on recently. If you want a more structured, deep dive into things, go to training.kalzumeus.com and there will be a video on improving the user experience in the first run of your software.

Ramit:  So anyone who makes software or serves clients or customers would be really well served to check out Patrick’s stuff. It’s very much similar to I Will Teach in a sense that I Will Teach seems like it’s a money blog, but it actually has very little to do with money. It’s about psychology. It’s about understanding people. It’s about improving your communication. So I love reading it. I don’t build software. I build information products, but I love reading your stuff, Patrick, because you really dig into test results, data, and my most favorite of all is you dig into why people behave the way they do. Why do they chronically undercharge even thought they quote “know” that they should charge more? Why do they think that technical skills matter most when in business that’s questionably true? And why do they not trust things that have worked in other industries like marketing for years and years?

So I love the way that you show your own test data, you communicate it beautifully to engineers and it happens to communicate beautifully to me as well. So thanks for putting up your site.

I’ll share my site as well. I put up a special giveaway for people listening here. It’s iwillteachyoutoberich.com/kalzumeus-pricing.  That’s a free mini course on pricing that should help you really change the way you think about pricing and again, how I went from charging $4.95 for one product to $12,000 for a recent product with a dramatic fall in complaints and whiny freeloaders. Hopefully that helps you guys.

Patrick:  Let me give a quick little mini testimonial for Ramit here. We had dinner a couple of years ago. He gave me some advice on pricing my consulting services. For a variety of reasons I never quote my rate publicly, largely because it goes up all the time and I never want to have my own rate quoted against me as evidence that I should cede ground in future negotiations.

That said, it went up hugely as a result of some of the advice he gave, particularly regarding how you position the rates in the context of your discussion with the client. You cannot possibly waste your time listening to him on that subject.

Ramit:  I appreciate it Patrick. All right, we’ll talk soon. Thanks.

Patrick:  All right. Talk to you later, bye bye.

Ramit Sethi and Patrick McKenzie on Getting Your First Consulting Client

Patrick notes: Hiya long-time blog readers.  Last year I wrote two articles on career advice for young engineers, largely informed by conversations with a buddy of mine, Ramit Sethi.

Over the last twelve months, I have tagged every message in Gmail I’ve gotten from someone who applied the advice in those articles to effect in their careers.  Sample comments: “Your advice made me $20,000 in two minutes.”, “Your advice made me $35k”, etc etc.  The running total is at about $280,000 (a year!), which makes those two articles probably my highest ROI ever from just writing blog posts.  (n.b. If this were the whole of my business I’d need to have a quick heart-to-heart with myself about obvious inefficiencies in that monetization model but, luckily, the business does well enough to cross-subsidize the blog.)

Ramit offered to do a series of interviews about freelancing/consulting, which I know is of interest to many of you, so I naturally took him up on the offer.  (Though I think much of what we talked about applies just as well to the software business, to be honest.)

If you weren’t already aware: I don’t talk about it on my blog that often, but I do high-end consulting,  typically for improving the engineered marketing of software companies.  Ramit is a NYT best-selling author who makes a living teaching people how to do this sort of thing better.  Ramit is extraordinarily credible on this topic — in addition to his take on most things jiving with mine, I have word-for-word stolen some suggestions from him for e.g. client proposals, to the mutual benefit of my clients (they took the engagement) and myself (they paid $$$ for the engagement).

This is the first in a series of three interviews — the other two will be out later.  Want to make sure you don’t miss them?  Either subscribe to the podcast (details below) or to my email list.

If You Want To Listen To It

MP3 download (~50 minutes, ~120 MB): Right click to save.

Podcast format: either subscribe to http://www.kalzumeus.com/category/podcasts/feed in your podcast reader of choice or you can search for Kalzumeus Podcast in the iTunes Store.

Transcript: Ramit and Patrick on Acquiring Your First Customer

[Patrick notes: Shoutout to CastingWords for this transcription, which I paid $75 for.   I always use them for transcription and then make a hand-pass to make things flow a bit better and format for the Internet.

Can I mention they have an interesting pricing strategy, since it is relevant to y'all?  They price per-minute, but there are three levels based on how rapid you want the estimated turn-around to be.  I picked $1.50 a minute for the 6-day turnaround.  You can also buy 1-day turnaround for $2.50 a minute.  The same exact service, sold for a 67% premium based on expressed customer urgency.  I sometimes even get 1-day delivery when I paid for the 6-day delivery, but you understand I'm not paying for outcomes, I'm paying for predictability of outcomes, right?  If I need a video transcripted for a paying client with delivery scheduled for two days from now, I pay for the express service.  If, on the other hand, I have flexibility as to when I publish a podcast, then I can pay for the standard service.  That's beautiful market segmentation.  You can do very similar things for your software applications (and, yes, consulting gigs) and your clients will thank you for the opportunity to pay more to get guarantees of things which are valuable for them.  In addition to delivery timeframes SLAs are often useful pricing levers in that way -- including SLAs which just formalize a guarantee of something which is, in fact, available on a best-effort basis to people without the SLA, too.]

[Patrick notes: I've included somewhat extensive commentary in-line with the transcript.  It is all called out like this.]

Patrick McKenzie:  Hideho everybody. My name is Patrick McKenzie, and I might be better known as patio11 on the Internet. I’m a small software entrepreneur who, over the last couple of years, has run a consulting business largely focused on making software companies more money by delighting their users. I’ve invited my friend, Ramit Sethi, here today to talk to us a little bit about how you might be able to supercharge your freelancing and or consulting business. Ramit’s going to do a bit of a self intro now.

Ramit Sethi:  Thanks for having me, Patrick. My name is Ramit Sethi. I run a site called iwillteachyoutoberich.com. It’s a very modestly titled site, and I have a New York Times bestseller by the same name. My background is in psychology and persuasion. I help people use psychology to change their behavior and change other peoples’ behavior, whether it’s with money or with their careers or learning how to negotiate.

The way that I run my business is actually through information products. About 98 percent of my stuff is free, and then, occasionally, I will release a course. Usually, these courses take me a couple of years to develop, and then they tend to be pretty premium prices. If people join them, great. They might use them to earn more money or find a new job or find their first profitable idea.

And so, Patrick and I became friends, especially talking about marketing and pricing and just shaking our heads at some of the stuff we see on the Internet. Hopefully, we can share some of our stories from behind the scenes that we haven’t revealed before, which might help you raise your rates, get more business, and get better clients.

Patrick:  Yeah, and all this sounds very good. I think some people might feel a bit of disconnect in getting advice from us because for some reason, and this surprises me more than anybody. I seem to have fallen into that “Internet famous” thing, where people think that I’m some untouchable celebrity, which is absolutely not the case. And you are…

Ramit:  You are a celebrity to me, Patrick. I had to go through 10 assistants just to get this time with you on the phone.

Patrick:  [laughs] Those were all your assistants. You’re a New York Times bestselling author, but honestly, the techniques we’re going to talk about worked for us when we were much earlier in our careers. They helped get our careers to the point where they’re at right now. They’re generally applicable even to people who might not have an audience or any asset built up yet. (Although there is no time like the present to start building…)

Ramit:  Yeah. I think that’s exactly right. I think one of the biggest psychological barriers people see is they see advice from people, whether it be here or on Mixergy or any other place, and they say oh, well, that might work for him because he has an email list of 100,00 people or whatever it may be, but really, these techniques can be applied, maybe in a smaller setting.

If I say, and I’ll tell you how I collect 100,000 data points for one of my courses. You don’t need that. You can start with 20. It’s, frankly, very effective, and then at a certain point, you’ll be able to get 50 or 500 or 5,000. Patrick, what do you say we start off by actually addressing that main thing, which says, “Hey, sounds great, Patrick, but I’m not an Internet celebrity like you. How do I get my first customer?”  What would you tell them?

Getting Your First Job When You’re The Outsider In The Middle of Nowhere

Patrick:  Before anyone on the Internet knew who I was, before I even started commenting on the forum that I was on before the forum before the Hacker News (that I gained a lot of my audience through), and way before I had a blog, I worked at a technology incubator in central Japan.  I’m in Gifu Prefecture, and I love Gifu Prefecture. Gifu Prefecture’s contribution to the world is a particular type of bird [Patrick notes: ukai (鵜飼) – I had to look it up after the interview, apparently the English is “cormorant”] where you leash the bird, take the bird to the river, and have the bird fish for you… then you make the bird regurgitate the fish.  Gifu is not exactly, like, high tech central. [Patrick notes: This is a slight exaggeration for comedic effect – we might have more iPhone developers per capita in my town than almost any city in the world.  Ask me why some other day – it’s a great story.  In general, though, I generally tend to laugh at suggestions that I enjoy an anomalously privileged access to the IT industry.]

I got my first job in software because I was working at a tech incubator here, and somebody needed 3,000 PowerPoint slides translated about CAD software.  If you’re not familiar with CAD software and PowerPoint slides and technical translation, it’s the most boring job ever.

But I did good work on it. There’s no reason to work on stuff if you’re not going to do a good job on it. When my contract expired for that day job, and I was looking for the next thing for me, I went to the guy who I had over delivered on the 3,000 slide PowerPoint presentation and said, “Hey, I find myself needing a job in the next couple of months. I know you might not be hiring right now, but you know a lot more people in this neck of the woods than I do. If you know anyone who needs a programmer or needs a technical translator, would you mind introducing me to them?”

Ramit:  What happened then?

Patrick:  He took me to a meeting with two of his clients, and the meeting was…It was explained to me that the meeting was like a job interview, and it took me years to figure out what actually happened. But basically, behind the scenes, he went immediately to two of his clients and said, “Look, I have an American. He’s an engineer. He’s done great work for me. He’s got this list of successes behind him at his old company. You’re going to hire him as a favor to me.”

And so, we went to this “job interview,” and I thought I was doing the whole interview dance.  I wondered why they were not asking many questions of me. We got to the end of it, and I said “I’m a little uncertain of where we are in the conversation right now.”  They said “You were hired before you walked in the room. We’re just getting to know you right now.” This surprised me.

When I tell that story to Americans, people say that, “Wow. Those Japanese people, they’re so weird and wacky.” But honestly, man, the truth of the world is that that is how a lot of jobs are allocated in America, too. It’s not based on the whole resume dance and the “Did you meet the 16 bullet points we put in our advertisement. Send in a resume. Maybe if we like you, we’re going to interview you.”

There are lots of jobs passed along on the private communication level where you’re scratching somebody else’s back that’s done something for you. So definitely, if you’re just starting to get into the business, whether you’re looking for a job or you’re looking for a freelancer/contracting/consulting engagement, find the people who have some reason to respect you, to feel a little bit of a social obligation towards you. And just ask them, “Hey, can you help me out on this?”

Ramit:  I love that because I love the part about oh, those crazy Japanese people. Because we always hear these great stories, and then the first thing we naturally psychologically do is create an us versus them. We say that could work, but XYZ. I call that the special snowflake syndrome: “That could work, but I work at a nonprofit.”  Or “…but I work in Kansas.”

You worked in the most remote place I could imagine, and it worked for you. One of the reasons I was so excited to talk to you was I want to expose what happens at high levels of business to everybody. I want to open that veil.  It’s funny, because the way…for example, the way that jobs are gotten is very similar to the way you get clients.

There’s something I always teach my students, which is 85 percent of the work is done before you ever sit down in the room.

Patrick:  Absolutely.

Ramit:  That applies to a negotiation, that applies to getting clients, that applies to getting a job. Many of my students who go through my career course, by the time they sit down for an interview, it’s not an interview. It’s a discussion. By the way, it’s a discussion with someone they’ve already been out to coffee with two or three times.

Think about the caliber of that discussion or the contours. They’re completely different than you genuflecting and saying please, give me a job, please. Instead, it’s like the job is assumed. Now let’s discuss the details. Let’s actually talk about that in terms of clients, Patrick. You’ve done a lot of client work. I’ve done some client work as well, and I’ve taught a lot of people how to get clients.

When it comes to getting your first one, two, or three clients, what are some important things to note, and what are some common mistakes that people make?

Don’t Underbid to Get Early Clients – It Hurts Your Pocketbook And Credibility

Patrick:  The most common mistake I see when I’m talking to other engineers is that people radically undercharge for the first client.  This often comes from a perceived desire that goes like: ”I need to make my bones before I can start charging what I’m worth, so I’ll do this for you for really cheap, 10 bucks an hour or whatever.”

I was similarly overly needy with my first few clients.  I undervalued myself in the first couple of engagements. We’re going to talk about pricing in general later [Patrick notes: upcoming in the second installment of this interview], but you don’t want to ever come off as needy:

  • It will hurt your financial situation in a very direct manner.
  • It will also compromise your client relationship, because when a customer gets something for $10, they assume it is worth other things which cost $10.

$10 is not a meaningful amount of money to any business. [Patrick notes: I hear you, bootstrappers – I started a business with $60.  But after you’re selling something, $10 which buys something additive to revenue is a joke.] If you’re charging Starbucks latte money for your consulting offering, you’re never going to get buy‑in at the CEO level of a software company to get your initiatives adopted. You’re going to be treated like somebody’s kid’s nephew’s brother and only allowed to make copies.

If you actually wanted to make copies, you can get a low skill job anywhere to do that. But we got into this business to be respected for our advice and to be valued and to actually do stuff that matters. Charging 10 bucks an hour is not on the easy, straightforward path to doing stuff that matters. People that do stuff that matters have a ground floor which is higher and then they go up from there. [Patrick notes: I think there’s actually an interesting “social justice” type of point to make here, in that to the extent that there exist durable social classes in America, one quick way you can identify them is whose ground floor starts at minimum wage or menial gruntwork and who never has to do that, even when they’re unskilled labor, due to a combination of credentialing and connections.  That’s neither here nor there, though, and I almost hesitate to mention it because I think “Waily waily, I have neither credentials nor connections, life is unfair.” tends to obscure choices that we can make to better our situations.]

Ramit:  I want to emphasize a couple of things you mentioned. One, if you’re charging 5, 10, 20 bucks an hour, it’s very, very difficult to go from that to charging 200, 300 an hour or 10,000 a week.  It’s very difficult to make that transition. If you do it when you come in, that can happen. But going from one level to another is extremely difficult.

[Patrick notes: This is, if anything, an understatement.  There exist multiple paradigm shifts which separate $20 an hour from $X0k a week, and it is vanishingly unlikely that any client will make that transition with you.  Thumbnail sketch: You can get from $20 to $100 by getting serious as a professional, and you get from $100 to $200 by getting really good as a professional (or working in a high-demand speciality), and then somewhere between say $150 and a weekly rate in the tens of thousands you probably repositioned your offering such that it is no longer directly comparable to what you were doing before.  Concrete example: you can sell Rails programming at $20 an hour (to bad clients, as a newbie freelancer who screams please-take-advantage-of-me), and then you can sell Rails for $100 an hour (baseline clueful Rails programmer in 2012), and then you can sell Rails at $150 an hour (intermediate/senior consultant on a strategically important project, say).  Can you sell Rails at $50k a week?  I'm going to go with "almost certainly yes."  I think there are probably people who do that, and if you listened to them pitch clients, they would speak a language that holds very little in common with what you hear from a $100 an hour Rails developer.  Want to speak that language?  Keep reading for some thoughts.  (It will also help to get pretty darn good at Rails... though I think most people in my audience probably overestimate how skilled you have to be to move up that ladder.)]

Ramit: I happen to know that because on a product side, the first product I ever sold, the information product, was a $4.95 eBook. One of the last products I sold was a $12,000 course. I’ve gone the entire gamut of information products. When we talk about pricing, I’ll go into more detail on that. But suffice it to say, it’s extremely difficult to climb that ladder.

Never Work For Free As A Software Developer (Asterix)

Ramit: The other thing you mentioned is how many people go in saying, “I’ll just do this first, and I need to make my bones.” And you know what? There is a time and a place to do free work. I do believe in free work occasionally. But I always tell people if you’re going to do free work, make sure you are clear about your messaging.

For example, let’s say that it was my first time out there getting my first client. Let’s say I just want to build a portfolio so at least I have something to point at. Now, I’m generally not a fan of free work, but I can be strategically. This is what I would say to the client. I would say look, my normal consulting rate is $85 an hour, or whatever format of pricing you’re using.

However, I really like what you’re doing, and frankly, I want to build up my portfolio. I would be willing to do this for three weeks for free if, in exchange, you agree that if I do an extraordinary job, then we can discuss working at my normal rate. Well, who’s going to say no to that? If you do an extraordinary job, everyone’s going to want to pay you.

But in this case, yes, you are working for free. But you are explaining why. That is so important. It separates you from, frankly, the people who are new. They’re new, and you can tell that they’re asking to be taken advantage, because they’re like OK, I’ll work for free. It’ll be fine. Somehow, I’ll go from free to $500 an hour. Doesn’t work. Explain your messaging. Explain your positioning, and people will respect you way more for it.

Patrick:  I’ve got to be totally honest with you. I don’t think I would ever work for free as a developer, just because of the way the market is laid out right now. You just don’t need to. Hypothetically, if you’re going in for free, you should have a larger upside than just having a pot-at-the-end-of-rainbow outcome be working at your full rate. You might make it a condition of the free work that the works gets discussed publicly.  This gets you a public case study that you can use for your portfolio and the social proof that you have done this meaningful work for another company in the industry.

[Patrick notes: You will then aggressively leverage this portfolio when attempting to get work at your current billing rates.  I have projects which I did at $X per week which I will use to justify new $5X per week projects at new clients.  If clients ever picked up on the discrepancy – which would require me being stupid like mentioning that somewhere publicly… wait… d’oh – I would say something like “My previous client took a chance on me earlier in my career, when I didn’t have a track record of delivering results to people just like them.  I now have that track record, which is why you are paying the sticker rate.  After I deliver a win for you, if you give me permission to mention it publicly, it will go into a presentation just like this when I tell another person why they have to pay $10X rather than $5X.]

Patrick: In addition to that publicity being a benefit from you, that the public/private distinction there makes a very natural thing to charge around. You mentioned that 98% of your material is free. I do a whole heck of a lot of stuff for free. I’ll speak at conferences for free. My blog posts are free. I do open source software, which is free.

If you want me to do something so competitively sensitive that you don’t want me shouting it from the rooftops to anyone I can get to listen to me, then that always has a price tag attached to it.

Research The Customer To Win The Engagement Before The Interview Starts

Ramit:  That’s right. I want to talk about one of the secret sauces of my business, and it’s something that actually nobody really cares about. People think they care about it, but they don’t care about it. It is the research that I do going into building a product or getting a client. And I know you’ve done this as well.

It’s funny. The other day, I was asking people, “Hey, if I speak at South by Southwest, what would be a good talk?” Somebody wrote back on Twitter saying, “You should talk about your research methodology.” I said that would be great… for the three people who would attend.

Research is what allows me to charge 100 times what my competition charges… but nobody cares. Nobody wants to see [the hard work which goes into] how the sausage is made.  They just want to see the shiny tactic – the A/B test where you tested the color of this button.  [Patrick notes: I have to tweak Ramit’s nose here and mention that he got a 60% increase in sales from A/B testing literally in the week which we recorded this interview.  But hey, I sympathize with his general point that people want to hear quick fixes rather than actually doing the work.  Oh, let me bang my favorite drum – how many of y’all actually run A/B tests?  They’re Ramit’s mental characterization of a magic-bullet no-effort-required diet-pill-of-business-success and I can’t even get people to swallow the freaking pill.]

Ramit: Let’s actually talk for a few minutes about customer development and research going into a product.

I’ll talk about on the product side, and I know you’ve done quite a bit of work on the client side as well. For me, when I build information products, they can be anything from an eBook all the way up to a full‑featured, eight week course with gigabytes and gigabytes of video and thousands of pages of material. So when I start off, for example, with my course on earning more…

I have a course called Earn 1K, and it’s about how to take your skills and turn them into freelancing income by getting multiple clients and earning 1K. Many of my successful students earn 5K or 10K in a month on the side. So, very relevant to the people listening here. When I started off doing this research, I actually didn’t even think of doing an “earn money” product. [Patrick notes: Ramit started in the personal finance space.  Read I Will Teach You To Be Rich, but his wheelhouse would be passive investing, creating systems to move money around, and maybe a bit of optimization about e.g. credit card rewards.]

But when I went on book tour [for IWTYTBR], I went to all these cities around the country and I asked people, “Hey, what do you wish I wrote more about?” Almost to a person, they said, “I love your stuff on automation, but I really want to know how to learn more money.” I was surprised. I was like, really? Isn’t that scammy?

They were like, “I don’t care. I just want to know how to make more money.” And so, I started doing research, and I pulled my team together. The first thing we did was basically just what we call cloud research. We wanted to understand the dynamics of the market.

There’s about five or six ways to earn money.

You can negotiate your salary. You can get passive income, which for most people, never works. You can get freelance income. You can blah, blah, blah, blah, blah.  [Patrick notes: Ramit would probably round out this list with 1) buy real estate and rent it to people, 2) invest in the public capital markets, and 3) start an honest-to-goodness business.]

We looked at it, and we’re like, “OK.” We think we’re really good at freelancing, and we think that the market is particularly bad at that. And so we started asking people survey questions.

Now, you can get good survey data with as few as 20 responses.  For all the engineers listening, listen closely: Statistical significance is irrelevant when you’re doing customer research. I don’t give a damn about P values and anything like that. It’s almost all qualitative. That’s what I care about. I want to hear the words they use.  [Patrick notes: Engineer reporting for duty as audience stand-in!  Oof, critical hit, advice totally warranted by actual experience!]

We started off by saying…We didn’t say here’s a key insight as well. When you’re doing customer research, I’ve seen a lot of early surveys. They’ll say something like this. They’ll ask a fake question. They’ll say, “Ramit, if I told you I could solve all your storage needs in five hours for less than 25 picodollars, would that interest you?” [Patrick notes: Ramit is making a reference to Tarsnap, which is a technically jawdropping backup service which has abysmally bad pricing.  Ramit does not know what Tarsnap is or why he’d care about it – he literally only knows it “We should bring up an example of how engineers are terribly bad about connecting prices to business value, like that picodollar bullshit.  Seriously.  They don’t even price gestures to the dinner we are eating potato chips in picodollars.  And you know why?  Because if you went into any restaurant and offered to buy potato chips for a penny apiece – which is, like, a lot of picodollars, right? -- they’d throw you out.”]

Ramit: Look, guys, [asking leading questions] is BS. That is the worst type of marketing. Because you don’t really want the answer. You’re trying to sell them. Instead, you should ask open-ended questions like “Tell me about your biggest frustration. Tell me what you’ve done in the last six months to improve your financial situation.

“Have you ever thought about earning money? If so, how have you thought about it? Have you ever tried it? What happened?”

We start to understand the words that they used. We collected approximately 50,000 data points, through everything from chat, email, surveys, one-on-one interviews, phone calls.

Now, you don’t have to do 50,000.  Honestly, 100 gets you farther than most people do. [Patrick notes: I think talking to ten individual people who could actually buy your product prior to writing a line of code puts you ahead of the curve, judging from my inbox.  You’ll learn a million times more from 10 people than you’ll learn from your IDE when coding a product built for nobody.] Now what happens is most people will retreat into a room for six months, they’ll build their product or their service and realize that they got it completely wrong. Just to give you a sense, Patrick, for us, Earn 1K on the side. It took us six months to figure that out that title: “Earn 1K”. Why didn’t we call it “Earn 10K”?

Because most people don’t believe that they can earn 10K, even if they can. On the side, because most people believe if they have to earn more money, they have to quit their job and the start the next Google with venture capital. That’s not true. The research is really what allows you to distinguish yourself from your competition so that when someone comes to your site. They start nodding their head uncontrollably, and they say yes, and price becomes a mere triviality. I’m curious if you’ve had that experience.

How To Parlay Interests And Expertise Into First Consulting Gigs

Patrick:  Absolutely. I told you how I got my particular job in the past, but I didn’t talk about my first consulting client yet. I used to be active on forum for lots of SEOs, search engine optimizers, who often, they have a side business themselves or their main source of income is publishing a particular thing and then getting traffic to it via SEO.

Many of them are less than technical or they have enough skills to, like, hack together a site in WordPress, but they don’t know how to take that to the next level. The natural engineer thing to do in this circumstance is to ask someone OK, what are your technical problems? Oh, you have problems with WordPress sites? I’ve done WordPress sites before. Let’s talk WordPress, WordPress, WordPress.

No SEO wakes up in the morning and thinks, “Damn, I have a WordPress problem.” They wake up in the morning and say, “Damn, I have a business problem.”

[Patrick notes: This is generalizable to any group of business owners.  Even software companies.  Pick a software CEO you admire, I can guarantee you that they don’t wake up with software problems.  Heck, freebie for you: solve identification and sourcing of highly talented programmers and every software CEO I know will write you a check for last month’s gross revenues.  After hiring, the next biggest problem most of them have is selling more of the software they have already written.]

Patrick: The SEO continues: “My business only made however many thousand dollars last month, and if I could get more pages on the website, then I might have more traffic and be able to drive more revenue for it.  But I don’t see a clear way to doing that without me doing all the writing myself. “

After you can talk to them and establish that rapport, that you are actually listening to the problems that they are talking about, you can suggest how to address those problems in ways that you are uniquely capable of doing.

I might tell the SEO, who is a potential client: “You’ve gotten this level of traffic so far with your existing site. You want to double that over the course of the next year. You were saying that the roadblocks that are stopping you are a) you’re on an outdated architecture where you, personally, have to write everything, and b) it’s been impossible to find someone who is a subject matter expert at this who can also make web pages, because that combination of interests just does not exist.”

Ramit:  Yes. I’m nodding my head right now. I’m like yes.

Patrick:  Yeah. “I totally understand that it is impossible to find someone who is both good enough of a journalist in the space to work for a genuine published magazine and also can edit HTML pages. I have an idea for you. I’m going to make a CMS for your website. That’s just a page that they can go into, like WordPress, and they can do their writing like they do so well.  The CMS will ship it over to you, and you figure out which business model that you experimented with will work well with this content. “[Patrick notes: In context, I’m suggesting that the SEO will either have in-house advertising, display advertising, an affiliate/lead-gen relationship with another publisher, or products of their own with which to monetize marginal traffic.]

“You click two buttons to hook it up to that page, and boom. That’s it. It’s live on the Internet, and Google will start sending people to it. Does that sound like it’s something motivational to you?”

By this point, the SEO is going “Hell, yes.” I’m like, great. Now this project, I think I can deliver the minimum version of it in two weeks from now. Two weeks from now, you get the CMS. You can start having your magazine quality writers putting stuff in, which will look beautiful, have pictures on it, and start generating traffic on Google.

By that point, everything else about the engagement is a detail. They want it.

Ramit:  That’s right. They want it. That is the number one thing. Do they want it? Not what does your website look like, not how big is your button, not how optimized did you get your conversion funnel. Most of us could focus more on building something that people want.

That comes with the early research. I love the way you talked about how you communicate with a client, because it shows you really listen.

Actual Experience From Someone Who Pays $X00,000 Yearly For Engineers

Ramit: I want to emphasize something, especially for the engineers listening to the call. I am a client that I work with engineers. I have engineers on staff.

Ramit: I pay them pretty well. I have passed on hiring engineers who may be more technically proficient, but they didn’t understand what I wanted. Honestly, guys, as a business owner, do you think I care if you’re using this technology or that? I just don’t give a damn [about technology]. I really don’t.

What I care about is, is my business going to generate revenue? Am I serving my customers? Is my website going to go down, and I have to be the one who tells you? Or can I go out on a Friday night and not worry about my business?

Those are the things I care about as a client. I’m reminded of a great story that somebody…one entrepreneur told on a Mixergy interview with Andrew Warner, and is it a great story. He was in the relationship market. His buddy actually started an information product in the relationship space, for women. [Patrick notes: No clue what interview this is referencing – feel free to drop me a note if you remember it.  By the way, you should be listening to Mixergy.  It is what the New York Times would produce if the NYT cared about producing value for people in our line of work.  It occurs to me that mentioning the NYT in the same breath with Mixergy is likely the most positive thing I’ll ever say… about the NYT.]

Ramit: The guy was doing very well. I believe he was making either 40k or 400k a month. He was doing very well. This guy got pretty interested, and he said, “Hey, I’ve got to take a look at this market.” He spent about four or five months really doing deep research. Lots of stuff, including ad words, including customer research, including buying all the other products.

He finally built his own product. Within two or three months, it was making more than his friend’s. It never stopped. I happen to know that that business is now a gigantic business. Why? What separated him from his friends?

His friend called him, frustrated, like “Hey, I don’t understand why your site’s making more than mine.” He said that he had found some very subtle things in the research that his friend had not. I will tell you that we had that same exact thing happen. When I built my Find Your Dream Job course, it took us about three or months to build the first version, and we’re pretty experienced at this.

When we went out to test it with about 20 people: The first person failed. The second person started crying. And the third failed as well.  At first I thought, “They’re just dumb. They don’t know what they’re doing.” No, then five people failed. Then 10. It took us about…I believe it was 15 or 16 versions to get it right. When we looked back, we had skipped over some very subtle things in the research process.

Once we got those right, sales skyrocketed.  [Patrick notes: cough read writeup in Fortune Magazine cough] I’ll just say that it’s very, very important to understand the words that your client or your customer is using and be able to explain how and why you can help them.

Patrick:  I think we don’t pay nearly enough attention to the exact words people use. Maybe we would if we came from a communications background. Nothing motivates people like having their own words repeated right back to them, which is something that you should try to do more often. It’s just an easy conversational hack to sound more persuasive.

[Patrick notes: Engineers take heed: your clients will often make mistakes about engineering reality when talking to you.  You will feel the urge to correct their misconceptions about engineering reality, perhaps by rewording their requests such that they match the way the world actually works.  Don’t do this. You will never delight a client by teaching them what a web service actually is.  You will absolutely delight clients by mentioning that the “web service” (cough iframe cough) which you implemented for them, allowing them to get data from System A onto System B (cough displayed on pages served by System A, they never talk to each other cough), provably increased sales by $200,000 in the last quarter.]

Patrick: But you have to make your prospective clients feel like you understand where they’re coming from. And that starts with both understanding where they’re coming from, and then communicating like you understand where they’re coming from. Even if you’re building a website for someone, it’s not just a website, right?

There is some particular need that they have for that website, whether it’s for their business purposes or because a lot of business owners are very personally invested in their business. You need to communicate to them that you understand that they are personally invested and that you are also capable of treating this website like it’s important, like it’s more than just bits on a server somewhere.

Here’s a hypothetical example for you. I live in Japan. I happen to have lots of Asian friends, so I just know that there is one particular niche market in America, that if I really wanted to stop my business right now and start a totally new market, I could do it. A lot of people who might not be English as first language themselves have a worry that they are going to have children who do not learn how to speak their native language, and as a result, will never be able to communicate with their grandmothers.

And so, there’s this market in America for schools to teach the children the language of their parents, basically. [Patrick notes: The term of art is “heritage language school.”  I think I probably butchered it during the interview… I don’t get much practice speaking my own heritage language out loud these days, what can I say.] If you’re building websites for those schools, you’re not really building websites, so much as you are selling the person who runs that school on getting a website done.  She [Patrick notes: overwhelmingly female and underserved by technology available to her, where have I heard this song before…] is generally exquisitely sensitive to the emotional needs of her clients, who are typically mothers.

Rather than focusing on the technical aspects of the project — it’s going to have pages and an admin system and a this and a that – you sell that you understand the business and the emotions driving the business.  The business purpose here is that success for your business, the school, is primarily dominated by how many new students it can enroll.  [Patrick notes: This is overwhelmingly the case for almost all educational businesses which do not receive direct state subsidy, by the way, from “piano tutor” all the way through “second tier universities.”  First tier universities are anomalies in that they’re actually choosy about who they let in.] I understand that parents enroll students in your school because they feel that there is a connection to a trustworthy source of authentic information about their heritage.

[Patrick notes: This is the money-line for this particular pitch.  I manage to execute on a gets-to-the-heart-of-the-business line that good in only one out of three or so of my pitches.  If I get a line that good into the interview, the engagement is sold.  I can even point to identifiable moments of time when a company has hit me with one of these, and seriously, in the full knowledge that I’m being successfully sold to, if you get me that well I’m in and damn the price.]

Patrick: I might hypothetically continue “Because I do lots of work in this space, I can deliver a website that embodies trust, authenticity, and tradition for you.” If you can present that pitch, you will be 10,000 times better than anybody who might be better at technical infrastructure, better at the design, whatever. If you can empathize with them on where they’re coming from, you’ll be better off.

Patrick:  In the same fashion: you were asking earlier about some problems people have in their first couple of clients. I was a little too overeager for work, and I worked with people whose businesses I understood on an intellectual level but did not understand on the feel it in my bones level. I’ve since gotten a bit more choosy about that.

Almost all my customers run software businesses. But, at one point, I worked with an eCommerce company, which was also a startup, so I thought “close enough.”  They were an eCommerce company in the men’s fashion space. Let’s say they sell dress shirts. Ramit, you’re a pretty nice dressed guy, but I’m wearing a t‑shirt right now with a startup logo on it.  Haute couture is not my strongest skill.

When someone says “OK, you need a fine-cut silk, black shirt,” [Patrick notes: is that even a thing?  Heck if I know.  I’m pretty sure they come in “silk” and “black”, give me a third attribute you can group shirts by.], my eyes just glaze over.  My ignorance was even hurting my ability to execute on parts of the engagement that I actually understood, like say site architecture for SEO purposes. I literally told the client “You’re going to silo some pages around that. like, fine silk shirt, blah, blah, or blah, blah, or blah, blah.”  With the blahs in there.

My client has made this his life’s work. You could literally see him disengaging from the conversation as I was dismissive about the subject. I was kicking myself. So one thing that I did to get better, in terms of that particular client relationship, when I realized that I really didn’t know anything that I was talking about, even when it was material to his business, was to say, “Look, you know me. I’m not going to lie. I’m not exactly a fine dresser. Can you just tell me, a geek who knows nothing about this, what is the one thing I should learn about men’s shirts?  If I only learn 10 minutes of material about dressing myself in my entire life, what would those 10 minutes be?”

Bam, his eyes lit up. His life’s work is men’s shirts. Do you think he likes talking about men’s shirts? Oh, heck yes. He loves to share that knowledge to people. (If I was savvier about it, I would have asked for that at the initial interview.)  [Patrick notes: If a client talks about nothing but themselves for the entire interview, you will get the job. They’ll remember you as being tremendously responsive to their needs, and people care a heck of a lot more about themselves and their businesses than they care about you and your business.  Conversely, if an interview is ever the you-you-you show, you probably will lose that engagement.]

How Startups Fail At Communicating With Customers

Ramit:  It’s amazing how powerful it is when you actually put yourself inside the mind of your prospect. I want to talk about this for a few minutes. You see very similar copy on most startup websites, similarly terrible. Here’s what it says. It says easy, fast, free. Those three words should never, ever, ever be the headlines or sub‑headlines on your page.

Do you know why? They don’t mean anything. Easy? What does that mean? When you say easy to me, to me, that means I don’t have to check my text messages on a Thursday night when I’m out with my friends at a bar. To a 45 year‑old mother of two, it means something very different. I don’t have to learn this weird HTML syntax with these brackets. [Patrick notes: Ramit co-founded PBWiki.]

Easy is not a descriptive word. It’s a word that engineers use or even amateur copywriters because they don’t have anything else to say. Why? Because they’ve been lazy. They haven’t actually figured out the words that people use. People don’t say I was really looking for an easy, fast, and free solution. They say I was looking for a way to earn more money, and I was sick of getting scammed.

Therefore, that’s why if you go to one of my pages, you’ll see the fact that I was on the Today Show or the fact that I’ve written for the New York Times. That’s not just there to feed my very large ego. It’s there because the customer indicated that it was important to them. I’ll give you another story about communicating with your clients.

Doing $80k of Engagements In 8 Weeks In The Super-Lucrative Field Of Violin Tutoring

Ramit: One of my star students is a young woman named Jackie, and she lives in the Midwest, and she’s a violin instructor. Now, she’s quite good at violin, but that wasn’t really what interested me. The fact was she had clients, but she came to me saying, “I want to learn how to grow my business.”

And so, she had a few clients, but it was just like middling, and it wasn’t doing very well. I said, “Who’s your client? Who’s your client?” This is where most people stop dead. They say, “People who are looking for storage solutions.” Oh, really? What type of person? What gender? What age? Other people will say, “I’m building a product on love.” “Oh, really? Who’s your customer?” “Oh women between the ages of 27 to 54.”

A 27 year‑old woman has nothing in common with a 54 year‑old woman when it comes to love, clothes, or virtually anything else. The way they describe love is completely different. Her customers were kids, parents, moms, dads, everybody. I said no, no, no, no, no. I worked with her. This is what happened. I’ll cut to the chase.

In eight weeks, she was able to generate $81,000. How did she do that? She quickly found out who her customer was. Any idea who the customer was, Patrick?

Patrick:  I’ve read this story from the year before, so I have a good idea. But want to spoil it for the rest of the people?

Ramit:  The customer was not the 10 year‑old kid. It was the mother of the 10 year‑old kid. By the way, that mother tended to be ethnic, tended to be Asian. Not a surprise when you think about it. But this isn’t obvious prior to starting to do the research. Now, by the way, what does this Asian mother want? She doesn’t really just want her kid to play like Yo‑Yo Ma.

Why does she want that? Because she wants little Timmy to get into Harvard. And so, when you deeply understand that, then everything about your positioning, your marketing can change. For example, imagine a new testimonial which says: “My son used to be really shy and withdrawn. Now, after going to Jackie’s class, he’s so talkative. He’s made so many friends. I can already see his grades going up because of the new discipline that he’s learned.”

[Patrick notes: I know every engineer in the room just got the willies, because you think that using that testimonial to sell violin tutoring is somehow unethical.  It is perfectly ethical if Little Timmy’s mom actually reported that as her experiences.  This is, in fact, how middle-class parents justify virtually every extracurricular.  You have probably used a variant of this exact sales pitch yourself, except it was probably promoting video games rather than violin.  Video games help teach problem solving and hand-eye coordination, not just that you should Spirit Rush to Charm/Deathfire Grasp the Corki outside of Baron for the easy ace so you can push mid for the gg, right?

(Man, that might be my best double coded joke ever.)

(P.S which somewhat spoils the joke: If you’ve cottoned onto the fact that that is actually a totally comprehensible statement and feel repulsed by it welcome to being every client ever.  Those of you who play League of Legends just went "Dude, what's wrong with you, was Spirit Fire on cooldown?" and those of you who don't are zoning out almost as fast as a has-money-but-can't-program client does when told about Ruby DSLs and test driven development.)

<Sidenote type="semiPolitical unfortunateReality" forwardLookingPromise="thisBarelyEverHappensOnThisBlog">

P.S. To people who might have a Little Timmy in their life: from the perspective of someone who knows how the admissions game is played, Little Timmy should really be looking for ways to sound like anything other than Asian-smart-kid as possible, because Harvard has a declared policy of racial discrimination, and because in addition to racially discriminating against Asians they have a particular narrative stereotype of an Asian who they think they have quite enough of already.  That stereotype gets good grades, plays violin/piano, and has no personality.  I mention this to accurately summarize the preferences of bureaucrats whose professional competency is racial discrimination rather than to agree with them.  “Talkative” helps him – quite a bit!  I would actively avoid mentioning violin at all… unless you can write with humor (and a touch of pique) about how you abominably suck at violin, hate the stereotype, and enjoy subverting things, because humor and subversion play much better in admissions essays, and because humor/subversion are good mental hooks to make you stand out against the other Asian applicants you’re explicitly judged against whereas “smart, good grades, violin player” do not provide hooks.

Even if you haven't won genetic lottery that Harvard optimizes for, it is still within your power to market your existing product offering (and/or tweak it to make it more marketable) such that you can improve your chances of passing their (biased) decisionmaking process.  I think that is largely a more productive use of a single student's time than lamenting that Harvard's admission department is unfair (which it is, no question, but if you really want to go to Harvard I'd suggest betting your chips on making you more acceptable to Harvard than making Harvard stop systematized racial discrimination in admissions in time to benefit yourself).

</Sidenote>

But that’s neither here nor there, from the perspective of selling Little Timmy’s mother on the value of violin lessons.  She wants to buy violin lessons.  OK.  Customers wants do not always align with their needs -- often, selling them successfully involves a) understanding their wants, b) getting to the root issues behind them, and c) proposing to deliver solutions to those root issues by -- wham, switcheroo -- giving them what they actually need.

Some of my most successful projects were exactly not what the client first thought of engaging me to do.]

Ramit: Wow! That speaks directly to the heart of what her clients want. By the way, it’s not a lie. It’s completely accurate. This is marketing at its best, where you are actually listening to the customer and then delivering value on what they want, totally ethically.

So, for all of us, when we’re writing worthless copy like easy, fast, free, stop. You’re being lazy. Go out and talk to your customers and figure out their real pain points and write you don’t have to check your pager every Friday and Saturday night. That is a very, very powerful message.

Or “silk shirts that don’t wrinkle when you’re getting off the subway.” That is very powerful to the businessman in Manhattan. All right? So that’s all I’ve got to say about copy when it comes to relating to your customer.

Patrick:  I totally agree with that. Also, something that people don’t realize is that this is particularly easy for engineers to do. They think I am trivially capable of doing this, or I am trivially capable of using from free open source solution for doing for their…Therefore, no one else in the world wants it.

My original claim to quote, unquote fame on the Internet is a little program called Bingo Card Creator. It makes Bingo cards for elementary school teachers.

To this day, despite the fact that I’ve been publishing about this for six years with a constantly updated stats graph that shows, like, $200,000 plus of Bingo cards getting sold, people ask me: how could anyone possibly need that? You can do it in Microsoft Excel in, like, five minutes. All you need to do is know how to use Microsoft Excel, like someone that has an engineering degree.

People with engineering degrees don’t teach elementary English. That’s just a fact of life. The reason I know that teachers really genuinely need that is because I’ve talked to literally thousands of teachers by this point, and I know that they have a very particular need for getting ready for class tomorrow.

It isn’t bingo card software. They have a particular need to teach a particular lesson plan that they already have laid out about, say, the American presidents, and they want an easy to use activity that they can just slide into that. And, at no point, do they start thinking of OK, I can open up Microsoft Excel and start scripting up some quick macros, and only two hours from now, I will have something that works for my kids.

They want something that they can go to their local Google, type “American presidents”, pause for a second and remember back to their class about incorporating more fun activities in the classroom, type in “bingo”, hit enter, and get something on the first page that works. And that’s fundamentally why that business works.

Ramit:  Love it. What you said when you said like, I can just open up Excel with my extremely simple knowledge of macros betrays a complete lack of understanding about the customer. In fact, this is what I want…I’d like to talk about stepping out of your own comfort zone and understanding the other people, the people that you’re trying to serve.

Most people are not builders. Engineers, understand that. Most people do not talk or think like builders. They do not want to sit around and build a bunch of stuff. I’m talking about myself. I hate building stuff, except the stuff that I’m really good at, building courses and stuff like that. Do you think if you put a bunch of LEGOs in front of me…I’m going to pick that box up and throw it straight in the trash.

I just don’t care. I don’t like it. I don’t want to build a macro. I don’t want to do all that stuff. The second thing is I have a limited amount of time, and if your customer, for example, has a family, they have extremely limited amounts of time. So for them, paying 5, 10, 20, 100 dollars is nothing. Because to them, they get…especially if you’ve segmented your customer to people who have income and are willing to spend it, as opposed to people who have no income and have unlimited time and unlimited technical skills…

Hint to anyone building stuff for other engineers, who haven’t segmented out their pricing or positioning, that’s bad. I like to talk about this. I was just reading something on Hacker News. There was a comment about email newsletters, and the funny comment to me was who still uses email newsletters? It just made me smile, because it’s a classic, classic mistake we make of thinking that our world is everyone’s world. Just to give you a sense, I make over 98 percent of my revenues through email.

Patrick:  I facepalmed quite a bit when I heard that line, too.  [Patrick notes: I’ve sold a couple hundred thousand dollars of software with email campaigns.  I will – hopefully by the end of September – have a product offering to help software companies do this without having to bring me in for consulting.  If you want to hear more, give me your email address.]

Ramit:  Yeah, you almost cannot pay me money on my site. My conversion funnels are pretty sophisticated, and we’ve built them and tested them for many, many, many years. Email works very well. However, in this day and age, when people talk about oh, you’ve got to get on social, got to get on Facebook, get a Twitter account, my suggestion for people trying to get your first three clients, forget everything that will not immediately get you three clients.

So, if you’re putting up a Twitter feed, ask yourself how is this going to get me clients? And then you’re going to start realizing that you’re giving yourself BS answers, like, I’m getting into the conversation. I need to be at the top of mind. Really? Is that going to help you get three clients or is reaching out to 10 people with custom emails, showing how you already understand their business and suggesting a couple things, is that going to help?

There are the things we talk about in earn 1k, but you can do them anywhere. When I first started off writing copy about four or five years ago, I started studying the really, somewhat dark arts of long copy pages. My sales pages are approximately 40 to 50 pages long.

People say, “Ramit, that doesn’t work.” Really? I have the data. I know for a fact that it does work. In fact, there’s a very sophisticated marketer. His emails are about 20 or 30 pages long. People said [laughs] who reads these emails? Does anyone actually read this? He laughed and said [laughs] only the buyers.

Patrick:  [laughs] I love that line.

Ramit:  It’s really incumbent upon you to stop thinking that your worldview is everyone’s worldview and realize that marketing works for a reason. As one of my professors said…in communication, she said, the value in this material is not in the difficulty of it. It’s in the usefulness of it. It’s not important how hard it is, what you’re doing. It’s important how useful it is to your customer.

Patrick:  This ties back into how…really understanding who, exactly, can afford to buy your product or service offering is, and how important that is. For example, I’ve slagged on social media quite a bit, and I have not slagged on it nearly enough. The person who has the authority to buy your offering at, say, a company which…

By the way, guys, for all the engineers in the audience, you sell engineering services to for profit companies because they are the only people who can pay actual professional engineer rates. There are vanishingly few private individuals and or non-profits who will actually pay engineers the going rate.

Anyhow, so who at the company has the authority to make the decision to bring you on? It’s probably not someone who has a Twitter feed. People look at my business, and they might naively think that I get lots and lots of leads off the blog or on Hacker News, but if I’m getting brought in by, like, the CEO level, or the head of product or the head of marketing at a company, they’re probably, well, a little bit older and have…They would tell you in so many words, I’ve got better things to do with my time than to stay on Hacker News.

I don’t, apparently. But [laughs] I don’t meet those type of people typically off Hacker News. I’ll often meet them at something like a conference that’s organized for the explicit purpose of generating more sales for software companies, which by the way, people who pay $2,000 to go for a conference whose tag line is “Sell More Software” are often interested in paying money to sell more software.  [Patrick notes: I was thinking, in particular, of the Business of Software conference, but I’ll bet you there are a dozen of these in any industry you care to name.  If your prospective clients go to those conferences, you should probably try to go, too.]

They’re meeting people for conversations in between the…the lectures at that place is a great use of my time, I have found. “Who still uses email and newsletters?”  Gahhhh… multi‑billion dollar industries are multi‑billion dollar industries for a reason. You need to have an appropriate level of business awarenesss to back up your technology skills [and if you had that level of awareness, you would not be skeptical about email.]

I would not have a business but for being technologically good at what I do. I would not have a business if I was not able to actually deliver on the things that I offer to my customers. But there’s a huge business knowledge that needs to be present to also successfully run a business.

That starts with knowing the market outside of your narrow specialty. If you don’t already know what businesses are likely to have websites that drive huge amounts of their total business value, then you’re not going to be successful at selling people on engagement to improve their website such that their business gets more revenue.

You need to know, like, what the transactional model for the business looks like. Take two industries which look similar to each other, say insurance or retail finance. Thank God I don’t actually have to do work with either of these.  But play along for a second [Patrick notes: I don’t endorse the following conclusions about this, just making an example]: if you want to sell engagements to these guys, you should understand e.g. that an insurance company might have a very, very direct path to revenue via the use of their website.

They can actually take leads on the website and start converting those directly into transactions and or into applications for their high-margin insurance products with very little work on top of that.  The core business at say, a bank might be more relationship based, where they have longer sales cycles, and they’re only capturing the lead generation on the website or only doing low margin services like checking accounts or whatnot.

[Patrick notes: Checking accounts are loss-leaders with godawful terrible margins, used mostly to get people in the door for credit cards and home loans.  Ironically, the only checking accounts which make appreciable amounts of money are the ones used by the bank’s “worst” customers, who get eaten alive by fees and penalties.  Ask Ramit about that stuff, though, he’s the finance expert.]

Patrick: If you were looking at two similarly situation businesses, you would go with the one that you could provide more value to. So you need to know that about the business. If you can’t sketch someone’s business model on a napkin, I don’t think you can ever sell them anything worthwhile.

Learning Long Copy And Other Unexpected Sources Of Business Value

Ramit:  It reminds me of something I call going from D to C. And that means going from Disparagement to Curiosity, and when you see a comment that says who still uses email newsletters. That’s disparagement. You’re basically saying I’m smarter than this company. Who would ever use email newsletters, which is ironic, because this person happens to be exactly wrong.

And it, therefore, makes them look far more foolish because they’re disparaging something they simply do not understand. I would, instead, rather have people say, “Wow, these guys are using an email newsletter.” They seem to be doing pretty well. They get a lot of press. They seem to have a lot of customer testimonials. What do they know that I don’t?

From D to C. Stop the disparagement and start the curiosity. Like I said, when I started studying the dark arts of long copy, I first looked at these long copy pages, infomercials, and I said these things are scams. I started off with a disparagement model. But as I started getting deeper and deeper into it and learning what works, what doesn’t, what is ethical and what is not, I learned that there are very, very good reasons that direct response marketers have been using long copy for over 100 years.

What do they know that I don’t know? The answer is they know a lot. They know a lot more than I could ever hope to learn, and it’s all encompassed in this knowledge in direct marketing. So instead of disparaging things that we don’t understand, let’s actually try to say, hey, for 15 minutes, I’m going to try to understand that maybe these guys know something I don’t.

When you can do that, why…for example, of the reasons I moved to New York was all my Silicon Valley friends said it’s all about direct ROI. Those companies are so stupid that pay for ads in Times Square. I looked at them like that’s interesting, because those companies have been around for 50 years. Why does Louis Vuitton have billboards that they spend $200,000 a month on or 500,000?

What do they know that I don’t? As I moved here, the answer is they know a lot. They know a lot more, in terms of brand, and not everything is directly measurable. It’s important to be able to say, “Look, I may not know everything. Let me try to at least understand the basics of it.” When you do, you’ll see entire worlds open up. Like for me, I saw entire worlds of pricing, monetization, long copy, upsells, cross sells, AOV.

I saw all these things open up that I had never, never, never had an idea of. It was all because I first was disparaging them, and then I said all right. I better learn what these guys are doing. And that changed everything for me.

Patrick:  I’ve had similar experiences myself. Something that I often see in our industry is people have a fascination for the new. So anything that smacks of the old way of business or that technology is so last year or that thing tends to turn people off. Here’s a heuristic for everybody: it is entirely possible that you are the smartest person in a particular industry… but I would heavily bet against that.

If everyone in an industry does something in a particular way, like if every enterprise software company doesn’t put their prices on the website, and you think “That’s so stupid.  I would never buy anything without the price being on the website”, consider the somewhat radical notion that every enterprise software company since ever is not simultaneously making the exact same mistake and that maybe there’s something about that model you don’t know yet.

Ramit:  God, that is the best example ever. Because I see it all the time. Oh, whenever I see a site where they don’t give me the price, I just close the page. And then you say to yourself OK, that’s great. What is your budget, by the way? Oh, I don’t have a budget. I’m just looking around. I could just build this on my own. You’re not the customer. You’re not the customer. The customer…

Patrick:  “How many millions of dollars in software purchases have you authorized in the last quarter?” [laughs]

Ramit:  Exactly. Like, are you kidding me? I’ll give you an example of a purchase I made just this week. I have been looking at some retention issues and improving some retention flows in my funnels, and I happened to be on some newsletter that I signed up for years ago, which by the way, I read once in a while.

They happened to release a new eBook on retention. It has 75 pages of charts and retentions and strategies and this and that. The email came. I read…It was, I would say, about a four page email. I read the first 15 percent, clicked the link, looked a couple pictures, saw a couple of keywords in the bullet points, like how XYZ company plugged their retention problems. I sent it to my assistant.

I didn’t even buy it myself. I sent it to my assistant. I said buy and add to cal, which means add to my calendar for me to review it later. That was it. The purchase was about $199. It took me less than 15 seconds to make that purchase decision. But why? Because I was the right customer at the right time. I had a burning pain point, and I had the budget.

So no matter what their website looked like and all that, yeah, that may have mattered a little bit. The most important thing was they understood their customer, they understood the code words and the problems I have, and it was already sold before I even looked at it. It was already a sold thing for me.

Patrick:  I’ll give you an amusing anecdote about that. So there are tools I use in my own business, right? One that I use a lot for designing mockups of user experiences is called Balsamiq Mockups, and I think their entry level pricing is, like, 80 bucks or something. A lot of my engineering friends say “Wow, 80 bucks is a lot for something that’s like Microsoft Paint++”.  [Patrick notes: The sarcasm drips from my voice here.]

Anyhow, so I frequently sit down with consulting clients looking at three pages of mockups that I’ve prepared that the engagement. The story that I’m trying to sell them on is “OK, if we do it like this, our revenues for the next quarter are going to go up by 20 percent.”

I got a question from someone who is similar to me at the company. Techy guy, young 20s, et cetera. He said, “That looks cool. What’d you make it in?” I said, “Oh, Balsamiq Mockups. It’s this thing that a company puts out which lets you mockup pages very quickly.”  “What, you paid money for that?” And the CEO says…by the way, notable and quotable… “Get one for everybody. Put it on the company card. You were talking about the plus 20 percent in revenue, Patrick?”

It’s two totally different mindsets looking at the same artifact, right? The CEO only sees it in the “This is the tool that someone I trust is doing something incredibly valuable with me on. It is cheap at any reasonable price.” Whereas the person who could potentially have, given the next two years of his life, actually implemented that tool, is valuing it at nothing…because clearly, he didn’t have anything planned for the next two years.

Ramit:  Cost versus value. This is something that we’ll talk more about in pricing. But if your first inclination when you look at something is how much does it cost, chances are you’re not the customer. And chances are you would be a terrible customer. In fact, I did this just yesterday. I did a web cast where I actually opened up a new course.

I was testing it. People when I start talking about the course, there will be some people on these webcasts. There’s usually hundreds of people there. They’ll say what’s the price? What’s the price? How much does it cost? What’s the price? I quickly tell them if your first question is about price, this course is not for you.

Because if all you’re concerned about is price, then you haven’t even factored in the calculus of value. If my course can teach you how to negotiate a $10,000 raise, then does it even matter what it costs? It could 100. It could be 500. It could be 5,000. If you believe in the material, and there’s a guarantee, then cost should be one of the last things.

Now, here’s the key. Certain people think like that. Businesses think in terms of value. Generally, individuals do not. And so, that is when you start choosing who are the customers I want to go after? Are they people who have no money or people who complain about money all the time or people who have no time to actually use this?

Or are they people who look at a…an information product or an engineering project and say, you know what? This might cost me $10,000, but I’m going to make back far more. Maybe I’m going to make back more money. Maybe I’m going to get peace of mind. That is value versus cost.

Patrick:  Amen. And that’s, by the way, a good heuristic when you’re looking at customers. So you’re going to be selling them on a relationship which is going to, at the end of the day, there will be an invoice delivered, and that invoice is going to have a bunch of zeroes in it. So you are probably not going to be the first professional relationship someone has ever had.

In fact, if you are, that’s a bad sign, because they have no idea how to work with you. They are not going to have a maximally happy result no matter how well you execute on that relationship. So look at how they comport their business in other ways. If someone has an accountant that they’re paying $300 an hour for, they understand that an accountant is generating some value for the business that is worth $300 an hour.

If someone doesn’t have an accountant, and if you ask them “Just curious, why don’t you have an accountant?” And they say something like “Heck if I’m going to pay $300 an hour when I could do it for myself in QuickBooks”, that’s a leading indicator that this person is not going to value your time as a professional either.

Ramit:  Exactly.

Patrick:  Now, conversely, if someone says that they pay their accountant $300 an hour because accountants provably make the business money but that the riff‑raff techie guys are just crazy for demanding 40 bucks an hour, then also, again, leading indicator. Have a nice, firm handshake and try to get introduced to someone else, hopefully someone a little more sane. But you’re not going to have a successful commercial relationship with them.

Ramit:  That’s right. Focus on taking your B+ customers/prospects to be A customers. Don’t focus on the D people, trying to turn them into A customers. It will never happen.

Patrick:  Never happen.

Ramit:  It will never happen. I will talk to you and Patrick will talk to you more about this. Patrick, I love how many times in your life you’ve used the word pathological customers online. I, myself, have many of those as well. And, in fact, I will talk about how I turned down over one million dollars in revenue per year to avoid the type of customers I do not want.

We’re going to talk about that in our next call, which will be on pricing. But for now, let’s leave our URLs so people can find us. Patrick, do you want to go ahead and start? Where should people find you?

Patrick:  Sure. My blog is at http://www.kalzumeus.com/blog [Patrick notes: You found it!]

Ramit:  What can they find when they go there?

Patrick:  I largely talk about the business of making and selling software. If you want the specific deep dive into that, as in whatever I happen to be thinking about at any given day, that would be at https://training.kalzumeus.com.  [Patrick notes: Ramit and I touched on the topic of how email makes serious money for businesses earlier.  If that subject interests you, or you would like to learn more about how you can use engineering to improve the marketing of your software business, I strongly suggest trading me your email address.  I promise not to waste your time.]

Ramit:  I love Patrick’s blog because not only does he talk about selling software, but I sell information products. I don’t sell software. But I find so much relevance in what you talk about, and I love how you delve into the psychology of being able to turn your worldview around and deliver value to people, and then charge accordingly.

I’ll share my URL as well. I actually put up a special page for anyone listening to this, to give away some free stuff for you. It’s http://www.iwillteachyoutoberich.com/earn1k/kalzumeus-start/. That’s a mouthful. You’re going to get some stuff there on how to find your first few clients, including a free video and a free mini course that I put together for you. So take a look. I hope you guys enjoy it. We’ll talk to you on the next call.

Patrick:  All right. Let me give just a quick mini testimonial for Ramit. We met for the first time a couple of years ago in New York and had dinner together, and some of the advice that he gave me at that dinner was extraordinarily valuable. It took me off of one trajectory that I was on with my consulting business and put me on a much better trajectory.

I’ve always known him to say really, really valuable things when I’ve talked to other engineers about some of the advice and, like, salary negotiation that he’s given me.

I have a stack of emails in Gmail, like I think it’s somewhere 20 something, and the running total is 200 and X thousand dollars of extra money that that’s made my readers. I really trust Ramit. There is no BS here. You can’t possibly waste your time on it.  [Patrick notes: Usual disclaimer: no money exchanged hands for that recommendation.]

Ramit:  Appreciate that. All right, Patrick, we’ll talk soon.

Patrick:  Talk soon. Bye bye.

Ramit:  Thanks.

Doubling SaaS Revenue By Changing The Pricing Model

Most technical founders abominably misprice their SaaS offerings to start out.  I’m as guilty of this as anyone, so I wrote up my observations about un-borking this as The Black Arts of SaaS pricing a few months ago.  (It went out to my mailing list — sign up and you’ll get it tomorrow.)  A few companies implemented advice in there to positive effect, and one actually let me write about it, so here we go:

Aligning Price With Customer Value

Server Density does server monitoring to a) give you peace of mind when all is well and b) alert you really darn quickly when all isn’t.  (Sidenote: If you run a software business, you absolutely need some form of server monitoring, because the application being down costs you money and trust.  I personally use Scout because of great Ruby integration options.  They woke me up today, as a matter of fact — apparently I had misconfigured a cronjob last night.)

Anyhow, Server Density previously used a pricing system much beloved by technical founders: highly configurable pricing.

Why do geeks love this sort of pricing?  Well, on the surface it appears to align price with customer success (bigger customers pay more money), it gives you the excuse to have really fun widgets on your pricing page, and it seems to offer low-cost entry options which then scale to the moon.

I hate, hate, hate this pricing scheme.  Let me try to explain the pricing in words so that you can understand why:

  • It costs $11 per server plus $2 per website.
  • Except if you have more than 10 servers it costs $8 per server plus $2 per website.
  • Except if you have more than 50 servers it costs $7 per server plus $2 per website.

This is very complicated and does not align pricing with customer success.  Why not?

Pricing Scaling Linearly When Customer Value Scales Exponentially Is A Poor Decision

Dave at Server Density explained to me that their core, sweet-spot customer has approximately 7 servers, but that the per-server pricing was chosen to be cheap to brand-new single-server customers.  They were very concerned with competing with free.

Regardless of whether this wins additional $13 accounts, it clearly under-values the service for 7 server accounts, because their mission-critical server monitoring software in charge of paging the $10,000 a month on-call sysadmin to stop thousands of dollars of losses per minute only costs $79.  You don’t get 7x the value from server monitoring if you increase your server fleet by 7x, you get (at least) 50x the value.  After you get past hobby project you quickly get into the realms of a) serious revenue being directly dependent on the website, b) serious hard costs like fully-loaded developer salaries for doing suboptimal “cobble it together ourselves from monit scripts” solutions, and c) serious career/business reputational risks if things break.

Let’s talk about those $13 accounts for a moment.  Are $13 accounts for server monitoring likely to be experienced sysadmins doing meaningful work for businesses who will solve their own problems and pay without complaint every month?  No, they’re going to be the worst possible pathological customers.  They’ll be hobbyists.  Their servers are going to break all the time.  They’re going to misconfigure Server Density and then blame it for their server breaking all the time.  They’ll complain that Server Density costs infinity percent more than OSS, because they value their own time at zero, not having to e.g. pay salaries or account for a budget or anything.

My advice to Dave was that Server Density switch to a SaaS pricing model with 3~4 tiers segmented loosely by usage, and break with the linear charging.  The advantages:

  • Trivial to buy for non-technical stakeholders: name the plans correctly and they won’t even need to count servers to do things correctly.  (“We’re an enterprise!  Of course we need the Enterprise plan!”)
  • Predictable pricing.  You know that no matter what the sysadmins do this month, you’re likely to end up paying the same amount.
  • Less decisions.  Rather than needing to do capacity planning, gather data internally, and then use a custom-built web application to determine your pricing, you can just read the grid and make a decision in 30 seconds.
  • More alignment with business goals.  Unless you own a hosting company, “number of servers owned” is not a metric your CEO cares about.  It only tends to weakly proxy revenue.  Yes, in general, a company with 10 servers tends to have more commercial success than a company with 1 server, but there are plenty of single-server companies with 8 figures of revenue.

(Speaking of custom-built web applications to determine pricing, the best product with the worse pricing strategy is Heroku.  Enormously successful, but I’m pretty sure they could do better, and have been saying so for years.  All Heroku would have to do is come up with four tiers of service, attach reasonable dynos/workers/databases to them, and make that the core offering for 90% of new accounts.  You could even keep the actual billing model entirely intact: make the plans an abstraction over sensible defaults picked for the old billing model, and have the Spreadsheet Samurai page somewhere where power users and the sales team can find it.)

Ditching Linear Scaling In Favor Of A Plan Model

After thinking on my advice, Server Density came up with this redesign:

I love this.

  • The minimum buy-in for the service is now $99 a month, which will segment away customers who are less serious about their server uptime.
  • You now only need to make one decision, rather than needing to know two numbers (which you might not have access to at many of their customers).
  • The segmentation on users immediately triples the price for serious businesses using the service, irrespective of the size of their server fleet.  This is good because serious businesses generate a lot of money no matter how many servers they have.
  • Phone support will be an absolute requirement at many companies, and immediately pushes them into the $500 a month bucket.

My minor quibbles:

  • I still think it is underpriced at the top end.  Then again I say that about everything.
  • Did you notice the real Enterprise pricing?  (Bottom right corner, titled “More than 100?”) Like many SaaS services, Server Density will quote you a custom plan if you have higher needs.  Given that these customers are extraordinarily valuable to the business both for direct sales and for social proof, I might make this one a little more prominent.

Results From Testing: 100% Increase In Revenue

Server Density implemented an A/B test of the two pricing strategies using Visual Website Optimizer.

At this point, there’s someone in the audience saying “That’s illegal!”  That person is just plain wrong.  There is no carbon in a water molecule, and price testing is not illegal.

What if the fact of the price testing were discovered?  Not really that problematic: you can always offer to switch someone to the most advantageous pricing model for them.  Since most existing customers would pay less under variable pricing than they would under the above pricing grid, simply grandfathering them in on it removes any problem from people who have an actual stake in the business.  For new customers who get the new pricing grid but really, really feel that they should be a $13 a month account, you can always say “Oh, yep, we were testing.  I’ll give you the $13 pricing if you want it.”  (David from Server Density says that this is in fact what they did, three times, and had no lasting complaints.)

Most customers will not react like this because most customers do not care about price.  (Those that do are disproportionately terrible customers.  To quote David from Server Density, “We had the occasional complaint that pricing was too high but this was from users with either just a single server or very low cost VPSs where the cost of monitoring (even at $10/m) was more than the cost of the server.”)

Anyhow, where were we?  Oh yeah, making Server Density piles of money.  They requested that I not disclose the interval the test was conducted over, to avoid anyone reasoning back to their e.g. top-line revenues, but were OK with publishing exact stats otherwise.

Variable pricing: 150 free trial signups / 2161 visitors

Pricing plans: 113 free trial signups / 2153 visitors

At this point, variable pricing is clobbering the pricing plans (they get 25% less signups and pricing plans being inferior at maximizing trials has a confidence over 99%)… but let’s wait until this cohort reaches the end of the trial period, shall we?

Server Density does not make credit card capture mandatory.  (I might suggest revising that decision as another test.)

Variable pricing: 23 credit cards added / 2161 visitors

Pricing plans: 18 credit cards added / 2153 visitors

That’s a fairly similar attachment rate for credit cards.  But collecting credit cards doesn’t actually keep the lights on — the important thing is how much you successfully charge them, and that is highly sensitive to the prices.

Variable pricing: $420 monthly revenue added / 2161 visitors   (~$0.19 a visitor)

Pricing plans: $876 monthly revenue added / 2153 visitors  (~$0.41 a visitor)

+100% revenue (and revenue-per-visitor) for that cohort.  Pretty cool.

(P.S. Mathematically inclined readers might get puzzled at the exact revenue numbers — how do you get $876 from summing $99, $299, and $499?  Long story short: Server Density is a UK company and there are conversion issues from GBP to USD and back again.  They distort the exact revenue numbers a wee bit, but it comes out in the wash statistically.)

We Doubled Revenue?!  Can We Trust That Result?

Visual Website Optimizer displays on the dashboard that it is 93% confident that there was indeed a difference between the two.  (The reported confidence intervals are $0.19 +/- 0.08 and $0.41 +/- $0.16.  How to read that?  Well, draw your bell curves and do some shading, but for a qualitative description, “Our best guess is that we doubled performance, but there’s some room for error in these approximations.  What would those errors look like?  Well, calculus happens, here we go: it is more likely that the true performance improvement is more than ~3x than it is that there was, in fact, no increase in performance.”)

Truth be told, I don’t know if I trust that confidence in improvement or not, because I don’t understand the stats behind it.  I understand the reported confidence intervals and what they purport to measure, I just don’t know of a defensible way to get the data to that point.  The ways I’m aware of for generating confidence intervals for averages/aggregates of a particular statistic (like, say, “Average monthly revenue per visitor of all visitors who would ever sign up under the pricing plan”) all have to assume something about the population distribution.  One popular assumption is “Assume normality”, but that’s known to be clearly wrong — no plausible arrangement of numbers makes X% $99, Y% 299, Z% $499 into a normal distribution.  Even in absence of a rigorous test for statistical confidence, though, there’s additional information that can’t be put in this public writeup which causes me to put this experiment in the “highly probable win” column.  (If my Stats 102 is failing me and there’s a simple test I am neglecting, feel free to send me an email or drop a mention in the comments.)

Note that since this is a SaaS business that is monthly revenue added.  Increasing your monthly revenue from a particular cohort by $450 increases your predicted revenue over the next year by in excess of $4,000.  (The calculation is dependent on your churn rate.  I’m just making a wild guess for Server Density’s, biased to be conservative and against their interests.)

Now, in the real world, SaaS customers’ value can change over time via plan upgrades and downgrades, and one would ideally collect many months of cohort analyses to see how things shook out.  Unfortunately, in the equally real world which we actually live in, sometimes we have to reason from incomplete data.  If you saw a win this dramatic in your business and were wondering whether you could “take your winnings” now by adopting the new pricing across all new accounts, I would suggest informing that decision with what you previously know about customer behavior vis-a-vis number of servers over time.  My naive guess is that once a server goes into service it gets taken out of service quite rarely indeed and, as a consequence, most Server Density accounts probably have roughly static value and the few that change overwhelmingly go up.

And what about the support load?  Well, true to expectations, it has largely been from paid experts at larger companies, rather than from hobbyists complaining that they don’t get the moon and stars for their $13 a month.  Dave was particularly impressed how many were happy to hop on a phone call to talk about requirements (which helps learn about the customer segments and develop the future development and marketing roadmaps) — meanwhile, the variable pricing customers largely a) don’t want to talk about things and b) need a password reset right now WTF is taking so long.

Server Density expects that their plan customers will be much less aggravating to deal with in the future, but it is still early days yet and they don’t have firm numbers to back up that impression.

Testing Pricing Can Really Move The Needle For Your Business

Virtually no one gets pricing right on the first try.

(When I wrote the pricing grid for Appointment Reminder I snuck a $9 plan in there, against my own better judgment, and paid for that decision for a year.  I recently nixed it and added a $199 plan instead.  Both of those decisions changes been nothing but win.)

Since you probably don’t have optimum pricing, strongly consider some sort of price testing.  If I can make one concrete recommendation, consider more radical “packaging” restructurings rather than e.g. keeping the same plan structure and playing around with the plan prices +/- $10.  (This means that, in addition to tweaking numbers, you find some sort of differentiation in features or the consolidated offering that you can use to segment a particular group of customers into a higher plan than they would otherwise be at numerically.)

For more recommendations, again, you probably want to be on my mailing list.  You’ll get an email today with a link to a 45 minute video about improving your app’s first run experience, the email about SaaS pricing tomorrow, and then an email about weekly or biweekly about topics you’ll find interesting.  Server Density is not the only company telling me that those emails have really been worth people’s time, but if they don’t appeal to your taste, feel free to unsubscribe (or drop me an email to tell me what you’d rather read) at any time.

Disclosure: Server Density is not a client, which is very convenient for me, because I’m not ordinarily at liberty to talk about doubling a client’s revenue.

Stripe And A/B Testing Made Me A Small Fortune

I’ve run software businesses for the last six years, all premised on the simple notion that if I provide value to customers they should pay me money.  The actual implementation of translating their desire to pay into money in my bank account was less simple… until I found Stripe.  They’re now up there with Twilio and Heroku in terms of “infrastructure companies which will totally change the way savvy software companies do business”, and if they ever get international processing nailed, I think they’ll probably take over the industry to Paypalian scales.

How do I love you Stripe, let me count the ways…

Well Thought Out API Design

Ever worked directly with the Paypal API?  Keith, my podcast co-host and somebody who routinely codes systems that process millions in payments, shudders when he mentions it.  The Paypal API is powerful and (fairly) reliable, but the experience of coding against it is absolutely maddening.  It is very much a legacy API which has to support decisions made at the dawn of the Internet which were largely driven by considerations not relevant to software developers or web entrepreneurs.

Stripe’s API is one of the best I’ve ever worked with:

  • It uses all the REST-y goodness that the web development community has come up with in the last few years.
  • The documentation is suitably comprehensive, organized for easy consumption, and screams “You will have this in a secondary window when you’re coding stuff that matters” rather than “This was designed as a 450 page PDF by a standards committee.”  The table of contents for any one of Paypal’s APIs is longer than all the docs for Stripe… and less useful.
  • There are several first-party libraries available, they work, and they feel like first-class citizens of their respective ecosystem.  Stripe-ruby is fantastic and feels like ruby.

Most Painless Integration Ever

As a direct consequence of having a really, really well-designed API, integration with Stripe was a breeze.  Getting credit card processing hooked into Bingo Card Creator — authorization, charging, accounting, the works — was 29 lines of code.  I signed up for Stripe, got started with the API documentation, and successfully charged a real credit card from production three hours later.  They’ve got the fastest time-to-business-value of any API since Twilio.
One major reason Stripe works exceptionally easily is because of stripe.js.  Basically, if you’ve ever tried to charge credit cards before, you’re aware that there is a PCI-DSS standard out there and if, e.g., credit card numbers ever hit your hardware then you’re in for a world of painful compliance audits and ridiculous checking-boxes-for-the-sake-of-checking-boxes.  (“No, I don’t run my server on a server which sits in an unlocked room in a building the general public has access to.  Phew, dodged a bullet there.  Now excuse me while I go install some anti-virus software on my Ubuntu box and very diligently review my Nginx logs daily.”)
There are two major ways around PCI compliance:
  • You redirect people off-site for the transaction to e.g. Paypal or Google Wallet, and let the megacorps worry about it, then they redirect people back to you when they are done.  This is a poor user experience that often confuses customers and might decrease conversion rates.
  • You have an iframe or something capture their credit card on your site but actually submit it only to the payment processor.
Stripe.js is a very well-implemented “or something”, where JavaScript that they’ll provide for you hooks into your credit card form with trivial work.  (About ~6 lines for me.)  When a user submits the form, you instruct Stripe.js to AJAX-y over to their servers and authorize the card.  Then you process the results in a callback.  This lets you verify e.g. that the card exists and is chargeable prior to submitting your form and executing your server-side purchase logic.  Stripe will then give you a token allowing you to securely charge the card for the authorized amount, and you can choose whether to do that or not on your server-side.  (For example, I perform other business logic validations first, and void the authorization if e.g. the user has already purchased the software.)
This means that their credit card details never hit your server.  Now, rationally speaking, if your server is insecure then the page the credit card form is hosted on is in the hands of the enemy, and you can no longer trust that Stripe is the only party which sees the credit cards.  However, PCI compliance has very few rational parts about it.  Stripe gets you past that hurdle with a minimum of pain.
This is really, really important for developers because you get end-to-end control of the user experience.  You don’t have to do a redirect off-site and you don’t have to have a garishly styled external iframe in the middle of your app.  You can slide a credit card form in whatever part of your workflow makes sense, have it feel organically like your app (because it is, actually, your app), avoid the Paypal/Google attempts to use your relationship with a customer to capture a new account for themselves, etc etc.  That has the potential to significantly increase revenue.  (More on that later.)

Amazing Support For Developers by Developers

So let’s say you happen to support a Ruby on Rails application coded by a novice web programmer in 2008.  Hey, it happens.  There are a lot of old gems required for the program to operate, somewhat creakily.  Let’s further suppose that this causes you to have a conflict with a dependency from an external API vendor, because the vendor doesn’t specify what version of the old gem to use with their ruby library.  If you mail support@, and tell them “When using a version of this gem four years out of date, your library dies on a particular line, because you use an API that doesn’t exist in the oldest versions of the library.  I can’t use the latest version of the library because it causes dependency conflicts.  What should I do?”, what would you expect them to say?
Here’s what I expected:  “Thanks for your email.  We can’t help you with coding your application.  You should use the latest version of the library.  Please see our FAQ at…”
Here’s what Stripe actually said:

 Hey Patrick,

Thanks for the report. I took a quick look:

$ git clone git@github.com:archiloque/rest-client
$ git bisect start
$ git bisect good v1.0.3
$ git bisect bad v1.6.1
$ git bisect run ruby -rubygems -e ‘$:.unshift “lib”; require
“stripe”; Stripe.api_key = “KEY”; begin; Stripe::Plan.all.count;
rescue; exit 0; end; exit 1′

Suggests that 7563fd as the culprit. Looking at the log, this seems to
be around 1.3.0. Then:

$ git log v1.3.1..7563fd
$ git log v1.4.0..7563fd

So, looks like v1.4.0 is the first version that included that #body
interface change.

I just pushed stripe-ruby 1.5.22, which adds a dependency on 1.4.0 of
rest-client.

Thanks again for the heads up. Let us know if you run into anything else.

I am not easily emotionally moved by git command lines, but this is clearly somebody who understands me and what I need in life.  In addition to exactly diagnosing the problem (I was on rest-client 1.0.3, the most recent version was 1.6.1, and it would really have been compatible with anything after 1.4.0), he fixed it for everyone else.

(Sidenote: This is one of the very few times in my life where mailing support@ made me a better engineer.  “You can figure out which version of a library breaks your application by running your minimal failing test suite commit-by-commit, watching for exactly the commit where it fails, and then correlating that to the released version which will actually work for you.  But since that will take forever, use binary search instead.  And there exists a git command which will do this for you.”)

That email was signed by the co-founder.  Patrick Collison, when he isn’t running a payments company, apparently found time to verse himself in arcane git commands.  I was practically vibrating with “These guys understand where I’m coming from.” after that, and they’ve not let me down since.

I’ve had exactly one serious problem with Stripe, in a year.  Their API broke for three transactions, due to a load balancer issue.  This caused their client library to return “Unspecified error, card not charged”, prompting my application to not deliver software to the user, but they were actually charged.  Clearly, that’s quite problematic.  They proactively got in touch with me about it, fixed the problem, and generally demonstrated competence and professionalism.  I gave away three free copies of the software and apologized profusely.  We haven’t had any recurrences since then, over about a thousand transactions.

Their Web Application Rocks

So in addition to programmatically charging cards, payment processors typically provide web interfaces.  They’re typically abysmal.  Paypal’s — and, again, I like Paypal — will take upwards of 15 seconds to find a transaction when you’re searching by its primary key, and it looks like it was written in 1996, principally because it was.

Stripe’s interface is pretty (don’t discount how much that matters, since you actually have to use it), snappy, responsive, and well-thought-out.  It has an awesomebox which, given 1234 as input, will quickly find every transaction with 1234 as the last four digits of the credit card, bring up the transaction for sale #1234 (an ID my code passed over with the transaction), finds all of your $1,234.00 charges sorted by recency, etc.  There has to be someone in Stripe who actually runs a side-business on it, I swear.  That or they’re telepaths.

Refunds are one click.  (And also available with an API.  This has saved me tens of minutes versus Paypal, since I have to log in, find the transaction, and write a refund note manually to do a refund with them.  It also saves me a lot of frustration, as correlating Cindy Smith to a Paypal transaction is difficult, whereas in Stripe all I have to do is keep their authorization token around server-side and then refunding a transaction is as easy as customer.sale.refund!)

Each transaction has a programmer-comprehensible set of logs attached to it, so I can quickly debug application problems.

Oh, they also have an API sandbox, with credentials segregated from the production API, and which can be manipulated via both the web interface and the API trivially.  I think this is an absolute hard requirement for APIs which can actually touch the real world.  (It is one of my very few knocks against the Twilio API.)

Stripe Has Fair, Comprehensible, Comparatively Transparent Terms

Ever heard “Paypal turned off my account waily waily” or “Paypal froze my money waily waily”?  Most complaints about Paypal actually aren’t about the API, they’re complaints motivated by a) commerce is hard because of the amount of fraud on the Internet and b) Paypal doesn’t historically do a great job of giving you resolution options if it’s fraud detection is overly aggressive in your case.  (I actually believe that they’re worlds better on this than they are perceived to be — the one time Paypal had an overly aggressive fraud alert on my account I was able to resolve it with a single one-minute telephone call.)

Stripe asks for prior review of your business model but, in my experience, approves you automatically and then actually does the human review while you actually have a set of working API keys.  They make transfers to your bank account 7 days after your customers pay you, to make an allowance for fraud/refunds/etc.  Seven days is impressively faster than most merchant accounts.

Stripe really shines in those rare cases where you need a human in the loop.  It’s still always a good idea to tell people in advance if you’re going to do something which will trip a fraud screen (e.g. open payments for a widely anticipated conference and then collect $X00,000 in $500 chunks from people in multiple countries — this will almost certainly get a Paypal account frozen).  A friend of mine — who has previously had issues with cleared payments getting filched by Google Checkout and then got Google’s customary /dev/null customer support — asked Stripe if an upcoming product launch would cause an account freeze.  “Thanks for contacting us.  Of course not.  You’re clearly legit.”  It’s like they found the sweet spot between “Computers can make decisions in lightning-speed at scale” and “Humans can actually be trusted with discretion.”

Developers Obsess About Price So I Guess I Have To Mention It

Stripe charges $0.30 + 2.9% per transaction, which is comparable with Paypal at low volumes.  This is frequently the #1 thing devs tell me they look for in their payment processor.  That is insane.  We sell products which have margins that come very close to 100%, and saving pennies on transactions to spend tens of thousands on integration costs (*) or to shave full percentages off our conversion rates is absolute madness.

* Think I’m exaggerating?  That’s about two weeks of dev time.  Trust me, you will not get a shopping cart integration done in two weeks with most payment providers.  Again, it took me three hours with Stripe.  I still can’t believe that.

I Extensively A/B Tested Stripe Against Off-Site Checkout And Found…

… that I should really not ship prototype shopping carts, even when I think it is really cool to get something out the door.

Back prior to the redesign of Bingo Card Creator, I tested Stripe on-site credit card payments (the interface for which I threw together with Twitter bootstrap in ~45 minutes) against Paypal and Google Checkout.  Specifically:

Test #1: Paypal / Google Checkout vs. Paypal / Google Checkout / Stripe

Test #2: Paypal / Google Checkout / Stripe vs. Stripe

Test #3: All three vs. all three, with the difference being whether customers upgrading directly after a trial limitation had been reached were sent to the purchasing page or an in-app credit card form

All three of these tests were null results.  (i.e. No significant difference in aggregate purchases between either of the two options.  Interesting, though, any time paying by credit cards was an option, that was overwhelmingly the customer favorite.  When the choice is Paypal versus Google Checkout, I get 50/50.  When the choice is Paypal / Google Checkout / Credit Card, I get 5-5-90 or thereabouts.  That could be sensitive to the design of my pages, I don’t know — I tested e.g. re-ordering the buttons and that didn’t change things, but didn’t go on to test e.g. button copy or color.)

[Edit: Whoopsie!  A comment on HN sent me back to my A/B testing records.  Turns out Test #2, which I had misreported as PP/GC vs. Stripe but was actually PP/GC/Stripe vs. Stripe, was actually a weak 90% significant win for PP/GC/Stripe.  Test #3 was a weak 90% significant win for sending folks to the purchasing page rather than the hacky Boostrap CC form.  Sorry for the misreporting earlier -- these were in the Big Book O' Failed Tests and I forgot to check the detailed reason for why.]

So, despite customers overwhelmingly choosing credit cards, adding that option via Stripe wasn’t capturing additional sales at the margin.  This was surprising to me, because it is received wisdom in the conversion rate optimization community that users hate off-site checkout.  I mentally tied a string around my finger to revisit the issue later.

I Followed Up On Earlier Testing And…

Earlier this year, after having decided to offer all three payment options full-time, I did an experimental website redesign, in an A/B test.  This gave me the opportunity to have my cobbled-together credit card form replaced by one done by a professional designer.  That experimental redesign was very, very wide-ranging and affected pretty much every stage of the software purchase funnel.  Results were mixed — some steps radically better, others worse — and netted out to no significant change in revenue.  Since the user experience was very improved, I adopted the redesign.

While I was looking at the stages of the purchasing funnel, I saw that the newly redesigned checkout experience didn’t really seem to motivate customers more or less than the old, ugly checkout experience, but users continue to overwhelmingly prefer credit card checkout either way.

Anyhow, some months later, I took a run at fixing the part of the funnel which had suffered most in the redesign.  For whatever reason, improvements in the usability of my application had made users much less likely to hit the free trial limitations.  This caused less of them to get taken into the purchasing pathway, after which point their experience was largely consistent across both versions of the site.

So I tested the stupidest thing that could possibly work to get more people to hit the trial limitations: decrease people’s free quota from 15 cards to 8 cards.  And I did that in an A/B test.  One line of code which tested, literally, two characters in the program.

Wham.

Not only did the 8 card limit absolutely crush the 15 card limit (99% statistical confidence, 1.89% conversion rate instead of 1.04% conversion rate from free trials to paid accounts on a sample size in the 5,000s range), it did something which is fairly rare in my A/B tests: it caused synergistic effects.  Ordinarily, I operate on the Bayes-is-about-to-turn-over-in-his-grave assumption that two stages in the funnel are largely totally independent from each other.  So, for example, if stage #1 is “Did they hit the trial limitation?” and stage #2 is “Did they purchase the software once in the shopping cart?”, I default to expecting that a test which increases the number of people hitting the limitation will not meaningfully impact the conversion rate in the shopping cart.  This is because this assumption has previously been good enough to bet money on, at least in my business.

Well, this time I lost the bet… or I won, catastrophically.  It seems that the marginal prospects (with the between-8-and-15 cards needs)  hitting the trial limitation have very different behavior when exposed to the shopping cart than the will-hit-the-limit-regardless prospects.  I did half a dozen tests to isolate the exact cause (I’ll spare you the deep dive into bingo customer minutiae).  Suffice it to say there is a) a customer group which needs between 8 and 15 cards and b) they really, really like pretty checkouts.  (I’m guessing that I’ve probably captured significant business from a portion of the population which isn’t teachers, who make up about 60% of my customers typically, but haven’t done any qualitative surveys to figure out who these new folks are.)

So, anyhow, with 99% confidence of a huge increase, you adopt the change, right?  I did that back in May.

Since selling to elementary schoolteachers is highly seasonal, let’s look at year over year results.  All of these months have the new redesign in place for 2012, but the new trial limitation was implemented mid-May and default behavior by the end of the month.

May: +38% increase in sales

June: +108% increase in sales (in the dead of summer, my slowest season)

July: +33% (dang, only?)

If this change continues being motivational during the school year it will be worth several tens of thousands of dollars a year to me.  If not, drats, it only doubled my money on the redesign.  I like giving credit where credit is due, so:

  • The redesign that debuted as “Awesome for users, meh for the business” now retroactively looks like the best idea for this year.  Thanks Ashraful.  (Hire him.)
  • Stripe, which makes the purchasing part of the funnel possible now, is incredibly amazing.  (And now processing 90% of my transaction volume for this product.)
  • As much as I love the above two, I have to give most of the credit to making decisions on the basis of data.  I know I’m a broken record on this, but no matter how many times I say it it doesn’t seem to change the behavior of many folks in the industry, so: A/B testing prints money.  So does having sufficient metrics in place such that one knows where the high priority places to A/B test are.

Incidentally, I do A/B testing with A/Bingo and measure test effectiveness throughout the funnel using KissMetrics, since A/Bingo won’t track multiple conversion types for a single test out of the box.  (Ben Kamens at the Khan Academy persuasively argues that fixing this would be a good idea.  It is on my list.)  Two years ago someone asked me whether I thought $150 a month for KissMetrics was worth it.  Ahem, yep!

Back To Stripe

Stripe is now my first choice for payment processing.  All of my new projects will start with Stripe and — maybe! — use Paypal if I get around to it.  (I don’t feel any impetus to migrate away from Paypal on BCC or Appointment Reminder — the code works and Paypal is, as mentioned, responsive when I have problems… but the CEO of eBay isn’t running git bisect for me if I have an API issue, so I feel no need to keep them in my plans forever.)

Two minor niggles mentioned for the purpose of completeness:

  • They occasionally expect me to be a better programmer than I am, by trusting me to do things correctly the first time.  (A customer had — I kid you not — a lightning strike hit her computer during checkout, and as a consequence the JS callback fired 36 times.  This resulted in 36 transactions, which Stripe processed without complaint.  Oops.  Server-side validation added.  Luckily, I caught the anomaly before my customer did, so I was able to refund and explain it to her prior to her bank asking for $1,078.20.)
  • “Authorize first, charge a second later” shows up on a lot of my customer’s online credit card statements as two separate charges until the first authorization gets voided, which can take days.  I’m almost certain this is not a Stripe issue and is, rather, a legacy payments infrastructure issue.  C’est la vie.  This causes about an email a month, and no customer has ever had a problem after I explain it.  (Editor’s note: Somebody from Stripe emailed me a work-around — just don’t feed Stripe.js a price and it won’t pre-auth the card.)
If you’re US-based, you can use Stripe, too, and they have my unreserved don’t-even-bother-looking-elsewhere recommendation.  If you’re not US-based, I feel your pain, and hope Stripe expands to your neck of the woods as quickly as possible.  (In the meanwhile, check out Paypal.)

Standard disclaimer: I occasionally write about companies which I use in my business and I feel are relevant to you guys.  Stripe isn’t a client.  I haven’t accepted anything of value from them… well, OK, technically speaking they have deposited $30,000 into my bank account, but you know what I mean.  (I think I also got mailed a hoodie at one point.)

You Should Probably Send More Email Than You Do

For the last six years or so, I’ve blogged, participated in online watering holes like Hacker News and the Business of Software boards, tweeted, spoken at conferences, and been very public about what I’ve learned about making and marketing software. Folks tell me that my advice has made their lives and businesses better, which is enormously motivational to me. Also, all this online participation has a variety of helpful side-effects for my business: more consulting leads, link juice to help my SEO out for the product businesses, reputation/credibility enhancement, yadda yadda.

One medium I’ve never made much use of personally is email. This is objectively suboptimal, because email is the best broadcast channel ever invented for business purposes. There’s no time to fix that like the present, so a) I created a mailing list, you should probably sign up and b) I would like to explain why your business should probably send more email than it is right now.

The Thirty Second Sales Pitch

Give me your email address and I’ll send you things that you’ll enjoy. For example, immediately after you confirm your email address, I’ll send you a link to watch a free 45 minute training video on improving the first run experience of your software. Why would you care about that? Because you’ll learn stuff like:

  • how two hours of work lets me sell $10,000 extra of Bingo Card Creator a year
  • how I more-than-doubled customer lifetime value on Appointment Reminder by implementing a product tour
  • why some software companies that you’ve heard of pay a fair bit of money for similar advice
  • tactics that two folks have already reported made their businesses more successful after implementation

In addition to that video, I’ll periodically send you other stuff you might be interested in. For example, last Friday I sent the mailing list a very well-received, in-depth look at how to price SaaS plans. Twenty people wrote me back and said they found it useful and would implement at least one recommendation in their own business. (Didn’t see it? If you’re on the list, send me an email.  If you’re not, sign up, you’ll get it automatically tomorrow.)  That’s a specific example, in generalities you’ll get:

  • exclusive looks at software/marketing topics which for whatever reason aren’t right for this blog
  • announcements when I produce something of particular interest to you (like e.g. my Business of Software presentation, which is the smartest/funniest I’ve ever been in 7.5 minutes)
  • announcements of new product offerings, should I ever decide to make anything that I think you’ll find interesting

Email: Geeks Ignore The Best Marketing Channel Ever

A long time ago, I used to be an anti-spam researcher. I was very, passionately committed to getting 95% less email in people’s inboxes. This lead me to have an enormous psychological block against collecting and sending emails for my businesses. My perceptions were that:

  • users bucket email into “tolerably annoying” and “hated with passion unmatched by a thousand burning suns”
  • email marketing is universally kind of seedy
  • asking for email addresses would damage customer confidence
  • other methods of communication made email obsolete
  • ethical use of email is economically marginal for the business

These perceptions were catastrophically wrong. If you are currently where I was six years ago, let’s have an intervention.  You should start collecting emails from people interested in your topic of expertise and periodically dusting off their inboxes, too.  Here’s why:

Presentation Of Content Influences Perception of Value

I try to avoid the word “content” because I think that “content” auto-commoditizes the value of whatever it is you are offering. Shakespearean plays would sound like terrible wastes of time if they were described as “content.” Regardless, I’m going to use “content” illustratively for the next few paragraphs.

Have you ever heard the phrase “You can’t judge a book by its cover”? It’s the worst kind of horsepuckey. In addition to the fact that it is trivially possible to judge a book by its cover, it is an empirically observable fact that most people, when presented with a book, will judge it by its cover.

Content gets judged by it’s cover.

  • Visual presentation is treated as a proxy for content quality and is provably dominated by first impressions formed in 3 seconds or less (see “Blink”).
  • Content which bears social proof (including e.g. visual elements suggesting endorsement by news media, tastemakers, or one’s peer group) will, in A/B tests, often ROFLstomp absolutely equivalent content lacking social proof.
  • Content appearing next to things which suggest high value will tend to inherit that high value. (This is the entire justification for the NYT’s rate card.) Content appearing next to things which suggest low value will tend to inherit that value.
  • Content has perceived value accutely dependent on what you describe it as. Novels are valuable, text files are not, even text files which are bitwise equivalent to novels. Reports are valuable, white papers are less valuable, PDFs are virtually valueless. (Seriously — A/B test this on a lead capture form.)

Here’s a concrete example for you: 37signals recently offered to give away free copies of their best-selling book Getting Real in return for mailing list signups. The positioning for it was, unfortunately, as a “free PDF.” Some members of HN proceeded to question the value of the give-away, including by interpreting the positioning for it as “a PDF file full of content that was published years ago to the Internet.” That’s painful. For what it’s worth, Getting Real is a great book with good advice in it, some of which is very actionable.

Given that reading Getting Real is a win for the reader and a win for 37signals, as a marketer, you want to convince people that reading it is in their interest. This begins with positioning it in such a way that people perceive value out of it. For example, rather than calling it a “PDF file”, which is begging to get valued based on the price of bits by people who think all bits deserve to be free, you can call it a best-selling business manifesto written by beloved industry experts. (That’s certainly marketing but, crucially, not a word is false. If you believe that cynical Internet-types would be less likely to download it if it were phrased that way, you could hypothetically A/B test that, and you would hypothetically lose.)

What Does That Have To Do With Email?

Consider this blog post (we’ll walk it back to email in a second). How are you reading it right now? Statistically speaking, you’re probably reading it either through a feedreader or on an aggregator like Hacker News. It is sandwiched somewhere in the middle of 30 other posts, all presented with the same visual weight. You will spend, statistically, an average of under three minutes on it. You will, statistically, not read all of it. This is a shame, because this post is orders-of-magnitude more important than a lot of the dross it is located next to.  However, because humans are humans, you (statistically) are going to associate it with dross because that is where you found it.

I’m not immune to this: my feedreader has over 1,000 items which I’ll never get to. Here’s what I see on those rare occasions when I open it:

Don’t look at this from my perspective.  Look at it from Aaron Wall’s perspective.  He’s one of the savviest SEOs alive and has a SEO training business which he would like to promote to people.  (Disclosure: I used to pay him $300 a month for it.  I spent waaaay too much time on his forums and answered so many questions that he made me a moderator and comped my subscription, demonstrating further that given the opportunity and a text input field I pretty much can’t help myself.)

Anyhow, Aaron is competing with thousands of unread items which are all presented as being approximately equivalent in value to his offering.  They’re not!  Egads, they’re not!  As much as I love with keeping up with the news coming from commentators about World of Warcraft, SEOBook is a bazillion times more valuable to me.  But I’m still probably not going to read that article!

Now let’s compare this to my inbox:

See those twelve unread messages?  How many of them do you think I’m going to read today?

That’s right, I’m going to read all messages in my inbox, because like most white collar professionals reading and responding to email is my effing job.  If Aaron Wall had hypothetically sent me his actionable tactics on how to market my business online, then that would get a halo effect from being in my inbox.  It wouldn’t be competing with the news about the Diablo 3 launch, it be in my workflow right between answering a question about the software I sell and re-sending a five figure invoice to a client.  I read and pay attention to my email, whereas blog posts get skimmed or dismissed outright.

Emails Get Opened And Change Behavior

Having done this for six years, I have good horse-sense with regards to the anatomy of blog posts and where links go on a page.  For example, if I put a link like “If you do nothing else to improve your copywriting go take a look at CopyHackers” I can tell you that, at this point in the post, maaaaaybe 1% of readers are going to actually click on that.  (The rest of y’all are missing out, seriously.  I could practically justify my consulting rates just doing dramatic readings of that for the web teams at my clients.  Application of the advice therein has made tens of thousands of dollars.  This personal recommendation may get that click through rate up to 3%.)

Now, if you’re an email-skeptic, you’re going to say “Well sure, but that’s got to be better than email, right?”   Wrong!

I soft-launched my training email list a few weeks ago, and have some seven hundred odd subscribers on it.  When I sent them an email last Friday about SaaS pricing, fully sixty percent of them read it.  (Sidenote: Folks thought I was going to get an email list full of mailinator.com or throwaway email addresses, since I was giving an incentive for signing up to the mail list.  cough  Not so much, no.  Folks scamming you for the incentive are a — cheap — cost of doing business.)

Roughly 25% of folks who read the first email (or a full 15% of the mail list) clicked on a link with approximately similar prominence to that one.  (It was to Ruben Gamez’s writeup on how and why he changed pricing for BidSketch.  Seriously worth a read.)

Changing behavior can be substantially more lucrative than just getting a link clicked on.  For example, if you’re not just publishing anonymous “content” but rather trying to reactivate users of an application (lifecycle emails) or educate-them-to-the-point-where-they-want-to-buy-something (drip marketing), a little nudge in behavior could result in adding thousands of dollars of customer LTV.  One of my consulting clients could trivially afford to include a ten dollar bill with every email.  (You’re already thinking of mails hitting spam filters, mails not getting read, and mails not getting acted on.  Yep.  You’re overestimating all of those numbers, but yep.  A few percent survive all those hurdles and result in thousands of dollars of sales at the margin.  Email is a numbers game and the numbers are very motivational indeed.)

Blog posts are very poor at changing actual behavior.  Here’s a “conversion” I’d like to get out of everyone in our space: I want you to start A/B testing, because it will make you a substantial amount of money.  I’ve beaten that drum so many times that folks identify A/B testing with me and ask me for my opinions about it.  I have probably told a hundred anecdotes like “I just did an A/B test and increased software sales by 70% with 99% statistical confidence.  The change was a two-character configuration tweak that I dismissed on a hunch six years ago.”  (That totally happened this May.  Ask me for details later.)  My consulting clients frequently tell me they’ve read my things on A/B testing for years, been very intrigued, and yet no amount of saying “This is worth millions of dollars” has ever convinced them to have one of their twenty employees spend 15 minutes implementing an A/B test.  It was downright surreal for me the first half-dozen (!) times this happened: folks who have followed me for years and could, in many cases, literally quote from my writing on this subject had never acted on it.

(Speaking of presentation changing perceived value: If you pay nothing for expert advise you will value it at epsilon more than nothing, if you pay five figures for it you will clear your schedule and implement recommendations within the day.  In addition to this being one of consulting’s worst-kept secrets, it suggests persuasive reasons why you should probably extract a commitment out of software customers prior to giving them access for the software.  Doing this will automatically make people value your software more.)

People — Including Geeks — Actually Like Getting Email!

I always thought I really hated getting email.  It turns out that I was not a good reporter of my own actual behavior, which is something you’ll hear quite a bit if you follow psychological research.  (For example, something like 75% of Americans will report they voted for President Obama, which disagrees quite a bit with the ballot box.  They do this partially because they misremember their own behavior and partially because they like to been seen as the type of person who voted for the winner.  99% of geeks will report never having bought anything as a result of an email.  They do this because they misremember their own behavior and partially because they believe that buying stuff from “spam” is something that people with AOL email addresses do, and hence admitting that they, too, can be marketed to will cause them to lose status.  The AppSumo sumo would be a good deal skinnier if that were actually the case, but geeks were all people before they were geeks, and people are statistically speaking terrible at introspection.)

For example, when I started going back through my inbox and memory to find emails that had really struck a chord with me, I remembered that two onboarding emails from Twilio had been particularly good.  I mean, sure, “I hate email”, but when Jeff Lawson sent me a note asking how Twilio was doing I read it.  (Subject line: “RE: Welcome to Twilio”  This is the point where geeks point out that they hate when evil marketers hack their brains and make them click on the message to open it and discover that Jeff Lawson didn’t write it to me personally.  Trust me on this one: I not only was not pissed off at that — I didn’t remember it until I opened it again just now — I went on to build an entire business on top of Twilio, with the first step largely being prodded by a well-executed series of email which kept bringing them back to mind over a few weeks.)

I assume you can probably see a similar mail sequence if you sign up for Twilio right now, so go do that.

My first business, Bingo Card Creator, makes extraordinarily light use of email.  I send out a newsletter on every month with a major holiday, telling people to make $HOLIDAY bingo cards with Bingo Card Creator.  The newsletters practically write themselves off the usual template, with slightly different graphics and a find/replace for the name of the holiday and tracking codes.  If I forget to send one of these newsletters real customers actually find my email and complain.  That blew my mind the first three times it happened — probably because part of me thought the newsletters were not really delivering value.  In hindsight, that was stupid.  People pay money for Thanksgiving bingo cards.  Of course they want to hear about them when go out of their way to check “I’d like to get a newsletter about new bingo activities, about once a month.”

Permission And Trust Are Worth Money

I had the Rails request log opened with tail -f e it when I launched my email list.  (Geek-to-English translation: I was watching who signed up in real time.)  Sixty seconds later, a particular email address caught my eye when it was confirmed.  Let’s call it Totally Not Mark Zuckerberg (TNMZ) since it wasn’t Mark Zuckerberg but was a person who I wanted to make the acquaintance of.

TNMZ has apparently been reading my blog for years.  I never knew that (d’oh!) and would have never presumed to contact TNMZ because I assumed that TNMZ would have better things to do than read email from me.  Explicitly asking for email from me makes that worry seem sort of silly.  The ability to reach out to TNMZ and know that contact would be welcomed is worth meaningful amounts of money to my business, even if nothing ever came from the mails sent by the actual mailing list.

Similarly, if you sell SaaS, and get say a hundred prospects to give you their email addresses, you can do motivational things for your business just by sending out 10 “Hey I saw you signed up.  I’m the CEO.  What questions can I answer for you?” mails to the people who look like the most promising prospects.

This is an ability that you don’t get with blog posts and largely won’t get with other broadcast methods like e.g. Twitter.

There are, of course, other companies which make scads of money from carefully curated email lists.  DailyCandy sold for nine figures.  Groupon is an email marketing company, growing to billions of dollars of sales on exploiting an arbitrage between “It’s comparatively cheap to get young, professional women to sign up for an email list” and “After they’re on the email list, they spend motivational amounts of money at its direction, and we get half of gross.”  (P.S. That arbitrage opportunity is now fished to heck and gone.)

Almost every first-class e-commerce company treats their house email campaigns like they are the goose that lays the golden eggs, chiefly because they are.  For companies which have repeat-purchase models, direct response to emails can represent half or more of customer lifetime value.

One of the largely-unsung secrets to Facebook having such an insanely high user retention rate is that they use activity from your friends to give you highly personalized emails designed to bring you back to the site and post stuff.  (A detail I really like: you can reply to email and then post things on Facebook without even visiting it.  Facebook will then, predictably, hit your friend with an email and use social pressure from you to bring them back in.)  Many social startups are extraordinarily aggressive with this early in their lifecycle (I’m looking at you, Quora) and gradually back it off over time.

Some folks might think I’m saying Build Trust With X, Monetize Trust With Email Sales Pitches, but it can work in exactly the opposite fashion, too.  For example, I wrote a drip marketing campaign (a series of emails scripted to go out at particular intervals) for WPEngine.  They sell high-end WordPress hosting, and every sale requires a strong commitment to change on the part of the customer — migrating your blog is not easy or fun for most people.  They also charge multiples of what the typical WordPress host charges, because they’re not the typical WordPress host, so it is imperative to educate the customer on the difference.  Many customers will not sit down and read 10,000 words of your marketing copy just because your face is pretty, but if you pitch them something like e.g. a course on how to improve their own WordPress installation, they’ll happily sign up for email from you.  (Really.)  You can then spend, e.g., eight emails over the course of a month educating them on what happens to WordPress under load and how to improve that, what WordPress’ security record is like and how to lock it down, and how browsers fetch and display content with reference to how to optimize one’s site to take advantage of it.  As you gradually build up trust as a respected provider of optimization advice that your customers (if they are diligent) can see working for themselves week in and week out, you can get more aggressive with “So we talked about X and Y and Z, and you’ve implemented some of it and not implemented some of the rest yet.  We could talk your ears off about this, but tell you what, if you switch to our service you’ll get it all because we breathe this stuff.”)

This type of approach demonstrably works well at selling software, even software which you might expect would require high-touch consultative sales processes.  Indeed, this is a way to scale the initial parts of the high-touch sales funnel while simultaneously passively collecting information about customers to help you do lead qualification for the really intensive portions, like say webinars or live sales presentations.  It also scales down beautifully to low-touch self-service sales approaches, too.

Email Keeps Your Audience Warmed Up

You might have heard the old advertising saw that someone needs to hear about your brand seven times before they buy.  I personally think that one is poorly sourced industry lore.  In place of it, let me cite something which is verifiably true: the probable value of a prospect goes down over time, the provable value of a customer goes up over time.  (The predicted future value of a customer is an odd duck for many SaaS companies.  I’ll sketch out the shape of the curve some time.  It’s a weird snake that requires a bit of explanation.)

You can break out the numbers in your own CRM to see this: your likelihood of getting an order from a prospect goes down sharply the longer they’ve been in the CRM, largely because the “lead gets cold.”  (Indeed, in a lot of fields you can lose up to 90% of the predicted value of the lead within the hour.  Crikey.)  Software businesses will see a similar effect in their own sales: for example, Bingo Card Creator trials (which are not time-limited) will lose 90% of their expected value after the first day (i.e. 90% of purchases happen in the first day), another 90% in the first week, and another 90% in the first month.  (i.e. Only one out of about a thousand sales happens more than one month after the trial starts.  That’s actually an old stat — it went waaaay up when I started emailing folks who opted-in on approximately a monthly basis.  Every time I blast out an email I get a few hundred bucks.)

Regularly getting in contact with customers or otherwise getting on their radar keeps leads warm.  Some of my more successful clients and confidants successfully get orders from people who’ve been in their company “ecosystem” (fan of the blog, trialed a product four years ago, signed up for email list, etc etc) for literally years.  And not “An order here and and order there” either, no, this is a repeatable process that they put in place because it works.  They plan out email campaigns with more sophistication than many of us would plan out actual product launches.

Email Helps Get Marginal Revenue Out Of Existing Customers For Almost Nothing

This worked on me, recently: I signed up for the Blue Nile mailing list back in October when I ordered my engagement ring, and they have sent me approximately 45 newsletters (I counted) since then.  I think I opened maybe two of them…  but sure enough, when I remembered I needed wedding rings too, they were sitting at the top of my inbox.  Guess who got the order?

You can do so, so much more with emails than the typical SaaS company does.  Here’s two stupidly simple things you can do to celebrate a customer’s first year anniversary with your service:

  • offer them a month free if they pay for a year of their current plan in advance
  • offer them a substantial discount (say, 25%) if they upgrade to the next higher plan level  (optionally, if they do it for a year in advance)
For the right companies and the right offers, that can mean $100 per email sent in extra customer LTV.  Plus, if you ask them for money in advance, you get the opportunity to spend it immediately.  (This is enormously motivational for SaaS businesses because they typically have godawful terrible cash-flow issues with customer acquisition costs front-loaded and revenue dripped out at a mostly steady pace for years.  That is typically the reason that SaaS companies attempt to seek investment: despite the cost of producing SaaS cratering over the last years, scalable customer acquisition channels are, if anything, getting more expensive over time.)
Paul Stamatiou wrote up how Picplum used this to their advantage.  I plan on covering the topic in substantially more depth, later.

Does This Email List Mean You Going To Stop Blogging?

One might reasonably ask where I’m going with this private email list.  Good question!  I’m not entirely sure — I have a feeling that I’ll write a mix of free material for it and, eventually, produce something which will add a lot of value for software companies.  That offering will be priced commensurate with value.

The amount of effort I put into my blog waxes and wanes with where I am in life at any given time. Some folks have recently noticed that I haven’t been posting as much as I used to. I plead “upcoming wedding” with the extenuating circumstance of “business is on fire (in a good way).”  Going forward, if I have something which makes a good fit for the blog, I intend to write it up as life permits.

Have a topic which you’d like to hear about?  Drop me a comment or email.

P.S. To save you a scroll-back-to-the-top, if you’re looking for the signup link for emails from me, it is here.

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(1~2 emails a week.)