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.

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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.

10 Comments

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.

26 Comments

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.)

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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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Kalzumeus Podcast Ep. 2 with Amy Hoy: Pricing, Products, And Passion

Keith and I recorded the second podcast, this time with special guest Amy Hoy. (If you missed the first podcast, see here.) We’re still searching for a format which really works for us, so this is a work in progress. Please share your thoughts with us on what you like/don’t like about it.

This podcast was recorded two months ago, largely because Keith and I got too busy to do the editing and post it. We’ll outsource more of that in the future. Of particular note: the 30×500 class that Amy talks about is already started, so if you’re interested in it, sign up for her email announcement (link waaay down on that page) for when it opens the next time.

Major topics for this podcast included:

  • why businesses are not price sensitive and how to price SaaS directed at them
  • how bootstrapping product businesses with a side of consulting worked out
  • the psychology of happiness

Download Links

Podcast link (MP3, 23 MB, approximately 80 minutes.)

Subscribe in iTunes &tc: The feed http://www.kalzumeus.com/feed/atom/ technically includes all posts on this blog, but if you put it into iTunes or your iDevice, it will slurp in only the audio posts. (Have a more finnicky client than iTunes? Try http://www.kalzumeus.com/category/podcasts/feed/ instead.)

Transcript

Patrick: Okey-dokey. You guys want to get started on the formal talking to people aside from the three of us thing?

Amy: Yeah.

Keith: Alright. Sounds good. OK, so we do the intro music [mimics intro music]. We don’t have intro music.

Patrick: We don’t have intro music.

[laughter]

Patrick: This is a third-rate podcast.

Keith: Welcome back to the Kalzumeus podcast and…

Patrick: This is episode two with…

Keith: Episode two, well, 2.5, because we actually recorded an episode two and then trashed it because it sucked.

Patrick: Yeah. This is uh…

Keith: Two alpha? Two Beta.

Patrick: Two Beta. It was an MVP of a podcast and then we shot it in the head because it was not accomplishing customer goals or anything.

Keith: Exactly.

Patrick: And we are joined today by special guest Amy Hoy.

Keith: Hello Amy.

Amy: Hello.

Keith: For our people, you want to do the introduction, Patrick?

Patrick: Oh, introduction, yeah. I’m Patrick McKenzie, better known as Pattio11 on the Internet and…

Keith: I’m Keith Perhac, not at all known on the Internet. Joining us today is Amy Hoy, who is the founder of Freckle and the new product 30×500, which seems awesome. We’re going to have Amy talk about that a little more coming up. Amy, do you have anything you want to add?

Amy: There are a couple more products other than those. [laughs]

Keith: Those are the big one’s that I know of, that I’m most familiar with. And, of course, your blog Unicorn Free, which is freaking awesome, by the way.

Amy: Thanks.

Keith: I was actually… I listened to the 5×5 podcast where you talked about where you came up with the name for Unicorn Free, and were explaining all that. Ever since then I’ve really enjoyed that.

Amy: Oh, well thank you. Yeah. I figure like, I was drunk and I wrote a note that I forgot and there was a Narwhal horn involved. It was a pretty good story.

[laughter]

Patrick: Ba dum bum.

Keith: Ba dum bum. Alright.

Patrick: So, let’s see. So, the 30×500 classes opening up in the near future [Patrick notes: We didn’t get this episode out on time, so if you want into 30×500, you’ll have to do it the next time Amy opens up the course.] and I feel it’s probably of interest to some people that are listening to this so why don’t you give us the rundown on that for the folks listening at home who don’t know what it is?

Amy: I’d love to, if I can pronounce my own product’s name. Sidebar, don’t name your product with numbers in it. I never can say 30×500 properly unless I do it like that in slow mo. In 2008 I got absolutely sick and tired of consulting, even though our consulting business was doing really well, mine and my husband’s. I knew that I didn’t want to be a consultant forever, I just fell into it because I had these skills.

I knew the way to make money was product. I had been watching 37 Signals from their rise back when they had zero products and were just designers and then they had products and all this stuff and all these people I knew who were starting businesses and were making money not by the hour but by the product.

I pushed my husband to help me make a software service, which is Freckle, which is nearly three years old now. We also wrote, after that, an e-book on JavaScript performance and from there on we built our product empire and weaned away from consulting entirely. During this process I felt entirely alone. There was almost no discussion about this stuff.

I knew what I knew by reading business books, which were not tailored to me, a two person company who was starting on the side. They were tailored to larger business but I was able to extrapolate the advice and apply it to myself. I read startup stuff, most of which was totally useless for what I was doing.

I wasn’t trying to get millions of users, I couldn’t spend money to acquire users, I couldn’t use venture capital, I couldn’t hire the best people. My husband and I were pretty great, but it was pretty much us and we were free.

Keith: You were pretty much stuck between the two worlds, weren’t you? What you wanted was a standard business model, but there weren’t any real books or information on standard business models in the Internet age and what information there was, was for startups and startups generally assume venture capital, which of course you weren’t going for, which is a great role to go down.

Just because you’re a startup does not mean you need venture capital and does not mean you need to do the seven billion users in two months for a free medium app, whatever.

Amy: But the hockey stick. The hockey stick. How do you survive without the hockey stick? I don’t know. In fact, I was anti-venture capital, for me. I feel like a lot of venture capital is quite deceptive, but I don’t begrudge anyone for taking it if that’s what they want to do. I’m like go after the dealers, not the users. I really didn’t want anyone else in-between me and my customers and my success.

I didn’t want anyone fiddling with my stuff. Until 2008, I had not been able to ship a project I worked on for years because management kept screwing with it, whether it was Behr Sterns, well they went out of business, or Limewire, where my CEO was a 12-year-old multimillionaire boy scout on crack. I never did anything for years and I was dying. I was like no more intermediation. No more between me and them. I was like no venture capital.

You’re right, there was nothing really to rely on other than old school business books and what I had detected by working around and following 37 Signals and Mail Chimp and these other businesses. I observed them over the years, lurked. They weren’t writing about it at that time. Even 37 Signals was not writing about their Bootstraps and Proud series. That was not in 2008, that was a lot later. So it was really lonely.

Patrick: Yeah. I start Bingo Card Creator in 2006 and, man, the state of the art back then. I was literally unsure it was legal to actually just setup a shingle on the Internet and start selling software. I tried to get advice from people in our community, which has some issues about things like that. They’re like no, God man. What if someone does a refund? You can get sued. You should never, ever, ever try to get away from the day job and, besides, they own your soul.

Keith: Going back to that a little, as much as we are three people on the Internet giving advice, you should never listen to people giving advice on the Internet.

[laughter]

Amy: Yeah, just us.

Keith: Yeah, just the three of us. I think that’s a very safe assumption. I would preface the “don’t take advice from people” with “random people on the Internet.” Find people who are successful and who are practicing what they preach, essentially.

Patrick: I think that’s life advice as to hanging around with the kind of people you want to be with rather than anybody else.

Keith: Rather than people who scream the loudest, yeah.

Patrick: This goes to picking your community, both in real life and in the Internet. If you routinely hang around people who run businesses, your perception of the world is going to get influenced by people who run businesses, and if you’re routinely hanging around people who will perpetually have a business some day you have a risk of that warping your perspective on things.

Amy: Absolutely. My rule of thumb is also that even if someone has what you want and people ask, “What’s the secret of your success?” and they say, “Hard work,” stop listening. Let’s face it, it’s a lot more than that and if they don’t have the insight or the willingness to share beyond the phrase “hard work” then there’s nothing you can learn from them from what they explicitly try to teach you. You can observe and be the learner and analyze.

Yeah, it really sucked and there were a lot of naysayers. Not maybe quite as serious as Patrick: did because we’re a couple of years later. Honestly, I really don’t listen to people.

Keith: Very good advice. Probably the best advice we’ll get out of this podcast is don’t listen to people.

Amy: Don’t listen to people. [laughs] People are like no, no, no, no, no. I’m like whatever. We started making a product business and it sort of was harder than I thought. A lot of it was easier than I thought, but it was all hard because we were alone. We were doing this on the side with consulting and we had these short bursts with super intense consulting contracts, mostly for Fortune 500 companies or Fortune 50 companies.

Thomas did a lot of JavaScript security and JavaScript performance. We did a lot of these media art installations based around Twitter and other APIs, Foursquare and stuff, for like Pepsi, who was awesome, and all the other people we worked for who weren’t awesome. So these intense projects that paid a lot but they demanded a lot of us.

So we were doing that and trying to build this product (Freckle) and then ship this product and then support the product after we shipped it and add new features and stuff. And it was really chaotic for about a year and a half.

And at the end of 2009, I knew that I could not do that anymore. That’d been nearly a year and a half, 18 months, 24 months almost, of doing this. And I was like, “I cannot consult and do this other stuff anymore. The product’s suffering. I’m suffering. I have to quit. I’m going to quit now.”

We just got this big check from this two-week project that turned into two months of hell. Then I quit, and I thought, “What can I do to help shore up this income?” And I thought, “I know. I can help people who are like me two years ago.” I wasn’t sure if people were into it or not, so I did a three-hour teleconference and invited some people. (Patrick notes: This idea is genius. It’s the MVP of a more involved product.) They paid me, not a lot.

And the number-one feedback was “more,” which I wrote down in my notebook as “M-O-A-R-R-R…” I counted the R’s the other day. I was like, wow. [laughs]

Keith: Just love writing those R’s, huh? [laughs]

Amy: I did. Everyone was like, “I want more.” That was the number-one feedback. So I was really excited, I guess, so I put extra R’s.

And that slowly turned into this three-and-a-half-month-long class that it is today, 30×500. I built the first one with my friend Alex Hillman, who’s awesome, who’s bootstrapped a community and a physical office space, for co-working and a whole bunch of other stuff, in Philadelphia. He’s amazing. He’s been a business consultant as well as stuff, and he helped me with the first version, and then he couldn’t do it anymore, time-wise.

And I flipped all the stuff around and created a community to go along with the class. I say, “created a community.” I basically meant open the mailing list and invited people to talk on it. The students have really created the community.

And so now I have this three-and-a-half-long mentorship program, which includes a lot of kind of mind-bending lessons an exercises that will help somebody get away from what I call “idea quicksand,” where you have a fantastic idea and then you either see someone else already did it or you get depressed.

You’re like, “There’s competitors. Is the market saturated? Can I validate this idea? What if I can’t validate this idea? What if I can’t build the whole thing and it won’t be like I thought it was?” Basically, everyone goes… [makes bomb-dropping sound] It ends in death, and never shipping anything, or shipping things no one wants. And so the very first thing we do in 30×500 is turn that around. I say, “No ideas,” [laughs] for the first month almost.

It’s all about learning about business, about how to come up with an infinite number of ideas, valid ideas which are pre-validated. You don’t have to have the idea then validate it. It’s all about turning the process on its head, coming up with as many potential profitable products as possible, learning to do market research, learning to really sell those ideas to people before you build it, and all sorts of good stuff: marketing, productivity, how to trim it down to a tiny thing you can ship, all that stuff.

The class is all about that, and it’s pretty intense. But we’ve had an amazing wave of launches lately, and I’m so happy.

Patrick: Yeah. People will not be surprised, based on my karma score, but I get most of my news through Hacker News and saw multiple of them on the front page in the last couple of days. Let’s see, there was, oh, shoot, projector, the one that does designer stuff and client stuff. (Patrick notes: I was thinking of PlanScope). I’m sorry, I can never…

Amy: It’s like project management and budget and scope management for freelancers and agencies to use with their clients. The client sees where their money is going, which is a huge problem, as you may know.

Patrick: Right. Yeah. I think you’ve mentioned this before, but there’s… so, a piece of received wisdom in the community, which, I will be totally honest, I have said this many times, is, “Don’t make things for people who are like you, because developers/designers, et cetera, don’t pay for software.”

I think you have an opinion on this as somebody who successfully sells time-tracking management and who just had multiple customers, or multiple, I guess, students from the program launch straight into the designer community and totally kill it. But what’s your opinion on that?

Amy: It’s not true.

[popping sound]

Keith: [laughs]

Amy: My water bottle. That was dramatic! That was my water bottle going, “Pop!”

[laughter]

Amy: It’s simply not true, pop, which is a polite way to put it.

[laughter]

Amy: I mean, if you look around at all these companies that are making so much money off the developer and designer audience like, GitHub, linda.com, Basecamp started exclusively with developers and designers. That was their market. They marketed to people like them, the small agencies and the individuals, and it grew out from there. Massively, it did. But they started with that core audience. That’s how I knew about it. I found out about it on an invite-only design community way back in 2005.

I usually have a whole list. PeepCode, look up PeepCode. Jeff’s does very well. Let’s see, Rueben from Bidsketch. It’s a total one-man operation. He just dramatically increased his prices, and he’s doing fantastically. Bidsketch is all about preparing beautiful, templatized proposals for your clients. There’s so much, FreshBooks, Harvest, all these other time trackers which make way more money than I do. There’s a lot. A lot.

And not all of those are exclusively designer/developer anymore, but a lot of them started that way and they branched out as they grew. But there are a lot of developer-only ones as well. Look at all these apps for server monitoring (Patrick notes: use it, love it) or Rails Screencasts from many different people, not just Jeff. There’s just tons, and tons, and tons of stuff.

So, I don’t know where the idea that they don’t buy comes from because there are products everywhere that are successful.

Patrick: I think it’s partly a projection thing, like, “I don’t buy anything and therefore people like me must not buy stuff.” Which, there are many issues with projecting your behavior onto other people.

Keith: And really, I think there’s also a… so, this is not just the Hacker News crowd, this is not just the Slashdot crowd, this is not just the techie crowd, there are a lot of people. I think the naysayers are the people who have more time than money, is honestly what it comes down to.

Because, honestly, if I had a ton of time, if I was working a nine-to-five job, had a set number of hours a day I worked at a fixed income, at that, and I needed time-tracking software, I would probably write my own on the weekend because I have more time than I have money at that point.

For someone who’s trying to run or start their own business, they suddenly have more money than they have time. Not that they’re making tons of money but because their time is much more valuable because there are so many other things they could be doing.

Patrick: and I have actually talked about this because I need to write my own invoicing software and stuff like that. I finally did not because I thought I could set up an MVP in about a week and take another week to fix any bugs so that’s two weeks of my time that it would take to build just my invoicing software. Or I could pay $20 to $50 a month for someone else’s invoicing software. That’s a no-brainer. Two weeks worth of billable work versus $50 a month. No-brainer at all.

Amy: Absolutely, but how long did you think about buying the podcasting equipment?

Keith: Actually, we just kind of fell into that.

Amy: A lot of people say they don’t buy stuff. They actually buy stuff left and right, they just weren’t paying attention. Not that you bought it mindlessly while you were sleep walking or anything. When you think back in your memory you think when did I buy things? It just doesn’t pop up.

Keith: I’m gradually getting better about it. The podcasting equipment, I was like we need podcasting equipment. OK, done. A couple years ago I started Bingo Card Creator on a $60 budget and when you only have 60 in the budget you get very creative about not spending money, but these days the budget is much more than $60 and I have to sometimes slap myself and say no, implementing this myself is absolutely not the right call.

I was talking to a buddy of mine and asked, “Is there any way I can optimize Redis such that it will use 15 megabytes less of RAM on the server? Then I won’t have to upgrade to the next higher tier of VPS.” He said, “What’s the next higher tier of VPS?” “$20.” “Do we need to have the rest of this conversation?” “OK, OK. I get it, I get it.” Gradually, very gradually I’m starting to get it.

Amy: It takes time. Most people aren’t like you, even developers. That’s fairly unusual. Most of us, especially Americans, we just tend to throw money at stuff.

Keith: I think we’re very much conditioned by living in Japan. It’s weird. Once you get to certain price points, like low price points for some reason people hee and haw over much more than they would decide over something of a large price point. If you’re spending $1,000 it’s easy to spend another $100. If you’re spending $10 or $15 people seem to think about it a lot more.

Amy: It’s true.

Keith: The old president of my company, multi, multi-millionaire (Patrick notes: he is credited with bringing the Internet to Japan, you do the math), he does a lot of donations and stuff to colleges and stuff and he had done this multi-million dollar donation to a college and he had just finished signing the contract and he’s leaving and he goes to a convenience store and picks up a bottle of water and he just goes, “I can’t believe water at a convenience store is 135 yen. That’s just so expensive.”

I’m like you just contributed millions of dollars and you’re complaining about $1.35.

Amy: I think we all fall prey to that one. The other day I was in a convenience store and I realized I needed a toothbrush and I bought a toothbrush and I was like why is this toothbrush $1.75? I’ve been paying like 3.50 each. I caught myself thinking I’m going to buy my toothbrushes there from now on. I was like wait a minute.

Keith: You actually consider should I go to a different store to get the cheaper toothbrush?

Amy: It only passed a moment, I have to say, to my credit, but it occurred to me. I was like come on, Amy. I’ve occasionally thought I should have kept the exact amount, 20 percent or whatever, and I’m like come on, really? Am I even wasting a cycle of my brain on 50 cents?

I’m not like that with buying software tools for business at all, so I think what you said earlier about selling to businesses is totally true, but I think there’s a lot more people who are just not commenting on things who just quietly buy the things they want or need whether or not they have a business.

Keith: This might not be a new thing for the 30×500, but you’re starting to focus more on building apps and things for businesses than for B2C stuff which, as somebody who knows and loves many B2C customers for his Bingo product, is totally the right way to go.

Amy: I like how you used love in a negative way. [laughs]

Patrick: I do love my customers.

Amy: I understand.

Patrick: I love them even when they write I can’t access your product from the blue Googles, only from the green Googles, can you please help me out? That’s still from a place of love.

It’s just from a place of I can do my math on what my hourly is on that versus an appointment reminder where I get to charge a car dealership every month. I’ve had car dealerships say is it 200 a day or 200 a month? I’m like it’s 200 a month and they’re like “Whatever. Either would have worked.”

Amy: That’s nice.

Patrick: In other news, I’m re-pricing.

Keith: The correct response to that is not $200 a month. If they ask is it 200 a day or 200 a month you say a day. If they say that’s too expensive you say then a week. [laughs] Start with the expensive one first.

Amy: You’ve got to capture that customer surplus. You want that.

Patrick: We were thinking about talking about pricing grids. One of the things that you can actually learn if you spend too much time hanging out on the Internet and talking to people about this is that a lot of SaaS companies use the four column pricing grid strategy typically.

I’ve talked to a lot of folks about this one. The one that really prints the cash, usually about 50% of sales, is the one to the extreme right that’s priced at businesses at prices that people think no one can will pay. Say, $250 a month for Wufoo.

It’s just that people who are spending essentially other people’s money, it just comes out of a budget so it doesn’t matter to them whether it’s 200 or 250 or 500. As long as it still only requires one signature or zero signatures it’s whatever it is.

Amy: Yeah. I hear the amount per signatures for an employee generating expenses in a large company is usually around $500. I think under $500 it does not require a signature.

Patrick: That’s consistent with my experience. Anybody who’s doing a SaaS pricing grid where the top price tops out at $20 or $30 should really…

Keith: Rethink what they’re doing.

Patrick: …put anything you need to just get an enterprise level, even if you don’t necessarily call it the enterprise level, and price it at $250 or $500. This is free money. And, oh, goodness…

Keith: So, not even looking at this as a huge business. When people think of business, they think of huge corporations. But even for small companies that are making a good amount of money, let’s say that a company has maybe six people working there that are contractors.

And a good contractor will run you about 100 to 200 an hour, depending on what they’re doing. If a product on the Internet costs you the same as one hour of that person’s time and saves them over an hour a month, then it’s a no-brainer to get that, right?

Amy: And that is exactly why, actually… Patrick, you asked this earlier. I’ve always told people, in 30×500 and “Year of Hustle”: do not sell to consumers. And some people will say, “But I have this idea.” I’m like, “No. You can do it, but I’m not going to support you because you’re going exactly against what I told you to do.” For that reason. For that reason.

You can sell on value to businesspeople. You can say, “You spend $80 an hour on this freelancer. I can save you 45 minutes of their time and charge you $60, and that is a win.” It’s certainly not a loss. I think I did the math wrong; I think that’s exactly $60. But let’s say half an hour of their time for 50 bucks or whatever. No, that’s still wrong. [laughs]

Patrick: We get the general idea.

Amy: You know what I’m saying. [laughs]

Keith: So there is really two places that you can really provide enumerable benefits to your customers. One is saving time. Because a consultant takes time. The amount of money that you save is directly related to how much you can charge, right? The other one is anything that increases sales.

Amy: Totally.

Keith: For example, Visual Website Optimizer prints money for customers. Anyone who is using Visual Website Optimizer is literally printing money with every single test that they do.

Patrick: This is the A-B testing software we often recommend to clients.

Keith: It is so amazing. So their largest for enterprise is “call us.” That’s fine. Their second-largest is $250 a month. OK? $250 a month for increases of sales starting at two percent, five percent, 10 percent, 50 percent. As good as your test can be, that’s how much money you are making with their $250-a-month service. It’s amazing.

Amy: It is amazing. They could probably charge more for that.

Keith: They could.

Amy: Ruben Gomez, who does Bidsketch, I mentioned earlier, he tweeted repeatedly and told me personally how much more money he was making when he drastically increased his prices. And I’ve been nagging him to write a blog post. So I’m going to keep nagging him until it happens, but his story is pretty incredible.

I’m not going to release the numbers because he hasn’t done it yet. You would think that he’s looking at private bids instead of people, the freelancers and consultants. And it worked out so well for him, so well. It’s such a big deal.

Patrick: I think he’s coming to MicroConf. We’re going to lock him in a hotel room in Las Vegas and not let him out until the blog post is written. (Patrick notes: Did not actually happen at MicroConf.)

Amy: Yes. Yes!

Keith: [laughs]

Amy: I vote yes. Let’s do that. [laughs] He’s a cool guy. I like him a lot. So yeah, you were saying more sales, or saving time. And I also think of, people usually go for cost reduction, I think, when they talk about monetary value. But I don’t see nearly as many products being successful for reducing costs, unless it’s extreme, because penny-pinchers aren’t people who spend money.

Patrick: One thing that’s great for software is if you can tell a story. Ultimately, all sales is about telling stories and painting the right picture in peoples’ minds, but tell a story where it reduces the amount of employee labor required to do something, particularly if that either allows them to switch them to tasks that actually generate money or, I hate sounding like a business, but “decreasing headcount.”

If you can successfully pitch to a business that you are going to “decrease headcount,” that is a total win in 99.95 percent of cases. So, Appointment Reminder, my software that does phone calls to the clients of professional-services businesses. I often say that if you have an office manager who costs you $4,000 month, who half of her time is literally talking to people’s voicemail to attempt to get them into the office at the proper time, then spend $200 a month and save $2,000 on salary costs.

One of my more successful clients is saying that, basically, I saved him enough on that to put his daughter through Harvard.

Amy: So you need to raise your prices. There’s that customer surplus.

Patrick: I need to raise my prices. Yeah, I so do. I did something very stupid when I launched Appointment Reminder, and I’ll just tell it to everybody to have you avoid doing it. I launched with the four-tier pricing structure, like usual, and the bottom plan was $9 for a, quote-unquote, “personal plan.”

So my idea was, “I don’t really care about the $9. I just want people using this.” I should’ve wanted people using it at 30 bucks a month for the cheap plan, because the people who pay $9 are, my word is “pathological customer,” for people who are penny-pinching, and they have every kind of support issue that you could possibly imagine, like, “How do I record telephone calls if I don’t have a telephone? Can I log into the website from my Kindle, which doesn’t really have a web browser in it?” Yadda-yadda-dee-da-da.

And they expect turnaround times of two minutes or less to customer-support issues arising at 3:00 AM in the morning.

Keith: I would really like to see someone. I don’t know if anyone has done a blog post about this, about a breakdown of the number of support calls and support messages you have, broken down by which plan they’re in.

Patrick: I will totally bet that it is the cheap-o Charlies who contribute a vastly, vastly disproportionate…

Keith: Like 80 percent…

Amy: Me too. Heard that over and over again from everybody. Also, this is something that you could absolutely do with our upcoming software-as-a-service product, Charm, which is a customer-support and true customer-relationship management tool. Everyone says CRM, they mean lead tracker, which I find to be terribly dishonest. [laughs] It’s like, one, they’re not customers yet, they’re leads.

And then after they are customers, doesn’t help you at all. The only exception I’ve seen is Intercom, which is pretty neat. But they don’t call themselves a CRM, I don’t think. But Charm will let you filter requests by plans or price points.

And so you’ll be able to profile feature requests and issues, specific ones, like, “Please add invoicing feature,” that kind of thing, by which plan or how much your customers are paying you. But also, you will be able to see how many incidents you get from which type of customer. But everyone I’ve…

Patrick: That would be great blog-post fodder if you can get anonymized data for that. Well, it’s not a great idea, but yeah.

Keith: No. I mean, that’s easy to get anonymized data from. You say, “My support numbers are X, and they belong to the lowest tier.” You can use even general numbers for that, I would think.

Amy: Do you mean if you blog about it, Patrick, anonymized?

Patrick: Well. So, I’ve already retracted this idea, but the idea I have now retracted was, oh, you could aggregate across all Charm customers, whether it was the cheap-o plan or whatever that generated the most customer support inquiries. I’m like, “No, that’s a wee bit aggressive.” [laughs]

Amy: Do you think that’s like a cats.jpg moment? Because I don’t really think so. I don’t think it’s a cats.jpg moment.

Patrick: The rational part of me thinks that it’s not a cats.jpg moment, but I think that loud people will perceive it as a cats.jpg moment. Really, this is inside baseball here, so let me tell everyone what a cats.jpg is.

Keith: First of all, yeah, I have no idea… [laughs]

Amy: Sorry. [laughs]

Patrick: So, 37signals said, “Oh, the 100 millionth file has just been uploaded to Basecamp, and it was called cats.jpg.” And they tweeted that out or put it in a blog post or something. And the folks who were worried about the Facebookization of all services were like, “Oh my God! 37signals can view all this data that we’re uploading to their servers, and they’re not treating it in a privacy-conscious manner! Brar!”

Amy: [laughs]

Patrick: So, OK, yes, A, it is totally technically possible for people to view data that you upload to your servers. That’s kind of how it works. And if you don’t trust them on that, you definitely should not be using Basecamp. But it was kind of a tempest-in-a-teapot kind of thing about whether it’s OK to publish that even if it’s a trivial amount of customer data. No one’s business is going to collapse over the words “cats.jpg” getting out, where if it was “letter of intent to dismiss Mary Smith for sexual misconduct.doc…”

Amy: [laughs]

Keith: They might’ve anonymized that. [laughs]

Patrick: Right.

Amy: I don’t think they would’ve put that up there. I think people were more upset over the idea that they were looking at individuals’ accounts. But there’s a lot of apps out there which say how many bookmarks or how many dollars have been invoiced or how many hours have been tracked. I’ve never seen anyone ever complain.

Keith: Complain about that, right.

Amy: I think FreshBooks and Hunch, they all do these infographic-style breakdowns of the data. But it’s totally anonymized, like you said, so it’s totally in aggregate. I can’t imagine. Well, you know what? I’m going to do it with Freckle anyway, so we’ll find out. [laughs]

Keith: The noisy people, the people who are complaining, I think, about the cats.jpg, I mean, aggre-data… [sputters] Aggregate data.

Amy: Aggre-data.

Keith: Aggre-data. There we go, aggre-data.

Amy: That’s great.

Keith: Aggre-data is brought from individual data, right? So if you have source to create the aggregate data, you have the original source data. So there’s really no difference in the privacy, right? It’s not like they purposely were looking at anyone’s single Basecamp to find cats.jpg. They just did, “Query, item number one million. What is name of that item?” Right? I don’t know, like Patrick said, tempest in a teapot.

Amy: How different would it feel if I wrote a blog post on Freckle, which is a time-tracking productivity tool, that said that 30 percent of all hours logged yesterday were overhead hours that are non-billable, versus I said the 100 millionth hour was logged to a project called “Cat.” You know what I’m saying? I don’t think people would care.

Keith: They didn’t even mention the project name, right?

Amy: No…

Keith: See, I think it would be different if you said that. But if you said, “The millionth task that was logged was overhead,” I don’t know how interesting that is. [laughs] See, me personally, that’s perfectly fine.

Patrick: See, this is the reason why it’s a tempest in a teapot. The only reason that anecdote was put into the post anyhow is because it’s harmless and silly and trivial.

Amy: Hilarious. [laughs]

Patrick: And if the 100 millionth item had been a business document, it just wouldn’t have been mentioned, because, A, privacy issues, but B, it isn’t funny. But because it’s stupid cat photos, it’s funny. And, brar, tempest in teapot. I avoided commenting on those threads because I thought commenting would make me dumber.

Amy: [laughs]

Keith: [laughing] We’re doing a whole podcast about it.

Amy: It’s true. I’m sorry I brought it up. [laughs]

Patrick: I feel myself getting more stupid with every sentence that comes out of my mouth.

Amy: Oh, no! I killed Patrick: McKenzie’s brain cells.

Patrick: What were our value-creating topics we were going to talk about…?

Keith: OK, so value-creating topics. Number one was the cat picture that Basecamp…

Patrick: No, that was not on the list.

Keith: Oh, that was not on the list. OK. [laughs]

Patrick: We were going to talk about…so, Amy, your business trajectory has been from one where you were consulting and not really loving it, to put it mildly. Now you’re 100 percent on the products. I started with the product/day job and got quit of the day job as of two years ago this week, which was the second-best decision ever.

Amy: Happy anniversary!

Patrick: Thank you.

Keith: Oh yeah, that’s right.

Patrick: But I kind of got sucked into consulting, starting about the same time I quit the day job, because people threw motivation on my company at me. And it was just hard to say no to the checks. And they generally come from people who are not Fortune 500 companies and have a little less BS associated with it, like the minimum BS that you can possibly have while still taking money from other people, I think.

So I’m pretty happy with that. But in the future, I would love to transition back into 100 percent product. And Keith is kind of at the end of the totem pole. Keith also quit. Like we talked about on the podcast last time, he quit his crazy Japanese day job and now works for consulting clients who are much better. But he also nurses dreams of having a…

Keith: A product and actually creating something of my own, right?

Amy: Yeah. That’s an awesome feeling.

Keith: It is.

Amy: I can tell you, from over here, it’s great.

[laughter]

Amy: Why didn’t I do this three years earlier? Keep at it. It’s worth it.

Patrick: So people have told me that they’re actually interested in how the lifestyle works out. Everyone grows up knowing lots of examples of people who work day jobs, and everyone kind of knows, “OK, you work for about 40 hours a week. You go commute to an office.” You know what the packaged lifestyle deal of working for a day job is, whereas they don’t know what it is to run a product. So, can we just spill the beans and say it’s F’ing awesome all the time?

Keith: [laughs]

Amy: Yeah. [laughs]

Keith: Except for customer support.

Patrick: Even for customer support…

Amy: Whenever I have to touch any other institution, like government or healthcare or banking, I kind of want to kill myself.

Patrick: Yeah, that’s true.

Amy: But it’s no worse than working with marketing people, [laughs] which is what I was doing as a consultant.

Patrick: And we never have to talk to an HR department, which is worth its weight in gold.

Amy: I haven’t worked at company big enough to do that, so I’ve avoided a special kind of hell. I feel very lucky for that.

Keith: [laughs]

Patrick: One of the things that I’m really appreciating this year is I’m getting married in June — yay — and pretty much taking off. I just told my consulting clients that, basically, either get themselves in by the end of May or it’s not happening till September, and just took off the entire stretch in there and will just not be working.

Amy: That’s awesome.

Patrick: I get a lot of people asking me, “How can you do that? The servers are going to burn down in a fiery badness.”

Amy: [laughs]

Patrick: Just verify for me that I’m not insane here. That’s not really how things work, right? These businesses…

Amy: Of course it’s how it works. The moment you turn your head, everything explodes in a fireball, then Godzilla comes out of the ocean. [laughs] Come on.

Keith: This is half-true, especially with Patrick’s track record.

Patrick: That’s not actually true.

Keith: OK, let me put it this way. [laughs]

Amy: Uh-oh. Is there dirt here? Is there dirt to dish? Do we get to dish dirt? [laughs]

Keith: No, no, there’s no dirt. He’s actually blogged about this. Whenever he is fully available, he generally has no support costs on his products, right? I think like, what, an hour of support a day or something like that?

Patrick: Way less than that, dude.

Keith: Way less than that. OK. Maybe 10 minutes…

Patrick: 20 minutes a week.

Keith: 20 minutes a week. OK. Anytime he gets on an airplane, or anything where he has no Internet connectivity, the server goes down. [laughs]

Patrick: This is not actually true. It just happened…

Keith: One out of 10 times. [laughs]

Amy: Just seems like it.

Patrick: It happened when I was doing an intercontinental flight back at Halloween, which is unfortunately the busy season for bingo cards.

Keith: You had another one when you were moving. You were moving and didn’t have phone access for one day, and the server crashed.

Patrick: Oh, God. [laughs] So this is two events in six years.

Keith: [laughs]

Patrick: The key that we were trying to emphasize to impressionable youngsters who are listening to this podcast is that you can step away from the business and it will not consume your life.

Keith: You can.

Amy: Absolutely.

Patrick: People will happily pay you money, even if you’re not working on the product every day, because people don’t care if you’re working on the product every day, they only care what they’re getting out of it.

Keith: The point I’m trying to make is, and what you say is true. 20 hours a week, you can go off and do what you want. People don’t care if you are working eight hours a day on your product, and you really shouldn’t be after you’ve launched to any certain degree. But keep your phone on. [laughs]

Amy: I’m sorry, I couldn’t parse that sentence. You can only not work 20 hours a week and people don’t care? I’m confused. [laughs]

Keith: Sorry, sorry. Did I really say that?

Amy: Yes.

Patrick: The English…

Keith: English? OK. So, as I’m sure everyone knows, we’ve been in Japan way, way, way too long.

Amy: OK.

Keith: So your customers do not care that you’re only working 20 minutes a week, or they don’t expect you to be working eight hours a day, because as long as the service works, they don’t care.

Amy: That’s right.

Keith: And you should not be working that much once your product is launched. However, you should always have your cell phone or some sort of Internet connection on in case things do explode, or someone to watch it for you.

Amy: So, we just took a month off in New Zealand. And then we came back for a week and a half. We’re doing city hopping in the US, San Francisco and Atlanta. And I actually did do email every two to four days, because I wanted to keep up with my class. We had somebody handling front-line support for the two apps.

We did have a server problem with Charm, but we haven’t launched that product publicly yet because we’re still ironing out those infrastructure kinks, right? And so I think my husband actually worked like two hours the entire trip, because he doesn’t have his class that he’s running. And nothing bad happened.

So here’s the thing, right? When you have a lot of customers, something bad can happen, and you can lose a few and you can be like, “You know what? I lost $200 a month of business and I took a month off. Who cares? Who cares?” And you can just gain those back. You come back, you’re like, “I’ll get new customers.” It’s not a big deal.

Someone will always cancel for some reason. It doesn’t really matter. In Freckle, we’ve gone down quite a few times. But it’s a product where you’re not in it all day, and something goes down once in a while. People don’t even get mad as long as you try to get back on and apologize. If it happens in the middle of the night, so be it. I’m not getting up in the middle of the night. No way.

Keith: And this is one thing. I think a lot of people on the Internet think that there is a limit to the number of customers you can have. They always talk about market shares and stuff like that. And talking about market shares when you’re going after big companies or products that need millions and millions of users is one thing.

So Bingo Card Creator is a very good one, because people always say, “How much of a market is there for teachers that need bingo cards?” Right? And there’s, compared to the number of programmers in the world, probably not many. But there are a f-ton, right?

Patrick: “More than I could ever hope to get to my website” is the short version.

Keith: If you were to even get one percent, you would never have to work again.

Patrick: I hate the one-percent math…

Amy: Oh, me too.

Patrick: Just as a comparable for folks, Bingo Card Creator, which is almost like the canonical example of, “Oh, God, that was a poor choice in niche selection, Patrick. Why did you do that?” has over 200,000 users and 6,000 paying customers. So if you think your thing for programmers is going to be more niche than that, you probably need to recalibrate expectations.

Amy: You’re probably wrong, also.

Patrick: And if I only had recurring revenue. That’s another thing.

Keith: [laughs]

Patrick: Recurring revenue, man, that’s the best kind of revenue, isn’t it?

Amy: It is crack, in a good way. It’s crack that doesn’t make you sick. [laughs]

Keith: [laughs]

Amy: And it’s legal and stuff. And you don’t have to inject it. I don’t know. How do you take crack? Stop me now… [laughs]

Keith: [laughs] Our street cred is going down the toilet right now. [laughs]

Patrick: So, definitely, if you have the opportunity to make a SaaS business, do the monthly charge thing that all the cool kids are doing, because it does wonderful, wonderful things for your cash flow. It helps you absorb advertising costs better. It will allows you to have high customer lifetime values without your customers perceiving the service as being expensive at all.

Amy: It’s true, that is a very good point! Recurring revenue is the Holy Grail and I love it. And back to your market share comment, recently, I mean it seems recently but it was like six or eight weeks ago, people were like…someone on Hacker News like, ‘Do people still pay for porn or these other things?’

And you were trying to be like, ‘I don’t know about that but I know people pay for a lot of these other tools, among which what you deem time tracking.’ And then the same or different person, very skeptical is like, ‘People don’t pay for time tracking!’

Keith: All people pay for time tracking! [laughs]

Amy: That’s how I read Hacker News, by the way. And then mentioned me and that’s just one example. In any industry there can be one example which makes money and I had to try them and then go, ‘You know what? There’s at least six to eight companies which make geometrically more money than I do!’ [laughs]

Keith: [laughs]

Amy: And then it went silent, surprisingly. [laughs]

Keith: [laughs] Always does!

Amy: I think a lot of people don’t, they don’t have any clue but they think that they do, about market share. What I hear a lot is, ‘Oh, but that market is saturated.’ You don’t even know what that means. That’s not what you think it means. Saturated means people don’t buy stuff anymore but they do.

If you have a pool that is very popular, has a lot of customers, there’s got to be a significant portion of those customers who are being ill served by that product.

Keith: Right, right.

Amy: It cannot be all things to all people. So someone like us who just needs a few thousand customers to live like a king, can swoop in and serve a segment of those customers, which were created for you by…

Keith: By someone else.

Amy: …this competitor which is allegedly saturating the market.

Patrick: That’s something I’ve been telling people for a while, it’s that competitors are a wonderful thing because it’s an engraved invitation from God that tells you that there’s money to be made in a particular place.

Amy: Yeah.

Keith: And there are always going to be people using your competitor’s products that are not happy with them that might want to go somewhere else. If you have a feature that other places don’t have, and even if you have a combination of features, so everyone else in this space might have the exact same features but they don’t have them in the same combination, you then have a niche of an already proven market share that want the features that you’re offering.

Patrick: We shouldn’t be the engineers here, either . We start talking about feature, feature, feature but we can honestly take something which is feature equivalent or even at less than the feature parity and just market it in such a way that, you know, it actually worked for people who it isn’t working for right now.

And that would itself justify a different business. Like, you know, there must be 500,000 big freaking enterprise project management/time tracking/Sa* , yada-yada things. Freckle doesn’t have to compete with them because you’re addressing just a different market than the kind of folks who want to buy consulting ware from IBM. So even with just a fraction of the “feature set,” you can just say, “Look, it will do what you need to do and get you back to charging your customers money.” Then that makes it a viable option for them, whereas the IBM consultingware wouldn’t be. Who would you consider to be Freckle’s big competitors?

Amy: Harvest.

Keith: Harvest.

Amy: “No Tool At All” I think is our biggest competitor.

Patrick: That is a big one.

Keith: That is a big one, that is a big one.

Amy: It’s huge! [laughs]

Patrick: Folks ask me how I convince people to stop using whatever their business’ scheduling software is and start using Appointment Reminder because you have to have the appointment schedule to send out the appointments reminders at the right time. And the easiest answer to that is, all you have to do is out-compete paper. It’s not very hard.

Keith: Moves people, especially techies, think that there is a solution out there already that people are using in the space that they don’t understand. And one of the things that I’ve seen with my clients especially is, they don’t have a solution other than Excel and a piece of paper.

Amy: Oh, it’s so true.

Keith: If you can beat down Excel you’re winning.

Patrick: Yeah.

Keith: The sad thing is how many don’t beat out Excel, right? [laughs]

Amy: Be careful about that because a lot of… so, I teach my students a lot of different things, one of which is a list of failure archetypes. Type one failures, failures that cannot be resuscitated by more work and marketing and repositioning and all that stuff.

And one of them is a “Cure for Religion:” trying to solve something that people don’t see as a problem.

Keith: Don’t want to see, right.

Amy: Lots of people love Excel and you will never pry it from their cold, dead fingers. Because they friggin love it. So you can be better than Excel and they’ll be like, ‘I don’t care, I’m not interested. I love Excel.’ And a lot of people cannot be reformed by software! [laughs]

Keith: It’s actually funny. My old company, they were having, not cash flow issues but reporting issues on their invoices and monies received and everything. It was taking so long because they were doing it over seven or eight Excel files and nothing was tied together and the sales guys were not reporting right.

So they commissioned me as an employee to spend a month or two creating an invoicing system that would tie back to all their sales and everything and just make it really easy to use.

I got all the requirements, made it all. I thought it was probably the easiest thing to use ever. Everyone said, ‘Oh, this is so easy to use.’ No one used it. [laughs] Like what they would do …

Amy: I think that was worth where that was going! [laughs]

Keith: Yeah, actually the sales guys really like it. The sales guys would put it the data, copy it into Excel and send it to the accounting firm. [laughs]

Amy: Yeah!

Keith: I mean, the saddest thing ever, to have your software simply be a copy paste solution for Excel. [laughs]

Amy: Yeah, that sounds really terrible.

Patrick: I don’t know if that’s sad or opportunity because I have definitely created things where for, largely not in publicly accessible parts of the product but if people say “the workflow requires X at the end of it”. If that is the issue that’s preventing you from paying me a motivational amount of money every month then wham! There’s a button on your dashboard now that exports CSV files. Go to town!

Although that’s an issue I think we’ve all talked about before. Customers, the things they tell you are they reasons they’re not buying the software are generally not the reasons they’re actually not buying the software!

Amy: They’re usually, yes. I find it is a mistake to listen to people. Not just in like, I don’t take their advice, this is different. I watch they do, so the whole ‘programmers don’t buy things’, I see people saying that, meanwhile they pay for like Apple products and GitHub and PeepCode.

And they say it with a straight face when they say it, “I would sign up for your service if XYZ.” And I’m like, “What would that look like? Why do you need that?” And they come up with something that’s so bizarre. I’m like, “Why don’t you do it this way?” And they’re like, “Oh…”

Because when people ask for features, like a client, most of us who are experienced consultants know that you can’t take anything they say at face value. You’ll be like, “What is your purpose?” They’re like, “I need this animated Flash widget, blah blah blah.”

And then you find out they need something really simple, and they just came up with that because it looked likely and they like to sound like they know what they’re doing. But they don’t. [laughs] It’s our job to figure that out and look at what they actually do.

Keith: Customers, businesses, clients, all of them together, most of them have really no idea how their business runs, I think. Patrick: always says that there’s a key number to any business that directly influences the bottom line of sales. And the number of companies that actually know that key number are few and far between, I think.

Amy: What kind of number are we talking about?

Keith: I did a recent re-jiggering of an online registration service (Patrick notes: more natural English might be “a hotel booking website”), and I did some consulting for them, and they were under the impression that 90 percent of their reservations came from the website instead of phone or walk-ins. And they were under the impression that they were having about a 60-percent, or a really high, conversion rate from people who came into the system.

And once we brought out the actual numbers, they saw that there was only 20 percent actually using the website. And of those 20 percent, only, I think, like nine percent actually completed a reservation on the website. And so it’s not that those numbers were necessarily bad, but they had a completely opposite view of the reality of their business, right?

And they had been doing that for five, six years. If they had noticed that five, six years earlier, they could’ve completely changed their strategy, but instead they were poking along because they were under a misconception.

Amy: Right. That’s a pretty big misconception.

Keith: That’s a pretty big [laughs] misconception, I know.

Patrick: That happens over and over again in my consulting career. I’m lucky I get to work with savvy, intelligent people. I mean, hey, they pay me.

Keith: [laughs]

Patrick: They’re all good companies run by smart people, and yet many of them don’t have the infrastructure in place to tell them material facts about the business that you can’t get just by looking at a screen in Google Analytics. That directly influences decision-making about those material facts.

Amy: Right. We tend not to notice what isn’t there. We just work on whatever’s in front of us. We don’t look for the thing that’s missing.

Patrick: That’s an interesting topic. As one business operator to another, what kind of things do you track for your business?

Amy: So, since we last talked, it hasn’t really changed that much. [laughs] We have a lot more… Actually, that’s not true. We set up KISSmetrics, since we track a lot of things now. But we do not have a very good sales funnel tracking, and that’s because we plan to redo the sales page completely. This is my white whale, perhaps, or some other thing that will never get finished…

[laughter]

Amy: …and I should give up on before I become a horrible novel, or something. Because that’s going to happen. But we track a lot of revenue, we track churn rate, we track feature adoption now. But, I’ll be honest, I haven’t looked at it lately. And by lately, I mean the last three months.

We’ve been totally occupied with other stuff. In fact, we haven’t developed, or even deployed finished features, for Freckle for months because of the international move, all the other drama we had in our personal lives, travel, and Thomas getting his immigration stuff sorted out. It’s kind of like your three month vacation, only we weren’t really having fun but for one month of it.

[laughter]

Patrick: Back to a previous topic, because you charge customers monthly, the revenue went up every month anyhow.

Amy: Yes. It did. It did. It went up no matter what. What’s really awesome is that I, a few years ago, got sick with mono for the second time.

Keith: Oh my God.

Amy: I developed chronic fatigue syndrome, which kind of blew. For a while I was so sick I couldn’t do anything. The best thing I could do in the day was to get up out of bed and go to the sofa and watch stupid TV. I couldn’t even watch smart TV because it felt like I was having an agoraphobic attack in a crowd with all the facts.

Literally, I was averse to facts. I couldn’t cope. It turns out that was low cortisol, believe it or not. I couldn’t make any decisions or do anything at all for three months, work wise. Zip. Thomas manned the support, he talked to the one developer who was doing work for us, and it was fine.

Our business grew even when I was on practically bed rest, and that was a really transformative moment for me. I knew we could take these vacations. I knew we could do this stuff. But that was like a, “Holy shit!” moment. Am I allowed to say that? [laughs]

Keith: Yeah.

Amy: Awesome. It was. I was just like, “Oh my…”

Keith: [laughs] We’ve been cursing like sailors the whole time, so…

Amy: Oh, OK. [laughs]

Patrick: You have, I haven’t.

Keith: Patrick: doesn’t.

Patrick: My half of the podcast is PG, his is PG-13.

Amy: Once I felt better and actually had the cortisol to think about it…

[laughter]

Amy: …it was like a sky has opened up, ray of light, choir of angels singing and throwing cash.

[laughter]

Patrick: I love that image.

Amy: It was the best. I was like, “You know what? I can’t be fired. I cannot be laid off. I do not have to worry about unpaid sick leave. I have it made.” I think that’s one of the big reasons that I’m such a tireless promoter of what I call Bacon Business. Products that bring home the bacon, that make money that you sell directly to people who buy them. Not advertising, not marketplaces, not venture backed, because they can change lives.

To get all philosophical for a moment, it’s epic to be able to live this kind of lifestyle. Isn’t it? It’s amazing. I think not enough people promote it in a way that isn’t like, “Oh, well, they’re just super successful. That’s not standard and I could never live like that.” The examples out there are just too lofty. And then there are people like us.

Patrick: Yeah. I know, so I’ve been hanging around with the small software developer crowd for a while and there’s a lot of businesses that might be like Bingo Card Creator in terms of scope, but maybe up to an order of magnitude and more in terms of revenue, just by doing things that you wouldn’t expect that people could do as a full time thing that they’re doing as a full time thing. They get all the benefits of the lifestyle.

It’s like being a rock star minus the groupies. You never have to show up anywhere at any time. Money just appears magically in the bank account. Seriously, guys. For any of you who are on the fence try it. It’s awesome.

Amy: It is.

Patrick: I’ve got a lot of respect for the Silicon Valley startup types and I’ve kicked around doing that myself a couple of times and have been offered motivational amounts of money to do that. “This is awesome!” is something that you will not hear from lots of the folks over there.

Amy: I wonder why.

Patrick: It’s like being a lawyer or consulting like management consulting. There are people the lifestyle works for and there’s people that the lifestyle just does not work for. I don’t know if I could think of anyone off the top of my head who has started their own software business and went full time at it and was like “no.”

Keith: “I want to go back to my nine to five.”

Patrick: “I really want more challenges in life.” That’s something I hear from a lot of people. “Don’t you feel bored like you don’t have enough challenges?” No, I can spin up challenges any time I want.

Amy: No one has ever said that to me. I think most people assume it’s way harder and more stressful than it is, and I understand why. I actually had a short Twitter conversation with Jason Cohen who I absolutely adore. He writes a fantastic blog, A Smart Bear. Before I say this, I want to say that I just think he’s great. I wanted him to speak at Schnitzelconf, but it was just too far for him to go.

He tweeted why do startup founders beat themselves up? It’s like why do hamsters eat their young? They just have to. I was like no. For starters, I didn’t say this in the Twitter conversation, but I used to breed gerbils and none of them ever ate their young because I took good care of them so I feel like I’m sort of an expert on both parts of this equation. I was like that’s not true.

My gist was that people do it to themselves. He said it was easier to be lenient after you’ve had objective success. I said I wouldn’t call it lenient, I call it self-respect. The truth is it doesn’t get easier after you’ve had objective success. I think a lot of people, they actually are worse to themselves after they’ve had objective success because they feel like they have something important to lose.

I know a few people who run businesses like ours, they may be more involved, some less involved, and they feel like they can’t go on vacation, they feel like they have to answer email in the middle of the night, and they do it to themselves. It’s not external. It’s all internal and I don’t think Jason believes me. [laughs]

Patrick: I’m constrained at how much I can say because he’s one of my wonderful, lovely clients, but I’ve heard that feedback from other people who, again, much like Jason I respect.

It is a psychological thing that this is a meme we really need to kill, but I think there’s a deep seeded… zeitgeist. Is that the right word? People are afraid to allow themselves to be happy and believe that success must require a certain quantum of suffering and if you’re not suffering you’re clearly not on the successful route.

Even people who are clearly by any objective measurement successful. It’s kind of a personality thing, too. Jason is a very hard-charging, type A kind of guy. He’s got a ridiculously successful company right now, he’s sold one successful company previously. If you want to look at somebody who’s got it made, Jason has it made.

There’s no external feature that would necessarily need to make Jason feel the need to beat himself up. Actually, something you said to me was very profound, that if there’s ever an issue between you and another person it’s not about you, it’s about them.

Amy: Absolutely. So true.

Patrick: I think that recompiled part of my source code when I heard it because it was just so f’ing true. I find myself quoting that to people a lot.

People have asked me, “You didn’t answer my email. Was it something I said?” I’m like, “Nope. Just an FYI, any time someone does something it’s probably because something that was just going on in their life because they’re in their life 24 hours a day and they’re in their relationship with you for like 36 seconds a day. Just don’t worry about it.”

Similarly, don’t worry about what other people are thinking of you because they’re probably thinking of you a lot less than you think they’re thinking of you. They’ve got better things to do by their perspective. Same with software, by the way. We see our own software eight+ hours a day. We know where all the skeletons are buried. We see every little imperfection. Customers, by and large, don’t care about the little things.

Amy: They don’t.

Patrick: If it makes their life better, great. You’ll have complainers who largely won’t buy it anyhow.

Keith: Especially on the backend.

Patrick: 90 percent of the customers if it accomplishes the big 48 point font promise that’s on the front page of the website they’re good. If it gets better over time, that’s great, but fundamentally they’re good. If it has a bug, no problem. Computers eat things all the time. Whatever. They will say “I’ve got better things to do than worry about it.”

Amy: All those things come from the same route, if you ask me. What Terry Pratchett called being trapped in the dark behind the eyes. It’s just that we go through our lives 100 percent privy to everything that goes on inside us, even if we don’t understand it, which most of us don’t. This has been proven by research.

When we make a mistake or we choose something we have an elaborate reason why. When someone else does the same thing we get really glib and superficial like well, I did this because I made a mistake but he did that because he’s a jerk. It all comes from being self-involved, which is the default nature of humanity.

I think you were saying it’s like a zeitgeist. That was the right word. I think it’s just human. I think a lot of us, especially in Western cultures, we tend to self-flagellate for no good reason. People call it the Puritan work ethic or whatever.

Keith: Well, it’s not just Western. I was going to say…

Patrick: Japan could teach everybody about self-flagellation. (Patrick notes: If I were not talking in real time I’d say “I could have a very long discussion on the degree to which Japan counts as ‘non-Western’ here if you wanted me to.” Side effect of getting a degree regarding that subject.)

Amy: [laughs] Fair enough.

Keith: Looking at it from the Japanese perspective, I wonder how much of it is almost like an arms race. So one of the things that happens in Japanese companies…

Patrick: Oh, God, yes. Oh.

Keith: So, going back to the startup, where people have to suffer. So they have to work the 20 hours a day kind of thing, only four hours of sleep, constantly working, not taking care of their health and stuff like that. There are people out there who only need eight hours of sleep, who enjoy working 15, 18, 20 hours a day.

I’m actually close to that. I love working. And I work much more than I probably should, because I enjoy it. It’s my hobby to be creating things. And I think people see, especially people like that who have become successful and think, “Oh, this person is successful because he only sleeps four hours a day. In order for myself to be successful, I have to only sleep four hours a day as well.” And I think it becomes an arms race for trying to be successful.

And in Japan, there’s a very similar thing with the amount of hours people work. So people think that people in Japan work long hours and they are productive for all those hours. That is the furthest thing from the truth on the planet. They sleep. They clean their ears. I had my coworker assemble a bicycle in his cubicle [laughs] during work hours, for no apparent reason whatsoever.

It’s assumed that, just like in the startup business, there are people who work long hours because they are really good and they are successful. There are people who work long hours because they are idiots and not successful, and it takes them time to do everything. But the longer the people are there, if everyone is there, it’s so much harder for you to go home, right?

Amy: Right.

Keith: If successful guy number one is working 12, 14 hours a day, you think, “Oh, I have to be there as long as he’s there. Otherwise I’m not going to be seen as being as productive as him.” So what it comes down to is a bunch of people sitting in an office for 14, 16 hours a day, only doing about four to five hours of actual work.

Amy: So it’s cargo-culting mixed with social contagion. (Patrick notes:Great line!)

Keith: Exactly.

Amy: Right.

Patrick: And like a massive game of chicken…

Amy: Yeah. [laughs]

Patrick: Chicken or prisoner’s dilemma, I guess, one of them. The first person to decide to go home gets the evil eye. I think that’s part of the startup culture, too, in that, “Oh, you quit after only 10 hours today. You must not want success enough.” We construct our own cultural pathologies, because people don’t have enough exemplars of folks in companies that said, “We worked four, six, eight hours today, and we go home to the kids, and things are fine.” The cultural pathology of overwork ends up getting celebrated.

Keith: We need more Fog Creeks of the world.

Patrick: Fog Creek, the office is a ghost town after five o’clock.

Amy: As well it should be.

Keith: Except on game night.

Patrick: Except on game night. (Patrick notes:Every Thursday. Third-best reason to work there. They’re hiring, go work for them.)

Keith: [laughs]

Amy: So you were saying, Keith, the examples you had were the guy who works 12 to 14 hours and is successful and then the guy who works, I think you said 12 to 14 hours and was not successful.

Keith: Yeah.

Amy: I thought you said lower numbers for the second guy. But anyway, when you said that I was thinking that what you don’t have room for in Japan, apparently, but also not in Silicon Valley, is the person who works five hours a day and actually outperforms the person who works 12 hours a day. And that’s not uncommon.

Keith: Right.

Amy: I have a lot of people who use Freckle who’ve written in to me and said, “You know what I discovered, which is really freeing, is that I actually only get two to four hours of work done at my computer done every day. The rest is dicking around. And so I’m going to spend all the rest of the time that I would waste on the computer going out and playing music or walking around or reading, and then I’ll get more work done in the two to four hours I actually work.” And I think that’s true. It’s backed up by a lot of research.

Keith: Oh, definitely, definitely. And going back to the Japanese side of it, the problem is that when everyone is forced to work 12 to 14 hours a day, you then have the problem of, why would I work smarter? Why would I try to automate my process so that I can work more during those 12 to 14 hours instead of dicking around?

So it’s actually, because you’re in a trapped system here, then there’s no reason to better yourself. But using a product like Freckle, and especially for consultants and people who define their own time, it’s the biggest win you can possibly have. If you find out that you are dicking around on the Internet for two, three hours a day while you’re working, and a time-tracking software like Freckle actually makes you realize that, and then you gain two to three hours a day…

Amy: That’s true.

Keith: Because, as soon as you realize that you’re dicking around, you go, OK, I’m just going to leave the computer. I’m going to de-screen. I’m going to go off, play with my child, play with my friends, go out drinking, get slammed, or whatever you want to do, right?

Amy: Absolutely.

Patrick: This is one of the benefits of doing your own thing. You have social pressure coming from yourself, which always happens, but you don’t have social pressure from other people who can tell when you leave the office. The vast majority of days, I have a two to four-hour peak of productivity, and after that I’m pretty much shot. And since I know this about myself now, I just don’t work the rest of it.

Keith: You probably shouldn’t say that. Your financier probably… [laughs]

Patrick: I will tell this to any client. (Patrick notes: Any clients in the audience? You presumably know I have a sense of humor and can judge my pace of working, having sat next to me for a while. Any prospective clients? Productivity for me tends to be bursty, interspersed with periods of introspection, much like your engineers.)

Keith: That you only work two hours a day? [laughs]

Patrick: This is why I have you pay the week rate, guys, because work gets done, but assuming 480 minutes of equally productive time is not a good assumption for working with me, which you will probably notice as I check Hacker News in the middle of the day.

Amy: [laughs]

Patrick: But, no. It’s funny, though. There’s people who I respect enormously who have found out the same thing about themselves. Four hours a day is kind of the productivity limit, and after that it suffers. I know one friend in particular, and I won’t mention his name because he asked me not to mention it publicly, but the point is that he asked me not to mention it publicly.

He thought people would think less of him if they thought that his business, which is wildly successful, was just a part-time gig. Which, that breaks my brain. Half the reason I do the blog and the podcast and whatnot is to give people examples of there being multiple paths to the cheese of success in life.

Amy: Hear, hear.

Patrick: I wish everybody happiness. That’s kind of like a foundational philosophical thing for me, but once you introduce people to other ways to getting to happiness, which can include not working all the time.

Amy: Or much at all. [laughs]

Patrick: Or much at all.

Amy: That was not a slam on you or anything. I was actually thinking about myself when I said that.

Patrick: It’s no problem.

Amy: Not that I thought you would think it was an insult.

Patrick: I’m lazy like a fox.

Keith: He’s very proud of that. He’s very proud of that. He gets on my case all the time for working too much.

Amy: I thought foxes were pretty brown.

Patrick: I’m going to convert Keith.

Keith: You converted me to quitting my day job, so you might be successful yet.

Patrick: I’m only saying I’m going to convert Keith because Keith is my best friend so the less he works the more time I have to play League of Legends with him.

Keith: And the more time he has to exploit me for his own product development and stuff.

Patrick: Keith, in addition to being my best friend, is also the designer, but I can’t get any of his time because it’s been filled up with client work. Anyhow, what was I saying? If other people are sincerely happy working 16 hours a day in the coding salt mines then bully for them.

But I know because I’ve talked to and met a lot of people who are doing the 16 hour days in the coding salt mines because they think either that’s required to be successful or because they are strongly socially pressured by people that that is the behavior you should emulate.

If you are folks out there like that, if it makes you happy, thumbs up, go for it, but if you’re not truly happy by that then start doing something that will make you happy because there are so many ways to succeed in this. In business, in life, in general.

Amy: Absolutely. You’re not talking about runners up, either. We did not quite hit my revenue estimates for 2011, but we did have $550,000 of revenue and in 2008 we had zero.

Keith: Not too shabby, right?

Patrick: High five.

Amy: I’m sorry, what?

Keith: Not too shabby, right?

Amy: Not too shabby, right. Exactly. I was hoping for 600 grand and we didn’t quite make it, but that was with a lot of drama where we didn’t work for a lot of that year. I had surgery, I was really sick. That was the three months. That was last year. I had surgery. I was out of commission for six weeks then. We had this hiring and firing drama. That year was screwed and we made $550,000. I’m basically retired and I don’t want to be this way forever.

I really enjoy working and I enjoy having impact and I enjoy touching people’s lives with my software and my course, and I do spend a lot of time on my course. 30×500, that is. We could sit on our asses and rake in $550,000 a year and really work just a couple hours a day on average and we could really cut our overhead.

Most of our overhead we spend on developing new features and our new app, Charm. We spent a lot of money on that the last year. That’s because I had bigger ambitions, but I’m never going to work a 40 hour work week. I had this near death experience, basically, with chronic fatigue. I had this priority change. I was a workaholic. No, no more. Now I’m a hippy, but you can be a hippy and earn $550,000 a year if you pick the right product and if you keep at it.

The first year and a half kind of really sucked, but we got over that and now we’re making really good money and it’s not that hard. Patrick, I found out about you because you blog about this stuff because you’re trying to be a positive example and I also don’t understand why the person you know refuses to be named because he’s afraid of being shamed and that’s just really sad, I think, that by telling people you make the world a better place.

I understand why he’s afraid, but I would rather put it all out there and be a positive example because there are so few of them.

Patrick: I think that is one reason, too. Going back to a topic we were just talking about, like you said, we’re not runners up here. How do I want to phrase this? I like celebrating other people’s successes. You guys make more money for me, bully for you. 37signals can buy everybody in Chicago a sports car these days, bully for them. It makes me happy to hear that other people are doing well.

Where is this topic going? Just a life tip for everybody listening, if you compare yourself to other people and think you’re not successful unless you’re beating them by some metric you will generally be less happy than you are if you’re comparing yourself against either where you were previously or what your goals are.

Success, for me, is either beating where I was last year or beating where I thought I was going to be this year. That generates happy points for me, whereas I never really cared about comparing with other folks. I think folks like the friend of mine who success is partly defined as being seen as successful, that kind of screws up your priorities a little bit, although I’m not totally immune to that myself.

That was rambling. I’m sorry.

Amy: Not as much as me.

Keith: I think we’re going to have to close this down because we’ve gotten complaints in the past about us talking too much.

Patrick: This one is only an hour and a half or so.

Keith: We also shot the shit for about 15 minutes so after editing it’ll be about an hour. That’s pretty good.

Patrick: OK. Only an hour. Thanks very much, Amy. Let’s give folks the actionable information with the call to action at the end. If they want to sign up for 30×500 how would they do that? (Patrick notes: Again, you can’t, because it took a while to get this posted. Sorry about that.)

Amy: First you actually have to apply. We’ve been creating more and more successes each time I run the class and I want to keep that turned up, so I want to basically help decide with you if 30×500 is right for you at this time. That application is launching on April 13. That’s Friday the 13th. All the information is on my blog at unicornfree.com.

Patrick: Sounds great. Thanks very much for doing the podcast with us, Amy. It was insightful as always.

Amy: Thank you for having me.

Keith: It was great to meet you and looking forward to seeing more about 30×500 and more Freckle stuff, too.

Patrick: For all you folks in the audience, we’ll probably be doing this again in a month or two. See you next time.

Keith: Depending on when we can all get together with the microphone. All right. Thanks for joining us, Amy. You take care.

Amy: Thank you for having me.

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11 Comments

I Redesigned My Software. Users: Thrilled. Conversion Rates: Up. Sales: Unchanged.

My oldest software product, Bingo Card Creator, is currently in maintenance mode.  For the last year and change, I’ve done very little to actively improve or market it — I just send emails, cut checks, and collect profits.  That was pretty much the plan for this year, too.

Then, I got an email out of the blue from Ashraful Sheik, a designer who had seen a years-old HN post by me about my design needs and wanted to see if I needed any work done.  I don’t usually rush to employ people who send me unsolicited emails, but I’m always happy to read emails, so I took a glance at his portfolio in case I could recommend him the next time one of my clients needed a designer.

I noticed that he had previously done a design for VLC Player.  It’s software that does… actually, I’m not really sure what it does, but I remember it from an HN thread waaaay back about them having SEO problems, and the reason I remember it was because I really liked their website design.  Simple, elegant, modern…  and very much not what Bingo Card Creator looked like.  So I mulled it over for a few minutes, figured I had a few days free in April, and asked Ashraful for a quote for a full-blown redesign of BCC.  I thought I’d try A/B testing it against the existing site.

Technical Sidenote: Why I Never Do Big-Bang A/B Tests

People have often asked me why I’ve never tested full redesigns before, and the answer is always “They’re a metric tonne of work to do correctly.”  You might naively assume that you just create two versions of your application’s template and, bingo, the money starts rolling in, but it is never that simple for non-trivial applications.

If you only have one site-wide template and you are totally religious about not including presentational code in any view/template/partial and the before and after redesigns are very compatible at the DOM level, then doing the A/B test isn’t that bad.  This was very much not the case for BCC and will likely not be the case for most live applications.

I actually considered making a complete copy of the BCC application with a shared database, then doing the split testing with some sort of software load balancer redirecting people to two entirely separate Rails stacks, but that promised to be a whole heck of a lot of maintenance pain going forward in return for avoiding coding pain for the integration.  So having nixed that idea, I did some plumbing in the Rails 2.3 internals to override how Rails magically picks layouts. This let me make duplicates of my existing layout structure for the redesign, do the appropriate HTML changes to them, and then start worrying about the main content areas of the layouts (where the real work began).

#goes in application_controller.rb
#Hack hack HACKEY HACK to re-direct all layouts to /layouts/redesign if this user is in that A/B test.
alias_method :old_active_layout, :active_layout

def active_layout(passed_layout = nil, options = {})

  redesign_choice = session[:big_bang_redesign] || ab_test("big_bang_redesign", ["default", "redesign"], :conversion => "purchase")
  # Exclude abingo controller and one blog article from scope of redesign -- customers don't see them and they'd take real work to get right.
  @use_redesign = (redesign_choice == "redesign" &amp;amp;amp;&amp;amp;amp; (params[:controller] != "abingo") &amp;amp;amp;&amp;amp;amp; (params[:action] != "developing_shopping_cart"))
  unless (@use_redesign)
    old_active_layout(passed_layout, options)
  else
  layout_name = old_active_layout(passed_layout, options).to_s rescue nil
  return nil if layout_name.nil?
  chosen_layout = "layouts/redesign/#{layout_name.gsub("layouts/", "").gsub("redesign/", "")}"
  find_layout(chosen_layout, default_template_format, options[:html_fallback]) if chosen_layout
end

Ahh, DOM conflicts.  One of my requirements for the new redesign, to save my sanity, was that it be built on a grid system.  I picked 960.gs because I happen to like it, but Bootstrap would have worked just as well.  BCC is presently written without the benefit of a grid system, so the internals of many pages require a bit of tweaking to fit onto one.  Also, the redesign omits elements of the previous design in some places in such a way that “display:none” doesn’t really cut it, so I wanted to be able to quickly turn off and on bits of HTML based on whether someone was using the redesign or not. I made a quick helper to do so: redesign(true) { # renders only if someone is seeing the redesign}, redesign(false) { #renders only if someone is seeing the old version}.

  def redesign(for_redesign = true, &amp;amp;amp;block)
    test_choice = session[:big_bang_redesign] || ab_test("big_bang_redesign", ["default", "redesign"], :conversion => "purchase")
    # Exclude abingo controller and one blog article from scope of redesign -- customers don't see them and they'd take real work to get right.
    @use_redesign = (test_choice == "redesign" &amp;amp;amp;&amp;amp;amp; (params[:controller] != "abingo") &amp;amp;amp;&amp;amp;amp; (params[:action] != "developing_shopping_cart"))
    #If for_redesign and use_redesign are both truth or both false, yield.
    if (!(for_redesign ^ @use_redesign))
      yield
    end
  end

This let me start attacking the marketing site and application for Bingo Card Creator, adding code-spackle where required to get things actually working correctly. It turned out to be necessary in 60 places, consuming most of the three days it took to get the redesign working after receiving the HTML and CSS mockups for it.

The final technical measure was for user experience: anyone who has ever done a redesign knows that a vocal contingent of users hates them.  As long as I was doing an A/B test anyhow, I gave users the ability to flip between which version they were seeing, buried waaaaaaaaay at the bottom of the page in the footer.  This way when people complained (and two inevitably did) I could tell them how to opt-out of the new version.  (It is also indispensable when testing to see that the site was functional in both versions.)  Feel free to use this feature if you want to see both versions of the site live.

Enough Technical Mumbo-Jumbo, Let’s See Some Screenshots

 

The old version of the home page:

The new version:

As you can see, the new version is cleaner, more modern, and (partially as a consequence of finally adapting to a world with wider displays than 800×600) has quite a bit more room to breathe between elements.  It probably still won’t get featured in any design galleries, but that isn’t the point: this site exists to sell software.  (I rush to add that this isn’t a reflection on my designer’s skill: my brief constrained him into favoring the commercial imperative over design imperatives in a few ways.  As always I’m ultimately responsible for anything which looks bad and the designer gets the credit for anything that doesn’t, since if I were left alone to design things they’d look like big balls of blue-green mud with large orange BUY NOW buttons stuck in them.)

Redesigning The UX of The App

As long as we were giving the site a facelift, I decided to see if without majorly tweaking the underlying application we could make it more usable.  I thought of adding a prominent graphical element suggesting what steps it requires to make bingo cards and tracking user progress, something which has been reported to work frequently among UX folk.  (I also have a motivational result or three from clients about this.)

This is what a new trial user previously saw:

Here’s what they see now:

I added a few affordances to that design.  For example, clicking on the elements of the progress bar makes my best context-based guess of how to move you backward or forward along the path of making bingo cards.  It also highlights showing you how far you’ve gone, as seen here:

You’ll note that I haven’t fixed the Next Step button yet.  Ahh well, always one more thing to do…

So How Did Things Go?

I generally do far less extensive A/B tests than this, and track them only to a single conversion.  (That is actually a limitation of my A/B testing software, A/Bingo, because I never really saw the need before to track a change’s effect on multiple conversions in my own business.)

However, since this redesign affects every part of my funnel from the AdWords landing pages to the internals of the application to the purchasing page, I thought it might reasonably be the case that the redesign was a win somewhere and a loss elsewhere, so just tracking to the final conversion (purchase) might cause me to have an incomplete view of the implications of  the redesign.

Enter KissMetrics, my current favorite funnel tracking software.  They’re wonderful, you should use them.  I’ve happily paid $150 a month for the last year or so and barely log in — that is totally justified now.

KissMetrics lets you include custom properties as people cause events in your site/app/etc (which you can then retrospectively organize into funnels on their website).  I simply included which version of the site someone was seeing as a custom property, then fiddled with their UI a bit until I had the filters set properly, and voila, I can now see the A/B test affect every funnel I have.

In some cases, the redesign was a win.

AdWords Landing Pages: Did Registrations Go Up?

Consider the AdWords landing pages, where I measure conversion to the free trial (all stats taken from last 7 days just for convenience, but they mostly match results since start of test):

old version Visits: 1,403 Conversions: 293 (20.9%)
redesign Visits: 1,349 Conversions: 311 (23.1%)

I’ll spare you the z-test: That modest increase is statistically significant at the 10% confidence level, but not at the 5%.  So middling evidence of a change in the right direction.  So far, so good.

It was actually a much more dramatic increase on my non-AdWords landing pages (SEO-ified content, you’ve heard me talk about it before), but that pales next to the following improvement.

The Application: Did User Success Increase?

I’ve written and presented previously about using funnel tracking to improve your application such that users are more likely to succeed with it.  Success with Bingo Card Creator involves, predictably, actually creating bingo cards.  Somewhat surprisingly, back when I started tracking it, only 48% of free trials actually got as far as actually successfully downloading a bingo card.  I’ve worked on that and gotten the number to 60% over the years — roughly a 25% lift in user success with a huge, honking increase in my bottom line results as a consequence.  My consistent experience has been that the more users succeed with BCC, the more money I make.

So if we look at the workflow for BCC:

 

I had to stitch that together from a pair of screenshots because it won’t fit on one interface in KissMetrics, but the numbers are accurate.  Let me direct your attention to the salient bits:

  • The redesign has a lot more people start at the Dashboard than the “default” (old) version does.  This is because the redesign is, as we previously discussed, crushing the old version at getting user signups to the free trial.
  • Each step of the funnel includes a percentage, which is the percent of the folks who started at Dashboard that made it all the way through that step.  (They’re not inter-step percentages, they’re cumulative.)  If you want to back out the math, you’ll see that the redesign outperforms the drop-off rate of the old site at every step in the funnel — 1% here, 2% here, 5% here.
  • This compounds multiplicatively.  By the end of the funnel, the redesign has a 9.2% increase (a 15% lift) in user success compared with the old version of the software.  To give you some appreciation of that: if you’re working with mature software and have already grabbed your low hanging fruit, the magnitude of that improvement is staggering.  That is literally better than a year’s worth of active tweaking at this point.
  • When you compound the pre-workflow increase in trial signups and the increase in user success, the actual number of teachers who successfully create bingo cards out of a given number sent to my site in the first place goes up by 45%.  This makes this the most successful A/B test I’ve ever run, at least by that metric.

Egads, So This Printed Money For You, Right?

Cue the bad news!  Teachers are so successful with the newly redesigned BCC that, out of any 100 using the software, less of them decide to purchase it.  This almost exactly cancels out gains in trial registrations and user success.  It is downright painful: last week, I got 26 sales, and would you believe they were split exactly 13/13?  That’s practically a textbook null result — it was so improbable to me that I spent a few hours checking stats to see if I hadn’t made a systematic error somewhere, but no, crosschecking in a few places makes it look legitimate.  (The split since I started the test is 50/46 in favor of the old version, which is comfortably in the null result territory as well.)

Does that result sound counterintuitive to you?  It is the sort of thing that, when I have to report it to clients, always sets me walking on eggshells.  The first rule of A/B testing is that everything you know is wrong.

Since I have the luxury of well-instrumented funnels, I can tell you where the problem isn’t:

We did a complete redesign of the purchasing page and shopping cart.  I omitted showing it above to save space, but I’m pretty proud of how it turned out .  The new purchasing page/shopping cart is not the problem: precisely as many people will, once getting to the purchasing page, complete a purchase as they would previously.  (On the subject of plumbing-that-takes-money: Stripe.  I’ve promised them a case study post someday, but the capsule version is that if you can use Stripe you shouldn’t be using anything else.)

The problem appears to be, simply, that less users hit our trial limitations now.  (Hitting the 15 card trial limit is the overwhelming cause of going to the purchasing page.)  This suggests that either a) the new site is converting more parents than the old one used to, and since parents rarely have 15 children they’re simply having a happy bingo experience and not paying (net win for the world, not really a win for me personally though) or b) for indefatigable reasons, users simply get what they need out of the free trial and don’t convert.  It is entirely possible that any of the sixty small tweaks I had to make to the site nudged people away from hitting those limitations.

This is one of the reasons I hate big-bang A/B tests — when you have a huge batch like that, isolating the exact cause of any observed effect is difficult (other than “Well, clearly, something changed in the redesign”), whereas A/B testing an individual element structurally gives you configurable levels of confidence that a particular element was the one and only cause of an observed effect if the stats shake out that way.

So Where Does That Leave You?

If I had a great desire to do more work in BCC, this would provide a good place to target.  I could figure out why the new version of the site is having less folks hit trial limitations, and either tighten those limitations or tweak the UX such that the site nudges more people into hitting them.  That said, the free time on my schedule is rapidly drying up as we get closer to my wedding, and even if I had captured all of that 45% increase to the bottom line that isn’t really the path forward for my business, so BCC is going back into maintenance mode.  This one is getting written off as an amusing and partially successful experiment which helped out my users but didn’t succeed at making me money.  I will likely finalize the redesign and kill the old version in the coming weeks.

How did existing users respond to the change?

Well, half of them don’t know about it yet, obviously. With two exceptions, the feedback has been overwhelmingly positive. Many of them were appreciative that they got the Totally New Software Absolutely Free. It is actually functionally identical to the old version — not one line of model code or business logic changed — but I have received many compliments about the wonderful new features, performance increase, and improved compatibility with Epson printers. Before you laugh, consider that probably 95% of software businesses don’t A/B test yet, so my users are in good company making inferences from observed behavior changes over time even when their explanation for the changes has no relationship to reality whatsoever.

Sidenote: If new software is assumed to be worth money and reskins make software “new” in the minds of the only people that matter (users), that probably suggests a viable marketing strategy. Your engineers don’t have to like it.

How much did it cost you?

BCC is growing like a weed for reasons totally unrelated to my work on it (long story but you can see the recent stats).  This means I have quite a bit of flexibility to cut checks to make things happen.  To give you a rough idea, we settled on a price of $1,X00 for PSD, HTML, and CSS mockups of my front page, my pricing page (complete with minor JS for the shopping cart), and the main page of the application.  I then munged that into site- and application-wide templates to get things to their current state.

Ashraful was wonderful to work with: very responsive to email, timely, and receptive to feedback in a way that improved the quality of the designs vis-a-vis my target market while also decreasing the amount of integration work I had to do.  I’d work with him again in a heartbeat.  You should hire him.

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Why I Don’t Host My Own Blog Anymore

I moved my blog over to WPEngine recently. Why? Read on.

I started blogging about 375,000 words ago (about three full-length novels… crikey). At first, I was on a subdomain of WordPress.com, mostly because a) it was free and b) I had no intention of ever writing anything more significant than a few observations I made while developing a summer project.  My posts about making and marketing software turned out to be rather more popular than I anticipated, and I eventually made them my main professional presence and moved them to their own domain name.

Eventually, I decided that I had to be in control of my site rather than being locked into only the themes and functionality that WordPress.com supported, so I started hosting the blog myself.  I installed WordPress on a modest 512 MB VPS from Slicehost, with the standard Apache 2 / PHP / MySQL stack, and thought that would be the end of my hosting decisions.  Sadly, it was only the beginning.

WordPress, PHP, and Apache: The Trifecta Of Finnicky Software

I’m a web developer by trade, so I’m very skeptical of unevidenced comments like “lol, PHP can’t scale.”  It’s transparently obvious that PHP can scale — one look at who uses it (Facebook is really all you need to know) proves that.  Sadly, my system crashed frequently under load, even after upgrading the 512 MB slice to a 1,024 MB slice, and after tweaking Apache and PHP’s memory-usage settings for hours.  I read practically everything written about caching plugins for WordPress and it availed me not.  The loads at issue weren’t generally that impressive, either: 10,000 pageviews here,  100,000 pageviews there, either way a modern server in 2006 ~ 2012 should eat those numbers for breakfast.

In addition to tweaking the heck out of my settings, I was hacking WordPress to lessen the load on the server.  I went so far as to putting all the static resources for this blog (CSS, images, etc) on a server used for my software business, since no level of traffic has ever managed to give Nginx a problem in my experience.  This made the blog much more stable under load, but it still crashed occasionally.

I eventually found the culprit: a setting in Apache named, ironically, KeepAlive.  Since then I have been seized by missionary zeal in trying to convince people that leaving KeepAlive on will probably not be in your best interests.  I turned off KeepAlive and have had a much more stable time since then.

Even with all this work, my blog crashed four times in 2011.  Each time, my monitoring software woke me up, and I learned things like “Oh, Jimmy Wales tweeted about an article of mine” at 4 AM in the morning while trying to restart the server.  I’ve probably lost in excess of 100,000 readers over the years for the blog being down.

I eventually got so fed up with Apache that I spent a day to migrate this (and 15 other sites) from using Apache as a front-end webserver to using Nginx to serve all requests and proxy dynamic requests to a backend Apache instance.  (Why not use Nginx to execute the PHP directly?  Long story — I do that elsewhere, but it isn’t painless.)

Routine Maintenance Sucked, Too

You’ve heard about WordPress’ somewhat spotty security record, right?  I’m aware of it as a practicing engineer and have even reported a few doozies in commonly deployed themes/plugins myself.  So I took some fairly extraordinary measures to secure the blog versus a stock WordPress installation:

  • required all access of the admin to happen through a proxy that I control
  • locking down all files on the WordPress installation such that the webserver could not write to them — this makes plugin installation/maintenance a manual chore and breaks some plugins, but makes it less likely that a vulnerability in a plugin or theme will ruin your day
  • performed some sporadic code audits on things I am inexpert on in a language I detest.  I eventually stopped doing this because reporting vulnerabilities to the WordPress ecosystem could easily be my full time job.

As a result of this, to my knowledge my blog never got compromised.  Whee, great.  It only took me a few billable weeks.  Plus I had all the usual fun of applying patches, making backups, restoring from backups when MySQL decided to eat the wp_posts table (still no clue why that happened), tweaking settings for rotating logs, migrating my hosting provider (Rackspace bought Slicehost so I had to move servers), yadda yadda yadda.

“Do You Enjoy Hosting WordPress?”

Two years ago at a conference I ran into Jason Cohen, a very smart guy who had sold his previous software business.  He told me that his new venture was managed WordPress hosting.  I was outwardly interested and inwardly cringing, because I thought “There are already WordPress hosts available for $4 a month, they all suck, and the software is pretty much irredeemable.  If it weren’t the best blogging software available I’d take a hammer to my backups then burn the shards and bury them on sanctified ground so that they never troubled the world again.”

At some point Jason asked me if I liked hosting WordPress.  I told him “I love hosting WordPress!  I love all the power and tweakability!”  And while I do appreciate control, I still can’t imagine what possessed me to say that.  Hosting WordPress has been a black hole of my time.

Last year I ran into Jason Cohen at another conference. He told me that WPEngine, the WordPress hosting company he’d told me about, was live and doing well.  In my haste to demonstrate that I had learned something from cutting myself on WordPress for the last five years, I mentioned “I guess you guys figured out to turn KeepAlive off, huh?”

Jason said “Actually, no.  I mean, sure, in the general case for a VPS, you want it off because otherwise your site gets non-responsive under load.  However, if you’ve got Apache talking to the outside world, something is wrong.  Apache only handles the request after it’s been through a load balancer, a Varnish caching proxy, and then Nginx, because Nginx does static content so well.  If the request gets that far you want KeepAlive on because your Apache will only be talking within your datacenter, only have a handful of connections, and you want those connections to be alive almost indefinitely because setup/teardown is always waste.”

You know how often I talk to software company CEOs and get not just corrected but destroyed and then re-educated about a point of technical fact?  Suffice it to say it made an impression.

So when Jason invited me over to WPEngine to do some marketing work, I leaped at the chance.  I went down to Texas for a week, met the team, and did my thing.  (Sidenote: Want to see a fairly typical week’s work for me?  Take a gander at their speed test tool, which you can point at an arbitrary WordPress site and learn why your page load speed isn’t optimized enough yet.  The punchline is, of course, that if you were with WPEngine they would have already fixed that for you.  I assisted with a redesign of this, wrote the month-long WordPress optimization course that the tool will let you sign up for, and generally improved copy and the like on their marketing site.)

So I Switched

In the course of hearing the sales pitch from them several times so I could write it accurately, I became convinced: WPEngine is absolutely superior in every way to me continuing to host the blog myself.  So I took out my credit card, signed up for their $200 a month plan (prices got reduced recently, see here), and migrated my blog over.  It has been quietly hosting my blog for the last several weeks, including through two of my highest traffic days ever, without a hitch.  For the first time, I can watch a post go to the top of HN and not have to have “top” open to keep an eye on swap consumption.

A few things that particularly impressed me about WPEngine:

  • A few hours after migrating my blog I got an automated email saying that they had found an outdated copy of TimThumb in my WordPress install and had upgraded it for me.  It wasn’t a vulnerability (permissions locked down saved the day for that one), but I’m very, very glad they keep an eye on things so that I don’t have to.
  • Migration was almost painless.  I just dumped the WP database, grabbed my existing files, and copied them over as instructed.  I needed to speak to support to get a setting tweak done for me (the plan I bought has WordPress multi-site not single site like my old blog, and this resulted in a minor issue), but all told I was up and running in about two hours of elapsed time.
  • Just like their speed tool promised, my site did get modestly faster.

I’m a bit of a YSlow fanboy and ever once in a while I go through my sites and make an optimization pass, so I usually have all the low-hanging fruit like gzipping, static content loaded from multiple domains, and the like taken care of.  I wasn’t expecting WPEngine to shave much time from my page loads, given the amount of optimization work I had already done, but I kept the old server around to do a fair test on AOL’s speed tool.  Take a look what happens: here’s a video showing (left) my old 1,024 MB VPS versus (right) WPEngine showing the same page from my blog.

If you didn’t watch the movie, I’ll spoil it: content pops in about half a second earlier (and finishes loading .8 seconds earlier) on WPEngine with no manual tweaking versus my tweaked-to-limit-of-my-ability VPS.

That test uses IE8 on a reasonable residential Internet connection coming from the US. For accessing from Japan or on a mobile device, it is viscerally faster for me, probably due to the CDN which WPEngine uses.

Do You Have A Blog For Business? Use WPEngine

The VPS that I used to run my blog on cost a bit over $100 a month (1 GB Rackspace slice + 160 GB of bandwidth + backups = I am not actually sure). WPEngine runs me $200 a month because I have high anticipated traffic. They have a $29 option for folks who don’t.

$2,500 a year for blog hosting sounds a bit on the high side, but it is honestly nothing against the amount of time that I will no longer have to invest supporting this sucker. I love being out of the hosting business. I never intended on being in it in the first place — it was always just something I needed to do to write for people. Less time poured down that black hole means more time to work on my businesses and share what I learn doing so.

WPEngine has been a total, epic win for me. I suggest that you use them if you are using WordPress for a business: go ahead, make with the clicky clicky. Want to just geek out on how they have their infrastructure setup? See here.

P.S. Long-time readers are aware of this, but just to reiterate: I don’t take money for blog posts, was not asked to write this by WPEngine (who are, again, clients of mine), and would not have written it except that their service really rocks.

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Salary Negotiation: Make More Money, Be More Valued

[Editor’s note: At nearly 7,000 words, you probably don’t want to try reading this on an iDevice.  Bookmark it and come back later.]

Imagine something a wee bit outside your comfort zone.  Nothing scandalous: just something you don’t do often, don’t particularly enjoy, and slightly more challenging than “totally trivial.”  Maybe reciting poetry while simultaneously standing on one foot.

If I told you I would pay you a hundred thousand dollars if you did five minutes of poetry recital while standing on one foot, would you do it?  It’s an absurd image, but play it straight.  There is no hidden gotcha here.  You won’t be videotaped.  Your friends will never see you make a fool of yourself.  The revolution will not be YouTubed.  The offer is exactly as simple as you think it is: poetry, foot, $100,000.

Would you read poetry for me?

Of course you would.  You’d be screamingly stupid not to.  In fact, not only would you read poetry, you’d probably take a poetry class to make sure you did it right, or go to the gym to verify “Yep, sure enough, I can stand on one foot.  Phew.  Pass me the Shakespeare.”  If you couldn’t stand on one foot, you’d fix that, because you know that is much easier than other things you routinely accomplish and you suddenly have a hundred thousand wonderful reasons to learn it, too.

What if you were talking about this at dinner with your friends, and one of them said “Oh, no, I’d never do that.  I just don’t do poetry.  I’m an engineer.  And besides, my father told me that people who stand on one foot look silly.  And what do I need $100,000 for anyhow?”  You would not clap them on the back and say “Damn straight!  Man, poets, always trying to tempt virtuous engineers into their weird poetry-spouting flamingo-standing ways.”  You’d say “Dude, it’s five minutes.  Heck, I’ll help you practice.”

This is pretty much how I feel every time I talk to my engineering friends about salary negotiation.  We overwhelmingly suck at it.  We have turned sucking at it into a perverse badge of virtue.  We make no affirmative efforts to un-suck ourselves and, to the extent we read about it at all, we read bad advice and repeat it, pretending that this makes us wise.

Dude, it’s five minutes.  Let’s un-suck your negotiation.

(New to the blog?  Hiya.  I generally write as an engineer for engineers.  Non-engineers can benefit from many of the same techniques, though the hiring market isn’t nearly as in your favor at the moment as it is for engineers in most major US metro areas.)

Why Negotiation Matters

Your salary negotiation — which routinely takes less than 5 minutes to conclude — has an outsized influence on what your compensation is.  Compensation can include money or things which are more-or-less fungible replacements for money, but it can also include interesting things which you value from “more time with your family” to “opportunities to do tasks which you find fulfilling” to “perks which make a meaningful difference in your day-to-day quality of life.”  That makes your negotiation five very important minutes.  You generally can’t do a totally bang up job on any five minutes of work this year and have your boss give you an extra $5,000.  You can trivially pick up $5,000 in salary negotiations just by sucking less.

Since salaries are shockingly durable over time, particularly if one is not good at negotiating, you can expect a $5,000 increase in salary to compound with your standard annual read-the-HR-chart-percent raise, cause a similar increase in your 401k contribution (which also compounds), and establish a higher peg for any further jobs you take (if you’re unsavvy and allow these other jobs access to your prior salary history, at any rate).  Accordingly, over the next ten years, the value of $5,000 a year extra salary is close to $100k gross, and the value of $15,000 a year extra (very achievable if you’re e.g. a young engineer who doesn’t realize that the hiring market is on fire right now, even outside of tech epicenters like Silicon Valley) is over $100k even net of taxes.

Shifting Your Mindset To Embrace Negotiation

We’ll discuss tactical advice in a moment, but let’s talk about the psychology of negotiation first.  I think that middle class Americans are socialized from a very young age to view negotiation as something that is vaguely disreputable and engaged in only by poor people.  Think of the associations you have with the word “haggling”: do you think of a successful young professional talking about thousands of dollars in a brightly lit office?  No, you probably think of an old woman arguing over a trivial sum of money in a dirty flea market.

If I were a little more paranoid and a little more Marxist, I’d honestly think that you’re so misinformed about reality that that is almost prima facie evidence of a conspiracy to keep you in the dark about this, to the advantage of people who a) you won’t negotiate with and b) who will feel absolutely no compunctions about negotiating with you.  Principally, this will be your employers.  People say that your house is the biggest purchase you’ll ever make, but it won’t be the most consequential negotiation.  If you’re sane only about 25% or so of your gross income is subject to the results of real estate negotiations.  Close to 100% is subject to the results of salary negotiations.  Thus, your salary negotiations are probably going to be the most important financial decisions you will ever make.  We socialize middle class Americans to go into them unprepared, demotivated, and fearful of success.

The reality is that rich, successful people negotiate.  (This is one important way in which they get — and stay — rich.)  It is an all-day-every-day thing in much of the business world, which is where most rich people get their money.

Your Counterparty Does Not Share Your Mental Model of Negotiation

Salary negotiations are very asymmetrical.   Companies know this and routinely exploit it.  Job seekers don’t, perhaps because they think doing so would be unfair and the word “exploit” makes them acutely uncomfortable.  So we often default by pretending that the employer is evaluating the negotiation like we would.  This is not true, and acting like it is true will harm both your interests and the interests of your future employer.

For example, many people’s mental model of employment is that an employee with a $60,000 a year salary costs about $60,000 a year to hire.  If they negotiate $65,000 instead, that’s $5,000 extra which has to come from… somewhere.  If the negotiation breaks down, then that is $60,000 saved.  This mental model is broken.

First, get into the habit of seeing employees like employers see them: in terms of fully-loaded costs.  To hire someone you need to pay for their salary, true, but you also have taxes, a benefits package, employer contributions to retirement, healthcare, that free soda your HR department loves mentioning in the job ads, and what have you.  (Trivia: for a US employer of professionals, the largest component after salary is usually healthcare, followed by payroll taxes.)  The fully-loaded costs of employees are much higher than their salary: exactly how much higher depends on your locality’s laws, your benefits package, and a bunch of other HR administrivia, but a reasonable guesstimate is between 150% and 200% of their salary.

The fully loaded cost of an engineer receiving market salaries these days in California or New York is close to $20,000 a month.  It is “only” $10,000 a month if they’re receiving a heavily below-market salary, such as if they’re working for a startup.  If you have a kid brother who majored in Flemish Dance and got a modest full-time job at a non-profit, his fully-loaded cost is still probably $4,000 a month or more.

This is a roundabout way of telling you that companies are not sensitive to small differences in employee wages because employees are so darned expensive anyhow.  You see $5,000 and think “Holy cow, even after taxes that’s a whole new vacation.  Five thousand dollars.  Five thousand dollars.  It would be so very, very greedy of me to ask for five thousand whole dollars.”  The HR department sees $5,000 and thinks “Meh, even after we kick in the extra taxes, that is only about 3% of their fully-loaded cost for this year anyhow, or seven hundredths of one percent of that team’s hiring budget.  I wonder if the cafeteria has carrot cake today?”

Virtually any amount of money available to you personally is mouse droppings to your prospective employer.  They will not feel offended if you ask for it.  (I received a comment that this is untrue for startups by someone today.  For a funded startup which has enough engineers to warrant a foosball table, the company payroll is well north of $100,000 a month.  Making a new hire is a big commitment, but they still have a lot of flexibility on the  details because the details do not shave months off of their runway.)

We’ve been talking about your employer as an abstraction, but in the instant case you’re talking to an actual person.  Let’s call him Bob.  It is Bob’s job to get you signed with the company as cheaply as possible, but Bob is not super motivated to do so, because Bob is not spending Bob’s money to hire you.  Bob is spending Bob’s budget.  Bob generally does not get large performance incentives for shaving money off of his hiring budget: you get a new Macbook if you convince Bob to give you $5k extra, but Bob gets (if he is anomalously lucky) a dinner at TGIFridays if he convinces you to take $5k less.  In fact, there are many organizations (and Bobs) for whom power, status, and money come from asking for more budget every year.  If you turn out to be on the expensive side, that is great for Bob, because a) he manages a high-powered peon so he must be a high-powered manager and b) this will help Bob get more budget next quarter.  So if you’re worried about what Bob will think of your moral character, or you want to compensate Bob because you feel you owe him for this job opportunity, do Bob a solid and negotiate in a spirited fashion with him.

You don’t owe Bob for giving you this job opportunity, by the way.  Internalize this: everyone in this discussion is a businessman.  (Some might call themselves “regular employees,” which just means they’re businessmen with self-confidence issues and poor business skills.)  If the deal makes economic sense, it will happen.  If it doesn’t, firm handshakes will be exchanged, non-specific promises will be uttered, and everyone will forget about this discussion in a matter of hours.  You will not be blackballed for negotiating.  Bob couldn’t care less and, even if he did care, he has better things to do with his time than worry about a candidate he didn’t hire.  Bob is working through a list of a dozen people right now, and his manager Dave is being such a hard case about that project’s schedule, and he’s not sure he can make his daughter’s piano recital, and the cafeteria’s carrot cake was a little dry.  Bob is far, far less invested in this negotiation than you are.

Your Negotiation Started Before You Applied To This Job

Your negotiation doesn’t happen in a vacuum.  Generic career advice is a little outside the scope of this post (though I’ve previously written a bit with engineers in mind that folks from many walks of life tell me was useful), but to make a long story short, many people think job searches go something like this:

  1. See ad for job on Monster.com
  2. Send in a resume.
  3. Get an interview.
  4. Get asked for salary requirements.
  5. Get offered your salary requirement plus 5%.
  6. Try to negotiate that offer, if you can bring yourself to.

This is an effective strategy for job searching if you enjoy alternating bouts of being unemployed, being poorly compensated, and then treated like a disposable peon.  (I served three years as a disposable peon in a Japanese megacorp and might be projecting a tad bit here.  Regardless, my loss is your gain.)

You will have much, much better results if your job search looks something more like:

  1. (Optional but recommended) Establish a reputation in your field as someone who delivers measurable results vis-a-vis improving revenue or reducing costs.
  2. Have a hiring manager talk with you, specifically, about an opening that they want you, specifically, to fill.
  3. Talk informally (and then possibly formally) and come to the conclusion that this would be a great thing if both sides could come to a mutually fulfilling offer.
  4. Let them take a stab at what that mutually fulfilling offer would look like.
  5. Suggest ways that they could improve it such that the path is cleared for you doing that voodoo that you do so well to improve their revenue and/or reduce their costs.
  6. (Optional) Give the guy hiring you a resume to send to HR, for their records.  Nobody will read it, because resumes are an institution created to mean that no one has to read resumes.  Since no one will read it, we put it in the process where it literally doesn’t matter whether it happens or not, because if you had your job offer contingent on a document that everyone knows no one reads, that would be pretty effing stupid now wouldn’t it.

You might think that desirable jobs at well-managed companies (Google, Microsoft, hot startup FooWithTheWhat.ly, etc) have layers and layers of bureaucratic scar tissue (a great image from 37Signals) to ensure that their hiring will conform to established processes and that offers will not be given to candidates sourced by using informal networks and interpersonal connections.  If you believe this, you have a dangerously incomplete mental model of how the world operates.  I have a specific recommendation for you to make that model more complete: start talking to people who actually work for those companies and who have hiring authority.  Virtually no company has a hiring process which is accurately explained by blog posts about the company.  No company anywhere has a hiring process which is accurately explained by their own documents about how the hiring process works.

I won’t give names, but all of the following are companies you’ve heard of:

  • Ironclad non-compete with an IP assignment provision of major multinational… struck from the contract with four sentences of discussion.
  • Major popular tech employer offered desirable employee $X as a salary because “it was the max the HR department allows for that position.”  He got hired that week at $2X.  All parties — hiring organization, HR, and employee — think they pulled one over on the other participants.
  • Funny story goes here. I now can’t tell you the funny story, because literally two hours before publication someone emailed me for advice about a situation that he believes is incredibly unjust at his company, and it is exactly the funny story to the letter.  Now if I tell you the funny story he might think “Dang, I write Patrick in confidence and it ends up on the blog.”  So, no funny story today.  Suffice it to say that in my old age I treat Dilbert less as farce and more as documentary.
  • “We can’t hire engineers fast enough through our standard processes so, meh, I guess we’ll circumvent them by just tossing $1 million per employee at whomever they currently work for.  Who cares, it isn’t my million.”

When Does A Salary Negotiation Happen?

Only negotiate salary after you have agreement in principle from someone with hiring authority that, if a mutually acceptable compensation can be agreed upon, you will be hired.

This is really, really important because it has direct implications for your negotiating strategy.  First, the company is going to spend a lot of time and effort on getting you to the point of agreement-in-principle.  Pretend you’ve gone through six rounds of interviews.  (You probably won’t if you get hired on informal networks, because all barriers vanish when important people want a deal to get done, but let me give some advice to someone a little less well-situated.)  Do some quick mental math on what that actually cost the company, with reference to “one man-month of an engineer’s time costs $20k” like we discussed earlier.  You’ll quickly reach the conclusion that the company has spent thousands of dollars just talking to you, and that doesn’t even count the thousands they spent deciding to talk to you instead of whoever isn’t in the room right now.  Walking away from the negotiation means that they lose all that investment.  (Yeah, sunk cost fallacy and all, but since people predictably act in this fashion you should, well, predict that they will act in this fashion.)  They really want to reach an agreement with you.

The second implication is that the inner serf worrying “If I even attempt to negotiate this, the deal will fall through” is worrying for nothing.  They’ve got thousands invested in this discussion by this point.  They want you.  The absolute worst outcome of negotiating an offer in good faith is that you will get exactly the contents of that offer.  Let me say that again for emphasis: negotiating never makes (worthwhile) offers worse.  This means you need what political scientists call a commitment strategy: you always, as a matter of policy, negotiate all offers.  (In this wide world I’m sure you can find a company who still makes exploding offers, where you get one yay-or-nay and then the offer is gone.  You have a simple recourse to them: refuse them and deal with people who are willing to be professionals.  You’re not a peasant.  Don’t act like one.)

This also means you do not start negotiating until you already have a Yes-If.  (Yes-If we agree on terms.)  Do not start negotiating from No-But.  (No-But we might hire you anyway if you’re really, really effing cheap.)  You don’t want to work for a No-But for the same reasons that smart employers hate hiring candidates who are a No-But (No-But maybe if not on my team, etc).  If they’re leaning to not hiring you, you will compromise excessively on negotiation to get them to hire you.  Compromising excessively is not the point of the exercise.  It is a seller’s market for talent right now: sell to someone who is happy to buy.

This means that any discussion of compensation prior to hearing Yes-If is premature.  If you’re still at the job interview and you’re talking price you are doing something wrong.  (Read the room: it is entirely possible that you came for a job interview, finished it, and proceeded directly to a salary negotiation.  That’s probably suboptimal, but it is OK.  Just don’t give the employer the option of having the schedule be job interview, salary negotiation, and back to job interview if they discover that you have a spine.)  The ideal resolution to the job interview is for both sides to be optimistic about the arrangement, and then you close with a warm handshake and “I look forward to receiving your offer by, oh, would tomorrow be enough time for you to run the numbers?”

You then have a high likelihood of doing your salary negotiation over email, which is likely to your advantage versus doing it in real time.  Email gives you arbitrary time to prepare your responses.  Especially for engineers, you are likely less disadvantaged by email than you are by having an experienced negotiator talking to you.

The First Rule Is What Everyone Tells You It Is: Never Give A Number First

Every handbook on negotiation and every blog post will tell you not to give a number first.  This advice is almost always right.  It is so right, you have to construct crazy hypotheticals to find edge cases where it would not be right.

For example, if your previous salary was set during the dot-com bubble and you are negotiating after the bubble popped, you might mention it to anchor your price higher such that the step down will be less severe than it would be if you engaged in free negotiations unencumbered by the bubbilicious history.  Does this sound vaguely disreputable to you?  Good.  This vaguely disreputable abuse of history is what every employer asking for salary history, salary range, or desired salary is doing.  They are all using your previous anomalously low salary — a salary which did not reflect your true market worth, because you were young or inexperienced or unskilled at negotiation or working at a different firm or in another line of work entirely — to justify paying you an anomalously low salary in the future.

Never give a number.

“But Patrick,” you cry.  “I don’t want to be difficult.”  You’re not being difficult.  You’re not doing anything immoral.  You’re not being unprofessional.  They’re businessmen, sometimes they don’t have all the information they would love to have prior to making a decision.  They’ll deal.

They already deal with every employee that they’ve ever had who was not a doormat at negotiations, which includes essentially all of the employees they really value.  Ramit Sethi (more on him later) introduced me to a concept that he calls Competence Triggers: basically, if you have to judge someone’s skill based on a series of brief interactions, you’re going to pattern match their behavior against other people who you like.  When people with hiring authority think of winners, they think of people like them who live and breathe this business thing.  They negotiate things as a matter of course: that is a major portion of the value they bring to the company.  Volunteering a number when asked says the same thing to people with hiring authority that flunking FizzBuzz says to an engineer: this person may be a wonderful snowflake in other regards, but on the thing I care about, they’re catastrophically incompetent.  It will also cause them to retroactively question competencies they’d previously credited you with.

I have literally heard that feedback, in so many words, from folks with whom I’ve had successful business dealings.  (A funny in hindsight story: I cost myself five figures with a single email.  The particulars are boring, but suffice it to say I fairly recently made a wet-behind-the-ears-engineer error in quoting a client.  He noticed.  So did my bank statement.  My bank statement kept quiet, but the client opined that it made him think less of me until we actually got to work together.)

So anyhow, you may well hear reasons why you should give a number.

Objection: “I really need a number to move the process forward.”

What you should think: “You’re lying to me to attempt to get me to compromise my negotiating position.”

What you should say: “I’m more concerned at the moment with talking to you about discovering whether we’re a mutual fit.  If we’re a great fit, then I can be flexible on the numbers with you and you can be flexible on the numbers with me.  If we’re not a great fit, then the numbers are ultimately irrelevant, because your company only hires A players and I only work at roles I would be an A player at.”

(Don’t talk like that normally?  Fine then, talk like yourself, but say substantially the same things.  Engineers overestimate how different we really are from business people: we say “10x engineer,” they say “A player,” but at the end of the day we believe that there are vast differences in productivity between workers.  OK, gut check: is this something we actually believe to be true or just something we wish for?  If it is actually your best guess about the state of reality, that has immediate news-you-can-use implications about how you should conduct your life.)

 

Objection: “This form needs a number.”

What you should think: “You’re lying to me to attempt to get me to compromise my negotiating position.”

What you should say: “Give me git access and I’ll fix it in a jiffy!  both people laugh No, seriously, speaking, I’m more concerned at the moment with discovering whether we’re a mutual fit…  Oh, it’s physically impossible?  Put in $1 then to get the ball rolling, and we’ll circle back to this later.”

 

Objection: “We want to figure out whether you’re an appropriate candidate for the position.”

What you should think: “You’re lying to me to attempt to get me to compromise my negotiating position.”

What you should say: “It’s so important to me that this is a good mutual fit for us.  Let’s talk about why I’m a great fit for this position: I know you’re concerned about $FILL_IN_THE_BLANK.  In addition to my previous successes doing it, I have some great ideas for what I’d do about that if I was working at your company.  Would you like to drill into those or is there another job area you’re more concerned about to start with?”

 

Objection: “I’m sorry, great try at a dodge there, but I just can’t go forward without a number.”

What you should think: “You’re lying to me to attempt to get me to compromise my negotiating position.”

What you should say (if you’re an engineer): “Well, you know, I would hate to have to walk away from the negotiation over this.  Working with your company looked it would have been such a wonderful opportunity.  I hear the hiring market is super-tight right now, would you like me to introduce you to other candidates?  Maybe we can shave a couple of months off of you filling this position.”

What you should say (if you’re not an engineer): “Damn, I guess I should have studied engineering.”

What you should say (if you’re a little put out by that comment): “Well, you know, salary is only one component of the total compensation package.  In terms of total compensation, we’re probably looking at something like $FILL_IN_NUMBER_HERE.”  (Suggested calculation: take the package value from your last company and add 5~10%.  If you don’t know how to calculate the value of your compensation package, learn that, but as a rough guesstimate salary + 30 ~ 50% for full-time employees in professional roles and the multiplier tends to scale up as your base salary scales up.)

P.S. I double majored in making things and making things up.  The joking comes from a place of love.  OK, love and schadenfreude, in solution with each other.

Listen To What People Tell You.  Repeat It Back To Them.

Properly run negotiations are not jockeying contests, they’re persuasive exercises.  (We’ll give the company a pass on the “what’s your number?” question because it is an established social ritual that they get one free pass at screwing you.  You still don’t have to cooperate with it, though.)  You know what people find persuasive?  Their own words.  People love their own words.  When you talk to them, you should use their own words.  Seriously, watch the eyes light up.

Did the solicitation for the job say “We are seeking someone with strong skills at scaling traffic in a fast-moving environment”?  Pick out the key words.  Scaling traffic.  Fast-moving environment.  “Scaling traffic” doesn’t sound like how I’d phrase it if I were writing or speaking for myself, but if you’ve just described your need to me as scaling traffic, by golly I will tell you how great I am at scaling traffic.  Reinterpret or rephrase the (true!) bits of your own story such that it fits the narrative framework which they have conveniently told you that they are going to respond to.  Did you previously work at a small business which was unencumbered by lots of process?  Sounds like a fast-moving environment, right?  Call it exactly that, then.

Micro-tip: Take notes during job interviews and salary negotiations.  It’s easy: go to the convenience store before the job interview, buy a writing instrument and a $1 notebook, jot down occasional notes when appropriate.

Can I do that?!  Of course you can.  Do you know anyone who you’ve ever thought “Man, I thought they were competent, but then it turned out they had a notebook so I had to write them off?”  No.  Taking notes says “I’m attentive and detail-oriented and I care about what you say.”  (Make sure you can take notes without playing with your pen or otherwise appearing to fidget.)  In terms of specific things that should get your pen moving, among others, I would focus on specific words they use and concerns they have so that you can come back to them later in the conversation.  Numbers are another good thing to hit the notebook, because numbers should only ever trend in a direction of “Better to you,” so you don’t want to do something stupid like saying “So how many days of vacation was that again?” and let a 24 suddenly become a 20.  (You might think “I’m going to write down the offer so I have proof of it for later.”  Get offers written, that goes hopefully without saying, but get it written by them and/or follow-up the discussion with an email recapping the important points and asking if you understood them correctly.  Your notes will not convince their HR apparatus to honor the agreement in event of a retroactive miscommunication, but an email from their decisionmaker likely will.)

People say the damnedest things.  For example, someone might spontaneously volunteer during a job interview that they’ve been interviewing for the position for six months.  (None of my clients would ever say that, of course, but then again one would hope none of their consultants would chop five figures off their own invoice with an email.)  If they say the position has been open for six months, take a note of that.  During the salary negotiation, if they have a pricing objection, one of your first responses should be “I appreciate that this is a little more money than you might have been thinking about, but this is an opportunity to get this position filled without delaying your business by another six months.  What is the value of that six months of execution to you?”  (Conversely, don’t say stupid things during job interviews such as “I need this job because…”  You never need a job.  Being needy means that the party who is not needy has automatic leverage over you: your BATNA to the negotiation is very poor.  Instead of being needy, aim for “I’m enthusiastic about the opportunity with working with you, assuming we can come to mutually satisfactory terms.”)

Micro-tip: Notice how often I say “We” and variations on “mutual win.”  Those work pretty well.  The only thing better than “We” is “You” (and variants), because people care a heck of a lot more about their problems than about your problems.  (This advice is stolen shamelessly from Dale Carnegie.)  This means that a) you should talk about their problems, concerns, and wishes and b) you should guard against your own natural tendency to bring up irrelevant things like your own problems, which typically will not help you sell the decisionmaker on adopting the mutual win you’re proposing.  Similarly, I generally try to phrase things positively rather than score debating points.  (“You just said X, but that was contradicted by your earlier statement Y, which means…” wins debating points but does not win friends and influence people.  You might try something like “Good good, but taking into account your earlier concerns about Y…”)

Research, Research, Research

Many people will tell you that you should familiarize yourself with the approximate salary range for the position in your region.  This advice is easy to act on (go to a salary aggregation site, guess what “the position” is, pray that this gives you a better number than rand(40000,120000)), but it leaves a lot to be desired.  It is 2012.  Facebook and LinkedIn exist.  You should, before any job interview, have intimate knowledge of the target company.  Prospective peers within the company are one obvious way to get it.  So are ex-employees, folks who’ve had dealings with them professionally, etc.  Key things you want to learn:

  • What do they value?
  • Who do they value within the company?  (Roles?  Titles?  Groups?)
  • What does the career path look like for successful people within the company?
  • Roughly speaking, how generous are they with regard to axes that you care about?
  • Do they have any compensation levers which are anomalously easy to operate?  (For example, if you asked around, you might hear a few people say that a particular firm pushes back modestly on out-of-band increases in salary but they’ll give in-the-money option grants like candy.)
  • All the fuzzy stuff: what’s the corporate culture like?  Yadda yadda.

You can even bring a lot of these questions to the job interview, which is (again) prior to the negotiation.  (Maybe not “So are you guys tightwads?” but culture-esque questions like “What are the projects this company thinks are really key to its future and how would a motivated person go about getting on them?” are both a) totally fair game and b) will win you brownie points just for asking.  Similarly, a lot of employees will, out of company loyalty, attempt to sell you on taking the job with the company by trading you very useful information.)

The more you know, the more options you have when doing negotiation, because you’ll have more things and more motivational things which you can offer in exchange for things you want.  It will also help you avoid making mistakes like e.g. getting into a rigid classification system where the classification you’re aiming at will make forward advancement towards your goals very difficult.  (Example: there are some companies where Product and QA are run like separate fiefdoms which haven’t forgotten the most recent war, and in those companies getting hired as an engineer may not be a career enhancing move if you like making things for a living.  There are other companies where people cross-function in those responsibilities all the time and applying for a job advertising as “Support Engineer” makes lateral moves onto customer-facing projects trivial.  You can find which one you’re applying to by taking any engineer out for coffee.)

New Information Is Valuable And Can Be Traded For Things You Want

There was a post recently on Hacker News about someone’s experience with a job offer from Google.  They wanted more money.  The recruiters offered to think it over, and came back with the reply that Google’s food benefit was worth a significant amount of money, with a calculation to back it up.  That is a pretty brilliant reply.  Google’s food benefit is about as old as the company.  Approximately all people wanting to work at Google are aware of its existence.  However, the explicit calculation of what it is worth is new, so if you bring up that calculation, by implication you’re offering newly found value to the negotiation.  This successfully convinces people that they didn’t really need that extra money.  It is so successful at this that Google recruiters apparently have this entire interaction scripted, since multiple people report having the exact same experience.

You should steal this tactic.  You are an expert in your own skill set, life story, and (ideally) value you can create for the company.  However, the person you are talking to is not.  If they ever resist about something which you want, consider reaching into the treasure chest that they are buying mostly blind and revealing one of the many glittering jewels inside.  They are going to get them all anyhow if they buy the chest, but each one you bring out decreases the perceived risk of buying it and therefor increases its perceived value.

Company: We can’t see our way to $88,000.

Applicant: Well, I know you do a significant amount of business with your online store.  At my last company, I increased sales by 3% by $YADDA_YADDA.  What would a 1% increase in sales be worth to you?

Company: Well, I don’t have that figure in front of me, but…

Applicant: Would it be safe to say “millions of dollars”?

Company: That sounds about right, yeah.

Applicant: Great, I can’t wait to get started.  Getting me that extra $4,000 would make this a much easier decision.  Considering that this is conceivably worth millions to you, we’d be silly not to do business with each other.

Company: I’ll see what I can do.

Applicant: Let me help give you some options!  [See below.]

(This hypothetical applicant is doing well on the negotiation but apparently needs to do more research on what conversion optimization specialists can get away with charging these days.  Here, let me help: six figure salary with all the usual perks as an employee, “senior engineer project rates” through “you might not believe me if I told you” as a consultant.)

Anyhow, simply by bringing attention to something which was hopefully already in bold print on their resume, they just increased their perceived value to the company, thus justifying the company moving a lever which (again) the company isn’t really sensitive to at the end of the day.

You Have A Multi-Dimensional Preference Set.  Use It.

Don’t overly focus on your salary number.  It is important (of course), but there are many parts of your compensation package, and many more things that you value.  Should you and the other party reach an impasse on any part of it, offer to table that part of the discussion (to be returned to later) and bring up a different topic.  You can then trade improvements for concessions (or apparent concessions) on the earlier topic.

Employer: “We were thinking $80,000.”

Applicant: “$80,000 is interesting (*) but not quite where we need to be to get this done.  Do you have any flexibility on that number?”

Employer: “I think I can convince HR to approve $84,000 but that is the best I can do.”

Applicant: “I appreciate that.  $84,000, huh.  Well, it isn’t quite what I had in mind, but the right package offer could make that attractive.  How much vacation comes with the package?”

Employer: “20 days a year.”

Applicant: “If you could do 24 days a year, I could compromise on $84,000.”

Employer: “I think I can do that.”

For those keeping score at home: the applicant never gives up anything but the employer will walk away feeling he got a good deal.

* Micro-tip: “Interesting” is a wonderful word: it is positive and non-commital at the same time.  If they tell you a number, tell them it is an “interesting” number, not a “wonderful” number.

Hoping around the offer also helps you defuse common negotiating tactics like “I have to go to $EXTERNAL_AUTHORITY to get approval of that.”  (This is in the negotiation playbook, because it works well: it injects an automatic delay in the process, and gives you a scapegoat for refusing a request while not being guilty of the refusal yourself.  You should strongly consider having an $EXTERNAL_AUTHORITY of your own.  Significant others work well.  Note that in the US your would-be employer is legally prohibited from breathing about the subject of your marital status, so something like “We’ll have to talk that over” or “That sounds reasonable, but I’ll have to run it by the family” has the dual virtues of being a socially acceptable reason to delay any major decision while also being equally available to unattached young’uns.  I talk shop with my family all the time.  I’ll certainly continue discussing employment with my family after it includes my fiancee, too.)

Anyhow, say your decisionmaker says that approving deviations from the company’s salary structure is outside of his discretion and those evil ogres in HR will likely deny his request.  That’s fine.  Express sympathy with him, because he just said he wants to give you more but can’t, then refocus the discussion on things which are within his personal authority.  (Vacation days, work hours, project assignments, travel opportunities, professional development opportunities, and the like are good areas to probe at.)  You can then use the unspent “You wanted to do something nice for me” obligation which he just acknowledged on one of the things which he has authority to grant you.

For Your Further Perusal

I’m deeply indebted to a few buddies of mine, principally Thomas at Matasano and Ramit Sethi, for teaching me to be less of a doormat in terms of negotiation.  Thomas has forgotten more than I’ll ever know about doing negotiations with clients.  Check out HNSearch.com with [tptacek negotiation] for some good advice, or (if you’re in Chicago) take him out to coffee.  By the way, if you’re an engineer and want to practice salary negotiation, Matasano is hiring and a great place to work for.

Ramit is extraordinarily persuasive about how psychology influences how people act in negotiations, and how a deeper understanding of this gives you better preparation than trying to focus on particular tactics.  When I told him that I was finally going to blog about one of our dinner conversations (you’re reading it), he said he’d give my readers a free video on negotiation tactics and the psychology underlying them in return for your email address.  The video is good and elaborates on some subjects that I haven’t covered, plus I know some people find them easier to learn from than lots of text, so that strikes me as a very fair offer. You’ll also get Ramit’s emails, which have never wasted my time.

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Bingo Card Creator (and etcetera) Year In Review 2011

I’m Patrick McKenzie (patio11 on the Internets) and for the last several years I’ve run a small software company.  My first product was Bingo Card Creator, my current product focus is Appointment Reminder, and I do occasional consulting for a variety of clients, mostly on helping them sell more of their software over the Internet.

Traditionally, right before Christmas every year I release an annual report.  See, for example, 2006, 2007, 2008, 2009, and 2010.  (Crikey, have I really been doing this for that long?)  I’ve also traditionally published live stats for Bingo Card Creator, but not my other lines of business.

Writing the annual report is partially to keep me grounded, partially to talk through my thoughts on the year and goals for next year, and partially to (hopefully) give other folks ideas that they can use in their own businesses.  I hope you find it interesting or, at the very least, mildly amusing.

Obligatory disclaimers: Assume any statistics that I give are “roughly accurate, to the best of my knowledge, at the time this report was written.”  There are still a few weeks left in the year.  Sales are typically low in the last two weeks, but the exact timing of credit card charges can cause a bit of jitter in the December stats.  From past experience, I have a high degree of certainty that there are about $1,000 or $2,000 of expenses (across all lines of business) which aren’t in the bookkeeping  system yet and won’t be until I sit down in March and check things for taxes.

Capsule summary: Best year ever, by a lot.  Broke $100,000 in sales for the first time and increased total profits to ~$70k.  2012 has inflection points coming for life and the business.

The Year In Brief

I put Bingo Card Creator into maintenance mode for approximately 48 weeks out of 2011: I only answered emails and kept systems running, but took no action to improve the product or marketing.  (The other four weeks I tried a few minor things out.)  This was, theoretically, supposed to free me to spend most of my efforts on Appointment Reminder…

… but that didn’t end up happening.  For a variety of reasons, most of my focus business-wise went into consulting.  Although I technically only did about 10 weeks of consulting during the year, I spent quite a bit of overhead time on e.g. arranging deals which ended up falling through, arranging the deals which did actually go through, and doing general promotion activities like speaking at conferences.  (I had the opportunity to speak at about a half dozen conferences this year, and assorted other events.  It is great fun, but since I generally have to fly to America for them, they tend to munch a full week out of my schedule each.  I spent almost three months of the year in the US, doing a combination of family events, consulting, prospecting, speaking, and meeting some Internet buddies to discuss plans for later.)

I also lost two solid months due to dealing with legal issues, mostly centering around Immigration.  I’d love to fill you in on the nitty-gritty, but have been asked not to by people close to the situation.  Suffice it to say that I was a shoe-in for a Japanese visa back when I worked at a large megacorp, was not a shoe-in for a visa when doing my own thing, and had a very hairy experience with getting them to approve me as a “self-employed engineering consultant.”  Tips of the hat to my Japanese clients, particularly Makeleaps / Webnet IT and myGengo, whose support was instrumental in getting Immigration to approve my renewal.

Despite not having nearly as much time to work on Appointment Reminder as I would have liked, I did manage to firm up its technical underpinnings, add new features requested by clients, and do a small amount of work marketing it.  I hope to make that more of my focus in 2012.

Bingo Card Creator

Despite being in maintenance mode, BCC continued performing like a trooper.  People always ask “Could you afford to live on it only?” and the answer is “Yes, but barely, and it would require a lifestyle adjustment, mostly in the don’t-fly-across-the-Pacific-so-often department.”  BCC did not meet the numeric goals that I had for the year.

Stats:

Sales: 1,539 (up 6% from last year’s 1,451)

Refunds: 14 (down from 22 last year, to .9% of sales from 1.5%)

Sales Net Of Refunds: $45,479.93 (up 5% from $43,398.55)

Expenses: $22,560.00 (up from $18,287.93, but largely just due to an accounting issue — I can’t split costs in my homegrown bookkeeping software, so the ~$3,000 I paid for servers for AR is hiding in that number)

Profits: $22,919.93 (see above accounting issue, essentially flat from last year’s $25,904.66)

Wage per hour: Let’s see, ~15 hours of programming, 20 minutes a week on customer support…  about $700 an hour.  Not too bad.

 

Web Stats:

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

Visits: 821k (up from 777k)

Unique visitors: 670k (up from 655k)

Page views: 2.9 million (up from 2.7 million)

Traffic sources of note: Google (46%), AdWords (18%), Binghoo (13%)

Trial signups for online version: 82,000 (up from 72,000)

Approximate online trial to purchase conversion rate: 1.8%

 

Narrative Version:

Aside from kicking up AdWords spend modestly (to no good effect) and running a few A/B tests, nothing really substantial happened with Bingo Card Creator this year.  I lost probably $1,000 to $2,000 of sales when the site crashed right during the middle of the Halloween rush for ~9 hours while I was on an airplane.  That was a little disappointing, but while it broke my candy budget it won’t exactly put me in the poorhouse.

Projections that BCC would continue to grow despite not being actively worked on turned out to be totally wrong.  I forecast 50% growth, reasoning “Hey, most of the systems work pretty much without my intervention, so I think the overall growth of the Internet plus a few A/B test means, oh, 50% or so.”  It mostly tread water.  I’m not hugely disappointed.

 

What Went Right:

  • Not having to work hardly at all for it.
  • Aside from the Halloween crash, the system was largely stable for the year.  I think I got woken up by the automated alarm maybe once.
  • SEO, AdWords, email marketing, and the usual scalable marketing stuff continued to be my bread and butter even when I was too lazy to actually cut and butter bread.

What Didn’t Work So Well:

  • Crashing on the third busiest day of the year, in such a way that it depresses my AdWords campaigns for the first and second busiest days of the year.
  • I integrated Stripe and expected a huge lift in conversions for going from Paypal to a simple CC-based payment system.  I tested this extensively in A/B tests.  I love everything about the Stripe system, but I have no evidence for “Stripe is better than Paypal/Google Checkout”, “Stripe/Paypal/Google Checkout is better than Paypal / Google Checkout”, etc etc.  That said, it might be something as simple as my buttons being ugly.  I’ll probably take a whack at it in the future, or better yet, have my designer take a whack at it.

Consulting

I did a few weeks of consulting this year, for several different clients.  Mostly, I do my engineering / marketing shtick for software companies, although some of my clients have been a wee bit farther afield.  I wrote up a fairly typical engagement with Fog Creek.  That one was a mutual success and we’ll continue to work together in the future.  (To the best of my knowledge, all of my consulting clients are happy with my work.)

One thing I’m going to do differently in the future is to work for less clients.  Don’t get me wrong: I love all my clients.  I was privileged to work with them.  However, it takes approximately X units of work to set up an engagement with a previous satisfied customer, 5X units of work to get a new prospect to the go/don’t-go decision on a new engagement, and I generally have to get three to four prospects to that point to actually wind up with a signed contract.  As my buddy Thomas at Matasano says, “That is life in the big leagues.”  However, since I’m not in a position where 100% utilization is a huge overriding goal of mine, I don’t need to keep the new prospect pipeline totally full… so I’m probably going to cut back on it quite a bit in 2012.  I’ll continue doing follow-up engagements for established clients where it makes mutual sense to do so, and I’m still of course available for interesting projects, but I’m not going to be doing six-week fly-across-America-four-times tours to drum up new business.

The following numbers are approximations only.  NDAs and having the sense God gave a tadpole constrain me from revealing my “going rate.”

Consulting sales: $55,000

Consulting expenses: $13,000  (mostly hotels and airfare for prospecting, which I pay for out of pocket.)

What Went Right:

  • Client selection.  I was, again, privileged to work for people who have interesting businesses, problems that I could make substantial contributions on, and the willingness and ability to pay all invoices in a timely fashion.
  • Raising rates.  My first guesstimate at my rate, back in 2010, was $X.  It turns out that I could do just about as much work as I wanted regardless of whether I charged $X, $2X, or $5X.  As a result, I typically quote fairly high rates and mostly stick with them, unless there is another reason I really, really want an engagement to happen.

What Didn’t Work So Well:

  • Disorganization.  At one point I was juggling something like five simultaneous proposals out while preparing for three conferences, two engagements, and six weeks of travel.  It got so bad that I showed up at a city once and checked at the airport for where I was staying, quickly seeing that I mistimed a conference by three days and thus had no hotel booked, booking a hotel from the taxi, and then arriving at the hotel to recheck my schedule and discover that I had used the previous year’s schedule and was actually simultaneously at a different hotel across Brooklyn.  (Shoutout to the Brooklyn Beta guys for saving me from my own stupidity that week.)  There were multiple points in the year where I found myself wishing for either a boss or a secretary or somebody to just say “Show up to X on Monday and Do Stuff and all the stuff that is not Stuff will be taken care of.”  My occasional slipups in dealing with the demands of a growing business caused me to drop balls in ways that were sometimes client-visible, too.  This is a major part of the motivation for cutting back next year.  (There is Plan B, of course: hire folks to do either the execution or the admin and take whichever part they’re not doing, but I don’t think I’m moving in that direction.)
  • Too much work!  Largely due to overhead and travel, plus the outsize distraction generated by the same, consulting munched a heck of a lot more time than I thought it was going to.  I wanted to have a solid eight months of the year to work on AR.  I think I probably got maybe two.

 

Appointment Reminder

I launched Appointment Reminder last December, with the goal of having approximately 200 customers and $10k in monthly recurring revenue by now.  I had planned on focusing for most of 2011 on marketing and selling it to more businesses.  That largely didn’t happen, but since I got the fundamentals of my SEO strategy in place (while largely ignoring the modestly more advanced content creation / etc that runs BCC and that I usually help clients with), the business grew despite my best efforts at totally neglecting it to focus on consulting and not getting deported.

AR has been hanging around at a crossroads for a while now.  There are two very different trajectories it could go down.  In one, I grow it organically, and it grows into a modestly profitable software business which will provide handsomely for my family and (in the fairly near future) employees.  In two, I take outside investment, and attempt to grow as quickly as possible to $N million a year in revenue, at which point options would include either a) selling to one of the larger players in the small business software space or b) continued operations at scale with a focus on growth.  Luckily, I have  the luxury of waiting on making that decision: my runway is infinite, the market opportunity is only getting bigger, and the perceived value of my involvement with a startup among investors does not appear to be depreciating.

This is one of the reasons I can’t be as open as I would like to be about the current status of the business.  BCC has essentially no secrets, and would not really benefit from having them, as — aside from elementary school English teachers — there is nobody out there who has something I want for BCC.  However, if I hypothetically wanted to take investment, then accredited investors suddenly have something I want very much and having secrets about AR gives me something with which to trade to get it.  (It is similar to not putting prices on an Enterprise Software website.  You can trivially get them, but the price of getting them is giving a salesman permission to give you the spiel.  Similarly, folks who ask about AR’s numbers these days are generally asking in the hopes that they eventually receive a phone call asking them for a check.)

The other reason I can’t talk about AR numbers so much is that I radically underestimated how important the enterprise market would be to the business, and you can’t spell enterprise without NDA.

So: I wanted to have two hundred customers by now.  For the publicly available plans, I currently have a few dozen paying customers.  There are ways to get things from me that don’t involve paying the numbers on the Pricing page.

AR is modestly profitable — it covers all of its own costs.  I plow most of the money it generates back into the business, though, rather than taking distributions.  For example, I’m now about 95% certain that I will have significant contractor or employee involvement on it in 2012.

Revenue: Undisclosed

Expenses: Undisclosed (very modest ongoing expenses, reinvested most profits)

Profits: I took about $5k just to have a number that would minimize disbelief at the tax office.

What Worked Right:

  • Twilio.  The Twilio API and service have been unalloyed epic wins for Appointment Reminder.  I had zero disruptions in service attributable to them, their customer support has been fast, responsive, and technically savvy (even helping me debug my own code at points), and they’ve been very supportive of me.  Plus they have these awesome red track jackets that they keep sending me, which you’ve probably seen if you’ve seen a picture of me doing any talk this year.  (I actually wear them mostly because I love the color red, but apparently I wear them so often that folks at the Fog Creek office thought the Twilio logo was my logo.)
  • Sendgrid: It’s like Twilio, except for email.  Great service.  No red jackets.
  • Unit testing & staging servers.  I am gradually getting more sophisticated in my engineering practices, and have been ramping up my testing activities since starting to code AR.  It has transformed the way that I do development, for the better, and made it easier to respond to customer requests to change things while decreasing the number of problems I have caused.  Total win.  See my presentation at TwilioConf for examples of the specific ways I use it for AR.
  • Exact match domain names.  “Hey Patrick, how is it that with no marketing budget and nearly no marketing work you rank #1 for [appointment reminder]?”  I told everybody that I was buying the .org specifically because that would happen but apparently folks didn’t believe me.
  • Using the self-service site as lead generation for enterprise sales.  Fairly self explanatory.
  • The service itself: AR solves a clear customer need, and my customers are raving fans of it.  There exist many services businesses which incur hundreds in direct costs and thousands in forgone revenue for a single missed appointment.  (Think, say, an HVAC company which sends a three-man team of tradesmen out to your house to replace your heater, which is a $2,000+ job, only to discover that you aren’t home to let them in.)  One of my customers reports that just the delta in no-shows since starting to use AR would pay for his mortgage and his daughter’s college education.  Many of my other customers report that their office managers, who previously did telephone reminder calls manually, are ecstatic to not have to do them any more.  Customer retention among folks who actually use the system (as opposed to signing up, doing a test call, and forgetting about it) is virtually 100%.
  • Talking to smart people for advice: Since I’ve been going back and forth on the investment question, I talked to a lot of entrepreneurs and investors whose opinions I respect.  I really appreciate their feedback, which ranged from “Are you kidding?  You’d hate it.” to “I want to invest in you, but realistically, you would lose nothing by waiting until you are sure.” to “Best decision I ever made.” and helpfully included a lot of actionable advice on how to do things in the meanwhile such that options remain open.

What Didn’t Work So Well:

  • Catastrophic engineering failures.  I had one combination outage/catastrophic failure in February (the details are recounted in that TwilioConf presentation) and a ~3 day period of sporadically degraded operations after my move to Rackspace, which I finalized over the Thanksgiving holiday.  Both of those were my fault, for architecting the system in a way which did not gracefully handle its multiple moving parts getting out-of-sync with each other.  I’ve since done significant work on making it more stable.  (Overall reliability for the year has been excellent, but those periods were easily the most stressed I’ve ever been about any business issue.)
  • Lack of focus: I’ve been commenting above on this, so I won’t belabor the issue, but I really didn’t get to work on AR as much as I wanted.
  • Enterprise sales: I’m actually fairly decent at Enterprise Sales, and am working with someone in the industry who has a deep Rolodex among folks who would be great candidates for AR, but (partly due to the focus issue and partly due to my own comfort level) I didn’t put nearly enough effort towards it this year.  What I should honestly do is go to a conference some time, prospect like a madman, and then make following up on those leads my only job until I’ve got contracts signed.  (The prices for enterprise SaaS make this very economically viable.)

Goals For 2012

Bingo Card Creator

  • I’d be happy with continued flatness ($~30k profits on $50k sales), maybe.  It isn’t the source of growth for my business anymore.
  • Continue using it as a laboratory for weird ideas I have on conversion optimization.
  • Don’t break it during Halloween.

Consulting

  • Do less work prospecting for new clients.
  • Do more work for existing clients.
  • Modestly increase billings, if that makes sense for where my overall business is.  (If I take external investment in AR, that will likely require shuttering the consulting business.)

Appointment Reminder

  • Figure out whether I want to take investment or not.  If so, do so.
  • Convince Keith (who I do my podcast with) to work with me, if possible.  (Don’t worry, he knows this is on the agenda.  We’re best friends.)
  • See about transferring responsibility for the engineering (particularly front-end) side of things so I can focus on marketing/sales.
  • 10x current sales numbers.  That seems to be a fairly safe bet regardless of whether I shoot for a small business or for a high-growth business.  (1,000x-ing would be another story.)

A personal note: The last 3,300 words ultimately matter much, much less than the next 3: she said yes.  We’re announcing to our family on Christmas, as per our family tradition.

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Productizing Twilio Applications

This post includes video, slides, and a full-text writeup. I recommend bookmarking it if you’re on an iPhone right now.

I make extensive use of Twilio (a platform company that lets you do telephony with an API) in running Appointment Reminder, my core product focus at the moment.  (Wait around a day or two and I’ll tell you a bit about how it is doing in my annual end-of-the-year wrapup.)

Twilio has a very passionate developer community and fairly good documentation on their website, but I’ve sometimes been frustrated at it, because it teaches you the bare minimum to get phones ringing.  That is truly a wonderful thing and a necessary step to building a telephony application.  However, if you continue developing your application in the way that the Quick Start guides suggest, you will routinely run into problems regarding testing your code, maintaining it, securing it, and generally providing the best possible experience to your customers and the people they are calling.

I have a wee bit more than a year of practical experience with a Twilio application in production, so I went to TwilioConf and did a presentation about how to “productize” Twilio applications: to take them past the “cool weekend hack” stage and make them production-ready.  Twilio has graciously released videos of many of the presentations at TwilioConf, so I thought I’d write up my presentation for the benefit of folks who were not at the conference.

The Video (~30 Minutes)

Twilio Conference 2011: Patrick McKenzie – Productizing Twilio Apps from Twilio on Vimeo.

The Presentation (40 Slides)

The Writeup

 

Why I Think Twilio Will Take Over The World

(This was not actually in the presentation, because I didn’t have enough time for it, but I sincerely believe it and want to publish it somewhere.)

I think Twilio is, far and away, the most exciting technology I’ve ever worked with.  The world needs cat photos, local coupons, and mobifotosocial games, too, but it needs good telephony systems a lot more, as evidenced by companies paying billions of dollars for them.

Additionally, Twilio is the nascent, embryonic form of the first Internet that a billion people are going to have access to, because Twilio turns every phone into a smartphone.  The end-game for Zynga’s take-over-the-world vision is the human race slaved to artificial dopamine treadmills.  The endgame for Twilio’s vision is that every $2 handset in Africa is the moral equivalent of an iPhone.  I know which future I want to support.

Smartphones aren’t smart because of anything on the phones themselves, they’re smart because they speak HTTP and thus get always-on access to a universe of applications which are improving constantly.  Twilio radically reduces the amount of hardware support a phone needs to speak HTTP — it retroactively upgrades every phone in the world to do so.  After that, all you need is the application logic.  And what application logic there is — because the applications live on web servers, they have access to all the wonderful infrastructure built to run the Internet, from APIs that let you get Highly Consequential Data like e.g. weather reports or stock prices or whatever, to easy integration with systems which were never built to have a phone operating as part of them.

You can’t swing a stick in a business without hitting a problem which a phone application makes great sense for.  I filled up three pages of a notebook with them in just a week after being exposed to Twilio for the first time.  Order status checking for phone/fax/mail orders.  Integrated CRMs for phone customer service representatives.  Flight information.  Bank balances.  Server monitoring.  Appointment reminders.  Restaurant reservations.  Local search.  Loyalty programs.  Time card systems.  Retail/service employee support systems.  Shift management.  The list goes on and on and on.

Seriously, start writing Twilio apps.

What This Presentation Will Actually Cover

I’m tremendously optimistic about the futures of Twilio and the eventual futures of companies which make Twilio applications, but I’m pessimistic about your immediate future as an engineer writing a Twilio app, because it is going to be filled with pain.  You’re probably going to make some choices which will cause you and your customers intense amounts of suffering.  I’ve already done several of them, so use me as the inoculatory cowpox and avoid dying.

Crying In A Cold, Dark Room

Back in February 2011, I moved from my previous apartment to my current house.  I unwisely decided to push a trivial code change prior to boxing things up.  This trivial code change did not immediately take down the server, but did cause one component (queue worker processes) to fail some hours later.  The most immediate consequence of this was that outgoing appointment reminder phone calls / SMSes / emails failed to go out.  Since I was busy moving, I did not notice the automated messages about this failure.

When I discovered the failure (8 hours into customer-visible downtime), I panicked.  Rather than reasoning through what had happened, I reverted the code change and pushed reset on the queue worker processes.  This worked, and the queue quickly went from 2,000 pending jobs to 0 pending jobs.  I then went to bed.

At roughly 3 AM, I woke up with a vague feeling of unease about how I had handled the situation, and checked my email.  My customers (small businesses using AR to talk to their clients) had left several incensed messages about how their client had reported receiving dozens of unceasing calls on the behalf of their business, in a row, at 7:30 PM the night before (right after I had restarted the queue workers).

Here was the error: my application assumed that the queue would always be almost clear, because queue workers operate continuously.  A cron job was checking the DB every 5 minutes to see whether a particular client had been contacted about her appointment yet.  If she hadn’t, the cron job pushed another job to the queue to make the phone call / SMS / email.  When the queue came back up, each client received approximately ~100 queued events simultaneously.  These did not themselves check, at the start of the job, whether the job was still valid, because the application assumed that the cron job would only schedule valid reminder requests and not execute 100 times in between queue clearings.

This resulted in approximately 15 people receiving a total of 600 phone calls, 400 SMSes, and 200 emails, in approximately a 5 minute period of time.

There are a variety of ways I could have avoided causing this problem for my customers:

  1. Don’t make code changes prior to planned unavailability, even if they look trivial.
  2. Don’t ever leave your phone that gets emergency messages out of your pocket.
  3. Switch to idempotent queues, so that adding the same job multiple times does not result in multiple copies of the job.
  4. Add per-client rate limits, so that application logic errors don’t cause runaway contact attempts.
  5. Add failsafes for historically unprecedented levels of activity, shutting down the system until I could manually check it for correctness.

Testing Twilio Applications

Unit testing and integration testing are virtually required to produce production-quality Twilio applications, and will make it much less likely for you to create catastrophically bad bugs in production.  Unfortunately, testing Twilio applications is much harder than testing traditional CRUD web applications, because of how TWIML is different than HTML (in terms of how minor syntax errors actually cause business problems), how it is not easy to replicate telephone operation in integration testing, and because Twilio sometimes has poor separation of concerns between the MVC of a web application, the Twilio helper library, and the Twilio service itself.

Twilio testing is inherently dangerous, because non-production environments (testing, staging, development, etc) could conceivably generate actual, real-world phone calls to phone numbers which were in your database but not actually under your control.  The first and most important tip I have for Twilio testing is to make it explicitly impossible to contact anyone not on a whitelist from code when you’re not in production.  I have a quick snippet that I put in a Rails initializer which monkeypatches my Twilio library to force it to only make phone calls or SMSes to whitelisted numbers.  (I don’t suggest actually re-using this code, particularly as you may not be using Rails or the same Twilio library that I am using, but you can reuse the idea of enforcing safety in non-production environments.)

 

 

A lot of Twilio testing will, unfortunately, require manual button-pressing (or scripts which simulate button-pressing on a telephone).  This is easier to accomplish if you can expose your local development machine to the actual Internet.  There are strong security reasons why you don’t want to do this but, if you’re comfortable with doing it, LocalTunnel is a great way to actually accomplish it.

Also see the section below on Modeling Phone Calls, because it will make Twilio phone trees and call logic much more tractable to unit testing.

You Should Have A Staging Server

A staging server is just a copy of the entire production system minus the actual customers.  (You probably shouldn’t put production data on it, because staging systems are designed to break and as a result they may leak data through e.g. SQL injections.  This is an easy way to lose your DB.)  You should use firewalls and/or server rules to make the staging server inaccessible to the world (aside from Twilio and any other APIs which need to access your site for it to work), but assume you will botch this.

Staging servers are virtually mandatory for Twilio applications, because Twilio apps can fail in ways which will not be detected until they are actually accessed over the Internet.  For example, even with unit and integration testing, failing to properly deploy all audio assets (MP3 files, etc) will cause Twilio to throw hard, customer-visible errors in production.  I have automated systems which check for this now, but since that isn’t an exhaustive list of things that can go wrong in production, part of my workflow for deploying all changes on Twilio is to push them to the staging server first, and then having automated scripts exercise the core functionality of the application and ensure that it continues to work.

How To Model Phone Calls

Twilio Quick Start guides generally don’t suggest modeling phone calls explicitly, instead relying on just taking user input and doing if/then or switch statements on it.  This is ineffective for non-trivial use cases, because as the application logic gets more complicated, it will tend to accumulate lots of technical debt, be hard to visually verify for correctness, and be extremely difficult to automatically test.  Instead, you should model Twilio calls as state machines.  I am a big fan of state_machine in the Ruby world.

I’ll skip the CS201 description of what a state machine actually is.  If you didn’t take that course, Google is your friend.

You should model calls such that they start in a predictable state and user input moves the call between states, causing side effects of a) running any business logic required and b) outputting Twiml to Twilio, to continue driving the call.  This lets you replace case statements with a lot of parallel structure with well-defined transition tables within the call models.  Those models are then trivial to unit test.  Additionally, adopting coding conventions such as “the Twiml to be executed at a given state is always state_name.xml and any audio assets go in /foo/bar/state_name/*.mp3 “allows you to write trivial code which will test for their presence, which will save you from having to manually go through the entire phone tree every time on the staging server to verify that refactoring didn’t break anything.

Additionally, state machines are much easier to reason over than masses of spaghetti code which case statements tend to produce.  For example, consider the following code, which attempts to implement the phone prompt “Press 1 to confirm your appointment, press 2 to cancel your appointment, press 3 to ask for us to contact you about your appointment.”  Spot the bug.

There are actually over six bugs in that code, above the trivial ones you probably saw with numbers not lining up to action names:

  • The Twilio API will pass this code params[:Digits] not params[:digits], which will cause an error that won’t be caught until you physically pick up the phone.
  • The comparisons of params[:digits] with integers will fail, because it includes string representations of numbers.
  • There are several mistakes in mapping numbers to actions.
  • One of the action names is spelled improperly.

These are very easy to miss because our brains get lulled into a false sense of security by parallel structure.  Instead, the model should be taking care  of that mapping between user input and state transitions.  This would radically simplify the code and make the controller virtually failure-free, while letting the model exhaustively unit-test possible user input, expected transitions, and business logic side effects.

State machines might seem like an unnecessary complication when you only have three branches in your code, but production Twilio applications can get very, very complicated.  Here is a state diagram from Appointment Reminder.  You do not want to have to test these transitions manually!

Dealing With Answering Machines

Dealing with the case where the phone calls is answered by an answering machine or voicemail system has been the hardest application design problem for me in doing outgoing phone calls in Twilio.  The documentation suggests using an IfMachine feature, which will cause Twilio to listen to a few seconds of the phone call prior to executing your code.  They do some opaque AI magic to determine whether the entity speaking (or not speaking) in that interval is a machine or not, and tell your application whether it is talking to a machine or a human.  In my experience, this has error rates in the 20% region, and many customers intensely dislike the gap of dead air at the start of their phone calls.  Also, if the heuristic improperly detects the beep, your message will start playing early, causing the recording to be cut off in the middle.

There are several ways you could attempt to deal with this:

  • Ignore the issue and treat both machines and humans the same.  This will produce the optimal result for humans, but your system will be virtually unusable when it gets a machine.  (This happens very frequently in my use case.)
  • Force a keypress (“1″) prior to playing your message, then give all users the same message.  This will force most machines to start recording immediately, stopping the cut-off-in-the-middle problem but annoying some clients.
  • Play instructions such as “This is an automated message from $COMPANY.  To hear it, press 1.”  Assume that anyone who doesn’t press 1 in 5 seconds is a machine and play the machine message.  If they interact with the call, play the human message.  This is my preferred solution (although not actually implemented in AR publicly yet, because customers don’t really grok this issue until it bites them personally).

There is one particular problem with recording messages on answering machines: if you give a user instructions such as “Press 1 to confirm your message” and they follow that instruction when listening to their voicemail, that keypress will not be caught by your application, it will be caught by their voicemail system, with unpredictable results (such as deleting the message) and an absolute certainty of not doing what your keypress would normally do.  Users do not understand why this happens.  They expect your instructions to them to work.

Securing Twilio Applications

Twilio applications have a superset of the security issues of web applications.  In addition to the usual SQL injections / XSS issues / etc, use of the telephone has unique security issues associated with it.

One issue is that confidential information is only confidential until you repeat it into a telephone.  Even assuming that the phone call isn’t intercepted (which is, ahem, problematic), there are very common user errors and use cases which will cause that information to be disclosed to third parties.  For example:

  • User error in inputting telephone numbers causes the message to go to the wrong party.
  • The message goes to corporate voicemail, where it will routinely be accessible to third parties.
  • The message is played over a speakerphone / cell phone / etc within earshot of third parties.
  • The message is saved on a physical device which can predictably leave the physical control of authorized parties.
  • etc, etc

Don’t ever put confidential information into an outgoing message, unless you have an automated way to authenticate who you are speaking with.

For incoming phone calls, Caller ID is not sufficient authentication.  It can be trivially spoofed, indeed, your phone company will probably sell you a product whose sole aim is to spoof Caller ID.  Instead, you should use a circumstance where the user is already authenticated and authorized, such as a face-to-face meeting or using a username / password pair in a web application, and then give them one-time PINs to do whatever they need to do on your system.  Alternatively, you can implement an entire password system for your incoming phone calls, but users tend to hate them, so I try to keep to the one-time PIN metaphor.  (When a user does something on the AR site which requires calling the system, such as setting up a recording for a reminder, I tell them “Call 555-555-5555 and put in your Task Code 1234″, which (since it is time-sensitive) both helps me look up what they were doing on a multi-user system and also conclusively demonstrates that they were able to read a web page which already verified their identity.

Not in the presentation because the slide got deleted for some reason: the 4chan rule.  Even if your free trial is discovered by 4chan, the world should not become a darker, more evil place.  There exists tremendous possibilities for abuse of free-form input/output to people’s telephones.  I gate access to my trial by requiring a valid credit card, and demonstration calls and the like have strict rate limits which prevent them from being used to spam someone’s phone to death.  (I should also make it impossible to send demo calls outside of standard work hours.  This is easy to say but a little tricky to implement across multiple time zones while still encouraging legitimate use of demo calls, which is why I haven’t done it yet.)

Twilio Scales Impressively

Twilio and modern web technologies scale impressively well by the standards of traditional businesses.  However, you should probably continue to rate-limit your systems, even though you could theoretically do substantially more volume.  For example, many customers who ask about scaling issues do not sufficiently understand that your application scales several orders of magnitude better than their business processes.  For example, a prospective client asked if my system could handle 10,000 phone calls a month.  I told them that I could handle that in under an hour.  They were quite excited about that, but as we continued to speak about their needs, it developed that actually doing that would have crushed their business.  They would have made 10,000 phone calls in an hour, received over 1,000 callbacks, and their two full-time telephone operators would have been overwhelmed by incoming demand for their time.

Grab Bag of Random Advice

  • Never contact Twilio, or any external API, inside the HTTP request/response cycle.  Doing so imposes an unacceptable delay in performance and slaves your reliability to that of the worst performing API you use.  (Twilio has never had user-visible downtime, but some APIs I rely on have.) Queue the request and tell the browser that you’ve done so.  You can drizzle AJAX magic on your website to make this feel responsive for your users.
  • The Twilio Say verb will have a robot read your message.  This is adequate for development, but for production, people prefer listening to people.  Fiverr.com is great for finding voice actresses for $5.
  • You can’t record too much information about Twilio requests, responses, and errors.  I stuff everything in Redis these days.  I strongly wish I had started doing this earlier, rather than writing “An error happened” to a log file and being unable to determine exactly what the error was or easily figured out whose account it actually affected.
  • When in doubt, don’t make that phone call.  Design your system to fail closed.  This is a continuous discipline, but it will drastically cut down on catastrophic problems.

Wrapup

That’s it for the presentation contents.  I remain very interested in Twilio apps, and am happy to talk to you about them whenever. My contact details are trivially discoverable.

I’m going to attempt to write a more comprehensive guide to developing Twilio applications, eventually. We’ll see what form that takes — I would really like to provide people an (even) easier way to get started, but at the same time I can’t justify dropping two months of my schedule to write a traditional book on it.

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