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Kalzumeus Podcast Episode 6: Teaching As Marketing

Happily, there are many ways to productize your relationships with customers or your expertise as a consultant.

[Patrick notes: The transcript below has my commentary inserted like this, as usual.]

What you’ll learn in this podcast:

  • Why vegetarians do not give great advice on pricing hotdogs, and Hacker News comments about the inadviability of selling information very rarely come from people with actual budget to buy information
  • Why having multiple packaging options (for example, at an X / 2X / 5X ratio) increases total revenue from products
  • Why you don’t have to be “Internet famous” to build an audience via teaching, and perhaps use that to sell things down the road

If You Want To Listen To It

MP3 Download (~90 minutes, ~82MB) : Right-click here and click Save As.

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

Transcript: Teaching As Marketing

Patrick McKenzie:  Hi to everybody. This is Patrick McKenzie, perhaps better known as better known as Patio11 on the Internets. Welcome to the, I think, seventh edition of the Kalzumeus podcast. [Patrick notes: 6th!] I’m joined here by special guest Nathan Barry, author of “Authority,” founder of ConvertKit, and a guy who has a few other things in his expanding product empire.

[Patrick notes: If you sell software, information, or consulting services, take a look at ConvertKit.  I started using it recently for one of my businesses.  It bakes a lot of acquired smarts into an email marketing workflow tool.]

Nathan Barry:  Thanks for having me.

Patrick:  Thanks very much for being here. I think we’re probably going to be talking about info products today, primarily. Let’s ask the obvious question first. Do you like the term “info product”?

Nathan:  I think it’s a little degrading. I tend to just refer them as courses or books. “Info product” always brings up the scammy Internet marketer.

Patrick:  Right. The whole “make money online” niche.

Nathan:  Right, exactly. I just try to write things and teach things that provide value. “Info product” doesn’t demonstrate that very well.

Patrick:  That’s something I totally agree with. I try to call mine “productized consulting” because the book was like a consulting engagement except delivered with less of my hours of unique attention attached to each delivery. I think you were also a consultant before you got into being a publisher, right? How did the arc of that transition go for you?

Nathan:  I did some freelancing in college, and then after I left college, I did a year freelancing full time. That worked pretty well for me, but then I went on an extended five or six week international trip. Didn’t do any work. Came back. It was the beginning of 2009, and there was a recession going on in the US, so nobody wanted to work with me then. I ended up taking a job leading the design team at a local startup, and I worked there for three years. That was a really great experience. Learned a lot of things. Learned a lot of things not to do.

I ended up building a few little iPhone apps on the side. Got those to making a few thousand dollars a month a month in revenue, and then used that to quit my job and go back to what I would call then “consulting.” Where before I referred to myself as a freelancer, after that point I referred to myself as a consultant. I think I brought a lot more value to each of my engagements, having more experience.

After leaving that job, I launched my first book, which was “The App Design Handbook.” That’s when everything changed for me. I went from these iPhone apps that were making anywhere from $1,000 maybe up to $4,000 a month, but really uneven revenue. A lot of it was chance. There wasn’t a great marketing strategy there or anything but then with the first book, things started to make sense as far as marketing and product launches, and I was able to make about $12,500 off of the book sales on the first day, and I never looked back. I actually never took a consulting project after that, because, as you call it, productized consulting pays really, really well.

Patrick:  It kind of cannibalizes the business too. After you’re capable of waving the magic wand and getting another one out the door, there’s increasingly less and less impetus to go out and grab another client engagement.

Nathan:  Exactly.

Patrick:  Keith and I just…the last episode of the podcast was on how this could potentially be a way for people to get out of consulting, which since we’ve already done that topic to death, we’re just going to do more deep dives into how to actually execute on it, rather than saying, “Yeah, it would be a great idea to get away from crazy client issues, and chasing invoices, and yadda yadda.” Can you just refresh my memory, when did you launch “Designing Web Applications,” which was your first book basically?

Nathan:  The first book was “The App Design Handbook,” which was focused on iOS applications.

Patrick:  Oh, that’s right. Sorry. I’m getting the chronology wrong.

Nathan:  That one came out September 4th, 2012, so as we’re recording this, it’s been out for about nine months or so, and then the second book was “Designing Web Applications,” and that came out December 12, 2012, so just about 90 days later.

Patrick:  That is pretty impressive. I kind of got the impression from just following your stuff on the Internet that you have been doing this for many, many years, and that I have to break myself to actually do the math. It’s like, “Wait, that’s 10 months.” Granted, you have a career before that, and you’re able to leverage what you learned from that, but the public portion of the career, or “public,” the so-called “Internet celebrity” portion of the career is just the last 10 months.

You Don’t Have To Be “Internet Famous” To Cultivate An Audience

Nathan:  Yep. That’s right. There was one key thing or habit that I formed that made that really, really easy to do, and that came from Chris Guillebeau. He writes a bunch of books and has a popular blog and stuff, but he kept telling me the idea of writing 1,000 words a day, basically the idea of making slow, consistent progress on whatever you’re trying to do. I built up a habit of writing 1,000 words a day, and that’s how I actually finished my first book. I tried to write a book in the past, and I’d never made it past the first three or four pages, so by working on it consistently every single day, I was actually able to finish it pretty quickly, and I kept track of it in a little iPhone app how many days in a row, and 1,000 words a day…

What happened is I launched “The App Design Handbook” in September, and I had a streak of 85 days in a row at that point, or 70 days in a row, or something, so then the next day after launch, my phone popped up and said, “Are you going to write 1,000 words today?” I went, “Well, I have 85 days in a row, so I don’t want to break that chain, so yeah, I’m going to write 1,000 words, but what am I going to write it about?”

I thought, “You know, I really like…I talked about designing iPhone applications, but I’ve spent a ton of time designing web applications as well, so I should write about that,” and basically I just rolled right into the next book, because I had this habit of writing 1,000 words a day. Anyway, it’s just continued, and it’s turned into another book after that, and I think I’m about a month away from hitting a full year of writing 1,000 words a day.

Patrick:  Wow. Congratulations.

Nathan:  Thanks.

Patrick:  I really think that the determination and stick‑with‑it‑ness there is valuable to a lot of people. My business was no great shakes back in the day, and the reason that it’s something larger than no great shakes now is just not stopping, even when I was just very, very part‑time in it, and couldn’t muster up for more than up to five hours a week, I was trying to grind out one A/B test every week, rain or shine. I don’t think I hit my streak numbers nearly as often as you did, but that was definitely one of the factors that kept it going in the right trajectory prior to actually quitting the day job, having more time to work on it.

Let’s see. Something that I often hear from people who I advise, “Well, if you don’t love the day job or don’t love consulting, maybe you could try this productized consulting thing,” that, “Well, yeah, maybe that works for ‘Internet famous’ people like you, Patrick, but I do not have a platform, or a reputation, or 7,000 Twitter followers, yadda yadda yadda.” In your experience, do you need to be “Internet famous” to actually make this work?

Nathan:  No. Not at all. It certainly helps in some areas, but I was not Internet famous just before I launched my first book. People hadn’t really heard of me. I didn’t have credibility and expertise. I designed a lot of software, but nothing…I didn’t design the Facebook mobile app, or anything for major startups, or things like that. It’s a fascinating topic of how you can gain credibility and authority, and one that I’ve worked on quite a bit, but just by teaching, you gain this perceived expertise. One story that I like to tell for me personally is, back in 2006, I was doing web design, standard marketing websites, so I spent a lot of time getting pretty good with CSS, fixing cross‑browser bugs, coding up everything.

I came across this site when it first launched called css‑tricks.com, and it was by Chris Coyier, and I remember looking at his site and going…I read a couple articles and I went, “Oh, I know that. He’s not much of an expert because I already knew that,” and I gave myself a little arrogant pat on the back or whatever.

He kept coming out with more articles, and I kept seeing that I already knew that, so we were basically at the same level and we were learning at the same pace. Over some time, other web design friends would ask me a question, and I would…instead of answering it, I would think, “Oh, Chris already wrote about this, so I’ll forward on his article,” because it was pretty good.

This continued on. Finally, Chris launched a Kickstarter campaign years later, so he’s been helping people out and writing articles about CSS for years. He launches a Kickstarter campaign saying, “I’m going to redesign css‑tricks.com, and I want to be able to raise $3,500 bucks so that I can focus on it, on doing a great redesign for a month, and I don’t have to worry about clients, or jobs, or anything like that.

Basically telling his audience, “Will you help me out so I can do this? As a reward, I will record all these screencasts of the process and tutorials, and everybody who backs the project will get access to that.”

I don’t have the exact number in front of me, but it was something like $85,000 that he raised out of his $3,500 goal, and that made me really sit up and realize there’s something else going on here. It’s not about skill, because Chris and I were at the same level. We started at the same point.

Because he was teaching, I think he got better than I did, and I definitely learned some stuff from him over the years, but he wasn’t that much of an expert than I was skill‑wise, but I did not have the ability to flip a switch and come up with $85,000 in effectively product sales, in whatever, 20 days, in what his Kickstarter campaign was.

That made me realize that the difference between he and I is that we both got better at the same level, but I kept that knowledge to myself, whereas he shared it with everybody. He was teaching, and that gave him authority, and that gave him a following. That’s the moment that made me finally sit up and go, “I need to be teaching.”

Patrick:  I totally agree with you there. I think teaching gives you both breadth and depth, breadth in that the size of the community and the size of your following increases, and depth in that you, just by the nature of teaching things, tend to learn them better than if you did not have to explain them to better. One of the reasons I originally started my blog back in the day is that I was worried that if I just had to bat an idea around in my head, that I could deceive myself very easily, whereas actually forcing the discipline of seeing that idea in print would mean that I would have to confront the internal logic of it more.

It turns out that when you are routinely confronting the internal logic of your ideas, of the marketing direction for your software product or whatnot, and seeing that, “OK, I posted in January about this being the plan. It is now July. Let’s see if the plan, and the actions subsequent to the plan, and the results actually match up together,” and then course correcting based on that is much, much more effective than just doing natural human thing to retrospectively construct a narrative that supports what you’ve been doing all along.

Yeah, big fan of teaching, obviously for…it’s a good thing to do for one’s self, clearly. I think it’s also a net benefit for the community and whatnot.

I don’t swing quite as hippie as some of the community do, but I think that open source and the cross‑pollination of ideas that happens with the Internet, with the communities that have started on the Internet and moved offline, like the Business of Software forum community used to be just a message board on Joel Spolsky’s site back in the day, and then a bunch of us know each other in person now.

The Amy Hoy crowd of friends [Patrick notes: I'm an honorary member] is growing and meeting each other offline these days. Hacker News meetups are moving offline. The ideas are getting mixed in these groups, and then between groups and whatnot, in a way that combines them to something that’s larger than some of the parts, I think.

Nathan:  One thing that I want to add on that, because we talked at a really high level about teaching is important, but when it comes to actually launching a product and building that credibility, I would say the first thing that’s really, really important is to say, “I’m writing a book. I’m putting out this course,” and put up a landing page for it, and just by doing that, as a very first step, you gain some credibility. For me, I was a random designer who occasionally blogged about useless stuff, but when I made the transition to, “I’m writing a book about designing iPhone applications,” I think there were a bunch of people that sat up a little bit and looked, and just because I put up that landing page and said I was writing a book, that gave me the start of some credibility.

Patrick:  I totally agree with that, and that people’s framing for value propositions are very important. The same way that people frame a newspaper article is ipso facto worth more than a blog post, someone who’s a published author, or soon to be a published author, on a topic is ipso facto more authoritative, more credible, better informed with regards to that topic than somebody who isn’t. Just putting that “author” word on your sleeve is a better positioning for yourself than having other, less useful words on your sleeve, like, say, “blogger.”

Nathan:  You do need to follow up the landing page with a statement of credibility, with something that actually demonstrates expertise, like some really in‑depth blog posts on the topic, sample chapters from your book, things like that. You do need to actually be good at it and show the world.

Patrick:  It’s kind of like all marketing. There’s the up‑front promise, and then you have to actually deliver at some point, the promises your marketing is making, because the Internet has a short temper and a long memory. You only get one reputation these days, not to say that your first product is going to be the end‑all, be‑all of every book ever published in the history of man, but you can’t put things which are terrible attached to your name, because you only get one of them.

That conflicts with another piece of advice that I often give, which is, “Ship things even if they’re crappy.” How can I resolve that contradiction? Definitely do ship things even if you think they’re crappy, because I think other people will think they are substantially less crappy than you.

[Patrick notes:  This might not have come out entirely correctly during the audio.  What I mean is that you shouldn't let excessive obsession with making the product perfect get in the way of delivering V1.0 to paying customers.  One of the worst pathologies of software entrepreneurs is being perpetually 6 months away from the minimum viable release.  It is much much better, both for you and for your customers, to ship something in a month and then spend 5 months polishing it in response to real user feedback then either spending 6 months in the BatCave then shipping or, worse, spending 6 months in the BatCave then not shipping.]

I think as creators, we often have kind of that Dunning‑something‑or‑other effect going on, where we see all the warts. We don’t have the view from outside our own head of how useful this is to someone who is just getting started, or has never seen curated resources on this topic, or has not been living this for the last 90 days of 1,000 words a day like we have.

Nathan:  I think when it comes to the reputation, if you’re trying hard to put out something that’s good, people will give you a lot of credit for it, and I think if you’re putting out something that’s scammy, or charging a lot for it when there’s not the value there, that’s where it’s going to hurt your reputation, but if you’re earnestly trying, and shipping things often, and trying to deliver a lot of value and help people, then putting out an early version of your product is not going to hurt your reputation.

Information Wants To Be Free Hates Being Anthropomorphized

Patrick:  That’s something that prevented me from publishing for the longest time, was just being scared of being seen as taking advantage of people. Partly was due to the natural engineer distrust of charging money for anything, and partly something that I would not have said that I agreed in, but a little voice inside of me was agreeing with anyway, was, “Information is free on the Internet. How could you possibly charge money for it?” Which, being older and wiser now, I’ve learned that, especially when you’re talking in a B2B context, this: Anyone who has employees, and accordingly must pay salaries every two weeks regardless of what they are doing, is literally incapable of finding things for free on the Internet.

Because if you tell one of your lead engineers to spend two weeks researching a topic, and you pay them $10,000, regardless of whether the blog post they were reading were “free,” creates a lot of value to a curated topic, and gives them resources of a known quality and an easy digestible format.

Rather than having them have to spelunk and do the curation step themselves, or do the, “Before I actually get to doing the work that I’m supposed to doing, I’m designing this web application or writing this email campaign, I have to first design a curriculum to teach myself that, and I will take my own curriculum, warts and all, and then I will do the implementation, and then we will actually get back to selling the thing that makes this business run.”

Nathan:  That’s where if you’re teaching a skill that other people use to make money, and you’re teaching it to people who have money, so that can be programming, design, marketing, anything, if it meets those two criteria, then people will happily pay to save even a little bit of time, because they’re businesses and they’re looking at profit, and loss, and those factors. That’s how it’s easy to justify a price of $250, or $500, or more if you can demonstrate that it delivers far more value than that and saves far more time.

Patrick:  Yeah, definitely. And there will be people, when you announce, that say, “Oh, you jumped the shark. You sold out. Nobody will ever buy this. Yadda, yadda, yadda.” Everything I’ve ever done, from Bingo Card Creator on down, I had at least a few people saying, “Nobody’s going to buy this.” At some point, I’ve just come to accept it. There exists that psychograph of people who just are fundamentally unhappy with the notion that products sell. That they’re empirically not that good at predicting that because all products ever have sold. So, I would just discount that opinion when people say it to you.

Nathan:  I’m going to, I think, misquote you when I say this but you mentioned it in a Hacker News comment on…I think it was for my book “Authority,” when it came out. There was somebody complaining about pricing and other things about it. Your comment was something along the lines of, “This is like the vegetarians complaining about the prices from the hot dog vendors.” Basically, these aren’t the people who are buying your product or who have any interest in your product and so their opinion is not really relevant.

Patrick:  I released a video course about life cycle emails last October, I think. It was largely focused for people who had businesses at a certain amount of scale. My typical consulting client was, at the time, 10 to 50 million dollars a year in sales. When I had an idea of the person I was writing for, it was really someone who had the official title, “Chief Marketing Officer,” or “Head of Product,” or something like that at a business that was at or near the scale of my consulting clients. Maybe at a million dollars a year of sales or at the low end a couple hundred thousand dollars a year of sales.

And then, there being many folks in the Internet who do not have several hundred thousand dollars a year of sales, people were, in the context of, “I am a $30 an hour freelancer” saying “$500 seems like a whole lot of money.” Whereas it just doesn’t, when you’re selling software licenses and they cost $20,000 a pop.

It was hilarious feedback I was getting because I was getting the, “Oh, it’s crazy to charge money for this free blog post on the Internet. Yadda, yadda, yadda.” And the feedback I was getting from some of the potential customers where it was like, “We are literally incapable of tracking a number this low on our systems. The expected value of a single lead exceeds the price of this course by several times. That is making it difficult for me to convince my boss to buy it.

Somebody literally asked whether they could just write an extra zero on the invoice.   That is two requirements: A, get an invoice but B, write an extra zero on it to convince the boss that it was worth the money.  Amazing, right?

Have Multiple Packages At Different Prices

Patrick: That segues neatly into the next question, packaging. One thing that’s worked out very well for you is having…I don’t know what the word is. One project, one overarching brand for a product but having multiple ways to deliver that product or multiple packages at different price points. Can you walk us through how you got started with that and how you think about packaging?

Nathan:  Yeah. Really quickly, the idea is…Or how it’s come out in practice is I have a book. We’ll take “Designing Web Applications” as an example. The book, to me, is the core product. It’s going to be…Not that this matters, but 150 pages of content. That’s where I put the majority of my effort. But then, there are other things, other useful things that could go with that. I’ll price just that book at $39. But then I think, “What other things could I include that will save someone time?” Because there are people who value their time far more than they…They value it at a higher rate. And so, I want to think, “What can I include that will save them time and they’d be willing to part with a little bit more money for?”

And so, that’s things like much more specific video tutorials on specific actions or Photoshop templates, code samples, all those kind of details. I also think about what would provide additional value, just as an educational resource. It may not save time but it’s more things. And my favorite there to do is interviews. I don’t like interviews as the product themselves. I like them as a value add to an existing product.

And so, I’ll get a bunch of different, fantastic people to sit down for half an hour or an hour and I’ll interview them about the topic. So for “Designing Web Applications,” I interviewed Ryan Singer and Jason Fried from 37signals who are fantastic product designers. I interviewed Trent Walton who had just redesigned Microsoft.com. And just was able to gain a lot of insight into their workflow and process, but also bundle that up and include it with a top tier package of “Designing Web Applications.”

And so, what I ended up with taking the book and all that other content and dividing it into three packages priced at $39 for just the book and I think there was a few other little things in there with it. And then $99 for the book plus some of the video tutorials and some of the interviews. And then everything, all the interviews, more tutorials, more code samples at a price like…I went with $249.

What that does is it lets your customers segment themselves. The freelancer who makes $30 or $40 an hour can buy just the book, get a ton of value out of it, hopefully implement all the stuff, and be a really happy customer. Maybe the design consultant who charges a lot more, values his time a lot more, can go with the middle package. Get more stuff out of it, $99 might not be that much to spend for him and the extra value is definitely worth it to him.

But then that $249 package is fantastic for real businesses because to them, once they’re holding that company credit card in their hand, there’s really no difference between $39 and $249, so long as it’s below that magic threshold of, “I have to ask my boss for approval.”

Patrick:  Which, FYI for anybody who hasn’t heard me say this 100 times, that magic threshold is generally under $500 or $1,000.

Nathan:  Yeah, exactly. If you’ve made a decision to buy this product and it’s just a matter of which version to buy, at that point…And I know this from buying stuff for my design team at the last company I worked for. I would look at it and go, “Is this higher package, a more expensive product, going to save me a couple hours worth of time?” I would do some quick math on it. “How much effort and time will this save my team?” If it was more than a couple hours, then it was totally worth it. There was one time I was buying a WordPress plug‑in that I needed for the marketing site. I only needed a single site license, but I was thinking about it and going, “Well, at some point in the future I might need a multisite license. I could see…There’s a decent chance of that.”

And so, I bought the multisite license for the company well in advance, just to make sure that I wouldn’t have to come back to the site and remember my log in information and sign back in and make another purchase because I knew what my time was worth to the company. I knew what they paid me. And I knew that just me coming back and making a second purchase was more expensive to the company than me upgrading to the multisite license right then.

Patrick:  It’s one of those mindspace shifts where people…Both of us come from modest means. We were talking about this prior to the podcast. You get the feeling ingrained in you when you are just doing commerce for yourself that if you’re from modest means and have a very frugal mindset that a $12 purchase versus a $20 purchase is something you think about and consider and weigh the pros and cons carefully because that’s eight dollars that you could save, right? Where in a corporate situation basically nothing under the cost of one week of a fully loaded employee’s time is a meaningful amount to the company. My business these days is running at a fairly high clip of revenue and expenses. I wrote a $10,000 check on less than two hours of thought in the recent past.

Given that as my pricing anchor of how quickly I can spend money when it is justified by value to the business, $49 and $249 and $749 all round to zero for me, basically. That’s not bragging. Bingo card greeter and all this kind of a blip on the scales of a “real business.”

If you haven’t had a P and L responsibility at a company yet, it’s kind of difficult to make the shift and figure out ultimately how little pricing matters from your perspective. It makes a great difference, a great, huge difference from the perspective of the person selling it because being smart about pricing and smart about packaging can really juice your returns from doing the same amount of work.

Nathan:  Yeah, and I’ll share some numbers on that in just a second. My favorite story related to expenses and business and that kind of thing is a friend of my dad’s growing up was an engineer at a very large printer and computer manufacturing company. He had a story of in their R and D lab, they had this series of drawers, a whole bunch of different nuts and bolts and all these little parts that were all separated out into 30 different drawers and labeled perfectly and all that. He was walking along and he bumped into it and knocked the whole thing on the floor and made this disaster. Everything’s mixing together of all these parts. And so, another engineer jumps up to help separate it all out and so he fixes it. He just grabs a broom and a dustpan and sweeps it all up and throws the whole thing away. The engineer’s like, “But those parts are worth money.”

He’s like, “How much are they really worth? $15? And we’re going to spend an hour’s worth of time, both of us, separating this out and cost the company $300 or more? Not going to happen. Throw it away and move on.” That just shows how, when you have a sensible approach to pricing, it makes a big difference.

But referring to how it makes a difference on the seller’s end, “Designing Web Applications” made $26,500 in the first 24 hours after it came out. Had I just used a single price point, so had I not given the people who wanted to pay more an option to pay more because if the $249 price wasn’t there then I wouldn’t have had fewer sales, necessarily, or I wouldn’t have had more sales. It’s just those people who would have paid $249 would have just given me $39 instead. Had that not been there, I don’t have the exact number in front of me but it would have been about $8,000.

Patrick:  So essentially, for similar amounts of work to develop the product, you made and extra ‑‑ let me do the math in my head ‑‑ 220 percent or so because you were savvy about your pricing strategy for it.

Nathan:  Yeah, exactly. Every time I’ve seen multiple packages in use, both when I do it and when other people do it, it consistently doubles revenue if not triples revenue.

Patrick:  Right. This is something where it’s very rare to find tactics which are just magic win buttons that work in every situation. This is one of them. Sort of like charge more, which, by the way, charge more. That’s both for the people listening to this and, honestly, I think the two of us could hear it, too. I remember Keith, my co‑host, had to talk me out of pricing my first product at $79 and then eventually went up to $249 for the early adopter discount and then basically $500 for the ongoing sales of the product. That obviously created a significant value for myself and my customers.

So, A, charge more but the multi‑tiered structure for packaging, much like the multi‑tiered structure for Software as a Service, is very, very good at reducing the absolutely absurd amount of customer service that these products would otherwise generate. The case where we’re selling something to a business for $49 which they’re going to turn around into several hundred thousand dollars worth of additional business for the company.

Nathan:  Yeah. My favorite part about it is, you can get more revenue based on the value you’re providing. Every company does not get the same amount of value of your product. You could let them pay based on the amount of value they’re likely to get, and you don’t have to exclude the people at the bottom end level. The freelancers can still afford my book at $39. I don’t have to completely exclude them.

Patrick:  That’s, also, for some people, been that particular point, has been a way to assuage their inner worries about charging more. For example, some people are very concerned about distributional access to their things. They don’t want to exclude folks who are starting a business or less well off than other people. Given that you know you have an affordable entry point into the product, then there’s no reason to feel guilty to about charging $500 or $1000 to the firms who can afford it. I’ve seen a lot of people be pretty successful at that. Personally, I almost intentionally wish I could. Like Mark, something that I very nearly did last time and I might do this time for my product, was asking a quick four question questionnaire, like “Do you already have a business that is making at least “x” amount of dollars? Check this box. If you do not, check that box.” So it physically not let you buy it because it depends on the kind of product. You’re delivering advice on the product. It’s only going to meaningfully create value for people who are already operating a business at scale. Obviously, both their point of view and from my point of view, I would prefer not to sell to people who are not going to get the value from the product.

Nathan:  Yeah. I think that’s good.

Patrick:  So echoing your tale of just put a packaging structure in place it being an auto-win, you can do something which we would call in software a “site license.” Instead, you can buy it for yourself or, if you want, to share it with your team. It’s not DRM‑ed or anything. You can download it and put it on your server. Just by the, I think I called it the corporate package, which was four times the price. There was, absolutely, nothing about the product during the implementation. There was no DRM on either version so it was, either, files which you could download, and watch and do whatever you can normally do with files, or files which you can download, and watch and do whatever you normally do with files, but could explicitly show it to other people. Now, I know you haven’t had quite as much success on the site licenses I have. What was my success on that? I was selling these site licenses of between $1000 and $2000. I think just for the cost of putting one extra paragraph on my page I got, I remember, it being like low five figures of marginal revenue associated with that. I would have to run SQL in order to verify that. It was, obviously, clearly, worth doing for me. And, clearly, worth buying for the company because a lot of them said, “Oh. Yeah. We listened to advice and turned it into a six figure campaign. Congrats.”

At that point, the $1,000 price tag really isn’t all that much compared to how much they got out of the advice.

Quick Tips on Selling Team/Site Licenses For Your Products

Patrick: Anyhow, the reason why I think the site license worked better for me than it has for you is, both, mine was competing with less options. You already have the sophisticated tier structure in place with  three different tiers. Then you had the up sale to the site license which was presented in parallel to those three.

You didn’t give it the same weight in either the copy, or the visual presentation or anything. You would have, really, had to work to find the site license on your site.

Whereas on mine, it was given equal visual weight to the core product. Also, in terms of who we sell to, your market is largely designers, mine was by construction just B2B software firms. B2B software firms have a very particular notion about the importance of intellectual property in terms of the makeup of the people who work with them, their business models, the way they treat things internally. A lot of them will err on the side of caution when given, even, a nudge in the direction of “BTW. This is intellectual property, you can’t just put it in the company drop box like I know you’re going to want to do, but that’s something you could buy.”

And then a lot of them, seeing that will be “Oh. That is something I can buy. That is something I will buy.” This comes naturally to folks working at a software company.

Nathan:  I think it’s important to think about, like you said, who the target is and how much they care about intellectual property and copyright. That said, I think that my audience, there’s enough design teams, that would be interested in the product, that I think it could have been a good fit. I think the area that, maybe, not as many people would have gone for the site license as a percentage as with your products just because of the fit and focus. But I think the biggest mistake that I made…And this copy is still on Nathanbarry.com/webapps if you want to look at the copy and design for that part. Pay attention in order to find the site license. That’s part of the mistake is that I just said one line about, “If you like to share this with your team, buy the site license for $1000 dollars.” I went with the 4x price, as well.

I don’t think it triggered any red flags for people as far as on the copyright side of things. Like, looking at your copy, it triggers something of, like you said, “Hey, this is an intellectual property issue. You need to pay attention.” Whereas mine says, if you want a site license go buy it. It doesn’t trigger any thoughts of if you share this with a lot of people, it’s a copyright violation. So copy matters.

Patrick:  Copy definitely matters. That’s something that we see over and over again in our work, both, for ourselves and for other people. I’m going to read out the copy that I use for this because I like it. You can see it at lifecycleemails.com if you plug that into your browser. My sales page is still up and still making sales. It’s probably something we should talk about in a moment. “Do you have a few people at your organization who would benefit from taking this course? No, problem. We sell group licenses, too. You can either grant your coworkers access to the course on our site or you can download the material and host it internally. One corporate license covers up to 100 people within the same organization. We trust you not to abuse our confidence. No DRM is involved.” That positions it as it mentions like obliquely the IP related thing. It doesn’t wham them over the head with it.

As long as we’re talking about IP, and DRM and whatnot, what’s your stance on piracy? I know a lot of people are like, “Oh. God. You’re selling files? People can copy files? You’re going to lose all your money to people copying it for free.” Empirically, how’s that working out for you?

Nathan:  I make money from my products. People by them. They’re quite available on torrent sites. You can go check them out. Go Google “Designing web applications,” I don’t know, “Free download.” Whatever you would add on to the end of that. Actually, you can just probably Google the product name, and click to the second page and you’ll get free downloads. You might get some viruses along with that. It’s widely available to pirate. I didn’t add any DRM. I am quite happy with the amount of money I’m making. I just don’t worry about it. I don’t want to give my customers the idea that I don’t trust them. I don’t want to frustrate them with DRM or anything like that. Basically, I don’t want to potentially jeopardize a relationship with somebody who I care about and who cares about me in order to potentially stop somebody who will probably never buy my product.

That said, it might be worthwhile to hire a freelancer to get Google to delist some of these, at least so they don’t show up on the first page of results, but otherwise, it’s just not worth the effort.

Patrick:  I think more than the minimum of effort placed to secure things is probably a loss. Especially, in our industry/things we are selling. I’m a heretic on DRM with regards to software programmers in that I understand why it’s valuable for people in the content industries like video games, and movies and whatnot. They have a sales cycle which is dominated by the first 48 hours and first one week of sales. Even if they can delay the appearance of a crack by six hours, that makes a meaningful amount of revenue for the business. For sole proprietors like us who have products like these, it’s basically, anything above the minimum amount of work to keep honest people honest is a net loss to you. The minimum amount to work is requiring a credit card to download and don’t make the link copy, pastable to other people. I think you use Gumroad for fulfillment, right?

Nathan:  Yeah. I do. They’re fantastic. I love the team over there and highly recommend them.

Patrick:  I met them through the BaconBizConf where they were one of the speakers. Ryan Delk, I think he’s the founder, came out to there, we got to… [crosstalk]

Nathan:  Yeah. He’s the head of their business development.

Patrick:  Got you. Yeah. It was great fun and they’re style of folks. I did all of my delivery/fulfillment through an application which I coded largely because, at the point, where I was launching this list year, I hadn’t done any hard core programming in a while and really wanted to. It’s absolutely the wrong choice. Nobody, is not buying your thing because it doesn’t have the custom coated shopping cart.

Nathan:  Right. You hear people, somebody said this the other day where they, really, liked Gumroad’s implementation of the check‑out process, which is fantastic. But what they didn’t like, is government charges a five percent fee so that includes the credit card processing plus, I think, 25 cents. Whereas “Stripe” charges 2.9 percent plus 30 cents or 25 cents, somewhere right in there. So “Stripe” is 2.1 percent cheaper. So this person was going to rebuild on their own, because they had the technical skills, the Gumroad checkout process almost exactly in order to save 2.1 percent on each transaction.

Patrick:  Right. It’s absolutely insane like you’re committing yourself to doing the barebones implementation of doing something like this is between three to five days of work. If you figure you’re first info product is going to sell so you’re fairly successful with it because you’ve heard from Nathan, and Brennan and myselfand you’re not making all the mistakes we did on our first one. So you sell $100,000. You saved yourself of $2,000 of tax write‑offable costs for a week of your time. Whereas, if you had spent that week, you know your existing consulting business, you would presumably have made a lot more. Or if you had spent that week rather than duplicating the table stakes to entrance, you had just worked on your copy, you would be at a multiple. It’s absolutely insane how important copy is, like headings and whatnot, the calls to actions on buttons.

I’ve seen people who have coded their own shopping cart and it was more important to them that it worked than all of the little details received adequate attention. They left the button on the buy page be “Submit”.  [Patrick notes: Elements of this story have been changed to protect the innocent guilty.  And, as always, I will cop to having made mistakes at least this forehead-slap inducing before.]

Nathan:  [laughs]

Patrick:  Where, I’ve got eight years of A/B testing experience, at this point. I can pretty much tell you that if you had thought to change that button, that would be worth like 20 percent of sales. But you didn’t think to change that button because you had just spent a week building a shopping cart when you should have just been pulling one off the shelf from Gumroad or any of the numerous scripts you could drop in and get this to work.

Nathan:  Yeah. There are all kinds of other factors. Like its fascinating talking to Ryan from Gumroad about all the stuff they do on fraud prevention. There’s a lot of stuff that goes into processing payments that you don’t see in an interface.

Patrick:  Yeah. I tend to think, and again, do what I say, not what I do, unless you are very sure you’re going to add value to your implementation, go with one of the people you can buy to do this.

Nathan:  Unless you really want to code a shopping cart.

Patrick:  Unless you really want to code a shopping cart.

Nathan:  Go for it.

Patrick:  The Gumroad guys did try to sell me aggressively a few times. I told them, one of the reasons I said, “No,” was I said, “Look. It’s my professional competence to build check out flows because I do that for consulting clients.” So the experience of coding one more where I can actually share the results of doing it adds value to me. I don’t think that’s totally a self‑serving excuse because I wanted to build a shopping cart, but there are perhaps those two things together in solution.

To change topics briefly, you mentioned a few minutes ago that you threw interviewers into one of your top tiers on your packages. I want to talk a little more about interviews because, I think, interviews are underappreciated as a promotional tool. One of the reasons that a lot of people do interviews to either supplement a product or as the product itself is that, candidly, the creation costs for interviewers are less than writing an equivalent amount of stuff yourself.

Nathan:  Absolutely.

Patrick:  I guess, you turn on the camera, get an expert in front of the camera, hit record, talk for 30 minutes, stop hitting record and that has a certain amount of perceived value which, generally, tends to scale up with the perceived expertise of the experts and what they say in the interview. In addition to the content creation costs being lower, if you are interviewing experts, experts typically already have their own following. The first thing they do when you release your thing and say, “Hey. Thanks for being a participant in my designing web applications. Your interview is in the top package, and I released it today.” They will promote that to their audience/their community, which since they typically have a larger audience community than you do, and many of that audience community will follow them wherever they go, that gets you exposure to people who are willing to buy your thing because that expert or that person they trust was in it.

Nathan:  Yep. Absolutely. You give them a copy of the whole product, which since it’s just information, that doesn’t cost you anything, and you include that with an email of, “Thank you so much for being a part of this. I really appreciate it. Here’s a free copy of the book and everything. Here’s the link if you want to share it.” In general, that’ll get, at least, 50 percent of the people you interviewed to share it. At least, and that’s worth a ton.

Patrick:  Every time I get interviewed in something, I, at the least, tweet it out and I generally send a brief notification on my email list on the next scheduled email, “By the way, if you guys want to hear more from me, I was interviewed in this book thing.” I’ve heard from people who use unique tracking, everything, that just the tweet can be worth 20 sales. It takes me a minute to compose, and then all of 10 minutes to compose the email to me asking for it so worth it at the margins right?

Nathan:  Yeah. It’s also a fantastic way to get to know people who can deliver a ton of value to your business and all kinds of things.

Patrick:  Because after you’ve done something together, you’re no longer strangers.

Nathan:  Actually, a perfect example is you and I, where I think we exchanged some comments on “Hacker News” and, maybe, an email about pricing. I think your exact comment was something like your pricing is the first non‑stupid pricing I’ve seen on “Hacker News,” or something like that.

Patrick:  Yeah. I was very impressed with it going on.

Nathan:  [laughs]

Patrick:  That’s right. This trajectory has happened a lot for me in recent years. Get to know someone through “Hacker News,” swapping an email occasionally. Then you interviewed me for one of your products, I think, “Designing Web Applications?”

Nathan:  Yeah. Because I wanted to cover the business marketing side of it. I always give people an introduction to that. So we had that brief exchange about pricing. Going back to the pricing conversation for a second, I had lower prices for the “App Design Handbook.” Based on your feedback, I increased them to the 39.99 to 49 prices that we talked about earlier. Yeah. We did an interview, included it with “Designing Web Applications.” It’s just a great way to get to know people because you and I have talked a lot since then, hung out at conferences.

Patrick:  Yeah. We’re definitely moving past Internet buddies into that professional acquaintances/friend stage of the relationship which it sounds a little odd, sorry.

Nathan:  [laughs]

Patrick:  I can be a little socially awkward at times. I’ll own it. It’s a real thing, right?

Nathan:  Yep. Exactly.

Patrick:  There are definitely people who…Some of my good friends are people who “I met on the Internet.” If you hang out with somebody for a few years, there’s no other word for it. You’re friends or you’re not. Anyhow, obvious to the two of us, but perhaps not obvious to the people listening to this. When you’re approaching 10 different people to do interviews, what sort of monetary incentive, are you offering them to do these interviewers?

Nathan:  I get this question a lot. The answer is zero.

Patrick:  I think we’ve both covered this topic in depth with other people. But somebody, not you, but a different person who was asking me for an interview for a book that they were launching which they were going to price it like $20 asked what number they would need to offer me from that to make it worth my time. And I said, “Look. I like you. I like the idea for this project. It was something I’m doing, making a SaaS in a sense like a sideline, side project. I said, “I like you. I like the project. I will do the interview. Candidly, there is no amount of money that you could reasonably offer me from this project that makes a darned bit of difference to my financial situation for this year. So don’t.” I think you got Jason Freed to do an interview with you. You could ball up your entire business and my entire business and drop it in the 37signals bottom line and I don’t know if anybody at that company would notice. Offering $3000 to get on the phone with you would not necessarily move any needle for Jason Fried et al.

Nathan:  Yeah. Exactly. He’ll do it because he wants to help out, business people, people putting out products, and he’s a nice person and generally wants to be helpful. But as soon as you start talking money and how you’re going to offer him five percent of your product that may or may not make anything, it just gets weird. Don’t ever bring that up.

Patrick:  It’s that thing, predictably, irrational where people have one schema for evaluating monetary transactions and they have the other schema for evaluating non‑monetary transactions and they operate in different fashion. I’ve got a rule…This is by the way a hack around for me having issues with socializing when I was younger, I always say yes when people invite me to do things. Unless I can articulate a good reason to say no, I say yes. If you invited me out to a party that was happening later today, I would say yes. Then maybe think about whether there should be any reason for saying no rather than doing the thing that I would default to when younger which is saying no just because my brain would cook up some rationalizing, but it was really I’m terrified of going to the party.

Nathan:  [laughs]

Patrick:  So if you ask me, “Can we hop on a Skype chat and I’ll record it and put it in this product?” Like 99 percent of the time, unless I have a date with my wife or something that you’d be bumping, the answer is yes. But if you ask me to do a business proposition, then the cold blooded business man in me comes out and very few business propositions are going to be worth my time.

Nathan:  Well, a classic case of this is with people doing open source software development, you’ll get some really top notch developers who will pour hundreds and hundreds of hours into these projects, all for free, never get any money directly out of it. So somebody will come in and go, you’ve put all this time in, I just need something slightly different. Can I pay you $25 to make this change? As soon as you say that, “Well, hold on. I’m a $200 an hour consultant.”

Patrick:  It’s like boom, slapped in the face.

Nathan:  ”Not only am I not going to do it, you’re offending me. You don’t value my time at all.” If you ask them to do it for free, chances are they would do it, but you’re right, it’s that two totally different mindsets. If you want to interview people, if you want to help somebody, ask very nicely with a pitch very specific to them, that you didn’t just copy and paste to a whole bunch of people, and most likely they’ll do.

Patrick:  The single best thing that can convince me to give the rest of the email some thought is some serious thought in the first few sentences I follow you, I’m familiar with your work, and have a reason why you in particular should be contributing to this thing in particular, rather than, “And clearly I wrote a list of 10 people who have a name in our space and am emailing it out to all $10.” I hate to sound like I’m an Internet celebrity, because I’m not. There are people like…Nathan and I are much closer to you, podcast listener, than we are to the 37signals or the Joel Spolskys of the world. But, it is a fact of nature, we do have a certain amount of audience.

If you are doing a product on A/B testing, conversion optimization or running a small software business and you can tie that to things that I’ve written before or things that I’m clearly passionate about, than I want to say “yes” to that.

Whereas if you’re just doing “How to Start a Start Up,” or “How to Get Venture Funding,” than I don’t know if Paul Graham is too busy to get interviewed for something like that. But Paul Graham would be a much better person to interview than I would be. “How to Get Venture Funded”…I don’t know.

Nathan:  You have a lot of experience that area…not.

Patrick:  Get into Y Combinator. That will help grease most of the skids for that. If you had a question then, “How to Get Into Y Combinator,” and being on “Hacker News,” like it’s my job, might give me some idea of what to tell you. I don’t think that would be something that I would make people pay for the advice for. Anyhow, wow, D, we’re at about an hour and we got more to cover, so mind if we move on to the next topic?

Nathan:  Sounds good.

Patrick:  The beating heart of both of our businesses is an email list. I think that even when I say that it is the beating heart of our business and probably, in my case, I think if I were to produce a formal statement of assets and liabilities, my email list would come in right under the accumulated value of my IP. For the business I think, you might…with circumstances for your business it might actually be the other way around. And yet people do not understand this, so let’s wax rhapsodic, or whatever even more about how you should have an email list and be sending stuff to it. You first.

Nathan:  I put having an email list as the second most important business realization that I’ve ever had, the first being that you should teach. Email lets you teach to people in a reliable way, and reliable and consistent. What you said about business assets, I would consider my email list, and it’s not massive, right now it’s 7,000 people, to be the most valuable asset that I own. It’s probably more valuable than everything else I own combined, more valuable than my cars and whatever else, not that I have a lot of assets, but it’s worth a ton, and I can’t understate that.

I can’t say that too strongly, but I should point out it’s not that I have 7,000 emails separated by commas that I can download and do something with. It’s that I’ve built up a relationship, and I’ve taught useful things to 7,000 people over time.

Patrick:  I think, when we talked about it in marketer speak, that just the phrasing of list, it gets people…like that obscures the fundamental relationship, which is that… Maybe the better way to think about it is not that you have a list of 7,000, but that you have 7,000 relationships created with people who trust Nathan Barry as their go‑to guy on these subjects, not just any 7,000 people, but largely 7,000 people who have a deep amount of interest and need for the sort of thing that you make, and ability in many cases to pay money to buy it.

Nathan:  I guess the important thing that I want you listeners to take away is that how email…the consistency of it. I asked at the Bacon Biz conference, it’s a room full of bootstrap‑ers, and software people, and all of that, and I asked, “Who likes recurring revenue?” and there’s a good chuckle from everybody, as everybody raises their hand. Recurring revenue is awesome because it’s predictable, your customers who love you the most keep paying you, in theory, it grows over time, you’re going to have a certain amount of loss, and so long as you can exceed that with growth, then you make more money than the previous month, all kinds of awesome things.

I had a realization that email is like recurring revenue for traffic and visitors. I looked at my traffic stats for my blog, and they were all over the map until I started building up a good email list. I could have traffic that went up a huge amount one month, because of a story went viral or whatever, and then drop significantly the next month. It was crazy and all over the map, but email, I could just keep consistently growing that list.

I’d lose some every time I sent an email, but so long as I gained more than that, my list grows every time. I have a relationship with each one of those people, so to me, email is the same idea as recurring revenue, but for getting visitors and engaged readers to your content.

Patrick:  I totally agree with everything you just said. One of the reasons I created my email list after years of not doing it, which are years that I very much regret now, because there were hundreds of thousands of people who visited my blog over that time that I have no way of getting in touch with ever again, like you, I had a blog. There were many articles which were very well received on it, and there were, on any given day, 500 or 1,000 people would make it a habit of checking to see whether I posted a new thing.

But aside from those folks who are like in the inner circle of really love everything you do and want to hear about it, there was no way for me to grow that number effectively other than just publish, publish, publish, and no way to reach people in any more deliberate manner than just posting something and hoping that it got good distribution on Hacker News and whatnot.

Partly as a business owner, no matter how much you like any distribution channel, you never want to be totally locked into them, and then partly as just like a regular old Hacker News denizen, it’s weird, but I occasionally ask for my things to be on the front page less, just because I never want to burn people out with them or give people the impression that I’m explicitly using Hacker News as the “Me, me, me all the time” marketing channel.

One of the benefits of having the email list was that, by construction, since people have asked to get it from you, it can be the “Me, me, me” show, as long as…well, it shouldn’t be the “Me, me, me” show. It should be the “You, you, you” show, that every email to them creates value for them, whether you’re teaching them new things or potentially giving them some sort of sales message for something that would create value.

It can be a…how do I want to phrase it? It can be rather more focused on things I am doing than, say, blog posts could be without coming off as quite self‑absorbed.

Nathan:  Yeah, because they opted in to hear from you, and at any time, they could opt out, so you can guarantee that these people want to hear from you.

Patrick:  Right. Speaking of opt‑outs, by the way, a great line I heard from Joanna at Copy Hackers was that the unsubscribed is not something you should take as a mortal insult. It’s just like the email equivalent of hitting the “back” button. We’ve all see the stats for our blogs. We know that a lot of people won’t read it, they’ll just hit the “back” button and whatnot, and we’re OK with that, but then we get the report from MailChimp that says, “You sent out the mail to 7,000 people and five people unsubscribed,” and then we get that feeling in the pit of our stomach, like, “Oh God, what did I say?” It’s not something you have to worry about at that level.

It’s like, one percent of the list on every email, then you have to worry about it, but some people are going to decide that it wasn’t for them, and that’s OK. I’ve said it in various degrees of seriousness, but 500 people who don’t like what you’re doing and three dollars will buy you a cup of coffee, but three dollars might not actually buy you a cup of coffee these days.

Nathan:  Yeah, and something…I think this is from Ramit Sethi, where he talks about actively trying to get people to unsubscribe, just because if somebody doesn’t want to be on the list, then they’re never going to buy anything from you, and you don’t actually want them on the list. That’s why you make it super easy to unsubscribe, and Ramit goes as far as sending out email saying, “1,000 of you should unsubscribe.” I think he had that as a subject line.

Patrick:  Can we go back in the time machine from…do you remember back when you had no email list? What was the first thing you did to start growing?

Nathan:  I put up a landing page saying, “I’m writing a new book called ‘The App Design Handbook,’ and put in your email address to hear about this book when it comes, and to hear about the process,” which, by the way, if you put together a landing page, the email opt‑in form is the most important thing on the landing page.

Patrick:  By far.

Nathan:  By far.

Patrick:  Headline email opt‑in form. Everything else is quite secondary for a page that doesn’t have much content on it.

Nathan:  Yeah, and you don’t need a lot of content. An email address is…you’re not trying to get them to spend hundreds of dollars, so there aren’t a lot of objections to overcome, other than, “We won’t spam you. I promise.” I put up that landing page, and I tweeted it out to my 412 followers, and I got 10 or 15 people who went to the page and said, “Yeah, that’s cool. I want to hear about that.” Those 10 or 15 people started at the list. A few people posted links to it. I emailed a few friends who were designers and said, “Hey, could you share this?” Through just kind of that activity, I got, I think, 30 or 40 people who said, “I want to hear about your process making this book, so I can hear about it and maybe purchase it when it’s ready for purchase.”

The great thing about that approach is you’re not getting random people who may or may not be interested in a product. They already told you, “I’m interested in this product,” so it’s not a matter of coming out with a product later and wondering if your audience will want it. If you start with product first, then you’re going to get higher conversion rates from email to paid, just because they already expressed some level of interest.

From there, the landing page got shared around a little bit. I think it made it on Hacker News, on the home page for just a little bit, and that brought in 150 email addresses, so I was sending out like 200 then. Then I wrote a detailed blog post about designing iPhone applications, and at the bottom of that blog post was that same email opt‑in form. “I’m writing a book. If you want to hear about it when it comes out, and hear from me a little bit in the meantime, drop in your email address.”

Patrick:  It’s the great underused technique for getting emails. How did that work out for you?

Nathan:  It continued to grow, and an important note is that this email list didn’t grow in silence. I knew that those initial 200 people, that they wanted to hear about designing iPhone applications, so I wrote this tutorial and I sent to them, and I said, “This is kind of related to the book. I think you’ll like it.” With that, I said a short paragraph of like, “Here’s how’s the book is coming along,” just so that three months, when I said, “The book’s here. Buy it,” they will have a clue who I am, because I stayed in touch and provided value throughout the process.

Patrick:  That’s honestly one of the biggest stumbling blocks for people with email, to keep the list warm by continuing to deliver value to it.

Nathan:  Yeah. Those blog posts that you put out…well, first, I guess what I should say is, linking to a landing page for a book, people will do that, and they’ll share it around, but it doesn’t actually provide any value right away. It doesn’t provide any value to the reader. If I share it with my Twitter followers, I tend to do it more as a favor to the author, because I think it’s a cool thing they’re doing, rather than because I’m like, “Oh, my readers really need to see this,” because it’s just an email opt‑in form.

Patrick:  I think you can…that’s true, the way most people do it. I think there’s definitely ways to structure the page, even if it’s just an opt‑in form, such that linking it to your audience does provide value to you. For example, so much of social sharing is based on trying to project an image of yourself to people. That’s why there’s like 600 political related thing in my Facebook feed right now, and not so much that someone was like, urgently, “This particular post is the best thing I have ever read about issue X,” but rather, “I have a position on issue X which I want to broadcast to people, so I will share this post.”

If you had an opt‑in form which, even with just one sentence, a really focused copy, like planted a flag in the ground, if that was something people wanted to sign on with, I think they would retweet that just to sign on for that movement, and to demonstrate to people that that represented them. What’s a good example to come up with that?

Somebody I know just recently put up an opt‑in page for a book on Ruby on Rails security, a topic near and dear to my heart, and they said…their one sentence of arresting copy was, “Your Rails application is broken,” like security‑wise, and that’s not the exact copy, but, “All applications are guilty until proven innocent. You’re not doing it right. I will teach you how to do it better. Give me your email.”

A lot of people retweeted just because they endorse that message of, “If you haven’t seriously thought about security, if that hasn’t been the number one issue on your plate for a while, then yes, your application is broken.” Does that make sense?

The other thing that works really well for getting distribution for landing pages is to have some sort of free goodie that you can give people in return for their email address, and then plug that goodie in other places, for example, doing guest posts with a, “If you’re interested in this topic, go here, and I will give you a one‑hour‑long video on blah, if you give me your email address.”

Or for people who do conference presentations, just having a bit.ly URL to your landing page, and put on the last slide of your conference presentation, “If you’re interested in this topic of the conference presentation, you can get…the term of art is a premium, but you can get this free valuable thing from me by going here and giving me your email address.” If there are 200 people in the room, you can get 20 emails like that…

Nathan:  They do.

Patrick:  You can put that in podcasts as well, do the Rob Walling kind of podcast tour to drum up interest in your thing, which kind of makes me want to ask, do you have any landing pages that people should be on?

Nathan:  If I was going to follow up with that right now, I would say something like…it’d be better if it worked into the conversation, but I have this email course on how to launch products, and if you go to nathanbarry.com/launch, you can get in on that free email course, and over three weeks, get some awesome content on exactly how to launch products.

Patrick:  That would’ve been a much smoother way to introduce it, but yeah, exactly like that. That’s something that you can do in virtually everything. You can also give that pitch to people in one on one, when you’re just shopping around your idea in your local community. I think the AppSumo guys were very smart about it. They said, “How do people get their first 100 customers, or 100 sign‑ups to an email list?” and it’s largely just by banging down doors like that.

Nathan:  One thing that I did very recently is I wrote an article for “Smashing Magazine,” and it was titled, “How to Launch Anything.” It’s my exact product launch plan, kind of my formula that I followed for three books now, exactly how to do it, but at the end…I always feel weird in guest posts. It’s kind of lame in a guest post to say, “If you want to learn more about this, buy my book.” That’s kind of an awkward transition, I think, and a lot of editors on sites will be like, “Really? That’s too self‑promotional.”

A great transition, and one I did on the “Smashing Magazine” post, is at the end, I said, “I don’t want your education on product launches to end here. You just read a 3,000 word article. That’s great. There’s much more to know. We could dive a lot deeper, so I put together this email course just for you guys. It’s at nathanbarry.com/launch. Go check it out, sign up, and we can continue this conversation, and we can dive a lot deeper over the next few weeks,” and that did very, very well.

Patrick:  I think that is excellent, excellent positioning. There’s multiple parties that have to be happy with that, and the circumstance we’re using, someone else’s audience, obviously the editor at “Smashing Magazine” has to be happy, you have to be happy because, ultimately, it’s your work and your business, and the readers have to be happy, and that’s kind of a meeting of those three. Sometimes conflicting interests where it works for everybody.

Nathan:  Yeah. And then, in that email course, later on in the process, I can pitch my products, and that’s totally fine.

Patrick:  Yeah.

Nathan:  So long as the email course provides a bunch of value on its own. But, two, three weeks in, I can give a, after casually introducing my product, later on I can give a hard pitch for it, and that works great.

Patrick:  Right. And people have less, not like memory a human would have memory, but memory in the homeopathic sense that homeopaths think that water has memory, which it doesn’t. But people on an email list have even less memory than water in that sense. While they’re a good source of traffic and bad sources of traffic given roughly consistent user demographics and whatnot, and connection of the need that got them onto the email list in the first place, their behavior downstream doesn’t strongly reflect how they got into it, a guest post versus a post on Twitter versus yadda, yadda. With, again, that very importantly given roughly similar demographic and need fit.

If you assume that folks on Smashing magazine are also designers, they are likely to be just as good for fits with the Nathan Barry ecosystem as folks who are coming in from a hacker news thread or yadda, yadda.

Just to give a story from my own experience, when I realized last May that I wanted to start an email list, not May a couple of months ago, but 2012 May, the first thing I did was put together a 45‑minute video on designing the first run experience of web applications because that’s something I have a good deal of expertise in and went fairly well as a video format and was something that I hadn’t done to death before, to be honest. I said, if you give me your email, I will give you this 45‑minute video.

It was not planned. Sometimes things just seem to fall into place retrospectively. I thought I was eventually going to be releasing some sort of product to the list after I had it. The priority at that point was to have the list and not have a use for it rather than have a use for it and not having it.

But it turns out that I eventually had a product that had a lot of video. By construction, if I’m asking people to sign up for the list to get a free video, it’s going to be people who appreciate consuming video rather than don’t. There are some people who listen to podcasts but don’t do texts. A lot of people will read hundreds of thousands of words from me but hate…

I’ve been told that my voice grates on people, or they just don’t listen to anything or whatever. And similarly, there are video people out in the world, so if you’re going to be selling video, attracting video people is a useful thing.

It also, the first video, you can still see it at training.kalzumeus.com. It was really, really rough. My equipment, my process for taking the video and whatnot were not exactly where they are right now. But that gave me an opportunity to get the kinks out of the process and a 45‑minute free video rather than the five hours of paid video where quality issues would be more apparent and looked on in a harsher manner.

Nathan:  Exactly. The takeaway from that is, if you’re using a free incentive to get people on your list, have it be similar in style and media type to a product that you think you might offer down the road.

Patrick:  Right. I think media type, character, tone, audience, yadda, yadda. It would be a bad, bad decision to get Magic: The Gathering players together onto your email list if you’re eventually going to be selling enterprise software. There is some overlap there, but the closer to 100 percent overlap that there is between your audience and the people you sell to, the better. Which, that segues into our next topic.

Both of us are kind of weird for business in that we have a product portfolio rather than just the one thing that we do. I have a very, a product portfolio which comprises a lot of disparate groups of people. Like the elementary school teachers who buy my Bingo Card Creator have zero interest in my authorship activities about selling more software for B2B SaaS companies.

Those folks have zero interest in Appointment Reminder, which helps scheduling at doctors offices and other places that need to send automated phone and SMS reminders to their clients to come in on time.

You have a much more focused product portfolio in that you’re kind of Nathan Barry, the person who teaches designers to be better at what they do and are branching out a little bit. But I really like your approach more than my approach just in terms of being able to cross‑sell to the same people over and over and over again, having a focused brand and more focused in your activities.

Nathan:  I think focusing in on your audience is really important. I wish I did a better job of it. To some extent, I have taken the approach of this is what I’m interested in. Hopefully I’ll get people who are also interested in the same things. So I’ve got a book on designing iPhone applications. A book on designing web applications. There’s a pretty good overlap between those two, designers. It may not be 100 percent overlap, but it’s pretty high. But then I branch out a little bit. I’ve got an email marketing application called ConvertKit. Some of those designers are going to care about selling products, so they will be interested in using email to do that. If we assigned a random number, there’s maybe 30 percent overlap there in some level of interest.

And then, I also happen to talk a lot about writing and publishing e‑books because I shared all the stats from my books. I’ve got some of those soon‑to‑be authors in my audiences. My latest book is called Authority and it’s on building an audience, building credibility and authority, and then how to write and sell e‑books, information products, I guess.

There’s great overlap with ConvertKit because, if you’re following my methodologies, you’re using email, ConvertKit’s designed exactly for my process. There’s not a lot of great overlap for the design stuff, but there is some. I’ve got plenty of people who have purchased all three of my books. It’s not as tight as I would like it to be. I think the person who does this best is Brendon Dun. He’s been on the podcast before.

Patrick:  Right. Brennan just passed a…Freelancers and consultants, they’re his bannermen and they will follow him into war. Sorry. I was watching Game of Thrones yesterday, if you couldn’t tell. But it works very well. There’s a consistent confluence of interest between what he’s working on any given day and what they’re interested in.

Nathan:  And the only way he differentiates is maybe what scale they’re on in their business, where he’s got some products for people who are brand‑new freelancers and then he’s got some for people who are building up an agency or a consultancy. He can run that spectrum of $40 product to $1,200 workshop, but it’s all within the same audience. The closer you can get to that the better. I have an iPad application that I made a few years ago. It made some money that helped me quit my job, so I’m very, very grateful for it. I learned a ton from the process.

But now, it’s targeted at speech language pathologists, which has nothing to do with, there’s no overlap whatsoever between them and designers or product marketers, anything like that.

It’s this product that’s sitting out there. It makes me $800 to $1,200 a month, which I’m certainly not complaining about, but it has no overlap in my ecosystem and I just don’t know what to do with it. If I was being smart, I would probably sell it off for a tiny amount of money to get rid of it or just shut it down or, you know, because it just doesn’t fit. As much as you can get a single audience, the better.

Patrick:  I think my candid and public advice for you would be either sell it for 10K or try that for two weeks and, if you don’t get any takers, then it’s probably the case that the ongoing focus drain that it requires from you would be better deployed at other points in your business. But given that there’s an installed customer base and whatnot, it would be better for them if you were able to successfully sell it to someone. Maybe someone who wanted to get into the app game and yadda, yadda.

Nathan:  Hopefully someone who had speech language pathologist as an audience, as customers.

Patrick:  That would be a great choice. Something I often see in small software companies is a husband and wife team where one of them is the domain expert and one of them is the programmer. If there is a programmer out there whose spouse is a speech language pathologist, and given that we know several thousand programmers, there’s at least somebody who’s in that combination.

Nathan:  Send me an email.

Patrick:  Please send Nathan an email.

Nathan:  Yeah, nathan@convertkit.com.

Patrick:  Speaking of which, so we’ve been talking mostly about info products, but both of us have significant SaaS experience. You’re running ConvertKit. A lot of people often ask me how you get the idea for a SaaS product that will actually sell to people. I really like ConvertKit as an example for this because it’s not a product that sprang out of your forehead Athena. Wait, no. Was it Athena or Aphrodite that came from the forehead…Athena from Zeus’. It’s a natural extraction from the business you already happen to be running. Obviously the designing web applications and whatnot are a technology‑focused business but they’re not a “tech business” in the way people usually think of where you have this pre‑existing business. It was obvious there was a recurring need in the business that could be better be met with technology than by the existing processes you were doing.

So you created that technology and you were basically customer number one for it. Given that you knew that knew that this process that you had been using was generalizable across your industry and across other industries, then you knew that there would be a market for it rather than just throwing something at the dart board and praying it stuck.

Nathan:  Absolutely. I know, since I built a tool that I want, for a process that I know makes money as far as how to email market and a lot of the stuff we’ve just been talking about, I knew that I would be a customer at the very least. Even if nobody else wanted it, I knew that I could use this tool to sell other books and products and make money. But the other fantastic thing that I love about building products for yourself is that you can actually use them like a real customer instead of using them in some artificial way. I had a tool years ago that was used by…

It was a SaaS application used by sign language interpreting agencies to schedule and manage all their freelance employees. I would go through, we’d release new features and I’d go through and test it. I would fill in all this fake data. I would click through things, but I wasn’t actually using the tool because I had no reason to use the tool.

It was all artificial use whereas, with ConvertKit, because I’m the biggest fan of the software and the person who is chomping at the bit to get new features in and all of that, I’m using it every single day and improving on it, testing it. It’s just a much better spot to be in then trying to use some tool that you don’t care about in an artificial way.

Patrick:  Given that I run Bingo cards for elementary teachers and scheduling software for the office managers at plumbing firms despite no longer being an elementary school teacher and having no experience in office management for plumbing firms, I can definitely tell you that the experience of developing a product where you’re using it “in anger” in your own business is much different than trying to guess what people are using it with. For those folks who are not building something for themselves, and I think that’s a totally valuable way to go about things, you have to have much more of your cycles devoted to being in the room with the customer, whether that’s a literal fact or kind of spiritually in the room with them, seeing how they use it in their business, rather than slinking off to the Bat Cave and coding up features that may or may not actually share on the ground correspondence with the way they use it or the way their business is run.

Nathan:  You certainly can, especially if you focus on solving a painful problem, you can definitely build software for other people. You’ve shown it with appointment reminder quite successfully, and I’ve done it on some other projects, it’s just I’m really loving the process with ConvertKit, building for myself.

Patrick:  Definitely, that’s still on my to do list. I want to try doing a course through that and see if it…obviously it’ll work. The big question for me is whether it will work in a transformatively better way than the processes I already do for it. Again, the fact that I had processes was not a reason for you not to make the tool, right? There are a lot of people that it’s their first time doing this or they don’t have a consistent way of doing email courses. You kind of get to bake in all the best practices you know from having done it for the last year and had significant success. Kind of a 37signals line having an opinionated product that delivers not just a pleasing UI and a nice experience, but also has like mini Nathan Barry whispering over your shoulder.

“The right way to do it. Here you’re going to do it like this. You’re going to put up a formula that looks like this and you’re going to schedule a course that looks like this.” You hit “go” and it will be magic. I really like everything about the product and the meta‑products around it, the strategy and where it fits in your business and in the business of your customers. On that note, just time check. We are passed the hour and a half mark, so we probably want to be wrapping it up in the next few.

Nathan:  Yeah, sounds good. Oh, I’d like to address validating the market for a product before you build it.

Patrick:  That could be a podcast in itself, but let’s definitely address it.

Nathan:  We’ll try to talk about it really quickly. Jason Cohen and a few others talk about if you can sell your idea and actually collect money from a handful of people before you build it, that’s really, really important. When I was trying to figure out what to build for ConvertKit, or what angle to take and if people wanted it, I went around and asked a bunch of people, “Is this a painful problem for you, with auto responders?” A lot of people said, “Yes.” You were actually the one person who said…I think what you said is, “You should build that software, but I would not buy it.” The reason is because you have all your own processes and that kind of thing. So, I went around and asked a bunch of people, “Is this a painful problem? Would you buy it?” Then I took it a step further and I asked, “How much would you pay for it?” And I got a number. Some people it was 50 dollars a month, some people it was…I think the highest number I got was 300 dollars a month.

Then I went further and said, “Would you pre‑order it? Would you pay for this before it was ready?” A lot of people said, “Yes,” with varying levels of certainty. There was two people that I was 100 percent certain would pre‑order it. The only problem is I didn’t have a way for them to pre‑order it right then. So what I did is I said, “OK, cool. Thanks for your time. I will check back with you in a few weeks, when I have a way for you to pre‑order it.”

I did that. I came back and the moment I came back and said, “OK, here’s a Gumroad checkout page. You can pre‑order it now.” That’s when I started to get real feedback. That’s when I started to get the, “Oh, well, it doesn’t have this feature.”

Patrick:  ”It won’t actually integrate into my system. I don’t actually have enough time to start running a campaign tomorrow. I’m just not ready for this.”

Nathan:  Yep, exactly, and it was, “Well, it would be a lot of work to switch away from my existing tool.” I started to get real feedback and the people that I was dead certain would pre‑order, never did and they still don’t use the tool today. Luckily for me, a bunch of other people did pre‑order it and so I got validation from other sources. But just one of the most critical lessons that I learned this year is that you don’t get real feedback unless you ask for money.

Patrick:  Yep and you don’t even necessarily need to be able to physically take the money, but actually asking for it is important. One thing that Jason Cohen did, which I did before, my validation for the Appointment Reminder market. I went to the Gold Coast/Magnificent Mile area of Chicago, which is an area that I happen to know has lots of high end retail. At the time I thought Appointment Reminder would largely be sold to massage therapists and salons and things like that. They’re thick on the ground over there.

I took out $400 from an ATM and would just go in to every salon, every massage therapy practice, ask if the person behind the counter was the owner. If yes, ask if they accepted walk‑ins. If yes, say, “OK, I would like to get your 30‑minute service, but I don’t want to actually have the service. I’ll pay you for the 30 minutes and I just want to talk about the industry for a little bit because I’m interested in it.”

Then we would have discussions about what their scheduling practices were like and what sort of software they used. Most of them were on pen and paper. Did they do reminder calls? What was their no show rate? What percentage of their business was recurring appointments? Yadda yadda yadda.

At the end of this I would demo the two page demo application I had for Appointment Reminder and said, “This will be available eventually. Is it something you’re interested in to solve this no show problem that we’ve established that you’re having?”

If they said, “Yes,” I would literally ask, “Can I put you down for the first month of it at…?” I picked a number. For most of it was 30 bucks. The pricing still is today, on the low end.

A bunch of them said, “Yes” and then I would follow up with, “Can I get a check for it?” That can you get a check question changes the conversation quite a bit, like you’ve noticed.

By the way, when you’re doing pricing, pricing is generally not something you should ask customers for, in my experience. That’s something you should announce to them and get the up‑vote or down‑vote on it. I think you would’ve had better results if you had said, “It’s going to cost a hundred dollars. Is it worth at least a hundred dollars for you?” Rather than pick a number without any sort of anchor attached to it. Because…

Nathan:  Yeah, I think that’s true.

Patrick:  If you went in to my consulting clients and said, “What’s the value of a lead for you guys?” “Twenty thousand dollars.” “OK, it’s going to cost a thousand dollars. Assuming it generates a lead every month, is the thousand dollars worth it for you?” They’d be like, “Um…” Scratch, scratch, “Yes.” And you’d have a different pricing structure than you do currently and a few people paying you quite a bit of money. That’s neither here nor there, I still really love what you’ve done with the business.

Anyhow, well, I think we’ve covered a lot of ground and to avoid boring people with our voice anymore, I’ve kind of cut this short. But we should definitely do another one sometime.

Nathan:  Sounds good.

Patrick:  Alright.

Nathan:  It was a lot of fun.

Patrick:  Yep, thanks so much for sharing your insights with us, Nathan.

For the people who are in my ecosystem, but not in yours yet, the easy entry point for them is nathanbarry.com/launch. Then that will get them on your email list and get them all the wonderful goodness that you give people for free with the obligatory there might, eventually be a sales pitch in there. For the two people who are listening to this but are not on my email list yet, you should be on it: see training.kalzumeus.com. Alright folks, thanks very much for sticking with this podcast through our kind of inconsistent schedule and occasional technical glitches. We’ll be back in a few weeks, so thanks much and see you next time.

 

[Patrick notes:  Still reading?  I've been working this August (and soon to be September -- bah, I always underestimate timelines) on a new project, about conversion optimization for software companies.  As part of the project I've been teaching a brief email mini-course on the subject. People have told me they're getting the 10% increases in conversion rate we've been shooting for.  Click here to sign up.  Totally free, cancel any time, yadda yadda.  There will probably be a more commercial announcement in a few weeks.]

Kalzumeus Podcast 5: Quitting Consulting Via Productization

Keith Perhac and I are back with the 5th epsiode of the Kalzumeus podcast.

Keith and I both have experience working as consultants in software development and online marketing.  People often ask us how to transition away from the feast-or-famine nature of freelancing, where you do very well when you’re delivering engagements and getting them paid quickly, and then do very poorly when work dries up or you have invoice collection issues.  One way to improve on this is building recurring revenue for your consultancy, via products.  A lot of folks think that the only way to do this is spinning a SaaS out of your consultancy.  While I have an abiding love for SaaS, building SaaS businesses takes a metric truckload of time and largely is not a good option if you have e.g. a personal burn rate of $6,000 which you need to cover next month.

Happily, there are many ways to productize your relationships with customers or your expertise as a consultant.

[Patrick notes: The transcript below has my commentary inserted like this, as usual.]

What you’ll learn in this podcast:

  • Why I wound down my consulting business recently, even though it was pretty successful
  • How to sell consulting clients retainer agreements, long term support contracts, and software licenses to become less dependent on revenue from new engagements
  • How “productized consulting” (it’s like infoproducts, except with a less obnoxious name) can make tapering down consulting viable for people who need predictable revenue
  • Examples of non-software products that technically-oriented folks could be creating
  • How Keith and I have applied content marketing (God, another word I hate) and effective use of email to sell these sorts of products
  • Our advice on pricing/packaging, and a few pointers at successful implementations of it to copy liberally be inspired by

If You Want To Listen To It

MP3 Download (~75 minutes, ~68MB) : Right-click here and click Save As.

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

Transcript: Quitting Consulting Via Productization

Patrick McKenzie:  Hideho everybody and thanks for tuning into, what is this, the fifth episode of the Kalzumeus Podcast. I’m Patrick McKenzie, better known as Patio11 on the Internets and I’m here with my co‑host Keith Perhac.

Keith Perhac:  Hi, I’m Keith Perhac, not known on the Internet.

Patrick:  Yeah, it’s been an absurd amount of months since we did the last version of the podcast together. What’s new and exciting with you, Keith?

Keith:  Oh my God, so much. I have a new daughter, which is fun, takes a ton of time out of my life but the main thing that I’ve been working on, non‑family related, is new productization. I’m sure you have a lot to talk about that, as well. I’ve been doing consulting about two years now, going on three. It’s gotten to the point where I want to start that whole productization thing. I think that’s what we’re going to talk about today.

Patrick:  Yeah, I think we’re going to be floundering around a little bit, as always, but largely people have been talking to us. Both folks who want to start consulting, and we’ve covered that topic before I feel, but also folks who feel like they’re stuck in the freelancer/consultant treadmill and want to get off it and start a product business based on that.

Keith:  Exactly.

I Quit Consulting.  Here’s The Expurgated Version Of Why.

Patrick:  We’re addressing that this time. Let’s see. I quit consulting recently.

Keith:  Congratulations.

Patrick:  That isn’t very public on the Internet, but it’s out there now, I guess. A brief background if you haven’t tuned into the other podcasts, since about April 2010‑ish, I’ve done occasional consulting for largely business‑to‑business software‑as‑a‑service firms. At the end of it, it was typically more successful firms in the industry that were doing between $10 and $50 million a year in revenue. I largely did my shtick for them. If you’ve been following me around the Internet, you know I love A/B testing, conversion optimization, pricing and vice, running email campaigns, yadda, yadda, yadda. Basically, if you boil it down to a business card that was tweet sized: “I make money for software companies.” I did that for a while. It was often fun. Unfortunately, I got to the point where there was not much of a future for it.

That isn’t actually true. There was a future for it, but it wasn’t a future that I wanted for myself. For example, at the end of last year, I was routinely bringing business from the Fog Creeks of the world, very successful companies that had a certain amount of scale. The step up from doing fairly motivational things for them at their levels of scale was to go into the Fortune 500 because there were other people who could continue to generate the growth in my weekly rates that I wanted or provide exciting new challenges.

I had an engagement at the Fortune 500 almost happen at the start of this year.  Obviously, I’m NDAed because the Fortune 500 company’s legal department is better funded than the Axis of Evil and twice as nasty.

My experience with the Fortune 500 company didn’t work out so well.

After that didn’t work out so well, it had collapsed in such a way to take out months of my consulting pipeline. [Patrick notes: When established clients or new prospects came to me and said "Do you have any availability in $TIMEFRAME?", I kept saying "I'm sorry, but I believe a large client will have 100% of my availability for the forseeable future."  Then I'd pass them to other consultants.]  I was thinking, “Do I really want to start rebuilding the consulting pipeline?” Which just means getting other engagements on the calendar, prospecting and talking to people who could potentially be good fits and whatnot, with an idea of starting to do more engagements starting in, say, August for delivery. Then having to pretty much pound the ground every week from August to December to make my numbers for the year work out.

Was there a reason to do that?  I took a look at the growth in my product businesses.

Every year for the last two, I’ve said “This is going to be the year where I actually work on Appointment Reminder in a consistent manner.”   And every year it gets neglected.  Appointment Reminder really deserves my attention (both in terms of “it deserves to have a fair shake” and “look at the revenue graph now extrapolate where that would be if you treated that like it mattered”).  I’ve just decided to quietly wind down the consulting business and focus more on my own stuff, which has been working out pretty well. I probably have done more coding on Appointment Reminder in the last month, month and a half, than I have in the previous two years. That’s fun.

Keith:  That’s something that I think a lot of people don’t realize when they get into the consulting or the freelancing gig. Especially I thought when I quit my job and started freelancing, I was like, “This is great. I’m going to be doing interesting programming and development work 80 percent of my time.” [laughter]

Keith:  That is the biggest lie ever. Now, I do still do a lot of development, less so now, but 90 percent of my time, honestly, is overhead. It’s finding new clients, like you said, setting up that funnel for your consulting business. Who is going to come in? Scheduling that all, getting contracts signed, getting contracts done, talking with customers, talking about what you’re going to do. Then you actually only spend a week or two weeks, depending on the contract, doing it. The rest is all overhead.

Patrick:  This is particularly true when you move from a solo consultancy into a firm model, like Keith has. I think, Keith, you are the principal at the firm. You have a bunch of contractors who occasionally work with you.

Keith:  Correct. It’s actually I say that I do a little development. I do much less development now because I do mainly the planning work. It’s like, “We have to meet these target numbers, so we are going to do A, B, C and D.” Then I work with my devs and it’s like, “Hey, let’s accomplish this with one, two and three.” Then in 90 percent of the cases, they’re the ones that are actually coding.

Patrick:  We talked about this in our earlier podcast with Brennan Dunn and company. In the solo consultant model, you’re typically doing pretty well if you can actually bill 75 percent of your time, so 75 percent of the time is actually billing engagements. The other 25 percent of the time is overhead, prospecting for new engagements, taking your vacations, yadda, yadda, yadda. When you move into a model where you’re no longer the sole partner and you have to manage people, typically your billing efficiency drops in drops until the 50 percent region or less as your firm scales up. Then the remaining 50 percent is unbilled time where you are more managing your people or continuing to rain make, get the new engagements, do the prospecting, deal with the administrivia such that your team is able to sustain a 75 percent‑plus billing efficiency.

That’s one reason why when people switch from a solo consultant to having a team, their income actually typically goes down for the first while until they have enough people under them such that the…what’s the word, leverage? Yeah, the leverage works out to more than replace their higher prior rate.

Keith:  Correct.

Patrick:  Anyhow, that’s where our consulting businesses are at, and we frequently hear from other people when we’re going to conferences and whatnot or just reading our inboxes. They similarly have a certain amount of success doing the consulting dance. The word burnout is used very frequently. Consulting, I don’t know if higher stress is the right word, but there is less stability than involved in W‑2 employment, where you just have one boss that you need to keep happy. You often don’t know where next month’s paycheck is going to come from. This sort of thing motivates a lot of people to find something that’s a little more stable for themselves.

Keith:  There’s also a lot of more concentrated work in consulting. Where if you’re, like you say, a W‑2 employee and you have a project, you’re there eight hours, maybe ten hours, depending on where you work, a day. You don’t have that huge rush. For consulting, you line up and spend your time rainmaking, getting the consultants lined up. Then it’s a week of solid work or two weeks of solid work, where you’re not doing anything, except these projects. You don’t have any downtime for meetings. You don’t have really time to just screw around because you have a deadline. You have your milestones that you have to accomplish and you have a very limited amount of time to do it.

Patrick:  Right. One of the reasons consultants can justify our crazy weekly rates is that typically we parachute into the project and just grind it out. Whereas with a W‑2 employee: every business has a cycle associated with it. Sometimes you have your busier periods and sometimes you have periods with a little more slack in them. You can have slack in a consulting engagement. That happens, but typically it’s a result of at least one of the parties not being on the ball. It doesn’t happen quite so often. You will typically spend fairly little time when you’re billing out at $200‑plus an hour reading Reddit.  Well, one would hope.

Keith:  [laughs] One would hope, yeah. I actually had a client (NDAed) who told me after the week was over that I had accomplished more in three days than they had accomplished in six months. He was like, “How do you do it?” I’m just like, “Honestly, because I don’t have to deal with your meetings every day, I don’t have to deal with any fires that come up. If someone says, ‘Oh, someone hacked the server, A and B’s privacy policy isn’t correct,’ I don’t have to drop everything and deal with that. All I have to do is concentrate 100 percent on the milestones in our engagement.” That gives a lot of freedom to just be really creative and be really, really productive.

I’m in the middle of a couple of engagements right now that are much more freeform. They’re mainly for friends, or friends of friends. [Patrick notes: Uh oh.] It’s not a, “Here’s a week of my time.” It’s, “We’ll do about eight, ten hours a week.”

What I’ve actually found is that it’s much harder to do that. It’s much harder to have that ramp‑up and to ramp down and to balance it between my other clients. I would actually highly recommend, and you’ve recommended this to me before, to definitely not do hourly, but not even do daily. Get your contracts as a weekly rate. Block off the time and say this is what we’re going to do in this amount of time. Otherwise, things just sprawl. They really just sprawl out of control.

Patrick:  I also think that it’s generally an anti‑pattern if you have any serious work scheduled for part of your time and then have friends’ or friends of friends’ engagements. You and I are friends. Occasionally we do work together, but it’s difficult to maintain the correct level of professional distance with friends.

Keith:  Definitely.

Patrick:  It’s also difficult to schedule them against the rest of your business if, for example, the rest of your business is actually charging meaningful rates. Then you have a grandfathered rate with a friend where you’re charging what you were charging when you were stupid and just out of college. Not that you were stupid or just out of college when you started your consultancy.

Keith:  [laughs] I was not out of college. I will not say anything about the being stupid when I first started. I think we’re all a bit stupid when we first start consulting.

Patrick:  This is true. That’s one reason why, and this is a little widely ranging, people very rarely stick with their initial set of clients. Partly because your business grows and it’s difficult for all client relationships to grow with you. There were clients that I really, really loved working with that started working with me in my first year of consulting. My rate went up from, I think it was $100 an hour, when I started. By the tail end of the career, I was putting out engagements that had $30,000 a week or $50,000 a week on the estimate and winning them. Not all clients made that jump, to put it mildly.

Keith:  I’m actually in that same position right now. I’m working with a lot of clients. I’m starting to have to phase out some of my older clients, because they are still at the, “Oh yeah, a week of Keith’s time is worth $1,500.” It’s just not anymore.

Patrick:  Yeah. Let’s see. We were talking about why people would want to quit and move to more of the perceived security and control that they get from running a product business, where they are both able to confidently predict that they’ll have enough money to pay the rent next month, even if the pipeline doesn’t work out at 100 percent or if their cash flow management with the existing consultant clients doesn’t work out at 100 percent. For example, there was a thread on Hacker News recently, where somebody had been doing six weeks of consulting for a particular client. There was a $10,000 check that was floating out somewhere. He really needed that $10,000 check. The first way to never get screwed about a $10,000 check is to not really need it.

But, if you’re in that position and the $10,000 will make a meaningful difference to you or your family, that can be a very difficult thing to have to juggle every month versus say having the typical SaaS model, where you might be getting the same $10,000, but it’s split between 40 accounts at $250 each. Any one client deciding to be a screwball with regard to paying their invoice doesn’t necessarily give you the risk of homelessness.

Keith:  Right. It also ties you to your client. If you have a large client that’s paying you 10K a month or 20K a month or whatever in a retainer function, then losing that client hurts you a lot more than if you have maybe 200 customers for your product, paying you $50 or $100 a month. Losing any one of those customers or two of those customers is not going to hurt you as much as losing that one big client.

Patrick:  I think Brennan Dunn had a great line in his podcast recently. He said, “If you are a W‑2 employee, you have one boss. If you move into consulting and have three clients, who are each responsible for about one third of your billing, you now have three bosses.” Each of them is independently capable of getting peeved off at you and independently capable of having a material impact on your standard of living, where if you move up to having 300 clients you no longer have bosses. You have people whose business you can take or leave.

Keith:  It’s in a good way, in a good way, not in a, “Screw you customers, go home.” kind of way. I find that you are more free to be creative and be engaged with the customer, when you are not beholden to them.

Patrick:  I think that’s totally true.  [Patrick notes: This sounds like a theme of 37signals work.]

Keith:  When you are 100 percent in that person’s debt, you’re much less likely to stick your head out and fight for what you believe in, because you’re not willing to rock the boat.

Patrick:  Mm‑hmm, right, not just fight for what you believe in, but also fight for the best possible outcome for the customer. Sometimes what customers need and what they want are not exactly the same thing. Giving them what they want is typically the best way to preserve the relationship. Sometimes, as consultants, you might be incentivized to do things, which you know, in your professional opinion, are not quite the best idea for them, but which are the easiest things that you could possibly sell them. For example…

Keith:  That’s a hard example to come up with. [laughs]

Patrick:  That’s a hard example to come up with, because we don’t want any past client thinking “Oh wait, that was our engagement!” [Patrick notes: Wry humor.  My clients were, of course, uniformly geniuses.]

Patrick:  You can imagine that there are clients out there and let’s say you do web design. You know that certain things convert better than other things. But the design has to get signed off not just by your point of client contact at the company, but their boss as well. A certain way of designing the page might have a little more visual flair to it and makes it easier for their boss to sign off on it, where that would negatively influence their convergence. You know ultimately that they are not in the business to have a beautiful website. They are in the business to make shedloads of money selling their product to customers, who will be happy to use it. But, because you need to continue that relationship, you might be perversely incentivized to give them the design that their boss will like, rather than the design that will convince their customers to get into more business with them.

Keith:  I actually had a customer I can talk about. He loved music on his top page, for some unknown reason.

Patrick:  Oh God.

Keith:  I know. It was a real estate agency.

Patrick:  Oh God.

Keith:  They insisted on putting it on. I was like, “This will drop your conversions. People will run screaming from the page.” The owner of the company told me, “I’ve been doing this web thing for five years. I know what’s going on.” I’m thinking to myself, “I’ve been doing it for 15, but whatever.” Anyway, at that point, we had Google Analytics and the numbers showed that the bounce rate went from something like 30 percent to 80 percent. People just ran screaming from the page. Nothing would convince him otherwise, nothing.

Patrick:  I’ve got to ask. I have a funny feeling what the answer is… Keith, is this one of your American clients or is this one of your Japanese clients?

Keith:  [laughs] No. This was a Japanese client, who I dropped like a hot rock.

Patrick:  I am shocked, shocked to hear this.

Keith:  [laughs] Yeah, no. I would also drop an American client who said that to me as well. But I have had much better luck with my American clients. For everyone, who is just now tuning in, Patrick has been telling me to drop my Japanese clients like a hot rock for quite some time.  [Patrick notes: Not because they're Japanese, just because Keith's conveniently available cross-section of the Japanese market has been uniformly pathological.]

Patrick:  Right. Don’t get me wrong. There exist large classes of people, who you should never, ever work for in America. But you typically don’t get to the top tiers of successful tech companies by being a client you could never, ever work for, whereas that is very, very common in Japan, especially in our neck of the woods. Just empirically, in Keith’s and my businesses, it has been the reproducible problem that working with Japanese corporations has not been nearly as successful as working with American clients. They typically have a much lower peg for the amount they are willing to pay engineers or people who kind of look like engineers. Keith and I don’t really look like engineers in Japan, but, be that as it may…

Keith:  I would just say tech people.

Patrick:  Right, tech people.

Keith:  Anything that deals with technology, like that whole Internet thing.

Patrick:  Right, that whole Internet thing. That whole Internet thing should cost $3,000 a month in Japan, for the fully loaded cost of an engineer [Patrick notes: Hmm, a little low -- $4,000 fully loaded, probably], whereas, in America, it’s closer to $20,000. If you ask for a “ridiculously high rates” like the equivalent of say $60 an hour, your Japanese clients will balk and balk hard at that, whereas a $200 an hour rate or let’s say a $100 an hour rate in America is the number that you would get for just putting out your shingle as a new consultant, who knows how to do in demand technology stack, even if you’re not sophisticated about bringing business value with that technology stack.

Keith:  Right.

Patrick:  By the way, a lot of people ask, “Hey, I’m a freelancer and I don’t charge $100 an hour. How do I get to the point where I can charge $100 an hour?” The answer is often just stop taking engagements at less than $100 an hour, because you are in demand at the moment.  [Patrick notes: For the most actionable business advice packed into the fewest words, see this post by Thomas Ptacek.]

Keith:  Right. I think there is a difference in that you have to position yourself better. This is kind of getting off topic, so I want to close this thread as soon as we finish this. You have to position yourself in a way that the $100 an hour is palatable to the person. You can’t just say, “Oh yeah. I’ll code up your web page for $100 an hour.” That’s probably not going to fly.

Patrick:  Right.

Keith:  Although lately rates have gotten so high that it may fly in some cases. But, if you position yourself, even if you are just coding up a web page for $100 an hour, if you position yourself in such a way that it shows that you are producing value to the business, and that is the biggest thing that you will deal with. This is something we are going to talk about with productization with B2B over B2C. If you are producing actionable results and business results to a company, they are willing to pay whatever. I’m looking for a new accountant here in Japan right now. One of the things I’ve been talking about is accountancy rates, because they go from almost nothing to ungodly expensive. I’ve been very clear. Anyone who can save me, in my taxes, more than I am paying them, I’m happy to pay that.

Patrick:  Right. There is no rate too high.

Keith:  Right, exactly. If I pay you $10,000 a year and you’re saving me $15,000 a year, I’m making $5,000. I’m very happy with that. That’s getting off topic.

Patrick:  That’s totally true. We’ve covered that topic in previous podcasts before.

Keith:  Yeah.

Patrick:  Let’s go into the models that people can use, both when they are still consulting, to do a soft transition to productization and then the harder transition later.

Keith:  Right.

Patrick:  Let’s see. One semi‑productization model for consulting is to just get your clients from the point where you are doing individual engagements and no money comes into the company without a new engagement being proposed, a new statement of work getting issued and a new contract negotiation, to the point where you’re getting money on a recurring basis from them.

Keith:  Right.

Patrick:  One model for that is called the retainer agreement. Keith, I think you have more on the ground experience with this than I do, because I was stupid and never got retainer agreements.

Keith:  [laughs]

Patrick:  Why don’t you describe how you set that up with a typical company?

Keith:  OK. For the first year of consulting, I never had any retainer agreements. They are also hard to do in Japan, another reason why you should not do consulting in Japan. [Patrick notes: Keith is talking about getting clients to agree to them, rather than they being legally problematic or anything.] But, eventually what it comes down to is that it is… after finishing an engagement, it behooves the company to have someone who understands what’s going on behind the scenes with the engagement. If you’re doing an A/B testing engagement, someone who knows the numbers can measure the impact and can essentially take the time every month to iterate, and that’s a great word for startups and it’s really true, iterate on the engagement. If I spend a week creating new landing pages, a new content management strategy for people to increase their SEO, and a new lifecycle email, that’s great. They have created that. But who is going to do the reporting? Who’s going to do the new iterations of that every month? If that’s something that they are willing to do in‑house, that’s great.

But most of the time, when you have hired a consultant, there’s two reasons.

One is you don’t know how to do it yourself. The other is you don’t have the time to do it yourself. That’s a very big one. Even if there are very smart people in your company, they are involved with company things. Like we were saying earlier, someone, who is only focused on tasks A, B and C is much more effective with getting those tasks done. [Patrick notes: One of the hardest problems across clients in my consulting career was convincing the client that they needed to re-task one employee to implement my bag of tricks on an ongoing basis.  A lot explicitly asked me to join the company to do that.  Stupidly I did not have a back-up offer after politely declining, like a retainer agreement for ~3 days a month.]

Having someone every month, not at the full rate…let’s say you charge, for example, $10,000 a week…not someone, who is going to charge you $10,000 every week, but someone who might charge $3,000 or $5,000 a month to come in maybe a day or so, maybe 10 or 20 hours, and put together a report, come up with some new test ideas, approach them to the company and implement them.

Patrick:  Right. This isn’t just a great thing for the consultants. It’s actually a great thing for the company. This both has the perception and the reality of decreasing project risk. You won’t believe how many projects I worked on, where they were a success as of the day I handed them off to the company, but then, for internal focus reasons or whatnot, they just didn’t get somebody to do the feed and watering of the new infant and then the infant died.

Keith:  Right.

Patrick:  For example, they want to protect their investment of say $20,000 in setting up the A/B testing system or getting them running. But they might just not have enough bandwidth internally to make that somebody’s job or they might assign it to a particular engineer and then that engineer gets busy with other priorities in the company and then that one is easy to drop, because it wasn’t his baby. Given that it was your baby originally, just telling people that you can be on top of that for them and that, as a result, it’s going to continue being successful and the engagement won’t get wasted, is a massive value‑add.

Keith:  Right.

Patrick:  It can be the natural continuation of the thing that you did for them. For example, if you’re starting with A/B testing, then obviously continuing to review A/B testing results every month and then sending them a report saying, “Here’s how much money we’ve made in the last month. I have tested these new three things this month. These two got a null result. They failed to create any meaningful value for the business. This last one increased your sales by five percent. Congratulations. BTW, invoice due as usual.” is a big win for them. The consultant reason for doing that is, he amount of time it takes you to implement three new A/B tests, is probably going to be pretty piddling relative to the amount of time it took to win and deliver the engagement in the first place. But you can conceivably get strong amounts of ongoing value for the customer from doing that. Then charge them relative to the strong amounts of ongoing value rather than the marginal amounts of additional work required.  This allows you to crush many conceivable hourly rates.

Keith:  Right. Because you’re charging for an ongoing service and you are charging for an ongoing service that is part creative and part administrative, this is something that is also very good for working within the consultancy. If you’re not a one‑man consultancy, what you do is you have the person or administrator who worked with you, you say, “We have clients A, B, C and D. Please write up the reports for them.” They know how to get the reports. They give you the reports. You look at them. You say, “OK. These are not performing well. These are performing well. We are going to change these A, B, C and D. You go in and change them,” you say, “and then we’ll send the email.”

Patrick:  Right. Typically, in a multi‑person consultancy, you have the A team or the partners winning the engagements. Then you might often have delivery of the engagements being handled by people that have been trained by the A team or the partners, but they’re not necessarily at that level themselves.  [Patrick notes: This is called "leverage" and it is the fundamental economic engine of multiperson consultancies.  Like they say on The Wire: "Buy for $1, sell for $2."]

Keith:  Right.

Patrick:  That is particularly well‑suited to retainer work, because, given that you have created a list of 15 things to try on say on the customer’s home page, actually implementing that within the visual website optimizer, which has already been set up, does not require the partners’ personal attention. They’ve already dictated most of the creative thing. It just needs somebody to actually go in, do the button clicking and then generate a report and send it to the right people at the right time every month.

Keith:  Right. I’ve had a couple of clients balk at this idea. “I’m paying you to do the work, aren’t I?” It’s taking my time from being creative, from coming up with the ideas, from working on ideas and strategies for the company, in order to write the emails or to pull a report. Depending on the report, that can take three to five hours, so that’s three to five hours that I’m spending crunching numbers instead of looking at the report and figuring out what needs to be done. It’s not value added work.

Patrick:  Right. People, who can generate SQL queries or, in pathological cases, people who are capable of downloading Excel spreadsheets and then copy/pasting the numbers into a PowerPoint are probably quite a bit cheaper and just as effective as the founder would be in doing that same amount of grunt work.

Keith:  Right. But someone, who can look at that PowerPoint and say, “Oh crap, here are the trends that we need to fix now” is a much, much different value proposition.

Patrick:  Right, right. It’s making sure that PowerPoint actually gets looked at as opposed to being left on a server somewhere, with no one being assigned to actually look and act on it every month.

Keith:  Correct.

Patrick:  Retainer agreements would have been absolutely transformatively good for my consulting business. Obviously the consulting business was always a part‑time thing for me. I never did more than about 20 percent of my time on it in a year, about 10 weeks of consulting. Say I had 15 consulting clients. I think out of the 15, probably 10 of them would have received enough value in the engagements that they would have happily signed off on having me continuing to keep an eye on things for them over time. Even assuming a fraction of my weekly rate, as the monthly rate for the  retainer agreement, that would probably have had a baseline value for the consultancy of upwards of $20,000 to $30,000 a month in billings. If that had happened, and hypothetically that happened and my consultancy still had the same problem this year with regards to the pipeline going forward, it probably wouldn’t have killed it, because it would be still very worth the time to continue servicing those clients and then build up the forward‑looking pipeline.

But, given that I did not have that, it didn’t have enough residual value for me to justify keeping it around. It’s no skin off my nose, because I have other products in the mix. But if consulting was my primary form of income or my sole source of income, then I would honestly be in quite a pickle at the moment, because I’d be essentially unemployed or unemployed until August.

Keith:  Right.

Patrick:  Then I’d probably be doing things like banging down the bushes to get engagements and not have the amount of pickiness that I can typically generate, typically exercise, with regards to finding engagements, finding a client that I can really do good work for and who is willing to pay the prevailing rate.

Keith:  Right.

Patrick:  Anyhow, other things that you can sell to clients besides retainer agreements?

Keith:  Let’s go into source code or licenses rather, because that’s a really simple one that’s an easy push, from consulting or development work.

Long-term Support As Productized Consulting

Patrick:  OK, then let’s talk about that. A great example of this, by the way, is, if you look at railslts.com, there’s something I suggested a few months ago. I’m still on Rails 2.3. If you’ve been following my blog, you know Rails 2.3 has had some severe security issues in the last six months. It’s also at the end‑of‑life for the product, which means the open source team that supports Rails, Rails core, doesn’t want anything to do with Rails 2.3 anymore. It’s like, if you find a security bug in it, good luck. They don’t want to be in charge of writing patches or managing releases for it anymore. I said that basically any consultancy,which does a significant amount of Rails development and has a lot of clients on 2.3, could get a significant line of business by supporting it in a commercial fashion.

What does that mean? They do the work they are already doing. If a vulnerability is discovered for 2.3, write the patch. Do the work to release the gem for it. But then charge on an ongoing basis for guaranteed access to those gem, to those security releases, in a particular guaranteed timeframe.

Actually, I urgently needed to buy this for my business, because I use Rails 2.3 in Appointment Reminder, which has hospitals as customers. I can’t just tell hospitals, “Yeah, I’m using an old unpatched version of Rails on my server. This technically means that your patient information could be rooted at any time.”

That’s not a very effective sales pitch. [Patrick notes: To say nothing about what Health and Human Services would say if I had a HIPAA-reportable data breach.] I needed to move to a supported version. I talked around with a few people. I found a consultancy called Makandra in Germany. They have a dozen people working for them and they have 50 clients, who are currently on Rails 2.3.

We hammered it out in a way such that I paid them a guaranteed amount of money per year, $10,000 actually. It’s a fair chunk of change, but cheap relative to hiring Rails programmers. They guarantee that, within 24 hours of having a severe vulnerability released for Rails, that they will write a patch for it and incorporate it into their privately distributed fork of Rails 2.3.

Keith:  Here is the difference between this and what we were talking about earlier with the retainer contract. They are not going to patch your software.

Patrick:  Right. They’re not going to patch my software. They didn’t write my software. All they’re doing is taking an extraction from stuff that they have written for other people and selling it to me as a product that I can just basically buy with my credit card.

Keith:  Right.

Patrick:  I think I get something like three hours of guaranteed integration support with it. But it’s not one of their partners will be individually discussing with me about this. It exists. I have access to it. I can buy that. Similarly, you can go to railslts.com and buy that, without having to go through the whole dance of writing a proposal, getting a master services agreement and a statement of work written to wire transfer this over to Germany. It’s just something you can buy on a SaaS model basically.

Keith:  Right. There are two things I want to say about this. First of all, they are not a sponsor. We just love them. [laughs]

Patrick:  Yeah. They are the opposite of a sponsor. They sponsored us for negative $10,000.

Keith:  [laughs]

Patrick:  Ow. By the way, that is the single largest check I have ever written for my business.  [Patrick notes: Good thing I don't have full-time employees, or it would be called "payroll" and be due every two weeks.] I was thrilled to write it, because it means I will not be locked up for losing patient information.

Keith:  Yeah. Yeah. I actually will talk about the big check that I am writing tomorrow in fact. I’ll talk about it in a minute. But what I do want to say on this is that people will think, “They created a product and they are selling it. What’s the difference between that and a productization?” This isn’t a product they created. This is something that they have to do for their day‑to‑day existence as a consulting agency. They are a development consulting agency. They have a lot of clients that they support on this recurring revenue, on these retainer type things, so they have to do the work anyway.

What they are doing is the work that they’ve done overall they’re then reselling.

Selling Licenses To Pre-Written Software To Your Consulting Clients

Keith: I do something very similar to this. I’ve been doing consulting on info products for about two years now. I do a lot of work with things like AWeber, InfusionSoft, OneShoppingCart, all these great or not so great systems, I won’t say which is which, that need coercing.

They don’t work exactly how the customers want. The customers generally want different functions out of them. I have essentially my toolbox. Any one of these can be a licensable piece of software for a client. Not in a SaaS model, because that requires a user interface a lot of the time.

It’s something that I can go to a client and say, “Hey, you know you want to run a contest that interfaces with AWeber and tweets people on their iPhone, when they’re sleeping, etc. I have a great piece of software that does that. We can work out some sort of licensing agreement in addition to the consulting. We do the consulting engagement. We get it all set up, in addition to other stuff. In order to keep using that software, you pay a recurring fee of X.

Patrick:  Or even, depending on the difficulty of the tool, it could be a one‑time downloadable thing with a one‑time license fee.

Keith:  Right, exactly.

Patrick:  There is a great example in the Rails world, about somebody who developed basically a skeleton, bare‑bones app between Rails with the SaaS charging model in place, which obviously a lot of people want to do. It is at RailsKits.com.  You can pay $300 for that and get all of the stupid crafty work of taking credit cards done for you. I happen to know that was greatly successful for his company. That was basically an extraction out of, “Oh God, I’ve written the same code 10 times for 10 different consulting clients, with very slight variations between them.” Given that all the value for the engagement comes for what we layer on top of that code, we could extract that basic user model and the subscribe/unsubscribe pages for the application, extract that, put it into a git  repository somewhere that could be conveniently consumed by people outside the company and then charge for access to that.

Keith:  Exactly.

Patrick:  By the way, that convenient consumption is very important. There are a lot of things that are good enough to do internally, given that it’s only going to be you and people that you know who have used it, which are not good enough to be used externally.

I do a small bit of angel investing. I recently invested in a company called BinPress, which is basically trying to do a dual licensing model for open source projects. If you’ll let me give a little plug for them here: the dual license model for open source is you have one license, which is very permissive, such as GPL or MIT. It’s typically GPL, because GPL plays better with it. You allow anybody to use it. Then you have a different license, which you sell to people, which lets them use the same source code in a less restrictive manner.

For example, the big thing with GPL licenses is, if code is GPL licensed, it is viral and it infects the rest of the application. You can’t have GPL code within an application which is sold on the iPhone App Store, for example. Apple, just blanket, does not allow you to do that.

For example, if you happen to be a mobile developer and you open source any code, if you GPL it, you can sell anyone who actually wants to use it in an application that is put on the App Store, a license that basically un‑GPLs it, with respect to them in particular. It’s a license to distribute it on the Apple App Store.  It doesn’t give them the right to the code. It doesn’t let them sell that code to other people.

They get to see the code. They get to use the code. They get to embed the code in their products on the App Store. But that’s the extent of it. (That was actually a fairly common license for software developers, prior to open source becoming such a big model.)

RedHat also uses a similar variant on that, where you can use the RedHat distribution for free, but there are additional dual license tools and whatnot that you can buy from them. I think they do that. Anyhow, binpress.com makes it easy to facilitate that transaction between people. That’s not a transaction that you have to make in a low-touch model, like buying straight from a website.  (That’s, of course, an option, but then you have to find distribution for it.  cough Binpress cough)

You can just offer that to consulting clients of yours, where, “Rather than paying me two weeks to write something for you from scratch and then you getting the rights to it, under a work for hire arrangement, there is some pre‑existing code I happen to have around that already does this. For a one‑time payment of $1,000, I will write you a two sentence email, which allows you to use it in your product. But you don’t retain rights to the code. I retain rights to the code.”

Keith:  That’s the big one. I’m actually talking with clients now that are like, “Yes, we want to use the code. But we also want to resell it.” That’s where things get really into the sticky situation.

Patrick:  That’s why you should charge them at least 10 times as much, if not more.

Keith:  Exactly, exactly. This is something you need to be careful with, especially if you’re doing dev work as consulting. What is owned by who? I was saying earlier that I write code for interfacing with AWeber. Who owns that code? Do you own that code and the client has a license? Does the client own that code and is it a work for hire, in which case, if it is a work for hire, you cannot use that code for another client. There’s a lot of things that you need to be careful with that I’m looking at that are way out of the scope of this podcast.

Patrick:  Check with your lawyer. If you need to know about this, by default, you will probably be writing things under work for hire. Definitely get a lawyer to look over your standard MSA, master service agreement, which clarifies the assignment of intellectual property. The most consultant‑beneficial thing you could do is to give clients a limited, non‑exclusive license to the code that you write for them, but that doesn’t assign the ownership of it to them. Many clients will push back against that. That’s basically a nonstarter at some larger clients, which will be forcing you to use their MSA and to basically work under work for hire. That’s something where you just have to work out the numbers. Are you charging larger clients enough such that you not getting any capital improvement, as a result of working for them, is a worthwhile thing for you?

Keith:  Right, exactly. You need to keep in mind…and I’ve had a lot of conversations with this. Like Patrick says, get a lawyer. They are worth their weight in gold for things like this. If it is a work for hire and you, for example, have a tool that you’ve been using in the past and you use it for that client, that is no longer your tool.

Patrick:  Right. That can be very, very unfortunate, particularly if that tool is already running on other people’s systems.

Keith:  Exactly.

Patrick:  Oh God, a situation you do not want to be in.

Keith:  Long story short, get a lawyer. [laughs]

Infoproducts: A Word We Hate But A Business Model We Sort Of Like

Patrick:  Anyhow, we were going to talk about info‑products next, right?

Keith:  Yes, I believe so.

Patrick:  Man, that word info‑products, I hate it with a burning passion in my soul.

Keith:  [laughs] I had another description that you hated even more, but I will not say it. I’m not going to rile your anger. [laughs]

Patrick:  OK. The way I always described it is productized consulting, at least in my business, because they were largely outgrowths of the sort of thing that I did for consulting on a routine basis. For example, last October, I released a thing called Hacking Lifecycle emails, which was basically a way to use lifecycle emails and drip marketing campaigns to sell more software for software businesses. It’s obviously a theme that I talk about a lot. That course basically came out of my experience of doing a particular engagement for consulting clients five times and figuring I could continue doing that consulting engagement for five new clients every year or I could distill it into a five‑hour video, teach people how to do it for themselves and then sell it at a fraction of what the price to get me in to do the engagement was.

Keith:  Right, exactly. People will look at this and say, “Oh, but aren’t you just cannibalizing yourself?” You’re taking essentially a $20,000 or $30,000 engagement and you’re compressing it into essentially…I forgot how much you sold it for. Was it $500?

Patrick:  Yeah. It was originally $250 and then $500, after the discount period was over.

Keith:  So you’re essentially cannibalizing your own consulting.

Patrick:  That is the exact opposite of the truth. [laughs]

Keith:  It is, it is. What happens is not only are more people going to get it, but it’s also a gateway drug, in a manner of speaking, because, to be perfectly honest, you do not pull any punches in the video course. You say everything that you do during a consulting engagement with regards to lifecycle emails. You go through every step. You go through everything that you talk about with your clients. The difference is that your clients have not been doing this for three years lifecycle emails. They can get started. They can do a lot with that infoproduct. You can go from zero to quite a bit very quickly. At the same time, it does not hold the same amount of value as hiring Patrick, for example, or hiring you as a consultant to do a week’s worth of work.

Patrick:  Right.

Keith:  That goes back to the conversation we were having earlier. When you have a consultant, they don’t deal with anything but that project.

Patrick:  This is partly a reflection of all clients wanting advice which is exactly specific to their interests. It’s something which Amy Hoy says a lot is that, “If you are starting a new software business, you should probably make it in B2B, because B2B customers are willing to pay a lot more for your software and will have less issues with buying it than B2C customers will.” Amy gets a lot of emails from people saying, “I’m thinking of starting a new business. Should I start it in B2B or B2C?” When she tells them, “You, specifically, Bob, should start it in B2B, because it will allow you to charge a lot more money and have less issues with selling it to customers.” Bob will say, “Wow. Thanks for writing that specific advice to me.”

I often joke that consulting clients really want to buy dramatic blog post ratings as a service.

Keith:  [laughs]

Patrick:  But it definitely seems like they really need to hear, “With respect to your particular business, after looking at all the factors, I will give you the same advice that I give to everybody else, but directly told to you.”

Keith:  Right.

Patrick:  But that’s a risk reducer for a company, because there could be some factor that they’re not aware of that could contravene your advice in the one percent case. They just want to make sure they’re not the one percent case, prior to committing to do something that might be worth six or seven figures to the business.

Keith:  Right, exactly. It’s also a matter of work. I’m having a contractor, right now, redo my yard finally, because it was just overgrown with weeds. He is of the opinion that, “Hey, anyone can do anything.” That’s a great position to be from. For free, he told me essentially what I need to do. He says, “You need to get a backhoe. You need to go here. You need to pour your concrete.” After step three, I’m like, “I understand how to do all this. When am I going to have the time? When am I going to have the inclination to do this? I would rather have you do this for my specific situation.”

Patrick:  The words, “First, you rent a backhoe,” has to be like the, “And then you read two weeks’ worth of free information on the Internet.” of the gardening industry.

Keith:  [laughs]

Patrick:  I had a great line in an email recently. I want to repeat it for everybody, because it’s so true. If clients have internal staff that they could be giving the project to and if the client has to have the internal staff read up on what the information is that they need to start the project and become an expert at the thing that you already have 5+ years of domain expertise in, even if it’s totally free information, they’re going to be writing a $10,000 payroll check with the memo “Reading free information on the Internet.”

Keith:  Right.

Patrick:  Free is not free for them anymore, after it has an actual clock ticking on their employees. That’s a pricing anchor that you can use, both for your consulting services and for infoproducts that put a curation layer on top of the “Wonderful amount of free information that is floating around on the Internet,” if you have the time to search for it and hunt through all the garbage and whatnot.

Keith:  Right. That’s another reason why your infoproduct and other infoproducts in general are so attractive. Yes, I will say, the information that you give on your infoproduct, most of it…I would say maybe 50, 60 percent is available elsewhere on the Internet.

Patrick:  I would say 90%+, if you knew where to look.

Keith:  90? OK, I was being generous. But, if you’re going to say that… [laughs] I think it would take at least three to four months to find it all.

Patrick:  Right. It’s not like I have some über secrets, which I keep from people. If you wanted to, you could probably reproduce most of it from just reading the 350,000 words on my blog, 100,000 words I’ve posted on Hacker News comments and watching approximately 15 hours of conference talks which I’ve given. If you have enough time to do that, mazel tov. You don’t have to pay me any money for anything.

Keith:  Right. But, who has that time? This is something that I think a lot of people miss, before they get into consulting and before they get into real business. When you are an employee, your time to yourself is not that valuable, in many cases, because you have a salary. If you’re sitting there, dicking around on Reddit, if you’re sitting there reading free information on the Internet, you still get paid the same as if you were coding constantly. It’s all a matter of your workload. However, to your employer, that is a very different value proposition.

Patrick:  No employee, anywhere, is free. They are so expensive. People who don’t have employees don’t understand how expensive employees are. I think primarily because people see their own salary and they think the salary is the cost of employing them, whereas employers do the automatic add another 50 to 100 percent to it, because they know that employees cost taxes, benefits, yadda, yadda, yadda, overhead.

Keith:  Space, computers, everything, yeah, free sodas, $10,000 worth of sodas every month. [laughs] My employees drink a lot. [laughs]

Patrick:  Soda, I hate soda as a perk. Soda, as a perk, the message that sends to me is that the company expects you to be a stupid twenty something, who can be convinced to give up tens of thousands of dollars in salary or meaningful amounts of equity in return for lots and lots of free commodity product, which they can purchase for $.60 a can themselves.  [Patrick notes:  And additionally that the company not only does not care about employees' physical health but wants to actively encourage them to compromise it.]

Keith:  Right. [laughs] I hit a sore spot it seems like.

Patrick:  Yeah. OK, let’s make a little less about soda and how tech companies like to screw their young and clueless employees and more on how actually to start from doing info‑products, given that you’re already fairly successful freelancer consultant. What can you make an info‑product about? What’s a good topic for it?

Keith:  Wow. That’s an open‑ended question honestly. If I had the answer, I’d be making a ton of them.

Patrick:  Why don’t we start with particular generalizable tasks, which are needed by a lot of people and that you’ve ended up delivering to a lot of people before?

Keith:  Right.

Patrick:  For example, you’ve said you’ve done lots of work with integrating for various companies that do training as a business, integrating their AWeber and InfusionSoft and yadda, yadda together. Obviously they have API documentation somewhere and that’s something that you could snap together with enough time or with downloading some code to do it for you. But you might be able to produce, for example, a 50 page book on how to integrate X, Y and Z together.

Keith:  Right, exactly. This is one of the problems that, as a domain knowledge expert, you come into. As an expert, you don’t know what other people don’t know. It’s very difficult. This is one of the things. If Patrick was to come to me and say, “What would I do an infoproduct about?” I could give him maybe five or six ideas. But he asked me and I’m like, “I have no idea.” I don’t know what of my knowledge is marketable. I know it, as a consulting style, but not in terms of what I could put in an ebook.

It’s interesting, you mentioned the InfusionSoft. Jermaine Griggs has done just that. He’s been using InfusionSoft pretty much since it started. He has built up a large consultancy just on getting InfusionSoft to perform the way that marketers want. It’s doing very well for him.

No matter what you do, if you have done it over and over again…and what I do, for any client, is have a swipe folder for whenever a client says, “Oh wow, I never would have thought of that. Hey, would it be possible to do this?”

If you have one client saying, “Is this possible?” there’s a chance that other people are saying it is well. This might be something to go back through and look at, when you’re thinking of an info‑product, when you’re thinking of what information you can package up. It’s like here are A, B, C and D, which I think are a 10 minute piece of work, but apparently produced a lot of value to my clients in the past.

Patrick:  Speaking of hitching your star to an existing product or service, many of us have tools, be that a software package or a service that they use, that we really like. Given that the profile for that tool is often larger than our own personal profile, writing the definitive guide on how to use that tool, vis‑à‑vis a particular industry or attempting to do a particular task, can be a very worthwhile way to get started on infoproducts. I don’t do it for consulting clients that often, but I have a legitimate amount of expertise on getting Twilio to work in a production environment, because Appointment Reminder, for example, actually runs in production.  [Patrick notes: To paraphrase Joel Spolsky on using cutting edge technologies, I have "bled all over" using Twilio in pursuit of actual business goals.  Ask me about how you explain answering machine detection to non-technical customers sometime.]

No documentation for a company is ever complete.  I know the missing bits to the Twilio documentation. “After you’ve gotten the quick start, here’s how you get into production without having clients want to break your neck when it’s distributed denial’s of service them.” Or “here’s how to test Twilio applications correctly.”

Keith:  Sorry to break in real quick, but this is something that, for an employer or for someone that wants to use Twilio in a production environment, instead of going through 60 free blogs with information that may or may not be correct or that may be old, or honestly just may be horrible, having it all in one piece of information that is paid…and this is the key. Paid information has a sense of quality about it. It relies on a person selling it to keep that quality, because otherwise, no one is going to buy it. It’s free for someone to post crappy information on the Internet. To get someone to actually be buying your information, it has to be good enough that people are going to buy it, not refund it, and tell their friends.

Patrick:  Right. Just the act of putting a price tag on something increases the perceived value behind it. Again, I’ve done essentially dramatic blog post readings for clients, where they could have read the exact same advice on a blog. In some cases, they had read the identifiable post that I was about to quote them. I just told them that straight to their face. They said, “Wow, we are going to get on that right away.”

Keith:  [laughs]

Patrick:  Yeah, you can look at Twilio and say, “OK. There is no good information on the Internet right now or no good concentrated, curated source of information for how to test a Twilio application, so I’m going to write that book.”

In 2013, even as a fairly accomplished Rails developer, I don’t know how you would go getting someone from the point of, “I have a git repository right now. I want to deploy this Rails application. What is the best practice for that?” Is it to “just use Heroku”? There’s no button on the Internet that says, “Click here to just use Heroku.” It’s a little more difficult. How do you set up a repeatable deploy process for Ruby on Rails? “Just use Capistrano or just use Chef or just use Puppet.” If you wrote the consumable, “Here is a book that you can buy for $75, which is going to save you the next two weeks trying to read blog posts written about Puppet in 2011, which are using command line parameters that don’t currently work anymore,” that would sell decently.

How To Package Products Intelligently

Patrick:  Is that something that you do on a regular basis, you know where the pitfalls are and you know where the pain point is that’s going to drive the developer to look for that, you can certainly package that up. Packaging it up in multiple formats works well. Nathan Barry is totally a genius at this I think. This is a trick that I will be using in my own info‑products in the future. There is a spectrum in how passive and active people want to be with information. The passive approach is just, “I want to buy a book and read it and do all the work myself.”

There is approaches, which are less passive, where the outcome is more guaranteed where, “I don’t want to just buy the book, I want to be able to talk to other people about the implementing the advice in the book or talk to you about implementing the advice in the book.” One level closer to the action or closer to the desired outcome might be, rather than talking to other people directly or hearing advice from you directly with regards to other people, “I want to just get on a phone call with you for an hour and talk about our particular circumstances such that nobody else can hear it.”

That might be a good way to break down three tiers for fundamentally the sale value proposition but three tiers of a product which capture increasing amounts of value from the customers for deliver increasing amounts of value for them, in terms of getting them closer and closer to their goal of getting the application deployed or what have you.

Keith:  Exactly, and that’s a mix of the info product and the consulting package, right? At the lower levels, you’re essentially just selling an ebook and at the higher levels, you’re selling your time, again for consulting. It’s packaged in such a way that it is more repeatable than going out. You don’t have to rainmake for it. It’s work that comes to you instead of work that you have to go out and get.

Patrick:  You don’t even necessarily have to put in your time into the higher‑level packages, by the way. For example, if just the e‑book…If you have the deploying Twilio, or the deploying applications book or whatever, if just the e‑book is the first tier, then you can have a tier that costs twice as much or more for the e‑book plus a git repository of downloadable code samples that they can copy/paste into their own applications and start mangling until it works. Or the e‑book plus your recommended puppet script for getting a bare‑bones Twilio testing environment to put into production, or what have you. Then on top of that, you could have the ebook plus a screencast of you setting up a Twilio application from scratch, plus the Puppet script. Play with the tiers there, but you can have an incredible amount of additional sales driven from customers who are not that price sensitive if you have additional value associated with the more expensive plans.

It gives you an easy, consumable, affordable option at the low end for people who just want to test the waters, and then for the people who have been fans of you for a while, they know you generally produce good work, they have a burning need for this in their organization, it gives them a way to spend more money on you.

Keith:  Right, exactly, exactly.

Patrick:  Nathan Barry has great blog posts (here and here among others) about how he did a three‑tier structure for some of his e‑books like “Designing Web Applications,” which worked out very well. The first tier for just the e‑book was, I think, in the sub $50 region. Then the middle tier was about two times that. The top tier was about five times that. It’s actually something that I heard from the Gumroad folks. Gumroad does fulfillment for info products. They say that A, their most successful merchants do a tiering structure and B, the most successful merchants, be they selling business‑to‑business info products or even things like CDs, generally have a 1X, 2.2X, 5X breakdown into the pricing for the tiers. I don’t think 5X is the ceiling, by the way, especially if you’re getting into a more hybridized consulting offering at the high end.

Keith:  Definitely not.

Patrick:  It’s a start. One of the reasons when I released my first product last year, the email thing, that I didn’t have hybrid structure was because I just didn’t have time to do any sort of delivery in the several months after releasing it.  I thought, “Well OK, I’ll just do a one and done thing, buy it or don’t buy it.” I didn’t have many tiers associated with it. Then I had an idea. “Wait, it’s going to be downloadable and people can watch it at their own speed, but I’ll just put a license on there for corporate use, so that you could download it and share it with your team at the corporation.”

That required virtually no work on my part. It was just adding another thing into the possible checkout basket and writing two sentences of legal copy saying, “Yes, you are allowed to share this with up to 100 members at your organization,” and then putting a price tag on it.

The price tag for that is, I think, $2,000 if you buy it off the shelf right now. Surprise, surprise, people buy it because $2,000 at a software company doesn’t really move the needle. If they’re going to make six figures, plus, off the implementation of the advice, then they’re going to want to cross their I’s and dot their T’s with regard to the licensing of the things that they’re using within the companies.

That’s a fairly hot‑button issue at software companies. You always want to know the license of the code you’re using and you always want to respect the IP rights of people whose products you’re using, because software companies are basically built on that. Yeah, micro tip, use a corporate license, charge 4X or 5X as much as the personal license. It’s free money.

Keith:  You had mentioned writing a Twilio book. I wonder when we’ll see the first, “Learn How to Use Twilio: The Pitfalls” e‑book come out on Hacker News.

Patrick:  Please write that book, seriously.

Keith:  Yeah, it would be great.

Patrick:  You can steal that idea. I’m never going to do it, just because I am interested in Twilio. I do a talk like that every year at the Twilio conference, but that was never the burning enough interest for me to actually sit down and do the work of writing that book. If you’re going to sit down and do the work of writing that book, please.

Building Products For Other Peoples’ Platforms Gets You Access To Their Audience

Patrick: By the way, you might not think I have enough of a profile to do something like this. If you write the definitive book on Twilio, you know who will be happy to get that book into the hands of as many people as possible? That’s right, Twilio, because Twilio makes money when people make phone calls and SMS messages on Twilio. Since your book knocks down the objections within client companies of, “Well, yeah, we could use that Twilio thing, but no one here knows how to use it.”

Twilio would happily send out an announcement about that book to their list of 100,000 developers who are writing about the platform. I don’t know that they would be happy about that, but I rather suspect they would be.

Keith:  Now, this is something interesting. When you’re working with platforms and talking to them, definitely talk to the people that you are writing about. If you’re writing AWeber book, I know the guys at AWeber would be thrilled for someone to write a book like that because it’s free PR on their side and, like you say, it gets people using AWeber. The same with Infusionsoft, actually it’s interesting. If you go to Infusionsoft’s website, you will be retargeted for ads for Jermaine Griggs’ stuff because he is the number one Infusionsoft marketer. They use him. They essentially have a group promotion thing going on, I assume. I don’t know.

Patrick:  Let’s talk about you and I just understood what happened there, but I think some of the folks who don’t understand retargeting technology recognize the importance of what you just said. They basically allowed this consultant who uses their service, to put a tracking pixel on their own website, such that people that view their website are pitched his stuff when they go to other websites, like Facebook or TechCrunch or what have you. They get those lovely little ads that stalk you around the Internet in the top corner.

Keith:  Which are highly obnoxious, once you know what’s going on.

Patrick:  That’s not true.

Keith:  Well, I did not say they were not effective. [laughs]

Patrick:  They’re not obnoxious if the thing you need to do for work this week is to get Infusionsoft integrated. Then those ads are exactly what you want to be seeing.

Keith:  Exactly.

Patrick:  Clearly, he has such a close enough relationship with them, such that they’re placing things on their own web pages at his commercial behest.

Keith:  This is conjecture on our part because I visited the Infusionsoft website and then I started getting those retargeted ads. I do not know any contract between the two, etc. I’m just saying that is a view that is happening. That might be happening.

What you’re doing is you’re saying someone who looked at Infusionsoft, “Oh, I might be interested in Infusionsoft, but I don’t know how to use it.”

Suddenly, you have all of these advertisement. You have all of this information coming to you. It’s like, “Don’t know how to use Infusionsoft? Check out this book, ‘The ABCs of Infusionsoft.’ See how to get the most out of Infusionsoft.”

What this does for Jermaine is it gets him customers for his book and for his consulting. What it gets Infusionsoft is tons of new customers, because they see, “Oh, this is really powerful. Oh, this is really easy to use.”  [Patrick notes: More importantly, it reduces perceived execution risk of using Infusionsoft improperly.  That risk is a core objection to adopting Infusionsoft in the first place.]

Patrick:  Now, in an ideal world, you would expect your technology platforms to be writing all of this documentation and giving it away for the customers for free, but how many technology platforms do you know out there that have ideal documentation written for them?

Keith:  It’s not even ideal documentation for most companies. There was an interesting article on Hacker News that was you don’t know who your API users are.

Patrick:  Oh, yeah. That’s absolutely true. Why don’t we give the brief rundown of that article?

Keith:  Can you give that real quick then?

Patrick:  Sure. The idea with you don’t know who your API consumers are, or that not all API consumers are folks like us, developers that are used to integrating APIs and do this 15 times a week. A lot of them are power users of applications. They’re technical enough to understand, let’s say, Gmail and Basecamp and name your favorite invoicing software, Freckle. Freckle doesn’t do invoicing, so Gmail, Base Camp, Freckle and FreshBooks could together be used to run a web design consultancy. They’re not technical enough to integrate those four APIs together, but they know it has to be able to get done somewhere.

They have some long‑tail need, in terms of, “I want it, when I send an invoice to somebody, to automatically send me an email two weeks later to remind me to follow up with them.” That’s something that they could build in 15 lines of code if they just knew how to use your API. You should build your API such that it is easily consumable by people who are not technically developers, but want to do it to build in the one percent features that you’re not going to build into the actual product.

Keith:  It goes to the same, even if you’re not on an API. I use AWeber a lot because my clients use AWeber. I’ve talked to the guys at AWeber and some of the comments I get is, “No one uses AWeber like this. No one has gone this in depth into AWeber.” There’s always going to be power users. I don’t think that we do that amazing stuff. We do what I consider a bare minimum, but there’s a lot of ways that your customers are probably using your platform that you don’t know about.

Patrick:  That’s totally true, too. A lot of these companies, there is only a certain amount that the people at the company can possibly know about the environment in a given industry or customer or use case. Twilio has north of 100 very smart, dedicated people working for them. Despite this, I’m willing to bet that nobody working at Twilio understands the banking industry like somebody who has worked at a bank for 10 years does. If you routinely grind out two factor authentication apps for the banking industry, I bet you could write a very compelling book about two factor authentication apps for the banking industry that Twilio would never be able to write even in 100 years. Whether you could sell enough of that to make it worth your while is a good question. But considering that you are writing things for banks, you are probably charging them very significant amounts of money. They could also pay very significant amounts of money even for just the description of it.

A lot of the products, even just books and whatnot that are sold on very technical topics to industries that are awash in money cost scads. There is a great book about the microstructure of the financial markets. That’s not the exact title, but it’s something like that. It’s basically how the various pieces of US exchanges talk to each other on a software level. If you need to know that, millions of dollars is riding on you not screwing that up. That book costs…That’s not something you can go and buy from Amazon for nine bucks.

Keith:  It all goes back to what it would cost, if I was to learn this myself, and not only what is the cost if I was going to learn this myself, what it the cost if I was to learn this myself and fuck it up.

Patrick:  Right. What is the risk associated with that? You do not want to be the next team lead in charge of Knight Capital. “Oh, we hooked up a testing system to the real Internet and then blew up our company [laughs] and did $400 million of trades in a day.”

Keith:  Oops.

Patrick:  That sort of oopsie is what is called a “career limiting move.” Given that people can often spend their company’s money on avoiding career limiting moves for themselves, that’s a win all around. Right?

Keith:  Right.

Email People Things That They’ll Find Interesting.

Patrick:  Let’s see. We briefly talked about the productization stuff and how people get started on that. We didn’t talk about email yet. Let’s bang the drum one more time. If you’re going to be selling anything, whether it’s consulting services or whether you’re thinking of productizing, you should really have an email list. You should be publishing something, such that people get on your email list. Then you should do a nice job of watering that email list or keeping it warm by periodically sending them things that they will be interested in.

Keith:  Right, exactly, exactly. I wanted to talk…

Patrick:  Do you have an email list?

Keith:  Yes. Ask me how many emails I send out?

Patrick:  How many emails did you send out today Keith?

Keith:  I think I’ve sent out three in total.

Patrick:  OK. I have an email list. I recently recommitted to emailing it every week, rain or shine. I’m currently on week one of that. It’s going to be week two as of this Friday. [Patrick notes: This is as of several weeks ago due to the time lag in producing podcasts.] If you’re not on my email list by the way, it’s training.kalzumeus.com. I’ll link it up in the show notes. You should be on it. There was an email last week about what product companies can learn from consulting companies. If you are listening this much into the podcast, it would have been very interesting for you. There will be an email in the next couple of days on what consulting companies can learn from product companies, which would also interest you, which you probably won’t get, because you are hearing this podcast later. The next thing you will be interested in, you should be on the email list for. This is the equivalent of a sponsored ad for the podcast, except it’s sponsored by me.

Keith:  [laughs] Listen, subscribe to Patrick’s emails. Don’t subscribe to my emails, because I never send them. That will be coming probably by the next podcast.

Patrick:  Why don’t you send them? We are giving this advice to people. It easier for us to give advice that we don’t actually take. How hard is that actually going to be for you to write an email to that email list? If this was a consulting client, and they said, “Oh God, I’ve got too many things to do. I don’t have enough time to write an email.” Does your consulting client really have enough time to write an email?

Keith:  They have enough time to write an email. I have enough time to write an email. Someone said this. I don’t remember who it was. You need to change the way you phrase things. You don’t phrase things as in, “I don’t have time,” because you always have time. You say, “It is not a priority.” When you choose to not do something, because you “don’t have time,” it’s not that you don’t have time. You could easily move something. It’s a matter of priorities. Right now, where I am in the consultancy and where I am with my productization, it is not a priority to get those emails out, to be 100 percent honest. It should be. It should be. For myself, there are other things I need to be working on. That’s why I say, in a month, those emails will start going out, because that’s part of the product plan.

Patrick:  Right. Figure out the 15 minutes that you need to write that email. Your first email could literally be the difference between not having enough time and priorities as a mindset.

Keith:  Exactly.

Patrick:  You could just write two paragraphs explaining the thing that we just talked about and then three examples of applying it to a business, and boom, done. That’s an email.

Keith:  Right.

Patrick:  That keeps your name in front of people and gives them some sort of value to hang their hat on for getting emails from you.

Keith:  Exactly.

Patrick:  For many, especially the less sophisticated consultancies in the room, that might be a mind blowing mindset shift for them.

Keith:  Yes.

Patrick:  OK. So you will be writing emails. I will write emails.

Keith:  [laughs]

Patrick:  To all the people, who are listening to this, you don’t have to have the infoproduct written yet. Just get the landing page up for it, maybe with a little bit of a description on what the thing you are eventually going to be selling is. Then just ask people if they want to hear about it, giving their email address. Then just keep in touch with them about that.

Two great examples of this which I saw recently, both regarding Rails security: Rails Security and Securing Rails.  They’re worth looking at both if you’re interested in that topic and for the meta-topic of how to do a good pitch for asking for an email address.

Keith:  While you’re doing that, I want to jump in with two things, really quick. I think, after the email conversation, we are going to cut it, because we are already at an hour and a half.

Patrick:  Sure.

Keith:  There are two things. First of all, like you say, before you even have the product, you can have an email list. When Meteor was just becoming a name, what was that? Nine months, a year ago, or something like that, all they had was a five‑minute video, a sales page or an information page that said what they were doing and then an email list that said, “Let me know more.” It was so compelling that so many people signed up. Suddenly they have all these people that they are communicating and reaching out to every month, every week, whatever timeline they decide. Those have two purposes. One is just to keep your name in front of them.

Patrick:  Right.

Keith:  Honestly, if Meteor had never emailed me again, I would never have thought of them twice. But, because they emailed me about once a month I guess with new information, I’m always like, “Oh, I wonder what Meteor is up to.” It gives me an idea that they still exist. The other one is just amazing freaking content. This is a recommendation for everyone. I’m going to ask if you know Wistia, expecting people on the podcast to answer me. [laughs] Wistia does video hosting. They are kind of like Vimeo. They are kind of like YouTube. But they are completely amazing. They probably have the best email marketing campaign that I have ever seen in my life.

Patrick:  I will +1 that opinion. It is totally amazing.

Keith:  They are probably the only email that I will drop whatever I am doing to watch it. It’s generally about a five‑minute or less than five‑minute video that tells you just amazing information on how to take better videos.

Patrick:  Right.

Keith:  They’re well made. They’re very informative, and they’re just a quick little snippets.

Patrick:  Right. They knock down objections to using the product like, “Objection, I can’t take video. I don’t have a good camera.” They have a video how to produce production‑quality video using your iPhone, which is shot on an iPhone. It’s got a funny ha‑ha sensibility to it, but it’s also funny ha‑ha sensibility which also actually teaches you how to shoot production‑quality camera footage on an iPhone. Like, use a stand, lighting is very important, here’s how to do the lighting. Then a few weeks later, they send you a video just on how to do lighting on a $100 budget. You can put together a lighting kit at Home Depot, or Best Buy or wherever.

Keith:  Which was amazing. Honestly, the iPhone video and then the lighting video pretty much sold me on that campaign. I’ve listened to everything ever since.

Patrick:  Right. Who are you going to use the next time a client needs video hosting done?  [Patrick notes: Sorry, the SEO in me wanted to give them a nice anchor for the attribution link.]

Keith:  Wistia.

Patrick:  Yeah, of course.

Keith:  At this point, again, they are not a sponsor. I use Wistia exclusively. I believe you use Wistia as well.

Patrick:  Yeah, my current lifetime value to them $3,200 and counting.

Keith:  Woo‑hoo.

Patrick:  I continue to doing it.  I suppose theoretically I could move some of my videos to YouTube or whatever, but why would I ever do that? Their product works really well and I feel I’m going in debt to them for making my business better every month just by teaching me things.

Keith:  Exactly, exactly. This goes back to the same thing that we were talking about with Twilio is that when they have more people making good video, they are making more money. The more people who are making good video, the more people who are watching the video, the more people who are signing up for their service to make, to produce video and to distribute video, the better their company is.

Patrick:  By the way, if Wistia didn’t already have that lighting video, you could have made that lighting video and sold it. Wistia would be happy to plug you to their email list about it. You could potentially have an arrangement where, “Hey, I noticed that you have a gap in your education/offering, such that people don’t know…” I don’t even know enough about video to know what I don’t know about video.

Keith:  [laughs]

Patrick:  It’s very true about customers, by the way. If you, being a freelance videographer, know enough about video to know what I don’t know about video, you could go to Wistia and say, “Your customers don’t know this thing about video that Patrick doesn’t know.” We’ll make this thing for them. Maybe we’ll let you use that for some flat fee. You can give it away for free to all of your customers. We’ll sell it on a paid basis to other people. That’s a way to underwrite your own content costs, without taking on the market risks yourself.

Wistia presumably has the scale to make it work. You go to a platform company and say, “We’ll produce this” and get $5,000 or $10,000 of guaranteed business from them prior to selling it. Now that you have the production costs covered, you can sell the marginal copies at $50 or $100 or whatever.

If it’s a great hit beyond that, great. If not, well, you’re not out any money.

Keith:  Right, exactly. We’ve said this multiple times during the podcast. You look at things like FreshBooks and whatnot. They are very happy to promote people who are using their API, who are using their system to produce that value to their customers, because in the end, that gets them more customers. Whether that’s an info product, whether that’s an actual developed product, like something that hooks into the system that reduces a pain point, these companies will help you sell your information, your product, because it helps them in the end.

Patrick:  Ooh, micro hint here: You can approach any API company or product that you do business with routinely and offer them a trade like, “I will write something for you, for example, a guest post on your blog with a description of an integration that we did for one particular company. All that I ask in return from this is a little link at the bottom,” to say the landing page where you’re going to ask people to sign up for your email list. It’s a great way to get your name in front of people and start developing your list, which is an asset that you can use to sell your own stuff. Where selling it directly from their blog, that might be more socially awkward to sell to the platform company.

Keith:  Right.

Patrick:  Attribution links, very easy sell and then you can still get a meaningful amount of exposure based on it. Plus, then that gives you something to put in your sales page, “As featured on the blah‑blah‑blah blog…”

Keith:  [laughs] Oh, that social proof. I think that’s a conversation for another time.

Patrick:  Yeah, probably. All right, well, thanks everybody for turning into this edition of the podcast. We’re hopefully going to be doing on them, knock on wood, more consistent schedule going forward, although I think we’ve said that in five out of five podcasts so far.

Keith:  I think we have. We’ve been doing this, what, almost a year now? Over a year, a year and a half.

Patrick:  People tell me closer to two, actually.

Keith:  Wow, that’s mind blowing, and we’ve done five. We will work harder, especially since Patrick is getting out of consulting and he will hopefully have more time in Japan so that we can get these made more.

Patrick:  Yeah, definitely. All right everybody, well, if you are somehow not in our ecosystem already, you can follow my blog at www.kalzumeus.com or, again, sign up for emails at training.kalzumeus.com. Keith, where can people follow you?

Keith:  Right now, they can’t because I have my products under the radar and my consulting web page is all in Japanese. [laughs]

[Patrick notes: He really is a marketing genius guys... just mostly for other people.  Incidentally, for those of you who wonder "How could you possibly run a consulting business without being'Internet famous'?", despite literally not even having an English language website Keith's company has billings in the you-wouldn't-believe-me-if-I-told-you region.]

You can always go to delfi‑net.com. If you can read Japanese, you’re welcome to check out the blog and the company information. If not, I should have something for everyone by next podcast.

Patrick:  A micro tip for everybody, by the way, if you do conference talks or anything, not to grind Keith’s nose in it, but have a better answer to that question than Keith did.  Put a link on the last slide saying “Interested in this topic?  Give me your email address at (PUT A BITLY LINK HERE) and I’ll send you (SOMETHING OF VALUE GOES HERE).”  It always works and takes mere seconds to say.

Keith:  Yes.

Patrick:  Anyhow, we’ll see you next time.

Keith:  All right, take care, guys. Thank you.

And Now A Brief Word From Our Sponsors Me

If you are currently a consultant and are intrigued by some of the ideas we discussed in this podcast, such as

  • how to sell clients on giving you more money, more predictably, for less hours worked, and having them love every minute of it
  • building sustainable revenue to de-risk your consultancy
  • growing your business beyond the inevitable constraint that you only have 24 hours a day

Then you should come to a bootcamp on the subject of building recurring revenue for consultancies.  Brennan Dunn and I are hosting it, on your local Internet, on August 8th.  We’ll be taking a very in-depth look at retainer agreements and other hybridized product/consulting models.

If you’re on the fence, here’s what one consultant had to say about my business advice:

“I’m a consultant that delivers web application software for startups and small businesses. Patrick writes concise, high-impact advice on running consultancies. Putting his strategies and tactics to use at Happy Bear Software has kept my pipeline full, my clients happy, and my bank balance consistently on the rise (via improved cash-flow, negotiating, and raising rates). His writing has single-handedly changed the trajectory of my business. If you run your own consultancy, his advice is the most important thing you’ll implement this year. It will probably make you astonishing amounts of money. I’ll be at the Bootcamp, too.”
Najaf Ali, CEO of Happy Bear Software

Go read about the bootcamp and, if it is appropriate for your business, sign up for it. We’ve got two dozen people committed to attend, and want to keep the class manageable, so we might have to close registration at some point.  If you want to be sure you’ll get in, reserve your spot earlier rather than later.  (Also, if you buy before the 24th, we’ll give you a professionally designed retainer agreement monthly report template.  Good design is one of the ways that you communicate to clients that they’re getting their money’s worth.  Want to hear more ways to do that?  Come to the bootcamp.)

We look forward to seeing you there.

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

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

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

What you’ll learn in this podcast:

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

If You Want To Listen To It

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

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

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

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

Matt Wensing:  Hey, how you doing, Patrick?

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

Matt:  [laughs]

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

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

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

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

[laughter]

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

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

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

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

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

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

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

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

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

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

Matt:  [laughs]

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

Matt:  [laughs]

Patrick:  The Internet is a funny, funny thing.

Matt:  It is.

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

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

Matt:  Yeah.

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

Matt:  Yeah.

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

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

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

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

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

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

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

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

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

Matt:  [laughs]

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

Matt:  [laughs]

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

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

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

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

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

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

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

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

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

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

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

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

Matt:  [laughs]

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

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

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

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

Matt:  Sure. Yeah, sounds great.

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

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

Patrick:  Both of those, I guess.

Matt:  [laughs] Sure.

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

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

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

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

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

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

Matt:  [laughs]

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

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

Matt:  Sure.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Patrick: I so strongly agree with that.

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

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

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

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

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

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

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

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

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

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

Matt:  Exactly.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Matt:  [laughs]

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

Matt:  [laughs]

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

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

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

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

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

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

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

Matt:  Yeah.

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

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

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

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

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

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

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

Matt:  Just say it in Japanese. [laughs]

Patrick:  Adverse selection process.

Matt:  Yeah.

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

Matt:  Yeah. [laughs]

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

Matt:  Yeah.

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

Matt:  Probably not.

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

Matt:  [laughs] Sounds like.

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

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

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

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

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

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

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

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

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

Matt:  Yeah.

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

Matt:  Yep.

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

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

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

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

Matt:  [laughs]

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

Matt:  Thanks, Patrick.

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

Matt:  Sure. Or know somebody that does.

How To Price Software Which Is Mission Critical For Business Customers

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

Matt:  Sure. [laughs]

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

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

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

Matt:  Yeah, I mean what…

Patrick:  Oh, sorry. You go.

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

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

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

Matt:  [laughs]

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

Matt:  Take that, yep.

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

Matt:  Right. [laughter]

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

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

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

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

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

Matt:  Sure.

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

How To Sell Into The Enterprise

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

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

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

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

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

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

Matt:  Yes. Yeah, absolutely.

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

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

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

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

Patrick:  Oh, boy. Life is wonderful.

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

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

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

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

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

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

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

[laughter]

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

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

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

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

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

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

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

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

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

Matt:  Yeah.

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

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

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

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

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

Matt:  Awesome.

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

Matt:  Oh, yeah. Yeah.

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

Matt:  Yeah. [laughs]

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

Matt:  Yeah. Absolutely.

Patrick:  Not that I hate sales guys.

Matt:  [laughs]

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

Matt:  Yeah. No, absolutely, absolutely.

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

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

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

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

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

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

Matt:  Bye.

Kalzumeus Podcast 3: Growing Consulting Practices, with Brennan Dunn

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

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

If You Want To Listen To It

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

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

Transcript: Running a Consulting Business, With Brennan Dunn

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

Keith Perhac:  Hello.

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

Keith:  Woo!

Brennan Dunn:  Hey there.

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

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

Keith:  OK.

Patrick:  This is still a third‑rate podcast.

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

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

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

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

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

Three Very Different Consulting Businesses

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

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

[Patrick notes:

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

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

Brennan:  Oh, yes.

The Many Benefits Of Charging More

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

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

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

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

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

Keith, can you help me translate that?

Keith:  Proper? Solid, business?

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

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

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

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

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

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

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

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

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

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

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

Brennan:  Right.

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

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

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

Brennan:  Right.

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

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

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

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

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

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

Patrick:  Yes.

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

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

Patrick:  Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

Selling Better Code As A Benefit Rather Than A Feature

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

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

Keith:  Right, exactly.

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

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

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

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

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

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

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

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

[Patrick notes:

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

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

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

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

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

Different Business Models For Consulting Companies

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Difference Between Charge Out Rates And Employee Wages

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

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

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

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

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

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

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

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

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

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

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

Keith:  Exactly.

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

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

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

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

[Patrick notes:

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

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

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

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

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

]

Brennan and Keith: That sounds about right.

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

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

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

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

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

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

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

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

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

Keith:  Infinitely.

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

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

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

Patrick:  Yeah.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brennan:  Right.

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

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

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

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

Brennan:  Exactly.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Keith:  More of a year for me, actually.

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

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

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

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

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

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

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

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

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

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

Keith:  Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Brennan:  Right.

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

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

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

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

Patrick:  That is so true.

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

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

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

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

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

Brennan:  Exactly.

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

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

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

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

Selling Info-Products

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

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

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

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

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

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

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

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

Patrick:  Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

To see more, sign up for my email list.

Keith:  Not too subtle there.

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

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

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

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

Patrick:  Oh God yes.

Keith:  Oh, yeah.

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

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

Keith:  Exactly.

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

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

How To Avoid The Content Treadmill

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Patrick:  Let’s go into it.

Keith:  You want to get into it?

Patrick:  Yeah, why not?

Keith:  All right. All right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Applying Drip Marketing To Services Businesses

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

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

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

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

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

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

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

Patrick:  Same here.

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

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

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

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

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

Keith:  Oh, that’s awesome.

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

“Oh, that’s awesome.”

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

Patrick:  It would never happen.

Brennan:  … A mountain.

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

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

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

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

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

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

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

That sort of thing works.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Patrick:  I paid for a copy.

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

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

Keith:  Charge more. Charge more.

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

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

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

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

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

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

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

Patrick:  Absolutely.

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

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

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

Keith:  Very nice.

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

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

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

Brennan:  No, I don’t.

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

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

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

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

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

Brennan:  Thank you.

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

Keith:  Hopefully, yeah.

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

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

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

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

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

Keith:  All right. Take care, guys.

Brennan:  Bye.

Keith:  Bye.

[Patrick notes:

Easily clickable links:

DoubleYourFreelancingRate (use coupon code “patio11”)

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

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

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

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

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

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

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

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

If You Want To Listen To It

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

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

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

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

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

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

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

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

How You’re Collecting Pathological Customers And How To Stop

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

[laughter]

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

[Ramit laughs]

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

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

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

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

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

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

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

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

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

Patrick, have you got those kinds of clients?

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

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

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

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

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

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

Patrick:  Yeah.

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

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

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

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

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

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

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

Ramit:  OK. So let’s…

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

Why We Fear Charging What We’re Worth

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

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

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

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

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

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

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

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

Patrick:  Yes.

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

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

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

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

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

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

Ramit:  Yeah.

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

Pricing Your Consulting Services Cheaply Does Your Customer No Favors

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

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

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

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

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

Ramit:  Yeah.

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

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

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

Would You Rather Work With Successful Businesses Or Bottom Feeders?

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

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

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

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

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

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

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

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

Working For Free (Don’t!)

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

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

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

Ramit:  Yeah.

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

Ramit:  I love that.

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

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

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

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

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

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

Things Clients Value More Than Money

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

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

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

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

The Unreasonable Difficulty of Shopping In A World Of Infinite Choices

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

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

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

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

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

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

Ramit:  Yes.

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

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

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

Patrick:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here’s an actual line I use on the few occasions where this comes up in prospecting: “We live in an uncertain world. I’ll be totally honest with you: not every engagement I’ve ever had has been an epic win. You’re a businessman – you know better than anybody that e.g. software development is risky, and sometimes you spend 6 man-months on something and end up with nothing to show for it.  That’s why, when things work out, the business profits way the heck more than what the fully-loaded cost for 6 man-months of engineering time is.  My clients often benefit substantially from the upside to our engagements.  If you need a guarantee from me for results, you’re asking me to shoulder the downside risk for this engagement.  I don’t typically do that, and here’s why: if I shoulder the downside exposure, I should likewise partake of the upside exposure, and my pricing for that upside exposure would sound like ‘Well, if I double your sales, to a first approximation I should end up owning half of the business.’

This is not an offer presented for negotiation.  No successful software business will countenance giving 50% equity to an outside consultant, ever.  It will never happen.  Even an early stage startup, which I virtually never work with, would have a hard time getting sign-off for more than like a 1/4th of 1% equity grant. (Worth mentioning: For a variety of reasons, I would almost certainly not work for that.)

This is a way to frame a discussion. I am just trying to reframe the discussion away from “Risk of a negative outcome” to the (true fact) that I have, in the past, delivered huge wins for my clients, and that next to the enterprise value of a huge win, my consulting paycheck is a tiny, piddling number. The only way that math works out in a mutually satisfactory manner is if the client pays the sticker price. Many do.

For folks who aren’t willing to, oh well.  Things cost what a buyer and a seller mutually agree on: if the buyer can't make the seller a mutually satisfactory offer, no sale takes place.  I enjoyed the conversation and would be happy to introduce you to someone else if I know anyone.  As a consultant, you should be thrilled to let prospects go if they signal that they would not benefit from working with you, such as by not agreeing to your rates.  As the monopoly supplier of your time, you get to be choosy.  (P.S. This directly implies that if you have a more solid situation, via a filled pipeline or external financial resources or what have you, you can get away with charging more.  That's Microecon 101 but people don't seem to apply it, so let me say this for emphasis: If you're scheduled at or near capacity, charge more.  If losing a client would not meaningfully impact your standard of living, charge more.  If you have a product business partially subsidizing consulting, charge more.

]

Ramit: But the point is, when you are pricing your service or product, make it congruent with the market.

Patrick, you know that your customers, on a weekly basis, care about their goals, how much they are allocating and stuff like that. You have properly priced it, as a result, like that.

For my students [of Earn1k, a course where Ramit teaches people to freelance without necessarily quitting the day job], hourly charging is a good way to get their feet wet. [Patrick notes: That’s an important point. I turned down all consulting offers prior to quitting my day job, and literally have never thought of balancing the two at once.]

Ramit: But my most sophisticated people then use other strategies, like retainer models, and packages and things like that. That’s how you can really get really rapid growth in terms of revenue and pricing.

[Patrick notes: That’s really good advice, if you and your clients are mutually amenable to that.  I have a baseline of recurring revenue, and an infinite sink for future hours, as a result of running product businesses.  Retainer models, which might commit me to future work with a particular client, don’t uniquely offer anything to me, and they also might commit me to working with a client while my businesses would really like the first crack at my attention.

But if selling your time is your main source of revenue, retainers are a great thing for you.

How might that work?  Well, let me spitball some numbers.  Say you charge $100 an hour for Rails programming.  You have delivered a project for a client.  You might write them a monthly retainer contract for up to 20 hours of maintenance work.  Crucially, you get paid $1,500 regardless of whether you do any maintenance work at all.  You tell the client that any time above the retainer is available on a new contract at your then-prevailing rate, subject to availability.  The client pays for the certainty that you will be available if they need you, not primarily for actually getting you to code patches.]

Ramit: The main things for everyone here to listen to are that you have to deliver a better product or result than anyone else. Without that, you can’t put lipstick on a pig.

[Patrick notes: Weak disagreement here – I think Ramit is overcorrecting to avoid a common criticism.  You don’t have to be better than everyone else.  Every doctor in America, save one, is not the best doctor.  Every lawyer, save one, is not the best lawyer.  Every Rails programmer, save one, is not the best Rails programmer.  Being the best isn’t a prerequisite to running a successful business.  You need to be capable, and to deliver fantastic value to your customers.  That does not require being a ninjedi gurumensch.  A lot of fantastic value can be delivered with capable, workmanlike coding. Enterprise Java, not exactly a well-known spot to find ninjedi gurumenschen, makes the world go round – planes don’t fall from the sky, cities don’t descend into bedlam, stores don’t run out of food, banks don’t suddenly discover they’re insolvent.  Well, most of the time, and that isn’t really a Java problem so it isn’t here nor there.]

Ramit: Two, make sure that you are charging as high as you can to find the right customers. If I were Target, I wouldn’t charge $500 for a scarf, because no one would pay it. However, if I am Barney’s, you had better believe I’m charging $500. It is strategic. The type of people that walk into a Barney’s are very different than the people that walk into a Target.

Finally, run some goddamn numbers. If you are charging eight dollars a month for your product and you think that’s going to make you a very healthy lifestyle, just run the numbers. Factor in churn. Factor in cancellations. Factor in support costs and realize that that’s a very difficult way. If you can charge eight, maybe you can make a better product and charge $57 or $97.

[Patrick notes: Or re-target the same product at people who will perceive more value from it.  Bitwise identical codebases support 10x to 100x ranges in pricing all the time.]

Patrick:  Yeah. Here’s an admission against interest, given that I actually help companies decide pricing strategies and therefore should be competent about it:

Even knowing that charging nine dollars is a stupid amount for business, I succumbed to my engineer weakness last time I launched a SaaS company and had a nine dollar personal plan at the bottom. I’ll tell you exactly what my self‑serving justification was for putting that nine dollar a month plan there. I thought that I would get blog articles out of productivity bloggers, if I had something that would appeal to their needs.

A) It was a total failure. I never got one single blog article out of a productivity blogger about it.

B) I refused to admit that I was a failure and kept that plan up there for a year. I had ungodly support headaches. That entire pricing tier made less money than individual other clients on the higher tiers.

Ramit:  [laughs]

Patrick:  You don’t even want to hear about the, “I got called at three AM in the morning Japan time, because the text on the website is gray. I think it would look better black. I emailed you about that 20 minutes ago, but you didn’t respond. So I figured I would call you in Japan at three AM in the morning with customer support issues.”

Yeah, don’t underprice your stuff.

Ramit:  Yeah.

Patrick:  It’s the same with services. You will get the most demanding clients, when you’re under‑pricing or when, God forbid, you are trying to compete with people on Elance or the other freelancer sites. Someone asked me why I’m not on Elance.

“Well, I don’t want to compete with people on Elance and the customers that are really in my wheelhouse and get a lot of value out of working with me would run screaming if they saw me on Elance.”

For the same reason that, sorry, what was that high‑fashion place that is not Target that I’ve never heard about?

Ramit:  Barneys?

Patrick:  Barneys. Barneys, if you were some sort of fashion house that’s trying to make a name for yourself and you go to Barneys and you say, “Look, we can get our scarves made in China, so we can afford to sell them to you for $5 and you can put them on your tables for $10, the buyer for Barneys is going to say, “Oh hell no. We’re not interested in that at all. We don’t care if it’s the reincarnation of some famous designer and some other famous designer who had a love child, someone who understands fashion. Please put in names for me here.” But it just would do so much damage to their brand and to their perceived positioning in the market being available for $10 that it is not even worth picking up that revenue for them.

Price For Dear Or Price For Free But Never Price For Cheap

Patrick: Similarly, you can price it for free or you can price it for dear, but never price it for cheap. You will just have lots of headaches and it makes life difficult both with that customer and with any other customer who will ever discover that relationship.

Ramit:  Wow. OK, so Patrick, you just said something that everybody needs to hear again. This was taught to me by my mentor, Jay Abraham as well. My students were clammering for a low price product. I’ll cover this in the qualification talk, but I don’t allow people with credit card debt to join my flagship or very expensive courses. That decision alone cost me over $1 million a year, but it’s the right thing to do.

So people were saying, “Hey, can you give me something low priced? How about something around $9 or maybe $20?” I asked Jay, “What would you do? The market is begging for this.” He said, “You know what? If I were you, I would actually just create something incredible and I would give it away for free. I would make sure that I tell them why.”

I did something very similar, I actually interviewed another one of my mentors, BJ Fogg. I spend 16 hours preparing for that call. I read my old textbooks and I pulled up my notes and we had a great call about behavior change.

Then I wrote an email to my list and I said, “Guys, this interview is incredible and I’m giving it to you for free. But I want to tell you something. I could charge $1,000 for this interview. I would easily sell it. But instead, I’m investing in you. I want you to take it seriously, treat it like a thousand dollar product. Close your computer. Turn off all your other stuff and really treat it with respect. Treat it like a $1,000 purchase because that’s what it is.” The response was incredible.

The point here is do not try to serve everybody and also decide what market you want to play in. You want to play in the high‑end market? Then just give away your stuff for free at the low end and make sure people know why you’re doing that.

Overall, as Patrick said, your pricing is strategic, your pricing will communicate to the market what type of clients and customers you’re willing to put up with and what kind you want.

Patrick:  Right. I turned down potential client work all the time. My minimum engagement is a week, and I’ve only deviated from that once or twice, this time for good strategic reasons. I just don’t want to deal with the overhead of selling a one‑hour, two‑hour engagement. That immediately prices me out of affordability for many, many people… who would largely not be good fits for getting excellent value from working with me.

I’ll often get emails inquiring around my hourly rates and what it would cost to get me on a phone call for an hour or two. I say, “Look, I’m not available for formal consulting for an hour or two. Because I love the space and because I like helping out bootstrapped entrepreneurs, if there is time available in the schedule, I will be happy to get a Skype chat with you or whatever. We’ll talk. I’ll give you some ideas. Then I’ll point you to the right blog post and then you can go execute on those. But I am not going to be the one in charge of your marketing for what you think an hour would be worth.”

If I quoted them a rate for an hour (by taking my weekly rate and dividing by forty), they’d probably think, “Oh God, that’s an insane amount of money.”

Ramit:  Right.

Patrick:  In addition to there being a karmic benefit here [Patrick notes: I’m using karma here in the loosely metaphorical sense to mean “one should act in the service of others; this will be rewarded / this is its own reward”], there are occasionally knock-on effects for the business.  For example, somebody told that in one context will occasionally mention that they got really, really good results to someone who does have the resources to pay for a week of my time.

I can’t tell you what clients that’s gotten me in the door with, but you know their names.

Ramit:  Love it. So Patrick, Let’s wrap here. Where can people find you? What’s your URL and what will they find there?

Patrick:  I’m at www.kalzumeus.com/blog for my blog [Patrick notes: you're here!]. It’s mostly about topics of making and selling software. Generally what I’m talking about in any given blog post is whatever I’ve been working on recently. If you want a more structured, deep dive into things, go to training.kalzumeus.com and there will be a video on improving the user experience in the first run of your software.

Ramit:  So anyone who makes software or serves clients or customers would be really well served to check out Patrick’s stuff. It’s very much similar to I Will Teach in a sense that I Will Teach seems like it’s a money blog, but it actually has very little to do with money. It’s about psychology. It’s about understanding people. It’s about improving your communication. So I love reading it. I don’t build software. I build information products, but I love reading your stuff, Patrick, because you really dig into test results, data, and my most favorite of all is you dig into why people behave the way they do. Why do they chronically undercharge even thought they quote “know” that they should charge more? Why do they think that technical skills matter most when in business that’s questionably true? And why do they not trust things that have worked in other industries like marketing for years and years?

So I love the way that you show your own test data, you communicate it beautifully to engineers and it happens to communicate beautifully to me as well. So thanks for putting up your site.

I’ll share my site as well. I put up a special giveaway for people listening here. It’s iwillteachyoutoberich.com/kalzumeus-pricing.  That’s a free mini course on pricing that should help you really change the way you think about pricing and again, how I went from charging $4.95 for one product to $12,000 for a recent product with a dramatic fall in complaints and whiny freeloaders. Hopefully that helps you guys.

Patrick:  Let me give a quick little mini testimonial for Ramit here. We had dinner a couple of years ago. He gave me some advice on pricing my consulting services. For a variety of reasons I never quote my rate publicly, largely because it goes up all the time and I never want to have my own rate quoted against me as evidence that I should cede ground in future negotiations.

That said, it went up hugely as a result of some of the advice he gave, particularly regarding how you position the rates in the context of your discussion with the client. You cannot possibly waste your time listening to him on that subject.

Ramit:  I appreciate it Patrick. All right, we’ll talk soon. Thanks.

Patrick:  All right. Talk to you later, bye bye.

Ramit Sethi and Patrick McKenzie on Getting Your First Consulting Client

Patrick notes: Hiya long-time blog readers.  Last year I wrote two articles on career advice for young engineers, largely informed by conversations with a buddy of mine, Ramit Sethi.

Over the last twelve months, I have tagged every message in Gmail I’ve gotten from someone who applied the advice in those articles to effect in their careers.  Sample comments: “Your advice made me $20,000 in two minutes.”, “Your advice made me $35k”, etc etc.  The running total is at about $280,000 (a year!), which makes those two articles probably my highest ROI ever from just writing blog posts.  (n.b. If this were the whole of my business I’d need to have a quick heart-to-heart with myself about obvious inefficiencies in that monetization model but, luckily, the business does well enough to cross-subsidize the blog.)

Ramit offered to do a series of interviews about freelancing/consulting, which I know is of interest to many of you, so I naturally took him up on the offer.  (Though I think much of what we talked about applies just as well to the software business, to be honest.)

If you weren’t already aware: I don’t talk about it on my blog that often, but I do high-end consulting,  typically for improving the engineered marketing of software companies.  Ramit is a NYT best-selling author who makes a living teaching people how to do this sort of thing better.  Ramit is extraordinarily credible on this topic — in addition to his take on most things jiving with mine, I have word-for-word stolen some suggestions from him for e.g. client proposals, to the mutual benefit of my clients (they took the engagement) and myself (they paid $$$ for the engagement).

This is the first in a series of three interviews — the other two will be out later.  Want to make sure you don’t miss them?  Either subscribe to the podcast (details below) or to my email list.

If You Want To Listen To It

MP3 download (~50 minutes, ~120 MB): Right click to save.

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

Transcript: Ramit and Patrick on Acquiring Your First Customer

[Patrick notes: Shoutout to CastingWords for this transcription, which I paid $75 for.   I always use them for transcription and then make a hand-pass to make things flow a bit better and format for the Internet.

Can I mention they have an interesting pricing strategy, since it is relevant to y'all?  They price per-minute, but there are three levels based on how rapid you want the estimated turn-around to be.  I picked $1.50 a minute for the 6-day turnaround.  You can also buy 1-day turnaround for $2.50 a minute.  The same exact service, sold for a 67% premium based on expressed customer urgency.  I sometimes even get 1-day delivery when I paid for the 6-day delivery, but you understand I'm not paying for outcomes, I'm paying for predictability of outcomes, right?  If I need a video transcripted for a paying client with delivery scheduled for two days from now, I pay for the express service.  If, on the other hand, I have flexibility as to when I publish a podcast, then I can pay for the standard service.  That's beautiful market segmentation.  You can do very similar things for your software applications (and, yes, consulting gigs) and your clients will thank you for the opportunity to pay more to get guarantees of things which are valuable for them.  In addition to delivery timeframes SLAs are often useful pricing levers in that way -- including SLAs which just formalize a guarantee of something which is, in fact, available on a best-effort basis to people without the SLA, too.]

[Patrick notes: I've included somewhat extensive commentary in-line with the transcript.  It is all called out like this.]

Patrick McKenzie:  Hideho everybody. My name is Patrick McKenzie, and I might be better known as patio11 on the Internet. I’m a small software entrepreneur who, over the last couple of years, has run a consulting business largely focused on making software companies more money by delighting their users. I’ve invited my friend, Ramit Sethi, here today to talk to us a little bit about how you might be able to supercharge your freelancing and or consulting business. Ramit’s going to do a bit of a self intro now.

Ramit Sethi:  Thanks for having me, Patrick. My name is Ramit Sethi. I run a site called iwillteachyoutoberich.com. It’s a very modestly titled site, and I have a New York Times bestseller by the same name. My background is in psychology and persuasion. I help people use psychology to change their behavior and change other peoples’ behavior, whether it’s with money or with their careers or learning how to negotiate.

The way that I run my business is actually through information products. About 98 percent of my stuff is free, and then, occasionally, I will release a course. Usually, these courses take me a couple of years to develop, and then they tend to be pretty premium prices. If people join them, great. They might use them to earn more money or find a new job or find their first profitable idea.

And so, Patrick and I became friends, especially talking about marketing and pricing and just shaking our heads at some of the stuff we see on the Internet. Hopefully, we can share some of our stories from behind the scenes that we haven’t revealed before, which might help you raise your rates, get more business, and get better clients.

Patrick:  Yeah, and all this sounds very good. I think some people might feel a bit of disconnect in getting advice from us because for some reason, and this surprises me more than anybody. I seem to have fallen into that “Internet famous” thing, where people think that I’m some untouchable celebrity, which is absolutely not the case. And you are…

Ramit:  You are a celebrity to me, Patrick. I had to go through 10 assistants just to get this time with you on the phone.

Patrick:  [laughs] Those were all your assistants. You’re a New York Times bestselling author, but honestly, the techniques we’re going to talk about worked for us when we were much earlier in our careers. They helped get our careers to the point where they’re at right now. They’re generally applicable even to people who might not have an audience or any asset built up yet. (Although there is no time like the present to start building…)

Ramit:  Yeah. I think that’s exactly right. I think one of the biggest psychological barriers people see is they see advice from people, whether it be here or on Mixergy or any other place, and they say oh, well, that might work for him because he has an email list of 100,00 people or whatever it may be, but really, these techniques can be applied, maybe in a smaller setting.

If I say, and I’ll tell you how I collect 100,000 data points for one of my courses. You don’t need that. You can start with 20. It’s, frankly, very effective, and then at a certain point, you’ll be able to get 50 or 500 or 5,000. Patrick, what do you say we start off by actually addressing that main thing, which says, “Hey, sounds great, Patrick, but I’m not an Internet celebrity like you. How do I get my first customer?”  What would you tell them?

Getting Your First Job When You’re The Outsider In The Middle of Nowhere

Patrick:  Before anyone on the Internet knew who I was, before I even started commenting on the forum that I was on before the forum before the Hacker News (that I gained a lot of my audience through), and way before I had a blog, I worked at a technology incubator in central Japan.  I’m in Gifu Prefecture, and I love Gifu Prefecture. Gifu Prefecture’s contribution to the world is a particular type of bird [Patrick notes: ukai (鵜飼) – I had to look it up after the interview, apparently the English is “cormorant”] where you leash the bird, take the bird to the river, and have the bird fish for you… then you make the bird regurgitate the fish.  Gifu is not exactly, like, high tech central. [Patrick notes: This is a slight exaggeration for comedic effect – we might have more iPhone developers per capita in my town than almost any city in the world.  Ask me why some other day – it’s a great story.  In general, though, I generally tend to laugh at suggestions that I enjoy an anomalously privileged access to the IT industry.]

I got my first job in software because I was working at a tech incubator here, and somebody needed 3,000 PowerPoint slides translated about CAD software.  If you’re not familiar with CAD software and PowerPoint slides and technical translation, it’s the most boring job ever.

But I did good work on it. There’s no reason to work on stuff if you’re not going to do a good job on it. When my contract expired for that day job, and I was looking for the next thing for me, I went to the guy who I had over delivered on the 3,000 slide PowerPoint presentation and said, “Hey, I find myself needing a job in the next couple of months. I know you might not be hiring right now, but you know a lot more people in this neck of the woods than I do. If you know anyone who needs a programmer or needs a technical translator, would you mind introducing me to them?”

Ramit:  What happened then?

Patrick:  He took me to a meeting with two of his clients, and the meeting was…It was explained to me that the meeting was like a job interview, and it took me years to figure out what actually happened. But basically, behind the scenes, he went immediately to two of his clients and said, “Look, I have an American. He’s an engineer. He’s done great work for me. He’s got this list of successes behind him at his old company. You’re going to hire him as a favor to me.”

And so, we went to this “job interview,” and I thought I was doing the whole interview dance.  I wondered why they were not asking many questions of me. We got to the end of it, and I said “I’m a little uncertain of where we are in the conversation right now.”  They said “You were hired before you walked in the room. We’re just getting to know you right now.” This surprised me.

When I tell that story to Americans, people say that, “Wow. Those Japanese people, they’re so weird and wacky.” But honestly, man, the truth of the world is that that is how a lot of jobs are allocated in America, too. It’s not based on the whole resume dance and the “Did you meet the 16 bullet points we put in our advertisement. Send in a resume. Maybe if we like you, we’re going to interview you.”

There are lots of jobs passed along on the private communication level where you’re scratching somebody else’s back that’s done something for you. So definitely, if you’re just starting to get into the business, whether you’re looking for a job or you’re looking for a freelancer/contracting/consulting engagement, find the people who have some reason to respect you, to feel a little bit of a social obligation towards you. And just ask them, “Hey, can you help me out on this?”

Ramit:  I love that because I love the part about oh, those crazy Japanese people. Because we always hear these great stories, and then the first thing we naturally psychologically do is create an us versus them. We say that could work, but XYZ. I call that the special snowflake syndrome: “That could work, but I work at a nonprofit.”  Or “…but I work in Kansas.”

You worked in the most remote place I could imagine, and it worked for you. One of the reasons I was so excited to talk to you was I want to expose what happens at high levels of business to everybody. I want to open that veil.  It’s funny, because the way…for example, the way that jobs are gotten is very similar to the way you get clients.

There’s something I always teach my students, which is 85 percent of the work is done before you ever sit down in the room.

Patrick:  Absolutely.

Ramit:  That applies to a negotiation, that applies to getting clients, that applies to getting a job. Many of my students who go through my career course, by the time they sit down for an interview, it’s not an interview. It’s a discussion. By the way, it’s a discussion with someone they’ve already been out to coffee with two or three times.

Think about the caliber of that discussion or the contours. They’re completely different than you genuflecting and saying please, give me a job, please. Instead, it’s like the job is assumed. Now let’s discuss the details. Let’s actually talk about that in terms of clients, Patrick. You’ve done a lot of client work. I’ve done some client work as well, and I’ve taught a lot of people how to get clients.

When it comes to getting your first one, two, or three clients, what are some important things to note, and what are some common mistakes that people make?

Don’t Underbid to Get Early Clients – It Hurts Your Pocketbook And Credibility

Patrick:  The most common mistake I see when I’m talking to other engineers is that people radically undercharge for the first client.  This often comes from a perceived desire that goes like: ”I need to make my bones before I can start charging what I’m worth, so I’ll do this for you for really cheap, 10 bucks an hour or whatever.”

I was similarly overly needy with my first few clients.  I undervalued myself in the first couple of engagements. We’re going to talk about pricing in general later [Patrick notes: upcoming in the second installment of this interview], but you don’t want to ever come off as needy:

  • It will hurt your financial situation in a very direct manner.
  • It will also compromise your client relationship, because when a customer gets something for $10, they assume it is worth other things which cost $10.

$10 is not a meaningful amount of money to any business. [Patrick notes: I hear you, bootstrappers – I started a business with $60.  But after you’re selling something, $10 which buys something additive to revenue is a joke.] If you’re charging Starbucks latte money for your consulting offering, you’re never going to get buy‑in at the CEO level of a software company to get your initiatives adopted. You’re going to be treated like somebody’s kid’s nephew’s brother and only allowed to make copies.

If you actually wanted to make copies, you can get a low skill job anywhere to do that. But we got into this business to be respected for our advice and to be valued and to actually do stuff that matters. Charging 10 bucks an hour is not on the easy, straightforward path to doing stuff that matters. People that do stuff that matters have a ground floor which is higher and then they go up from there. [Patrick notes: I think there’s actually an interesting “social justice” type of point to make here, in that to the extent that there exist durable social classes in America, one quick way you can identify them is whose ground floor starts at minimum wage or menial gruntwork and who never has to do that, even when they’re unskilled labor, due to a combination of credentialing and connections.  That’s neither here nor there, though, and I almost hesitate to mention it because I think “Waily waily, I have neither credentials nor connections, life is unfair.” tends to obscure choices that we can make to better our situations.]

Ramit:  I want to emphasize a couple of things you mentioned. One, if you’re charging 5, 10, 20 bucks an hour, it’s very, very difficult to go from that to charging 200, 300 an hour or 10,000 a week.  It’s very difficult to make that transition. If you do it when you come in, that can happen. But going from one level to another is extremely difficult.

[Patrick notes: This is, if anything, an understatement.  There exist multiple paradigm shifts which separate $20 an hour from $X0k a week, and it is vanishingly unlikely that any client will make that transition with you.  Thumbnail sketch: You can get from $20 to $100 by getting serious as a professional, and you get from $100 to $200 by getting really good as a professional (or working in a high-demand speciality), and then somewhere between say $150 and a weekly rate in the tens of thousands you probably repositioned your offering such that it is no longer directly comparable to what you were doing before.  Concrete example: you can sell Rails programming at $20 an hour (to bad clients, as a newbie freelancer who screams please-take-advantage-of-me), and then you can sell Rails for $100 an hour (baseline clueful Rails programmer in 2012), and then you can sell Rails at $150 an hour (intermediate/senior consultant on a strategically important project, say).  Can you sell Rails at $50k a week?  I'm going to go with "almost certainly yes."  I think there are probably people who do that, and if you listened to them pitch clients, they would speak a language that holds very little in common with what you hear from a $100 an hour Rails developer.  Want to speak that language?  Keep reading for some thoughts.  (It will also help to get pretty darn good at Rails... though I think most people in my audience probably overestimate how skilled you have to be to move up that ladder.)]

Ramit: I happen to know that because on a product side, the first product I ever sold, the information product, was a $4.95 eBook. One of the last products I sold was a $12,000 course. I’ve gone the entire gamut of information products. When we talk about pricing, I’ll go into more detail on that. But suffice it to say, it’s extremely difficult to climb that ladder.

Never Work For Free As A Software Developer (Asterix)

Ramit: The other thing you mentioned is how many people go in saying, “I’ll just do this first, and I need to make my bones.” And you know what? There is a time and a place to do free work. I do believe in free work occasionally. But I always tell people if you’re going to do free work, make sure you are clear about your messaging.

For example, let’s say that it was my first time out there getting my first client. Let’s say I just want to build a portfolio so at least I have something to point at. Now, I’m generally not a fan of free work, but I can be strategically. This is what I would say to the client. I would say look, my normal consulting rate is $85 an hour, or whatever format of pricing you’re using.

However, I really like what you’re doing, and frankly, I want to build up my portfolio. I would be willing to do this for three weeks for free if, in exchange, you agree that if I do an extraordinary job, then we can discuss working at my normal rate. Well, who’s going to say no to that? If you do an extraordinary job, everyone’s going to want to pay you.

But in this case, yes, you are working for free. But you are explaining why. That is so important. It separates you from, frankly, the people who are new. They’re new, and you can tell that they’re asking to be taken advantage, because they’re like OK, I’ll work for free. It’ll be fine. Somehow, I’ll go from free to $500 an hour. Doesn’t work. Explain your messaging. Explain your positioning, and people will respect you way more for it.

Patrick:  I’ve got to be totally honest with you. I don’t think I would ever work for free as a developer, just because of the way the market is laid out right now. You just don’t need to. Hypothetically, if you’re going in for free, you should have a larger upside than just having a pot-at-the-end-of-rainbow outcome be working at your full rate. You might make it a condition of the free work that the works gets discussed publicly.  This gets you a public case study that you can use for your portfolio and the social proof that you have done this meaningful work for another company in the industry.

[Patrick notes: You will then aggressively leverage this portfolio when attempting to get work at your current billing rates.  I have projects which I did at $X per week which I will use to justify new $5X per week projects at new clients.  If clients ever picked up on the discrepancy – which would require me being stupid like mentioning that somewhere publicly… wait… d’oh – I would say something like “My previous client took a chance on me earlier in my career, when I didn’t have a track record of delivering results to people just like them.  I now have that track record, which is why you are paying the sticker rate.  After I deliver a win for you, if you give me permission to mention it publicly, it will go into a presentation just like this when I tell another person why they have to pay $10X rather than $5X.]

Patrick: In addition to that publicity being a benefit from you, that the public/private distinction there makes a very natural thing to charge around. You mentioned that 98% of your material is free. I do a whole heck of a lot of stuff for free. I’ll speak at conferences for free. My blog posts are free. I do open source software, which is free.

If you want me to do something so competitively sensitive that you don’t want me shouting it from the rooftops to anyone I can get to listen to me, then that always has a price tag attached to it.

Research The Customer To Win The Engagement Before The Interview Starts

Ramit:  That’s right. I want to talk about one of the secret sauces of my business, and it’s something that actually nobody really cares about. People think they care about it, but they don’t care about it. It is the research that I do going into building a product or getting a client. And I know you’ve done this as well.

It’s funny. The other day, I was asking people, “Hey, if I speak at South by Southwest, what would be a good talk?” Somebody wrote back on Twitter saying, “You should talk about your research methodology.” I said that would be great… for the three people who would attend.

Research is what allows me to charge 100 times what my competition charges… but nobody cares. Nobody wants to see [the hard work which goes into] how the sausage is made.  They just want to see the shiny tactic – the A/B test where you tested the color of this button.  [Patrick notes: I have to tweak Ramit’s nose here and mention that he got a 60% increase in sales from A/B testing literally in the week which we recorded this interview.  But hey, I sympathize with his general point that people want to hear quick fixes rather than actually doing the work.  Oh, let me bang my favorite drum – how many of y’all actually run A/B tests?  They’re Ramit’s mental characterization of a magic-bullet no-effort-required diet-pill-of-business-success and I can’t even get people to swallow the freaking pill.]

Ramit: Let’s actually talk for a few minutes about customer development and research going into a product.

I’ll talk about on the product side, and I know you’ve done quite a bit of work on the client side as well. For me, when I build information products, they can be anything from an eBook all the way up to a full‑featured, eight week course with gigabytes and gigabytes of video and thousands of pages of material. So when I start off, for example, with my course on earning more…

I have a course called Earn 1K, and it’s about how to take your skills and turn them into freelancing income by getting multiple clients and earning 1K. Many of my successful students earn 5K or 10K in a month on the side. So, very relevant to the people listening here. When I started off doing this research, I actually didn’t even think of doing an “earn money” product. [Patrick notes: Ramit started in the personal finance space.  Read I Will Teach You To Be Rich, but his wheelhouse would be passive investing, creating systems to move money around, and maybe a bit of optimization about e.g. credit card rewards.]

But when I went on book tour [for IWTYTBR], I went to all these cities around the country and I asked people, “Hey, what do you wish I wrote more about?” Almost to a person, they said, “I love your stuff on automation, but I really want to know how to learn more money.” I was surprised. I was like, really? Isn’t that scammy?

They were like, “I don’t care. I just want to know how to make more money.” And so, I started doing research, and I pulled my team together. The first thing we did was basically just what we call cloud research. We wanted to understand the dynamics of the market.

There’s about five or six ways to earn money.

You can negotiate your salary. You can get passive income, which for most people, never works. You can get freelance income. You can blah, blah, blah, blah, blah.  [Patrick notes: Ramit would probably round out this list with 1) buy real estate and rent it to people, 2) invest in the public capital markets, and 3) start an honest-to-goodness business.]

We looked at it, and we’re like, “OK.” We think we’re really good at freelancing, and we think that the market is particularly bad at that. And so we started asking people survey questions.

Now, you can get good survey data with as few as 20 responses.  For all the engineers listening, listen closely: Statistical significance is irrelevant when you’re doing customer research. I don’t give a damn about P values and anything like that. It’s almost all qualitative. That’s what I care about. I want to hear the words they use.  [Patrick notes: Engineer reporting for duty as audience stand-in!  Oof, critical hit, advice totally warranted by actual experience!]

We started off by saying…We didn’t say here’s a key insight as well. When you’re doing customer research, I’ve seen a lot of early surveys. They’ll say something like this. They’ll ask a fake question. They’ll say, “Ramit, if I told you I could solve all your storage needs in five hours for less than 25 picodollars, would that interest you?” [Patrick notes: Ramit is making a reference to Tarsnap, which is a technically jawdropping backup service which has abysmally bad pricing.  Ramit does not know what Tarsnap is or why he’d care about it – he literally only knows it “We should bring up an example of how engineers are terribly bad about connecting prices to business value, like that picodollar bullshit.  Seriously.  They don’t even price gestures to the dinner we are eating potato chips in picodollars.  And you know why?  Because if you went into any restaurant and offered to buy potato chips for a penny apiece – which is, like, a lot of picodollars, right? -- they’d throw you out.”]

Ramit: Look, guys, [asking leading questions] is BS. That is the worst type of marketing. Because you don’t really want the answer. You’re trying to sell them. Instead, you should ask open-ended questions like “Tell me about your biggest frustration. Tell me what you’ve done in the last six months to improve your financial situation.

“Have you ever thought about earning money? If so, how have you thought about it? Have you ever tried it? What happened?”

We start to understand the words that they used. We collected approximately 50,000 data points, through everything from chat, email, surveys, one-on-one interviews, phone calls.

Now, you don’t have to do 50,000.  Honestly, 100 gets you farther than most people do. [Patrick notes: I think talking to ten individual people who could actually buy your product prior to writing a line of code puts you ahead of the curve, judging from my inbox.  You’ll learn a million times more from 10 people than you’ll learn from your IDE when coding a product built for nobody.] Now what happens is most people will retreat into a room for six months, they’ll build their product or their service and realize that they got it completely wrong. Just to give you a sense, Patrick, for us, Earn 1K on the side. It took us six months to figure that out that title: “Earn 1K”. Why didn’t we call it “Earn 10K”?

Because most people don’t believe that they can earn 10K, even if they can. On the side, because most people believe if they have to earn more money, they have to quit their job and the start the next Google with venture capital. That’s not true. The research is really what allows you to distinguish yourself from your competition so that when someone comes to your site. They start nodding their head uncontrollably, and they say yes, and price becomes a mere triviality. I’m curious if you’ve had that experience.

How To Parlay Interests And Expertise Into First Consulting Gigs

Patrick:  Absolutely. I told you how I got my particular job in the past, but I didn’t talk about my first consulting client yet. I used to be active on forum for lots of SEOs, search engine optimizers, who often, they have a side business themselves or their main source of income is publishing a particular thing and then getting traffic to it via SEO.

Many of them are less than technical or they have enough skills to, like, hack together a site in WordPress, but they don’t know how to take that to the next level. The natural engineer thing to do in this circumstance is to ask someone OK, what are your technical problems? Oh, you have problems with WordPress sites? I’ve done WordPress sites before. Let’s talk WordPress, WordPress, WordPress.

No SEO wakes up in the morning and thinks, “Damn, I have a WordPress problem.” They wake up in the morning and say, “Damn, I have a business problem.”

[Patrick notes: This is generalizable to any group of business owners.  Even software companies.  Pick a software CEO you admire, I can guarantee you that they don’t wake up with software problems.  Heck, freebie for you: solve identification and sourcing of highly talented programmers and every software CEO I know will write you a check for last month’s gross revenues.  After hiring, the next biggest problem most of them have is selling more of the software they have already written.]

Patrick: The SEO continues: “My business only made however many thousand dollars last month, and if I could get more pages on the website, then I might have more traffic and be able to drive more revenue for it.  But I don’t see a clear way to doing that without me doing all the writing myself. “

After you can talk to them and establish that rapport, that you are actually listening to the problems that they are talking about, you can suggest how to address those problems in ways that you are uniquely capable of doing.

I might tell the SEO, who is a potential client: “You’ve gotten this level of traffic so far with your existing site. You want to double that over the course of the next year. You were saying that the roadblocks that are stopping you are a) you’re on an outdated architecture where you, personally, have to write everything, and b) it’s been impossible to find someone who is a subject matter expert at this who can also make web pages, because that combination of interests just does not exist.”

Ramit:  Yes. I’m nodding my head right now. I’m like yes.

Patrick:  Yeah. “I totally understand that it is impossible to find someone who is both good enough of a journalist in the space to work for a genuine published magazine and also can edit HTML pages. I have an idea for you. I’m going to make a CMS for your website. That’s just a page that they can go into, like WordPress, and they can do their writing like they do so well.  The CMS will ship it over to you, and you figure out which business model that you experimented with will work well with this content. “[Patrick notes: In context, I’m suggesting that the SEO will either have in-house advertising, display advertising, an affiliate/lead-gen relationship with another publisher, or products of their own with which to monetize marginal traffic.]

“You click two buttons to hook it up to that page, and boom. That’s it. It’s live on the Internet, and Google will start sending people to it. Does that sound like it’s something motivational to you?”

By this point, the SEO is going “Hell, yes.” I’m like, great. Now this project, I think I can deliver the minimum version of it in two weeks from now. Two weeks from now, you get the CMS. You can start having your magazine quality writers putting stuff in, which will look beautiful, have pictures on it, and start generating traffic on Google.

By that point, everything else about the engagement is a detail. They want it.

Ramit:  That’s right. They want it. That is the number one thing. Do they want it? Not what does your website look like, not how big is your button, not how optimized did you get your conversion funnel. Most of us could focus more on building something that people want.

That comes with the early research. I love the way you talked about how you communicate with a client, because it shows you really listen.

Actual Experience From Someone Who Pays $X00,000 Yearly For Engineers

Ramit: I want to emphasize something, especially for the engineers listening to the call. I am a client that I work with engineers. I have engineers on staff.

Ramit: I pay them pretty well. I have passed on hiring engineers who may be more technically proficient, but they didn’t understand what I wanted. Honestly, guys, as a business owner, do you think I care if you’re using this technology or that? I just don’t give a damn [about technology]. I really don’t.

What I care about is, is my business going to generate revenue? Am I serving my customers? Is my website going to go down, and I have to be the one who tells you? Or can I go out on a Friday night and not worry about my business?

Those are the things I care about as a client. I’m reminded of a great story that somebody…one entrepreneur told on a Mixergy interview with Andrew Warner, and is it a great story. He was in the relationship market. His buddy actually started an information product in the relationship space, for women. [Patrick notes: No clue what interview this is referencing – feel free to drop me a note if you remember it.  By the way, you should be listening to Mixergy.  It is what the New York Times would produce if the NYT cared about producing value for people in our line of work.  It occurs to me that mentioning the NYT in the same breath with Mixergy is likely the most positive thing I’ll ever say… about the NYT.]

Ramit: The guy was doing very well. I believe he was making either 40k or 400k a month. He was doing very well. This guy got pretty interested, and he said, “Hey, I’ve got to take a look at this market.” He spent about four or five months really doing deep research. Lots of stuff, including ad words, including customer research, including buying all the other products.

He finally built his own product. Within two or three months, it was making more than his friend’s. It never stopped. I happen to know that that business is now a gigantic business. Why? What separated him from his friends?

His friend called him, frustrated, like “Hey, I don’t understand why your site’s making more than mine.” He said that he had found some very subtle things in the research that his friend had not. I will tell you that we had that same exact thing happen. When I built my Find Your Dream Job course, it took us about three or months to build the first version, and we’re pretty experienced at this.

When we went out to test it with about 20 people: The first person failed. The second person started crying. And the third failed as well.  At first I thought, “They’re just dumb. They don’t know what they’re doing.” No, then five people failed. Then 10. It took us about…I believe it was 15 or 16 versions to get it right. When we looked back, we had skipped over some very subtle things in the research process.

Once we got those right, sales skyrocketed.  [Patrick notes: cough read writeup in Fortune Magazine cough] I’ll just say that it’s very, very important to understand the words that your client or your customer is using and be able to explain how and why you can help them.

Patrick:  I think we don’t pay nearly enough attention to the exact words people use. Maybe we would if we came from a communications background. Nothing motivates people like having their own words repeated right back to them, which is something that you should try to do more often. It’s just an easy conversational hack to sound more persuasive.

[Patrick notes: Engineers take heed: your clients will often make mistakes about engineering reality when talking to you.  You will feel the urge to correct their misconceptions about engineering reality, perhaps by rewording their requests such that they match the way the world actually works.  Don’t do this. You will never delight a client by teaching them what a web service actually is.  You will absolutely delight clients by mentioning that the “web service” (cough iframe cough) which you implemented for them, allowing them to get data from System A onto System B (cough displayed on pages served by System A, they never talk to each other cough), provably increased sales by $200,000 in the last quarter.]

Patrick: But you have to make your prospective clients feel like you understand where they’re coming from. And that starts with both understanding where they’re coming from, and then communicating like you understand where they’re coming from. Even if you’re building a website for someone, it’s not just a website, right?

There is some particular need that they have for that website, whether it’s for their business purposes or because a lot of business owners are very personally invested in their business. You need to communicate to them that you understand that they are personally invested and that you are also capable of treating this website like it’s important, like it’s more than just bits on a server somewhere.

Here’s a hypothetical example for you. I live in Japan. I happen to have lots of Asian friends, so I just know that there is one particular niche market in America, that if I really wanted to stop my business right now and start a totally new market, I could do it. A lot of people who might not be English as first language themselves have a worry that they are going to have children who do not learn how to speak their native language, and as a result, will never be able to communicate with their grandmothers.

And so, there’s this market in America for schools to teach the children the language of their parents, basically. [Patrick notes: The term of art is “heritage language school.”  I think I probably butchered it during the interview… I don’t get much practice speaking my own heritage language out loud these days, what can I say.] If you’re building websites for those schools, you’re not really building websites, so much as you are selling the person who runs that school on getting a website done.  She [Patrick notes: overwhelmingly female and underserved by technology available to her, where have I heard this song before…] is generally exquisitely sensitive to the emotional needs of her clients, who are typically mothers.

Rather than focusing on the technical aspects of the project — it’s going to have pages and an admin system and a this and a that – you sell that you understand the business and the emotions driving the business.  The business purpose here is that success for your business, the school, is primarily dominated by how many new students it can enroll.  [Patrick notes: This is overwhelmingly the case for almost all educational businesses which do not receive direct state subsidy, by the way, from “piano tutor” all the way through “second tier universities.”  First tier universities are anomalies in that they’re actually choosy about who they let in.] I understand that parents enroll students in your school because they feel that there is a connection to a trustworthy source of authentic information about their heritage.

[Patrick notes: This is the money-line for this particular pitch.  I manage to execute on a gets-to-the-heart-of-the-business line that good in only one out of three or so of my pitches.  If I get a line that good into the interview, the engagement is sold.  I can even point to identifiable moments of time when a company has hit me with one of these, and seriously, in the full knowledge that I’m being successfully sold to, if you get me that well I’m in and damn the price.]

Patrick: I might hypothetically continue “Because I do lots of work in this space, I can deliver a website that embodies trust, authenticity, and tradition for you.” If you can present that pitch, you will be 10,000 times better than anybody who might be better at technical infrastructure, better at the design, whatever. If you can empathize with them on where they’re coming from, you’ll be better off.

Patrick:  In the same fashion: you were asking earlier about some problems people have in their first couple of clients. I was a little too overeager for work, and I worked with people whose businesses I understood on an intellectual level but did not understand on the feel it in my bones level. I’ve since gotten a bit more choosy about that.

Almost all my customers run software businesses. But, at one point, I worked with an eCommerce company, which was also a startup, so I thought “close enough.”  They were an eCommerce company in the men’s fashion space. Let’s say they sell dress shirts. Ramit, you’re a pretty nice dressed guy, but I’m wearing a t‑shirt right now with a startup logo on it.  Haute couture is not my strongest skill.

When someone says “OK, you need a fine-cut silk, black shirt,” [Patrick notes: is that even a thing?  Heck if I know.  I’m pretty sure they come in “silk” and “black”, give me a third attribute you can group shirts by.], my eyes just glaze over.  My ignorance was even hurting my ability to execute on parts of the engagement that I actually understood, like say site architecture for SEO purposes. I literally told the client “You’re going to silo some pages around that. like, fine silk shirt, blah, blah, or blah, blah, or blah, blah.”  With the blahs in there.

My client has made this his life’s work. You could literally see him disengaging from the conversation as I was dismissive about the subject. I was kicking myself. So one thing that I did to get better, in terms of that particular client relationship, when I realized that I really didn’t know anything that I was talking about, even when it was material to his business, was to say, “Look, you know me. I’m not going to lie. I’m not exactly a fine dresser. Can you just tell me, a geek who knows nothing about this, what is the one thing I should learn about men’s shirts?  If I only learn 10 minutes of material about dressing myself in my entire life, what would those 10 minutes be?”

Bam, his eyes lit up. His life’s work is men’s shirts. Do you think he likes talking about men’s shirts? Oh, heck yes. He loves to share that knowledge to people. (If I was savvier about it, I would have asked for that at the initial interview.)  [Patrick notes: If a client talks about nothing but themselves for the entire interview, you will get the job. They’ll remember you as being tremendously responsive to their needs, and people care a heck of a lot more about themselves and their businesses than they care about you and your business.  Conversely, if an interview is ever the you-you-you show, you probably will lose that engagement.]

How Startups Fail At Communicating With Customers

Ramit:  It’s amazing how powerful it is when you actually put yourself inside the mind of your prospect. I want to talk about this for a few minutes. You see very similar copy on most startup websites, similarly terrible. Here’s what it says. It says easy, fast, free. Those three words should never, ever, ever be the headlines or sub‑headlines on your page.

Do you know why? They don’t mean anything. Easy? What does that mean? When you say easy to me, to me, that means I don’t have to check my text messages on a Thursday night when I’m out with my friends at a bar. To a 45 year‑old mother of two, it means something very different. I don’t have to learn this weird HTML syntax with these brackets. [Patrick notes: Ramit co-founded PBWiki.]

Easy is not a descriptive word. It’s a word that engineers use or even amateur copywriters because they don’t have anything else to say. Why? Because they’ve been lazy. They haven’t actually figured out the words that people use. People don’t say I was really looking for an easy, fast, and free solution. They say I was looking for a way to earn more money, and I was sick of getting scammed.

Therefore, that’s why if you go to one of my pages, you’ll see the fact that I was on the Today Show or the fact that I’ve written for the New York Times. That’s not just there to feed my very large ego. It’s there because the customer indicated that it was important to them. I’ll give you another story about communicating with your clients.

Doing $80k of Engagements In 8 Weeks In The Super-Lucrative Field Of Violin Tutoring

Ramit: One of my star students is a young woman named Jackie, and she lives in the Midwest, and she’s a violin instructor. Now, she’s quite good at violin, but that wasn’t really what interested me. The fact was she had clients, but she came to me saying, “I want to learn how to grow my business.”

And so, she had a few clients, but it was just like middling, and it wasn’t doing very well. I said, “Who’s your client? Who’s your client?” This is where most people stop dead. They say, “People who are looking for storage solutions.” Oh, really? What type of person? What gender? What age? Other people will say, “I’m building a product on love.” “Oh, really? Who’s your customer?” “Oh women between the ages of 27 to 54.”

A 27 year‑old woman has nothing in common with a 54 year‑old woman when it comes to love, clothes, or virtually anything else. The way they describe love is completely different. Her customers were kids, parents, moms, dads, everybody. I said no, no, no, no, no. I worked with her. This is what happened. I’ll cut to the chase.

In eight weeks, she was able to generate $81,000. How did she do that? She quickly found out who her customer was. Any idea who the customer was, Patrick?

Patrick:  I’ve read this story from the year before, so I have a good idea. But want to spoil it for the rest of the people?

Ramit:  The customer was not the 10 year‑old kid. It was the mother of the 10 year‑old kid. By the way, that mother tended to be ethnic, tended to be Asian. Not a surprise when you think about it. But this isn’t obvious prior to starting to do the research. Now, by the way, what does this Asian mother want? She doesn’t really just want her kid to play like Yo‑Yo Ma.

Why does she want that? Because she wants little Timmy to get into Harvard. And so, when you deeply understand that, then everything about your positioning, your marketing can change. For example, imagine a new testimonial which says: “My son used to be really shy and withdrawn. Now, after going to Jackie’s class, he’s so talkative. He’s made so many friends. I can already see his grades going up because of the new discipline that he’s learned.”

[Patrick notes: I know every engineer in the room just got the willies, because you think that using that testimonial to sell violin tutoring is somehow unethical.  It is perfectly ethical if Little Timmy’s mom actually reported that as her experiences.  This is, in fact, how middle-class parents justify virtually every extracurricular.  You have probably used a variant of this exact sales pitch yourself, except it was probably promoting video games rather than violin.  Video games help teach problem solving and hand-eye coordination, not just that you should Spirit Rush to Charm/Deathfire Grasp the Corki outside of Baron for the easy ace so you can push mid for the gg, right?

(Man, that might be my best double coded joke ever.)

(P.S which somewhat spoils the joke: If you’ve cottoned onto the fact that that is actually a totally comprehensible statement and feel repulsed by it welcome to being every client ever.  Those of you who play League of Legends just went "Dude, what's wrong with you, was Spirit Fire on cooldown?" and those of you who don't are zoning out almost as fast as a has-money-but-can't-program client does when told about Ruby DSLs and test driven development.)

<Sidenote type="semiPolitical unfortunateReality" forwardLookingPromise="thisBarelyEverHappensOnThisBlog">

P.S. To people who might have a Little Timmy in their life: from the perspective of someone who knows how the admissions game is played, Little Timmy should really be looking for ways to sound like anything other than Asian-smart-kid as possible, because Harvard has a declared policy of racial discrimination, and because in addition to racially discriminating against Asians they have a particular narrative stereotype of an Asian who they think they have quite enough of already.  That stereotype gets good grades, plays violin/piano, and has no personality.  I mention this to accurately summarize the preferences of bureaucrats whose professional competency is racial discrimination rather than to agree with them.  “Talkative” helps him – quite a bit!  I would actively avoid mentioning violin at all… unless you can write with humor (and a touch of pique) about how you abominably suck at violin, hate the stereotype, and enjoy subverting things, because humor and subversion play much better in admissions essays, and because humor/subversion are good mental hooks to make you stand out against the other Asian applicants you’re explicitly judged against whereas “smart, good grades, violin player” do not provide hooks.

Even if you haven't won genetic lottery that Harvard optimizes for, it is still within your power to market your existing product offering (and/or tweak it to make it more marketable) such that you can improve your chances of passing their (biased) decisionmaking process.  I think that is largely a more productive use of a single student's time than lamenting that Harvard's admission department is unfair (which it is, no question, but if you really want to go to Harvard I'd suggest betting your chips on making you more acceptable to Harvard than making Harvard stop systematized racial discrimination in admissions in time to benefit yourself).

</Sidenote>

But that’s neither here nor there, from the perspective of selling Little Timmy’s mother on the value of violin lessons.  She wants to buy violin lessons.  OK.  Customers wants do not always align with their needs -- often, selling them successfully involves a) understanding their wants, b) getting to the root issues behind them, and c) proposing to deliver solutions to those root issues by -- wham, switcheroo -- giving them what they actually need.

Some of my most successful projects were exactly not what the client first thought of engaging me to do.]

Ramit: Wow! That speaks directly to the heart of what her clients want. By the way, it’s not a lie. It’s completely accurate. This is marketing at its best, where you are actually listening to the customer and then delivering value on what they want, totally ethically.

So, for all of us, when we’re writing worthless copy like easy, fast, free, stop. You’re being lazy. Go out and talk to your customers and figure out their real pain points and write you don’t have to check your pager every Friday and Saturday night. That is a very, very powerful message.

Or “silk shirts that don’t wrinkle when you’re getting off the subway.” That is very powerful to the businessman in Manhattan. All right? So that’s all I’ve got to say about copy when it comes to relating to your customer.

Patrick:  I totally agree with that. Also, something that people don’t realize is that this is particularly easy for engineers to do. They think I am trivially capable of doing this, or I am trivially capable of using from free open source solution for doing for their…Therefore, no one else in the world wants it.

My original claim to quote, unquote fame on the Internet is a little program called Bingo Card Creator. It makes Bingo cards for elementary school teachers.

To this day, despite the fact that I’ve been publishing about this for six years with a constantly updated stats graph that shows, like, $200,000 plus of Bingo cards getting sold, people ask me: how could anyone possibly need that? You can do it in Microsoft Excel in, like, five minutes. All you need to do is know how to use Microsoft Excel, like someone that has an engineering degree.

People with engineering degrees don’t teach elementary English. That’s just a fact of life. The reason I know that teachers really genuinely need that is because I’ve talked to literally thousands of teachers by this point, and I know that they have a very particular need for getting ready for class tomorrow.

It isn’t bingo card software. They have a particular need to teach a particular lesson plan that they already have laid out about, say, the American presidents, and they want an easy to use activity that they can just slide into that. And, at no point, do they start thinking of OK, I can open up Microsoft Excel and start scripting up some quick macros, and only two hours from now, I will have something that works for my kids.

They want something that they can go to their local Google, type “American presidents”, pause for a second and remember back to their class about incorporating more fun activities in the classroom, type in “bingo”, hit enter, and get something on the first page that works. And that’s fundamentally why that business works.

Ramit:  Love it. What you said when you said like, I can just open up Excel with my extremely simple knowledge of macros betrays a complete lack of understanding about the customer. In fact, this is what I want…I’d like to talk about stepping out of your own comfort zone and understanding the other people, the people that you’re trying to serve.

Most people are not builders. Engineers, understand that. Most people do not talk or think like builders. They do not want to sit around and build a bunch of stuff. I’m talking about myself. I hate building stuff, except the stuff that I’m really good at, building courses and stuff like that. Do you think if you put a bunch of LEGOs in front of me…I’m going to pick that box up and throw it straight in the trash.

I just don’t care. I don’t like it. I don’t want to build a macro. I don’t want to do all that stuff. The second thing is I have a limited amount of time, and if your customer, for example, has a family, they have extremely limited amounts of time. So for them, paying 5, 10, 20, 100 dollars is nothing. Because to them, they get…especially if you’ve segmented your customer to people who have income and are willing to spend it, as opposed to people who have no income and have unlimited time and unlimited technical skills…

Hint to anyone building stuff for other engineers, who haven’t segmented out their pricing or positioning, that’s bad. I like to talk about this. I was just reading something on Hacker News. There was a comment about email newsletters, and the funny comment to me was who still uses email newsletters? It just made me smile, because it’s a classic, classic mistake we make of thinking that our world is everyone’s world. Just to give you a sense, I make over 98 percent of my revenues through email.

Patrick:  I facepalmed quite a bit when I heard that line, too.  [Patrick notes: I’ve sold a couple hundred thousand dollars of software with email campaigns.  I will – hopefully by the end of September – have a product offering to help software companies do this without having to bring me in for consulting.  If you want to hear more, give me your email address.]

Ramit:  Yeah, you almost cannot pay me money on my site. My conversion funnels are pretty sophisticated, and we’ve built them and tested them for many, many, many years. Email works very well. However, in this day and age, when people talk about oh, you’ve got to get on social, got to get on Facebook, get a Twitter account, my suggestion for people trying to get your first three clients, forget everything that will not immediately get you three clients.

So, if you’re putting up a Twitter feed, ask yourself how is this going to get me clients? And then you’re going to start realizing that you’re giving yourself BS answers, like, I’m getting into the conversation. I need to be at the top of mind. Really? Is that going to help you get three clients or is reaching out to 10 people with custom emails, showing how you already understand their business and suggesting a couple things, is that going to help?

There are the things we talk about in earn 1k, but you can do them anywhere. When I first started off writing copy about four or five years ago, I started studying the really, somewhat dark arts of long copy pages. My sales pages are approximately 40 to 50 pages long.

People say, “Ramit, that doesn’t work.” Really? I have the data. I know for a fact that it does work. In fact, there’s a very sophisticated marketer. His emails are about 20 or 30 pages long. People said [laughs] who reads these emails? Does anyone actually read this? He laughed and said [laughs] only the buyers.

Patrick:  [laughs] I love that line.

Ramit:  It’s really incumbent upon you to stop thinking that your worldview is everyone’s worldview and realize that marketing works for a reason. As one of my professors said…in communication, she said, the value in this material is not in the difficulty of it. It’s in the usefulness of it. It’s not important how hard it is, what you’re doing. It’s important how useful it is to your customer.

Patrick:  This ties back into how…really understanding who, exactly, can afford to buy your product or service offering is, and how important that is. For example, I’ve slagged on social media quite a bit, and I have not slagged on it nearly enough. The person who has the authority to buy your offering at, say, a company which…

By the way, guys, for all the engineers in the audience, you sell engineering services to for profit companies because they are the only people who can pay actual professional engineer rates. There are vanishingly few private individuals and or non-profits who will actually pay engineers the going rate.

Anyhow, so who at the company has the authority to make the decision to bring you on? It’s probably not someone who has a Twitter feed. People look at my business, and they might naively think that I get lots and lots of leads off the blog or on Hacker News, but if I’m getting brought in by, like, the CEO level, or the head of product or the head of marketing at a company, they’re probably, well, a little bit older and have…They would tell you in so many words, I’ve got better things to do with my time than to stay on Hacker News.

I don’t, apparently. But [laughs] I don’t meet those type of people typically off Hacker News. I’ll often meet them at something like a conference that’s organized for the explicit purpose of generating more sales for software companies, which by the way, people who pay $2,000 to go for a conference whose tag line is “Sell More Software” are often interested in paying money to sell more software.  [Patrick notes: I was thinking, in particular, of the Business of Software conference, but I’ll bet you there are a dozen of these in any industry you care to name.  If your prospective clients go to those conferences, you should probably try to go, too.]

They’re meeting people for conversations in between the…the lectures at that place is a great use of my time, I have found. “Who still uses email and newsletters?”  Gahhhh… multi‑billion dollar industries are multi‑billion dollar industries for a reason. You need to have an appropriate level of business awarenesss to back up your technology skills [and if you had that level of awareness, you would not be skeptical about email.]

I would not have a business but for being technologically good at what I do. I would not have a business if I was not able to actually deliver on the things that I offer to my customers. But there’s a huge business knowledge that needs to be present to also successfully run a business.

That starts with knowing the market outside of your narrow specialty. If you don’t already know what businesses are likely to have websites that drive huge amounts of their total business value, then you’re not going to be successful at selling people on engagement to improve their website such that their business gets more revenue.

You need to know, like, what the transactional model for the business looks like. Take two industries which look similar to each other, say insurance or retail finance. Thank God I don’t actually have to do work with either of these.  But play along for a second [Patrick notes: I don’t endorse the following conclusions about this, just making an example]: if you want to sell engagements to these guys, you should understand e.g. that an insurance company might have a very, very direct path to revenue via the use of their website.

They can actually take leads on the website and start converting those directly into transactions and or into applications for their high-margin insurance products with very little work on top of that.  The core business at say, a bank might be more relationship based, where they have longer sales cycles, and they’re only capturing the lead generation on the website or only doing low margin services like checking accounts or whatnot.

[Patrick notes: Checking accounts are loss-leaders with godawful terrible margins, used mostly to get people in the door for credit cards and home loans.  Ironically, the only checking accounts which make appreciable amounts of money are the ones used by the bank’s “worst” customers, who get eaten alive by fees and penalties.  Ask Ramit about that stuff, though, he’s the finance expert.]

Patrick: If you were looking at two similarly situation businesses, you would go with the one that you could provide more value to. So you need to know that about the business. If you can’t sketch someone’s business model on a napkin, I don’t think you can ever sell them anything worthwhile.

Learning Long Copy And Other Unexpected Sources Of Business Value

Ramit:  It reminds me of something I call going from D to C. And that means going from Disparagement to Curiosity, and when you see a comment that says who still uses email newsletters. That’s disparagement. You’re basically saying I’m smarter than this company. Who would ever use email newsletters, which is ironic, because this person happens to be exactly wrong.

And it, therefore, makes them look far more foolish because they’re disparaging something they simply do not understand. I would, instead, rather have people say, “Wow, these guys are using an email newsletter.” They seem to be doing pretty well. They get a lot of press. They seem to have a lot of customer testimonials. What do they know that I don’t?

From D to C. Stop the disparagement and start the curiosity. Like I said, when I started studying the dark arts of long copy, I first looked at these long copy pages, infomercials, and I said these things are scams. I started off with a disparagement model. But as I started getting deeper and deeper into it and learning what works, what doesn’t, what is ethical and what is not, I learned that there are very, very good reasons that direct response marketers have been using long copy for over 100 years.

What do they know that I don’t know? The answer is they know a lot. They know a lot more than I could ever hope to learn, and it’s all encompassed in this knowledge in direct marketing. So instead of disparaging things that we don’t understand, let’s actually try to say, hey, for 15 minutes, I’m going to try to understand that maybe these guys know something I don’t.

When you can do that, why…for example, of the reasons I moved to New York was all my Silicon Valley friends said it’s all about direct ROI. Those companies are so stupid that pay for ads in Times Square. I looked at them like that’s interesting, because those companies have been around for 50 years. Why does Louis Vuitton have billboards that they spend $200,000 a month on or 500,000?

What do they know that I don’t? As I moved here, the answer is they know a lot. They know a lot more, in terms of brand, and not everything is directly measurable. It’s important to be able to say, “Look, I may not know everything. Let me try to at least understand the basics of it.” When you do, you’ll see entire worlds open up. Like for me, I saw entire worlds of pricing, monetization, long copy, upsells, cross sells, AOV.

I saw all these things open up that I had never, never, never had an idea of. It was all because I first was disparaging them, and then I said all right. I better learn what these guys are doing. And that changed everything for me.

Patrick:  I’ve had similar experiences myself. Something that I often see in our industry is people have a fascination for the new. So anything that smacks of the old way of business or that technology is so last year or that thing tends to turn people off. Here’s a heuristic for everybody: it is entirely possible that you are the smartest person in a particular industry… but I would heavily bet against that.

If everyone in an industry does something in a particular way, like if every enterprise software company doesn’t put their prices on the website, and you think “That’s so stupid.  I would never buy anything without the price being on the website”, consider the somewhat radical notion that every enterprise software company since ever is not simultaneously making the exact same mistake and that maybe there’s something about that model you don’t know yet.

Ramit:  God, that is the best example ever. Because I see it all the time. Oh, whenever I see a site where they don’t give me the price, I just close the page. And then you say to yourself OK, that’s great. What is your budget, by the way? Oh, I don’t have a budget. I’m just looking around. I could just build this on my own. You’re not the customer. You’re not the customer. The customer…

Patrick:  “How many millions of dollars in software purchases have you authorized in the last quarter?” [laughs]

Ramit:  Exactly. Like, are you kidding me? I’ll give you an example of a purchase I made just this week. I have been looking at some retention issues and improving some retention flows in my funnels, and I happened to be on some newsletter that I signed up for years ago, which by the way, I read once in a while.

They happened to release a new eBook on retention. It has 75 pages of charts and retentions and strategies and this and that. The email came. I read…It was, I would say, about a four page email. I read the first 15 percent, clicked the link, looked a couple pictures, saw a couple of keywords in the bullet points, like how XYZ company plugged their retention problems. I sent it to my assistant.

I didn’t even buy it myself. I sent it to my assistant. I said buy and add to cal, which means add to my calendar for me to review it later. That was it. The purchase was about $199. It took me less than 15 seconds to make that purchase decision. But why? Because I was the right customer at the right time. I had a burning pain point, and I had the budget.

So no matter what their website looked like and all that, yeah, that may have mattered a little bit. The most important thing was they understood their customer, they understood the code words and the problems I have, and it was already sold before I even looked at it. It was already a sold thing for me.

Patrick:  I’ll give you an amusing anecdote about that. So there are tools I use in my own business, right? One that I use a lot for designing mockups of user experiences is called Balsamiq Mockups, and I think their entry level pricing is, like, 80 bucks or something. A lot of my engineering friends say “Wow, 80 bucks is a lot for something that’s like Microsoft Paint++”.  [Patrick notes: The sarcasm drips from my voice here.]

Anyhow, so I frequently sit down with consulting clients looking at three pages of mockups that I’ve prepared that the engagement. The story that I’m trying to sell them on is “OK, if we do it like this, our revenues for the next quarter are going to go up by 20 percent.”

I got a question from someone who is similar to me at the company. Techy guy, young 20s, et cetera. He said, “That looks cool. What’d you make it in?” I said, “Oh, Balsamiq Mockups. It’s this thing that a company puts out which lets you mockup pages very quickly.”  “What, you paid money for that?” And the CEO says…by the way, notable and quotable… “Get one for everybody. Put it on the company card. You were talking about the plus 20 percent in revenue, Patrick?”

It’s two totally different mindsets looking at the same artifact, right? The CEO only sees it in the “This is the tool that someone I trust is doing something incredibly valuable with me on. It is cheap at any reasonable price.” Whereas the person who could potentially have, given the next two years of his life, actually implemented that tool, is valuing it at nothing…because clearly, he didn’t have anything planned for the next two years.

Ramit:  Cost versus value. This is something that we’ll talk more about in pricing. But if your first inclination when you look at something is how much does it cost, chances are you’re not the customer. And chances are you would be a terrible customer. In fact, I did this just yesterday. I did a web cast where I actually opened up a new course.

I was testing it. People when I start talking about the course, there will be some people on these webcasts. There’s usually hundreds of people there. They’ll say what’s the price? What’s the price? How much does it cost? What’s the price? I quickly tell them if your first question is about price, this course is not for you.

Because if all you’re concerned about is price, then you haven’t even factored in the calculus of value. If my course can teach you how to negotiate a $10,000 raise, then does it even matter what it costs? It could 100. It could be 500. It could be 5,000. If you believe in the material, and there’s a guarantee, then cost should be one of the last things.

Now, here’s the key. Certain people think like that. Businesses think in terms of value. Generally, individuals do not. And so, that is when you start choosing who are the customers I want to go after? Are they people who have no money or people who complain about money all the time or people who have no time to actually use this?

Or are they people who look at a…an information product or an engineering project and say, you know what? This might cost me $10,000, but I’m going to make back far more. Maybe I’m going to make back more money. Maybe I’m going to get peace of mind. That is value versus cost.

Patrick:  Amen. And that’s, by the way, a good heuristic when you’re looking at customers. So you’re going to be selling them on a relationship which is going to, at the end of the day, there will be an invoice delivered, and that invoice is going to have a bunch of zeroes in it. So you are probably not going to be the first professional relationship someone has ever had.

In fact, if you are, that’s a bad sign, because they have no idea how to work with you. They are not going to have a maximally happy result no matter how well you execute on that relationship. So look at how they comport their business in other ways. If someone has an accountant that they’re paying $300 an hour for, they understand that an accountant is generating some value for the business that is worth $300 an hour.

If someone doesn’t have an accountant, and if you ask them “Just curious, why don’t you have an accountant?” And they say something like “Heck if I’m going to pay $300 an hour when I could do it for myself in QuickBooks”, that’s a leading indicator that this person is not going to value your time as a professional either.

Ramit:  Exactly.

Patrick:  Now, conversely, if someone says that they pay their accountant $300 an hour because accountants provably make the business money but that the riff‑raff techie guys are just crazy for demanding 40 bucks an hour, then also, again, leading indicator. Have a nice, firm handshake and try to get introduced to someone else, hopefully someone a little more sane. But you’re not going to have a successful commercial relationship with them.

Ramit:  That’s right. Focus on taking your B+ customers/prospects to be A customers. Don’t focus on the D people, trying to turn them into A customers. It will never happen.

Patrick:  Never happen.

Ramit:  It will never happen. I will talk to you and Patrick will talk to you more about this. Patrick, I love how many times in your life you’ve used the word pathological customers online. I, myself, have many of those as well. And, in fact, I will talk about how I turned down over one million dollars in revenue per year to avoid the type of customers I do not want.

We’re going to talk about that in our next call, which will be on pricing. But for now, let’s leave our URLs so people can find us. Patrick, do you want to go ahead and start? Where should people find you?

Patrick:  Sure. My blog is at http://www.kalzumeus.com/blog [Patrick notes: You found it!]

Ramit:  What can they find when they go there?

Patrick:  I largely talk about the business of making and selling software. If you want the specific deep dive into that, as in whatever I happen to be thinking about at any given day, that would be at https://training.kalzumeus.com.  [Patrick notes: Ramit and I touched on the topic of how email makes serious money for businesses earlier.  If that subject interests you, or you would like to learn more about how you can use engineering to improve the marketing of your software business, I strongly suggest trading me your email address.  I promise not to waste your time.]

Ramit:  I love Patrick’s blog because not only does he talk about selling software, but I sell information products. I don’t sell software. But I find so much relevance in what you talk about, and I love how you delve into the psychology of being able to turn your worldview around and deliver value to people, and then charge accordingly.

I’ll share my URL as well. I actually put up a special page for anyone listening to this, to give away some free stuff for you. It’s http://www.iwillteachyoutoberich.com/earn1k/kalzumeus-start/. That’s a mouthful. You’re going to get some stuff there on how to find your first few clients, including a free video and a free mini course that I put together for you. So take a look. I hope you guys enjoy it. We’ll talk to you on the next call.

Patrick:  All right. Let me give just a quick mini testimonial for Ramit. We met for the first time a couple of years ago in New York and had dinner together, and some of the advice that he gave me at that dinner was extraordinarily valuable. It took me off of one trajectory that I was on with my consulting business and put me on a much better trajectory.

I’ve always known him to say really, really valuable things when I’ve talked to other engineers about some of the advice and, like, salary negotiation that he’s given me.

I have a stack of emails in Gmail, like I think it’s somewhere 20 something, and the running total is 200 and X thousand dollars of extra money that that’s made my readers. I really trust Ramit. There is no BS here. You can’t possibly waste your time on it.  [Patrick notes: Usual disclaimer: no money exchanged hands for that recommendation.]

Ramit:  Appreciate that. All right, Patrick, we’ll talk soon.

Patrick:  Talk soon. Bye bye.

Ramit:  Thanks.

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 30x500, 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.

Special Bonus Prize For People Who Read The Whole Transcript

I did a 45 minute video on improving the first-run experience of your software, to increase customer happiness and conversion rates. Some of the folks who have implemented advice from it have already told me that it made them appreciable amounts of money. You should probably watch it. Click here to give me your email address on the right side of the page, and I’ll give it to you free. You’ll also get an occasional email from me about things you’ll find interesting, like e.g. a new podcast getting posted, not-for-the-blog thoughts about software/marketing/etc, and (possibly) a product announcement someday.

Inaugural Kalzumeus Podcast: Japan, Startups, A/B Testing, And More

Hiya guys.  My good friend Keith and I decided to do something a little different and tried recording a podcast.  We’re still rather new at this, so it took for form of a freewheeling conversation.  Major topics included:

  • the experience of working at large and small tech companies in Japan
  • the Japanese web application market
  • career advice for programmers don’t call yourself a programmer
  • us trying to sell you on starting A/B testing
  • conversion optimization stories, including actionable tips which have actually worked for people
  • a wee bit of generic geekery.
The podcast weighs in at about 79 minutes long.

Podcasts take a metric truckload of work to put together.  If you like it, please, say so.  If folks have interest in it, we’ll do it again.  If not, well, one more data point as to what the market wants.

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Transcript (Because We Love You)

Patrick McKenzie:   Hi, everybody. I’m Patrick McKenzie, better known as patio11 on the Internets.  This is my buddy Keith.

Keith:  Hi, I’m Keith Perhac. I live next to Patrick’s and I’m pretty much unknown on the Internets.

Patrick:  So when we tell people we’re right next to each other, we’re right next to each other in Ogaki, Japan. How the heck did we end up here?

Keith:  Long, long story. So I’ve been here for nine years, you’ve been here for eight, pretty much. And we came here on the JET program. I was working as an English teacher, you were working at Softopia, which is apparently our prefecture’s gift to web development and iPhone development right now.

Patrick:  Yeah, the prefectural technology incubator.

Keith:  That was an interesting little incubator because it’s been losing money for the last seven years. And then when the iPhone came out, all of the iPhone developers and everything moved in there because rent is cheap. And suddenly the incubator is making tons and tons of money thanks to iPhone apps.

Patrick:  Yeah. That was crazy. The number one, number two, and number three most popular Japanese iPhone apps of all time were literally right next door to each other, all in Softopia. They’ve been saying that they were going to make Sweet Valley, the name of this region, into the Silicon Valley of Japan. And I always thought it was a pipe dream. And now we have three successful software companies in literally like a 10‑square‑meter space in one building here. [Editor's note: Perhaps not quiiiiite Silicon Valley yet...]

Keith:  Yeah.

Patrick:  It blows my mind.

Keith:  Yeah, essentially we’re in the Kansas of Japan. There’s nothing here, like literally nothing here.

Patrick:  Yeah, the engineering culture of this region is much less startup‑friendly than say a Silicon Valley or a New York would be. It’s dominated by one monopsony employer of engineering talent, which we’ve both had business dealings with.

Keith:  We’ll just say a very large automaker which everyone knows of and who pretty much pioneered the idea of kaizen, which I’m sure you all know of right now.

Patrick:  Yeah, the big buzzword for the lean startup movement was lean manufacturing before it was lean startup and before it was lean manufacturing it was just the [REDACTED] way. Whoo, shoot.

Keith:  [laughs]

Patrick:  Sorry, we’re editing that out.

Keith:  The T way.

Patrick:  Yeah, T. A big T-Corp here. Somewhat surprisingly, T-Corp and its various affiliated industries don’t really apply the T-Corp way to software development, do they?

Keith:  No, and I think the real reason that they don’t do that is because software development is not seen as a manufacturing process. It’s really seen as this kind of artsy‑fartsy kind of thing here. And it’s interesting because Web is definitely seen as artsy‑fartsy, and programmers themselves are pretty much seen as code monkeys.

Patrick:  Yeah.

Keith:  They’re seen as people on a factory floor that can… you just give them the spec and they punch out the pieces and that’s what programmers are for. And so what you have is a lot of managers who are used to managing assembly lines then trying to manage software projects in the same way. And it doesn’t really work quite as well.

And unfortunately, when big T feels that way about programmers, you find out that all their subsidiaries and everyone who works for them and everyone who deals with those subsidiaries and everyone who deals with the people who deal with those subsidiaries, the whole sort of culture kind of filters down to that.

Patrick:  This is true. Even at my old day job, which was a multinational corporation in Nagoya, which there is no company in Nagoya that does not have business with the big T in one way or another. It’s like Detroit times 1,000.

Keith:  Very true, very true.

Patrick:  Everyone is connected with the automobile manufacturing industry here. Even if you’re not directly connected into your day‑to‑day work. And it trickles down into things like the way engineers are treated, the way the discipline is treated, and the prevailing salary and wages for engineers here.

Even at a large multinational corporation as a salaryman, which is a full‑time employee who is expected to be at the company until death do you part, the wages for programmers are not that great here. Would you say the algorithm is $100 per year of age, per month, give or take?

Keith:  About that, yeah.

Patrick:  So Keith and I are right around 30 right now. That means we’d expect at a regular company here to be making $3,000 a month more or less, which as you might have seen is a wee bit less than you guys get in Silicon Valley.

Keith:  Yeah. Now I do have to say, the pricing structure for payments for programmers and for anyone really, is a holdover from the bubble days. And when you retire, you are guaranteed a very nice retirement fund. And every year because the company will do so well, you’ll get a big, fat bonus check, sometimes three times a year. And the problem is that Japan has been in a recession since about what, I think it’s ’90, ’92, something like that?

Patrick:  Yeah, somewhere in there.

Keith:  Long, long recession. And we don’t get bonuses. There’s no more job security for this until you retire at 60, now 65, soon to be 70. So we’ve lost all the benefits of working for peanuts at these companies and yet we’re still working for peanuts. That’s pretty much what it comes down to.

The salaries have not evolved with the change in Japan’s social contract, pretty much.

Patrick:  Mm‑hmm.

Keith:  We had a social contract where you go onto a company and they will take care of you until the day you retire and now it’s you go into a company and it’s pretty much hit or miss.

Patrick:  Now, for the peanut gallery that doesn’t know, the peak of the salaryman/lifetime employment system was in about the 1970s or so. And at that time it was about 30 percent of the Japanese labor force who was both working in a large multinational corporation and had this particular seishain [editor’s note: “full company employee”] status that we’re talking about. The rest of the 70 percent were not subject to the lifetime employment guarantee including, most prominently, women.

Keith:  Women, yeah.

Patrick:  Who we have many, many stories about how Japanese companies do not treat ladies right.

Keith:  That’s for a different time.

Patrick:  Yeah, another time.

Speaking of the social contract, a lot of Japanese society is built around this presumption that if you go to a good school you will get a good job at a nice megacorp like T-Corp and then have this lifetime employment guarantee. That’s one of the reasons it’s so hard to hire for startups out here, because basically you get one shot at that brass ring of lifetime employment and if you don’t take it right after you get out of the university, you are damaged goods for the rest of your life.

Keith:  Well, I do want to cut in there. That’s not really how it works, but that’s how everyone thinks it works.

Patrick:  I agree with both parts of that statement.

Keith:  And the problem is when everyone thinks that’s the way it works, especially for people who have just gotten out of college and don’t know what it’s like in the world, they’re going to go where it’s a safe bet. And we’re talking about lifetime employment and stuff and how that’s no longer a guarantee. However, if you get into a place like NTT, which is the phone company, even the big T, in most cases if you are a proper contracted employee, then you will probably be there until you retire.

Patrick:  Right.

Keith:  However, there are only a handful of those companies left. I would say that there’s less than 100, maybe less than 50 in all of Japan that are large enough to really be able to take care of you for your entire life like that.

Patrick:  And there’s definitely a difference in statuses at those big companies. For instance, one of the ways they manage to have a lifetime employment guarantee is that T-Corp has this… it’s like an industry within an industry of supporting companies, built around themselves, like suppliers, vendors, that sort of thing.

And while they won’t cut their employees come hell or high water, they’ll cut their vendors like nobody’s business and/or tell the vendors, “Listen, we can only afford to pay you a quarter of what we did last year, so make the appropriate adjustments.” And then the vendors will go down and cut their regular employees or, most commonly, cut their contractors.

Keith:  And T-Corp themselves have a lot of contractors. And when you think of contractors, you usually think of consultants or stuff like that. I’m talking about contract employees working on the assembly lines and whatnot. And those people do get cut.

Patrick:  Right, for example, right before the recent economic crisis, which is known in Japan as the Lehman shock for some reason, right before the Lehman shock there were about 6,000 foreigners, mostly Brazilians, living in our town of Ogaki. And so I go to a church out here and after the Lehman shock for about a year, every week at church we had a family X or a family Y or family Z having lost all the jobs in the family is going back to Brazil. So that population of foreigners, who were almost all contract laborers at the local manufacturing industries ,went from about 6,000 to about 1,000 in a little less than a year.

Keith:  That was a heavy, heavy downturn. But that gives you a pretty good idea of what the labor force is like in Japan. And why it’s difficult to get a good startup community here. I go to a lot of programming conferences and stuff and we really, as programmers, picked a really crappy place to be, to be perfectly honest, because the entire area is ruled by T-Corp.  Also, there’s just a very different way of thinking about business in Nagoya in the Nagoya area than in, let’s say, Tokyo and Osaka. And even for Japanese people, and other Japanese programmers, looking at Nagoya they say it’s very difficult for people who are not in Nagoya to start a business here. And it’s very difficult for new businesses to start here.

Patrick:  So we’ve been doing this for the last couple of years and we know how it actually works, but people in America always tell me I’m lying when I talk about working conditions for professionals in Japanese societies.

Keith:  [laughs]

Patrick:  Why don’t you tell me about those lies I’ve been telling for the last couple of years.  Just sketch some out.

Keith:  So I’ve heard some of the lies Patrick has been telling all of you and I have to tell you that I don’t think any of them were actually even slight exaggerations.

Patrick:  Well, let’s recount some stories, shall we?

Keith:  Let’s recount some stories. So coming home every night at 12:30 AM, if you could get home.

Patrick:  Right.

Keith:  OK, that’s definitely true.

Patrick:  Last train of the day is 30 minutes after midnight, I missed that train quite a bit of the time.

Keith:  Yeah, the business hotel near the station actually knew Patrick by name and face. And Patrick had this thing Tuesdays where there were longhalf‑day meetings.

And so you get pretty much nothing done on that day. So you’d have to work until about 12:30, 1:00, end up missing the train and he would arrive at the business hotel and they would have a room ready for him. And if he wasn’t there one week, then in the following week when he did show up, they would ask, “Why weren’t you here last week?”

Patrick:  It got so bad at one point I left my Kindle there overnight on a Monday and it was waiting at the front desk for me the following day with a note, this is Mr. McKenzie’s Kindle, he’ll be in, it’s a Tuesday.

Keith:  So really, no exaggerations about the workload. And I, fortunately, was not as bad as him. I could usually get home every night. I usually got home around 11:00 or so. So I was very lucky to get home at 11:00.

Patrick:  So what are we doing for this 12‑to‑19‑hour day? Is it actually programming for the entire time? No, not so much.

Keith:  OK, so Patrick and I had very different employers. He worked at a very large, how many people were in your company?

Patrick:  Well, let’s see, at my office there were about 70, but companywide maybe 1,000‑1,200 employees or so.

Keith:  So he’s with a very large company that does only programming. I, on the other hand, was in what is pretty much the Japanese startup.  A startup is called a “venture” here. It’s generally a single person putting his money on the line, getting a loan from the bank, and trying to make a company out of it. I was the only programmer at this IT company. So we were a company of around seven or eight people, and I was the only programmer left after my boss, the other programmer, quit.

So pretty much I had a lot of free rein in what I was doing, but, on the other hand, for any product that my company had to ship, I had to make it from scratch. And that’s not just programming, that’s the design, development, graphic design, figuring out what the customer wants, how we’re going to accomplish it, pretty much everything. The other people in the company were sales and management.

Patrick:  My company was a multinational consultancy.  Think of like an Accenture or IBM, which goes to a client and say, “Hey, we’ll fix your problem, whatever the problem is, and we’ll sell you smart people to make it happen.” We were in the wetware business. I was the least wet bit of the wetware, we’ll put it that way.

My official title was “System Engineer.” That’s one of these things in Japan, programmers are considered code‑monkeys, but system engineers, who tell programmers what to do, are assumed to have a bit of discretion and professional ability. Maybe half the company was people in sales or support, who would sell a university on, “You should use our systems for doing your backend course management or payroll or whatever.”

Then the other half of the company was the engineers like myself who would talk to the customer and figure out what they actually needed for integration with their systems and then build out the code to do it. Or assist outsourcing operations for outsourcing the business process management to low‑wage countries like India.

The feeling in the company was that even though we were a software company, writing software did not add value. That’s almost a direct quote from the CEO. So, we would figure out the software that needed to be written and then actually get the software written by cheap people because that would provide more value for our customer.

This resulted in me doing outsourcing management to India for about three years because I was the only one in the company who could speak good enough English to manage it. That was an experience.

Keith:  You had actually told me about some of the technical docs that they had sent before you were on the project where they would actually put the Japanese technical docs into Google Translate and then just ship them over.

Patrick:  Yeah. I tried to stop that and was less successful than I wanted to be. At one point I told my boss, “Listen, boss, we’re shipping out several thousand pages of technical documentations for this particular subsystem which just absolutely puts the ‘critical’ in ‘business critical.’ You need to clear the next month of my schedule so I can translate them.”

He said, “Your fully loaded cost as an engineer is about $6,000 a month [ salary of $3,000 times a factor of two for contribution, taxes and other overhead involved with hiring me]. $6,000 a month is too much to pay for translation. We want to get it done for about $4,000, so we’re going to have an Indian company to do the translation for us.” I said, “I don’t really love that plan, but I’ll do it. But I want to spot‑check the quality of their translation just to make sure we’re getting our money’s worth.”

The first day I get back an Excel file. I can’t remember exactly what the error was, but on the first page that was describing black as white, a clear error. I mail the Indian subsidiary and say, “Hey, I was spot‑checking the quality of your translation and there’s just this glaring error on the first page that makes me worry about the rest of the documents. Can you please tell your translators to be careful.”

They mail back to me a few hours later, “We don’t agree this is an error.” It’s literally a translation of black is white or something. So I mail back, “This is absolutely an error. I haven’t had the opportunity to discuss it with a native speaker of Japanese, but there’s no possible way that your translator is translating this correctly.”

I get a mail back, “We don’t agree.” I said, “You need to put your translator on the phone with me now because we need to discuss this. The project will not proceed if you have this level of understanding of what the requirements are.” They said, “We discussed with three authorities and all of them agree with our translations. So you’re outvoted.”

I said, “Who are your three authorities?” They said, “Google Translate, BabelFish and AltaVista Translate.” So I was outvoted by three computers who all use the same dictionary apparently. That sort of thing happened all the time. They had billed us literally $4,000 for having people do the manual copy‑pasting work into Translate and billed it as translation services. Yeah. That project didn’t work out very well.

Keith:  I actually want to jump back real quick. You had mentioned the difference between the System Engineers and programmers. You had a blog post, I think it was two weeks ago and it got put on Hacker News. Everyone was like, “Oh, I’m a programmer, so that’s what I’m going to call myself. I’m not going to call myself System Engineer.”

This is really one of the places where it’s a very clear‑cut difference. It doesn’t matter what it is that you do all day. A simple name change raises your pay grade pretty much double. The amount of things that you are trusted with, the amount of things that is decided that you do. This is not to say that programmers are not given system engineer responsibilities, they’re just not believed to able to accomplish them.

Patrick:  Right.

Keith:  So, it doesn’t matter what you’re doing in Japan, as long as you’re a programmer, call yourself a system engineer and you’d double your pay.

Patrick:  Right. Actually every time I had a bug for about the first two years of working on a company, often because I didn’t quite understand the requirements in the document because all the documents are in highly technical Japanese. And my co‑workers would be berating me for the bug or the absence of testing, which failed to reveal the bug. Or just being careless, because I’m often careless. They would say, “Listen, Patrick. This isn’t acceptable, you are not a programmer. This should have been taken care of.”

Definitely with regards to Japan, call yourself a system engineer if you have the choice, even with regards to America.

I do programming, I like programming, I love programming. The craft and actual activity of programming really, really appeal to me. But as a consultant when I’m talking to businesses, I never describe the value that I’m adding to the business as, “OK. I’m going to program some stuff for you in Rails.” Because businesses don’t really see it on that same level.

Even businesses that are run by really engineers’ engineers, like the Fog Creeks of the world, which really love programming and the craft of programming: at the end of the day they are a business.  So you need to be connecting to them on that business level of, “Here are the concrete benefits you’re going to get from doing this engagement with me.”

Keith:  It’s just like when you sell a product, you don’t sell the features, you sell the benefits.

Patrick:  Right, right.

Keith:  You are programming, and that’s the feature that you’re selling. But that’s not the benefit. The benefit is not, “I’m going to write code for you.” The benefit is, “I’m going to make a system that does this awesome thing. And this awesome thing is going to make you a million‑up in dollars.” And that’s what you sell. That’s why you call yourself a system engineer instead of a programmer.

Patrick:  Or providing solutions instead of providing software.

Keith:  Solution Architect. It was so funny. My job title in my company has changed so many times. I think it changed seven or eight times in the last four years. And my favorite one was “Solution Architect,” because it just says nothing about what I do whatsoever.

Patrick:  But civilians, or whatever you call people who aren’t engineers, sometimes respond to things like what is printed on your business card. That being the reality, adjust yourself to the reality rather than what you think your ideal world would look like.

Keith:  Yeah. Really, if you want to put “programmer” on your business card, write it in binary on the back or put it in as part of the design or something.

Patrick:  Right. You can always call yourself what you want when you’re around just us geeks, but when off Hacker News and you’re talking rate negotiations with customers, adjust to their view of the world.  It will make you happier in life.

Keith:  Exactly, exactly. Don’t believe us, A/B test it. I actually did this. I went to a prospective client with a programming friend of mine. We do the exact same thing. We have the roughly the same levels of technical and business acumen. We decided, “Hey, we’re going to try this out.” He called himself a system engineer, I called myself a programmer. For the rest of our meeting they deferred to him over me for every single thing. [Editor’s note: You’re right, this is not an A/B test.]

So just changing that one little word on your business card or when you introduce yourself makes a huge difference. It’s really just you have to change yourself to fit your customers’ expectations.

Patrick:  Obviously the culture of businesses in Japan is very different than what many of our listeners are used to.  Well, I say the culture of Japan: Japan is a big place. It’s like saying, “the culture in America.” Kansas is a different place than Texas, is a different place than a tech startup specifically in Mountain View, California. But the business culture of, say, metropolitan Nagoya, Japan is very different than the business culture of New York City, or at a tech startup in New York City, or at a financial services firm in New York City, or specifically Goldman Sachs in New York City.

You have to adjust yourself to whatever that particular situation you find yourself in. That being said, there’s very, very few places I’m aware of calling yourself a programmer is a career enhancing move.

Keith:  Yeah. Let’s stop berating everyone for calling themselves programmers.

Patrick:  Right.

Keith:  What do you say? You want to move on to kaizen?

Patrick:  Sure. Let’s move on to kaizen.

Keith:  OK. Everyone, I’m sure, knows kaizen.

Patrick:  Actually, I don’t think that’s true.  Why don’t you explain what kaizen is.

Keith:  Really? Because I got a photo from one of my friends in Nashville of all places. She went to a burger joint and had the Kaizen Burger. This huge burger with Kobe beef and cheese and all the stuff, and they just called it “Kaizen Burger.”

Patrick:  That sounds delicious, but I think the rest of America is not caught up to Nashville yet. So let’s go.

Keith:  Everyone should catch up with Nashville, I swear. [laughs]

OK. Kaizen is a term in Japanese which means “improvement.” That’s the general translation. What it has come to mean in American English is the reiteration and iterative improvement of systems and processes that were founded pretty much by Toyota. Essentially it’s reiterations over a design in order to get rid of flaws and to make a better product.

This is pretty much the the cornerstone of any physical manufacturing process. Any car that you see is built with kaizen. Apple does it with their Macs. Everything is iterated and iterated. They make a design, they put it out there, they find out what’s wrong and they slightly change it, they slightly fix it and they keep reiterating and reiterating. Then they finally get a great product. That’s how Toyota has worked, that’s how most manufacturing works.

Patrick:  I think this idea is so powerful. There have been hundreds of volumes written about the Japanese economic miracle. Honestly this and the related Toyota process improvement were so powerful that they were able to cover up every mistake made at the same time. If you have that going for you and the rest of the world hasn’t caught on too it yet, you can do all manner of stuff totally stupidly, like work your people to near death by exhaustion. You’ll still ROFLstomp over the competition.

Keith:  Exactly. Where kaizen comes in to our conversation now is that kaizen has left the physical manufacturing world and is starting to go into the software development.

Patrick:  If you read Eric Ries’s book The Lean Startup, which by the way is a fantastic read and you should read it if you haven’t already, it’s one of the ideas he touches on a lot.

Keith:  Yeah, yeah. I actually want to pick up a copy of that. I saw that in your house when I was over there.

Patrick:  One of the ways that kaizen is relevant, not just to people who are manufacturing physical products but also to software developers who are making software or an experience delivered over the Internet, is that we can do things like A/B testing. So we can tell in almost real‑time which of multiple versions of a website, once exposed to users, causes those users to have a happy experience. You could define “happy experience” in a few ways: judged by business goals like whether they buy more software or sign up for your email list more often, or judged by whether they achieve success with your software.

For example, I sell software that makes bingo cards for elementary school teachers. If the schoolteachers can’t successfully make bingo cards, that’s a problem for me. So, I can redesign the interface of my software such that they actually achieve task success.

Keith:  The great thing about this iteration, when we’re dealing with software and especially web apps, is that the feedback is so immediate and the cost for doing these iteration tests, these split tests is so low. How long does it take you to make a split test?

Patrick:  One line of code, it’s the only way to do it.

Keith:  One line of code. All right. In one line of code you can test which creates the better user experience.

This kaizen originated in manufacturing. In manufacturing, it’s a much more expensive process. You have to build it, which means you have to use the raw materials, you have to create the building process, then you have to ramp up production and ship it to the customer and the customer has to give you feedback. We’re talking, maybe, two or three years to get feedback on a single design before you can iterate.

Now, we can iterate… If you have enough users on your site, you can get an answer with a split test in about a day.

Patrick:  At Facebook or Google scales you can get it literally in seconds. Even at fairly minor scales, like the Bingo Card Creators of the world, I can throw out a test every Monday and have a statistically confident results generally by the following week. It’s a wonderful thing when you don’t have much time to work on a site.

If you’re getting about a hundred visitors a day then you can throw some up, come back a week later, and have results.  Doing the A/B test doesn’t block any of your other activities for the week. You can continue talking to customers or continue writing documentation, continue producing the new feature. Then, when you’re ready for it, take a look at the results of the A/B tests and generally just make a one click to pick result A over result B or whatever the stats tell you to do.

Keith:  What we’re actually seeing… Patrick’s A/B testing software, he made it himself. It’s called A/Bingo. It’s amazing and you should pick it up. I use Visual Website Optimizer, which is a great software, all JavaScript based, works on any page, I recommend that as well.

But what we’re seeing is a change from manufacturing where in manufacturing you can have a thousand ideas, but your iteration time is around maybe six months at the fastest, a year, maybe two or three if you’re talking something huge like a car.

With the software iterations, one line of code takes me five minutes to implement. VWO does the same thing, it takes me 5‑10 minutes to implement. What takes more time now is to actually think of what we’re testing. The time it takes to test something is so infinitesimal that thinking up good tests takes more time. Which is amazing that we’re in this technological area that we can test things as fast as we literally think them up.

Patrick:  Right. Also it prevents a lot of waste in the company. Have you ever been a really pathological meeting? I once had a six‑hour meeting involving four people to discuss the text that was going to be placed on a button for signing up to a mailing list. The mailing list was only getting 50 sign ups a week anyhow. There’s an actual cost to that. The fully loaded cost for that meeting was on the order of $300 an hour times six hours, so almost $2,000 spent just to determine the call‑to‑action on a button that didn’t really matter anyhow.

If you have a culture in your organization of testing things, that would literally have been a 45 second discussion. Like, “I think it should be, ‘Sign up for mailing list.’” “I think it should be ‘Sign up now.’” “OK. We’ll throw it in the test.” Done. And you save that $2,000 and spend it on stuff that actually matters to your business and your customers and the world at large.

Keith:  Yeah. Going back to the Japanese side of things, this is a big thing where they don’t consider software to be a manufacturing process. Testing in Japan… Now, we have unit testing and testing like that, but the idea of user‑based testing is pretty much non‑existent, almost completely non‑existent. Unless you’re going into the very large, very in‑the‑know tech companies. I’ve dealt with one or two, and they’re not common at all.

Patrick:  For example, one of the several big startups based in Tokyo are in the mobile gaming space. There’s an American company you’ve probably heard of, they allow you to make virtual cabbages and water the virtual cabbages. Sometimes the virtual cabbages rot.

This company is very, very sophisticated and they iterative improvement processes including A/B testing and collecting user metrics and what have you. They recently opened a Tokyo office and somebody there said, “Yeah. We’re pretty much planning on effing killing all the Japanese companies in the this space.”

I do not love that company, but I think they’re likely to achieve that goal.  Just like Toyota versus the American manufacturers, if there are 10 people in a fight and only one of them understands how to use science, I already know who’s going to win.

Keith:  I like that science is the thing that’s going to win the fight. [laughs]

Patrick:  It seriously is the revenge of the geeks out there right now. Really.

Keith:  Really it is. For the first time in history we have so much data that we don’t have enough people to process it. We have so much information that really what we need to do now is just process all this great information and put it to good use. And we just don’t have the resources yet.

Patrick:  Right.

Keith:  What we need is mathematicians and statisticians to find, look over, and analyze this data.

Patrick:  Yeah. Also, this is a good thing for you to pick up for your career. A/B testing is a skill set that is not really all that hard to pick up. Grab a book, study it for a week. The mechanics are dead simple. After that, it’s just a matter of coming up with what actually to test.

But that skill is fantastically rare, much more rare than, say, skill with creating web apps in PHP or Ruby on Rails. Because it has direct bottom‑line implications to the business, to the tune of, “What’s five percent of your sales for the next quarter?” When you’re talking to a company the size of say a T-Corp or just the line of business from Bank of America’s website, five percent is a very significant number.

If you can routinely quote numbers like that, you are no longer in the $60‑to‑$100‑an‑hour bucket with other programmers, you are in the bucket with strategic initiatives that add five percent to Bank of America’s bottom line. Scary stuff.

Keith:  I really hate to keep coming back to this. System engineer versus programmer, implementing an A/B test takes one line of code, takes five minutes to do. If you are the person that used that one line of code, changed the color of a button from blue to red, and added five percent to a multi‑million dollar company’s bottom line, you’re no longer the programmer who implemented that, you’re the guy who added five percent to a multi‑million dollar bottom line. That’s what matters.

Patrick:  Right. Billing also scales right to match, particularly when you get clueful clients. I won’t be comfortable talking about mine. Suffice it to say if you have a portfolio website… Not that I have a portfolio website.

Keith:  You need to make one.

Patrick:  I don’t know. Yes and no. When someone comes to me and says, “Hey, we’d like to hire you for this thing, do you have an example of people that it’s worked for before?” I can informally say, “Well, I’ve worked for XYZ, and XYZ have reported this kind of result.”

That’s, by the way, a trick when you’re dealing with clients… It’s not a trick because both of you will benefit from this. But say, “Look, if we have a successful result with this project, I would like to write that successful result up as a blog post or something. That will be to our mutual benefit, you’ll get additional attention because of me writing the blog post, and I’ll get something to keep for my portfolio.”

Phrased like that, many clients will say yes to it. It is a wonderfully, wonderfully wonderful thing to arrange for yourself as a consultant. For example, when I was working with Fog Creek, when it became obvious that the engagement was going to work out for both of us, I said, “Hey, you guys are always looking for new topics for your blog post, why don’t let me ghostwrite one about what we did for the marketing?”

They said, “Oh, yeah. Let’s do that.” So I wrote something called “Our Marketing Is Up Fog Creek and How We Fixed It” or something to that effect. Where we talked about things like we made changes to the website and as a result Fog Creek’s conversion rate went up by, say,  10 percent. Just make a guess of how much money Fog Creek makes in a year, add 10 percent to that, it’s meaningful, right?

So, Fog Creek is obviously very happy with this. But in terms of dealing with my other clients, when they say, “Oh man, Patrick. That number you just quoted to me is a lot of money. How do I justify that to the investors or how do I justify that to my team?” I say, “Well, if you look at this post over here by Fog Creek, they said I added about 10 percent.” And done, that’s one way to deal with pricing objections.

[Editor's note: Patrick wasn't clear on this, but 10% was a handwavy approximation number here.  The actual number is undisclosed.]

Keith:  And that’s something I’ve been working on with. We were talking earlier about how this split testing your stuff is not known in Japan. I’m trying to bring split testing and  modern iterative development practices into Japan.

One thing I found when dealing with my customers is that they feel the same way, it’s like, “How do I add this to my bottom line?” I say, “Well, I improved such and such company, who makes a million dollars a year, by 10 percent.” Sometimes they understand it and sometimes they don’t.

When they don’t understand it I say, “Well, why don’t we do it like this. You pay me half of what I’m charging. And for every percent improvement we see over your current baseline, you give me another X dollars.” People seem very happy about that. Until, of course, the results come in and they end up paying me three times to what they were originally going to pay me.

Patrick:  Yeah. Pay‑per‑performance is an interesting model.

Keith:  It’s not the best.

Patrick:  Yeah, I am not a big fan of pay‑per‑performance arrangements. Not to say I would never do them, but I typically try against them.

Here’s one reason. In any sort of project you have execution risk. Generally as a consultant you want to be responsible for your own conduct, but not risks external to your own execution. If, for example, you want to do a pay‑per‑performance arrangement for search engine optimization or for A/B testing or conversion optimization for a startup, that startup’s priorities might change on a dime.  This can happen one week after you get out of the building. That actually happens frequently. The project you were working on can get shelved.  This even happens at multinational corporations.

If this happens, you’re not going to make your pay‑per‑performance numbers no matter how good the quality of your underlying work. Typically, with a pay‑per‑performance arrangement you’re going to be getting a smaller number upfront, plus a payment if you hit particular milestones. You won’t get that milestone payment and you’re going to end up working for a fraction of your rate. And working for a fraction of your rate is not the purpose of the exercise. Unless it was client who had a clear reason not to pivot on the…

Keith:  Right. I should have prefaced that with saying that these are clients that I have had worked with before in my previous companies and that I do trust. And who I know are not going to shelve the entire project and I’m going to get put in the works.

These are things that part of the contract of doing the performance‑based payment is that I’m going to be setting it up and they are going to be putting it out there and that it is going to run. Like you said, it’s not a 100 percent, nothing’s ever 100 percent. But I would never do it especially for a large company that I’ve never worked with before, I would never do a performance‑based review. I don’t think.

Patrick:  Right. Engineers have a funny notion of what the price of things is. If I say “$3,000″, that sounds like a lot of money for us because, hey, we worked for months for that. But $3,000 for a real company that has real assets and real employees, that’s literally below their capability of measuring stuff. It isn’t a line item on the annual report, it isn’t even in the appendix to an appendix on the line item of the annual report. You really have to get into the five‑figures to even hit on the radar screen at all.

Given that, if you were thinking, “OK. We’ll could charge a variable price between $3,000 and $15,000, or just charge $20,000 fixed,” there’s a lot of businesses that will say, “Give me the higher $20,000 price, because that will make my life easier. Getting a variable charge approved through the accounting division or my higher‑ups or whatever is going to be more difficult, because that’s not our established process.”

If it is just a fixed  $20,000 coming out of budget X, well, budget X has hundreds of thousands of dollars in it because there’s employees in there, too.  [Editor's note: Employees are very expensive.  There is a cynical but true saying: "Overhead walks on two legs."] So $20,000 out of that budget is not difficult to approve.

Keith:  Right. Working, not with T-Corp in particular, but with other companies of that size, we would have our sales reps on their side come to us and say, “Our budget is X amount of dollars. Make it under that.”  That’s not their maximum possible budget, that’s the budget they have before they need additional signoffs.  You could spend within $1 of that, and it would be no problem. However, if they go over that line, they have to get the sign off of their manager or, god forbid, the vice‑president or someone. As long as it’s under that number even by a dollar, they can sign off themselves and that makes their lives so much easier.

Patrick:  You were saying something interesting earlier, which was that you hope to bring in A/B testing and these modern techniques into Japan. That’s something I’ve heard a lot in working with my other companies, because the Japanese engineering, with specific regards to, say, Web engineering, is kind of lagging a couple of years behind the U.S. right now, right?

Keith:  Oh, so far behind.

Patrick:  Let’s talk about the status things. So the Joel Test is getting almost 10 years old now.

Keith:  Is it 10 years already?

Patrick:  Almost 10 years I think. [Editor's Note: Even older!]The Joel Test is about basic things like source control, having a quality department, yada, yada. Japan, not quite there yet. So I worked with a company that worked with other companies. We had source control, thank God. Subversion, though, not git. Sorry, I didn’t mean to be a snobby geek there. Subversion is an excellent source control system. It’s heads and tails better than no source control system, which is the competition here in Japan.

Similarly, we write big freaking enterprise applications in Java with homegrown web frameworks, which were absolute pain in the butts to work with. One of the reasons I have like 60,000 Hacker News karma was there was a compile and deploy step that literally took like five minutes to run. So if I wanted to change, say, the number of columns on one particular table on a page, testing that would take upwards of an hour.  Oh, whoops, I had a one‑character bug in my HTML, rerun the compile. It’s going to take five minutes. Yada, yada.

The amount of friction involved in that process destroyed my productivity.  [Editor's Note: It didn't help that I'm fundamentally a lazy git.] However, we measured productivity by number of engineering hours expended, so by that metric I made my department look very good. But modern web frameworks like Ruby on Rails, Django, all the fun stuff, make life so much better.

Keith:  It’s really ironic that Ruby was created by a Japanese man, and yet Ruby on Rails is pretty much unknown here.

Patrick:  Maybe this will change a little bit. I think EngineYard has hired Matz, right?

Keith:  Right. Was it EngineYard ? I thought it was Heroku?

Patrick:  Yeah, it was Heroku. Sorry. Heroku by the way, is the most Japanese name on an American company I’ve ever heard. [Editor's note: I heard at Startup School that they were explicitly inspired by the Japanese aesthetic... in case the samurai and Godzilla on the pricing page had not clued you in yet.]

Keith:  Yeah. I know. But actually there are Rails conferences here and it’s getting more and more popular. The problem is that web apps themselves are still not that popular here. I think part of that is done in by the fact that, there are maybe four or five countries in the world that have IE6 shares above 25 percent.  [Editor's note: I don't know about this one, but wasn't sure enough to correct him.]

I believe they include Thailand, China, and Japan. China actually has I think 23 or 22. It’s really quickly dropping. But Japan still relies on IE6 so much. And the reason for this is that back when IE6, when XP came out, we were still, not really in the recession, but we still have a lot of money as a country. And so everyone had their IT departments, and everyone had these huge reduxes and they made all their systems compatible with XP. And it was great and wonderful. And then the money starts drying up, and the first thing to go is the tech departments.

I’ve worked with couple large companies that literally had outsourced their entire IT departments. And so there was no one at the company anymore who could even do anything. Let’s say they needed a new computer setup or new proxy or one of their NATs died or something, there was no one at the company who could fix that.

Patrick:  That brings up a great topic. You’ve probably heard that engineering productivity is worth pretty much any amount of money relative to engineering salaries.  Everyone tells you to get two big wide screens, as it’s only 400 bucks extra.

Despite my previous employer being a software company, they had outsourced the internal IT. So then rather than buying each programmer a computer, they would lease a computer through blah‑blah‑blah, whatever, for 80 bucks a month. And by default, it was a years‑old computer with, let’s say, one gig of RAM, a processor from 2003, and a 14‑or‑15‑inch monitor for a desktop system. And there was literally no button you could push at the company to get a better computer than that.

Keith:  Once the rules are set, it’s not worth the bureaucratic hassle and even the time to think about to change it in a company. What it does, in the end, is it just hurts everyone.

Patrick:  Another factor about web apps in Japan is that a huge portion of Japanese use of the Internet is not actually on real browsers, it’s on the lovely fake browsers that you find in old pre‑iPhone Japanese feature phones. That’s an entire topic in itself. Japan, hardware‑wise, were probably the most advanced cell phones in the world until…

Keith:  Also software‑wise. When we were still dealing with WAP and wedge TML and WEKO, WACKO, WACO, WACO, whatever the hell we had back in early ’90s and stuff, Japanese cell phones had iMode, which is a full-featured HTML subset, and they were browsing websites in ’91. On their cell phone.

Patrick:  Websites with pictures and JavaScript. It was amazing. And then it didn’t really change for like the next 15, 16 years.

Keith:  Yeah, they’re still browsing the same Web pages 20 years later.

Patrick:  Yeah. They call this the Galápagos effect. Like the Galápagos Islands, which have a variety of different finches that are found nowhere else in the world, Japan had a variety of very advanced hardware platforms found nowhere else. The software for each of the hardware platforms would be literally handwritten assembly each time a new model came out. That was the dominant way to do cell phone development, with improvements like, “OK, we’ll put a JRE on it and allow you to run Java code.” But that was the dominate cell phone paradigm up until the iPhone came out. And the iPhone proceeded to ROFLstomp over the Japanese carriers. Right?

Keith:  Pretty much. Pretty much. And now we have Android phones as well — a lot of Android phones. The problem is, and I think it’s pretty much the same in America right now, is that you don’t get the updates. The Galápagos model is still the common way of thinking for any cell phone besides the iPhone. So you have this Android‑based amazing phone that is outdated in one to two months. You will never receive an update for it through the life of the contract.

Patrick:  Just a feature of the Japanese consumer electronics market. People tend to upgrade devices very quickly here.

Keith:  Very quick. Very quick.

Patrick:  Japanese cell phones are marketed under the assumption that the core of the market updates their cell phones at least yearly.

Keith:  Yeah. In America, because everyone is on the two year contract, the companies assume that you’ll update your phone when you’re two year contract is up. And in Japan, even though there’s a two‑year contract, most people update their phone, I would say, once a year. And depending on how trendy you are, even more.

Patrick:  One of the main early adopters for the cell phones in Japan, and I swear I’m not making this up, high‑school girls.

Keith:  Oh, yes.

Patrick:  Their use of the phone as a mobile/Internet platform drives quite a bit of the development here. I can never remember which of the companies it was, but a couple of years ago when smartphones were starting to get popular, one of the companies was literally pitching them as a fashion accessory item.

So in addition to pitching, “It has a camera. You can take photos with your friends. And here’s what the software does.” They would pitch like, “And here are the varieties of things you can stick on the phone to make it look different but similar to your girlfriends’ phones.  This way, you can be trendy in your own individual-but-not-too-individual way.” [Editor's note: If you think I'm cynical about the social motivations of teenage girls, you should hear me talk about geeks.]

Keith:  Right. And they’re starting to do that with the Androids now. So each of the Androids has pre‑installed software for each kind of clique for the Japanese high‑school girls. It’s really interesting to look at. It is a bit depressing as a programmer. It’s like, “You could just customize the wallpaper yourself and not have to pay the $600 for the new phone.” But, oh well.

Patrick:  Yeah. Meet the customers where they’re at. Right?

Keith:  Right. Right. Do we want to go on to websites as… I still not have been able to figure out how to really put this other, not in Japanese.

Patrick:  Well, say it in Japanese and I’ll translate for you.

Keith:  Now I’m going to forget it in Japanese. What was it? Ore ore homupeiji kind of thing.  [Editor's note: The rough sense of this: "Me-me-me home page!" ] So what it really is, so you have the ore ore framework.  It is the framework that you built, and you love to death, and is not used for anything at all.

So the web page is pretty much in a lot of cases… OK, here’s how I’m going to say it. The business card web page, I think really is the best way to put it. [Editor's note: Brochure site, maybe?] A business card web page that doesn’t accomplish anything first of all. And in addition to not accomplishing anything, is made in a way so that the president of the company feels vindicated that he has spent enough money on his web page.

So even if they have like a goal like get customers or tell customers about our company, it’s not something that they’re working towards. They are not investing any time or effort into the home page other than saying, “Oh, we need a home page. I spent $6,000 on a designer to design me a home page in Dreamweaver.”

I think we should talk about those.

Patrick:  Let’s talk about this.

Keith:  Yes.

Patrick:  So we’ve got this idea of having a brochure website for maybe an offline corporation or even for companies that are SaaS Internet startups what not. The home page is not designed for the interests of the business but rather for interests of stakeholders in the business, which are two very different things.

Man, I’ve seen home pages that were literally battlegrounds. There was a war between the engineering department and the marketing department and both sides lost. Engineering said “We want to build features. We don’t want to work on any of that crap on the home page that doesn’t require any technical expertise whatsoever.” Marketing said  ”We have this message and this brand that we want to get across.” The result of that war was a page that didn’t convert anyone and wasn’t clearly owned by any group in the company.

There are excellent companies which have little dysfunctional issues like this.  Engineering’s job is to ship more features to the customer. Marketing’s job is to brand or whatever their magic stuff is. But nobody’s job was to measure the conversions on the page, or to increase those over time.

I’ve gone into very smart, successful, well‑managed companies and asked questions like “So, how many trials did you guys do last week?” And the answer would be, “We don’t know. There’s probably a SQL query we can run somewhere that will tell us that.”

Keith:  Yeah. I had a similar thing. This was actually very eye‑opening. I did a reservation system at a really cool place.  They have online and phone reservation systems.  The phone reservations have a backend to their online system, which the front desk uses to place reservations.

So I could see, when I was doing the analytics for their site, how many reservations they had but not where they came from. I couldn’t see if they were self-service reservations online or assisted reservations over the telephone. So I asked the person in charge. I said, “What percentage is online? And what percentage is phone?” He said, “I think at least 80 percent of our reservations are from online. I only think 20 percent are from the phone.” I said, “Wow, that’s much more than I thought. I thought that the phone would be much, much more popular. And he said, “Yeah, but those are the numbers I think.”

So I installed Google Analytics, and I dug into the numbers. It turned out that less than 20% of their volume was online, and more than 80% was on the telephone. So they had no idea of even the number of reservations that were coming in and where they were coming from. And doing a little more analytics, I found out that those 20 percent were the customers who had survived through the reservation process.  The system was difficult to use and the conversion was horrible: only about 15% of people who started a reservation actually got done with making one. That was very eye‑opening for them.

Patrick:  It’s easy to laugh at them in hindsight, but I guarantee if you run a business right now, there is some number that is key to your business that you are not tracking and that would be very eye‑opening to you. The one that I routinely bring up for clients is, what percentage of people who use the software/free trial/etc stop using it after the first time, versus what percent use it at least twice?

The number that use it at least twice is almost always depressingly low. When I started tracking it for Bing Card Creator it was only 40 percent of people came back a second time. These days, it’s up to 60 percent, which a 50 percent lift, did wonderful things for my business, but still 40 percent of people would not even give it a second look.

40% is a decent ballpark number for people who don’t track this.  That has been fairly consistent across a lot of clients of mine. No one ever gives you a book that says you should be tracking this because it’s abysmal right now and you should improve it, but if you’re not tracking that, I guarantee you it is probably abysmal right now and you should probably try to improve it.

Keith:  You should write a book about that. You should just write a book about these are the things you should be tracking, why the hell aren’t you?

Patrick:  Yeah, everybody tells me I should write a book, but writing a book is a terrible idea.

Keith:  Maybe a pamphlet. [laughs]

Patrick:  It’s funny. If I write a blog post people will read it and maybe comment on it for Hacker News. I know it would be forgotten the day after. Ideally, if I wrote a book it would be referenceable by people. Despite the underlying information being essentially the same product, if you put 2,000 words in a book it is perceived as having value, but if you put 2,000 words in a blog post your readers are going to be “TL;DR dude.”

That is the theory at any rate.  The reality is that putting 2,000 words in a book is a terrible, terrible use of my time business‑wise.  Even if I sell the book (or e-book) at $20 or $50 or $100 a piece, and sell hundreds of copies, that is not a meaningful amount of money relative to getting one of my happy consulting clients on the phone and saying, “Hey, I have an idea that I want to try for you guys. Hopefully it will do as well as the last time. Let’s get this going.”

Keith:  However, one thing you might want to try is even just a blog collection and get a physical, printed book. One of my clients, he’s actually considering giving his book away just because of the amount of press it gets him. We did some welcome page tests.

The first one was a picture of him, where he graduated from, and the things that he’s accomplished.

The second one was a big old picture of his book on the “New York Times Bestseller.”

The third one was “I’ve been on NBC” with a video of him in NBC.

The one that says “I’ve done all this” did fairly OK. The one that says “I published a book that was a bestseller” I think was 100 percent better. 100 percent better than that was “I was on TV.” Pretty much once you get on TV, people will buy your shit, no matter what you’re hawking. If you have a clip of you being on TV, they will buy anything you want.

Patrick:  This, by the way, is hilariously underexploited by engineers and people in the startup community, but it’s well known among direct marketers.  After you have press about you, if the New York Times blurbs about you, even one sentence worth: in all your copy from that point out you put the logo of the New York Times and you say “as appeared in theNew York Times” and that will increase your conversion rate up the wazoo.

You’ve suddenly jumped from “A website that I’ve never heard of and don’t trust” to “Endorsed by the paper of record.” You will routinely see this on some of the skeazier direct marketing pages. Even if they haven’t actually been on the New York Times, they’ll say the product category’s been endorsed by the New York Times.

For example, if they’re hawking a social network, they’ll say “As seen in the New York Times.”  They haven’t actually been reported about, but a social network — probably Facebook — has been reported about. I wouldn’t be happy about doing that. That said, if you’re a Fog Creek or a company with  is legitimately high enough profile to getink from the New York Times, that should probably be on the website somewhere.  Fog Creek has even had their office written about before. [Editor's Note: Like Lonely Island says, "Doesn't matter, still counts."]

I don’t know if that is on their website, actually.

Keith:  You should just talk to Joel about that. One thing I do want to say you don’t want to put on your site is “as seen on TV.” Never put “As seen on TV”, especially the red circular logo with all the explosions that you see on $50‑dollar abs stretchers or whatever. That’s not the best thing.

Patrick:  Yeah. People may have cottoned on to the fact that that means they paid for an infomercial. However, retrofitting an explanation like I just did is witchcraft. Have your intuitions and have your thoughts about what would probably work for the site. Like we mentioned earlier, it’s so cheap to be test these things, you should be continuously testing them.

Keith:  Even if you have a banner space on your home page, just switch out the banners. Do an A/B test with that, switch out the banners, see which one performs better. It’s so simple.

Patrick:  It’s so simple and it’s absolutely crazy the amount of lift you can get for an established business that produces value and has been doing so for a decade just by switching out banners.

Keith:  Speaking of which, are you going to tell about the recent A/B test result you got from Bingo Card Creator?

Patrick:  I should tell about the Bingo Card Creator story, right? OK. I went on a six‑week America tour recently, partly to drum up consulting business, partly to go see Silicon Valley and meet the people I’ve only been reading about in Hacker News, and partly just a change of place. So I went to New York City, went over to Fog Creek, chatted with them a little bit, and while I was in New York City I went to something called Hacker School.

It’s a bunch of people who are learning to become better programmers. They gave me an opportunity to talk to everybody and to teach a lesson on anything I thought they would find valuable. I think a lot of hackers don’t know about A/B testing, so I did a live demo of A/B testing using A/Bingo and I said, “This is literally how easy it is to make an A/B test. We’re going to live code one for my front page right now.”

“I’ve told you in like two sentences what Bingo Card Creator does and for whom.  Now, I’ve been doing this for five years and none of you all heard about it for more than 10 seconds, but just throw out a new headline for Bingo Card Creator. Try to beat my champion headline,  ’Make Bingo cards on your computer.’”

Someone said, “Why don’t you try ‘Create Your Own Bingo Cards Now?” I said, “That sounds like a great answer. It won’t possibly beat my best thing, but sure, we’ll just try coding it up.” I come back a week later and there was literally a 40 percent lift. 40 effing percent.

Keith:  And that’s on sales.

Patrick:  Yeah, that was tracked direct to sales.

Keith:  That’s not trials, that’s not, “Oh, I want to know more,” that’s direct sales. 40 percent increase to sales.

Patrick:  Yeah. Somebody who knew virtually nothing about my business was able to beat something that I’d worked on for a couple of years. Granted, with A/B testing there’s often a bit of reversion to the mean. You get a confidence interval for whether there’s a difference between A and B, but with the typical way that you do stats with A/B testing, you don’t get a confidence interval on what the percent lift is.

It could be anywhere from say two percent to 80 percent and you wouldn’t know where unless you do more sophisticated statistical techniques that I don’t usually bother doing.  Then, that results in a reversion to the mean effect, where a couple weeks later you’ll see it’s only a 20 percent lift now.  You think “what gives?” It was probably only 20 percent that whole time, you’ve just got a bit of a ghost in the machine there. [Editor's note: This is not the only way reversion to the mean can happen.  For example, it may be the case for some sites that change itself tends perform well, irrespective of whether the changed version is distinguishable from the old version from the perspective of users who haven't seen the old version.  I generally just ignore the possibility of that, but it is certainly possible]

Be that as it may, you would be amazed how often, big, successful, established companies, like 37 Signals, Fog Creek, Google, Microsoft, et cetera, see huge lifts from A/B testing.  They run tests years or decades after having released products and that has a meaningful impact on their bottom line without a huge amount of work.

Something I often tell my clients who have 10‑year‑old products, “How much work would it be to increase the value of this product to your customers by one percent? If you have a team of 20 engineers working on a project for 10 years there’s 200 man‑years invested in it already.  You’ve probably already snipped all the low-hanging fruit in terms of features. Making it one percent better by adding features is going to require five man‑years, 10 man years, 20 man‑years of work.  Making it one percent better in terms of perceived value  can be as simple as changing button copy or changing a headline that you use on your product’s landing page.” [Editor's note: Remember, the last feature added to the product gets seen by a fraction of a percent of the user base, but the headline gets read by most folks who open the site.]

One percent is definitely not the ceiling. You can get 5, 10, 20, 100 percent in some cases. Basecamp has done many A/B tests, but just tweaking the header on the pricing page was worth 40‑60 percent. That should blow your mind. [Editor's note: Not sure whether I was remembering my facts correctly here: just trying to Google for a citation, the only article I'm quickly bringing up is a story about Highrise, another 37signals product, getting +30%.]

Think back. A week ago you were doing something for your business, right? What were you doing last week? Did it get you 40 percent to 60 percent improvement in your business’s bottom line? If not, why weren’t you doing A/B testing instead? When you phrase it like that, it always scares the heck out of me but it’s kind of true. [Editor's note: I often get very handwavy with that phrase "bottom line": SaaS math does not work out such that 50% growth in rate of new account signups results in 50% to the bottom line. Work with me here -- I'm from the land of one-time purchases, where modeling the effects of an A/B test is simple without having to literally start using calculus.]

Keith:  You do need the other stuff, you can’t just A/B test your way to a successful business, but at the same time if you have down time, if you have any amount of time, like we said one line of code, five minutes, it’s not hard to do. If you have that time, you should be doing it.

Patrick:  This should be your routine practice.  If you make a new feature and you’re wondering if users are actually going to respond to it or not, put the new feature in an A/B test. It’s as simple as putting an if block around it. [Editor's note: I'm trying to sell you something, not describe engineering reality here.  Yeah, it can get substantially more complicated than "Wrap that in an if block."  Buy what I'm selling -- you'll be happy you did.]

Keith:  I’m sure a lot of people are thinking, “But then you have to hire a designer and they have to make a mock‑up.” Even though it takes one line of code, it’s a pain to think about all these things. I do graphic design as well, but I show all my stuff to my wife and my friends to get a different perspective.  Even if I don’t agree with their comments, even if their comments are batshit crazy, I test it because the cost of testing is so low.  [Editor's note: I do not endorse testing batshit crazy ideas.]

If it fails, it failed for three days and then it’s off the site and we’re never going to see it again. Sometimes you get nice results. I had a very nicely designed welcome page. My wife looked at it and said, “It’s too busy. Why don’t you try having no background?” Tried no background. 40 percent lift.

Patrick:  You often see in design advice, for example at Smashing Magazine. I love designers — Keith is a designer and Keith is my best friend — but on the medical science scale, the discipline of design is closer to leeches than it is to medicine. I don’t like this design, so let’s add more leeches. We should make design more rigorous, like medicine: we’re going to test a treatment against a placebo and then see if it doesn’t kill people. Less leeches, more penicillin.

There was an article recently on Smashing Magazine that said if your body copy is less than 16 points you’re losing money. That’s a great headline, isn’t it, because that is a prediction about the measurable nature of reality.  So you should be able to test that. I actually did test that. For Bingo Card Creator, I changed the body copy sitewide to 14 points for half of the population  and 16 points in the other half of the population. [Editor's note: BCC has used 14px for several years.]

Sure enough, I got a null result. “Null result” means that after a week and 20,000 people or whatever saw both variations, there did not exist data to conclude that 16 percent was different than 14 percent along the axis I was measuring. Good to know, right? [Editor's note: 49,000 participants, actually.  It was a good week.]

Keith:  I do want to follow that up a little, doing a lot of graphic design myself. A lot of it is gut instinct. There are a lot of rules to design, but when you say something like “anything less than 16 point font is unreadable,” that really has to do with each page. You can’t just take any page, make all the font 16, and you’re suddenly going to have increased conversions. [Editor's note: Bah, designers.]

Smashing Magazine spinning the story in that fashion was essentially linkbait. That’s the whole reason they did that. For some sites it might get you 20‑30 percent. It’s worth testing and in Patrick’s case it didn’t work. It all has to do with the design, it has to do with how the site feels, and for the particular users. Some users may want a green button, some users might want a red button.

If your users are the ones who want the green button and you give them a red button, no matter how well it converts on another person’s page, it’s not going to convert well for yours. For any design for anything you should test it on your own users instead of following just what other people say.

Patrick:  That brings up a funny anecdote about users and culture. One of the versions of my Bingo Card Creator website was designed by a lady in India.  (Editor’s note: Gursimran Kaur, whose name I avoided saying because I am unsure of the pronunciation, having never verbally spoken to her.)  I asked her to design a pair of buttons for me, to represent downloading and creating cards.  She thought that the action associated with creation was getting something from the website.  Think of your hand going out, grabbing something, and taking it back to you.

So her button looked like a palm with splayed fingers oriented upwards on a red background, which in America means “Stop!”:

I had to say, “Hey, in America, this gesture does not suggest ‘Come get this!’ It means ‘No, no, no! Before you click this button think carefully. Do you really want to download this software? It will give your Googles a virus.’” [Editor's note: I am poking light fun of my composite customer, who is not very technical, and as a result might use "the Googles" to mean, variously, the Internet, the web browser, or the entire experience of using a computer.]

We settled on a design of the download button that did not give their Googles a virus.  It probably worked better.

Keith:  You’ve made many buttons since then, of course. You’re very big into the color contrast. You want big, flashy buttons that say download this now.

Patrick:  People make fun of me. I’ve been saying this stuff about A/B testing and whatnot for years. I make buttons bigger and it almost always works better. One of the English as a second language folks in one of my forums was talking one day and he’s like, “I know Patrick loves his big, orange, pancake buttons.” Big, orange, pancake button is my keyword for this now because big, orange, pancake buttons really effing work. Go ahead.

Keith:  Except for these ones you tried last time. You had put these ones in and we were working together and he just turns to me and says, “I have these huge, new buttons and I really like them, but they’re just not converting well.” I look at them, they were really the ugliest things I’ve ever seen. They completely did not fit with the site at all. They were just offenses against God, honestly. [laughs]

Patrick:  Right. I’ve been trying to get Keith to be my cofounder for the last couple of years. We’ll see if that happens.

Keith:  We’ll see if that happens.

Patrick:  One of the reasons I have been trying to recruit Keith for this kind of thing is because there’s this, I don’t know.  Maybe it’s a skill, maybe it is an aptitude, maybe it is something your born with, but it is called taste. Whatever day God handed out the taste I was studying stats for D&D characters or something and totally missed it.

Keith:  For action buttons for Patrick it’s generally bigger, oranger, more pancake‑y. It’s pretty much the order it goes in.

Patrick:  With a little bit of rounding on the side.

Keith:  You love the rounding.

Patrick:  Good pancakes should be rounded and huge. Huge, rounded pancakes.

Keith:  I think your Bingo Card Creator is just going to have a giant orange circle on it that says “Buy now.” You should split test that for April Fool’s Day.

Patrick:  People wanted me to test that for a while. I was about to put an 800 by 600 button on my landing pages, but that would violate the Google AdWords content policies, which is problematic because most of the traffic to the landing pages comes from AdWords.

Speaking of which, interesting result from Fog Creek. Fog Creek decided to replace their FogBugz home page. It’s text‑heavy and tries to sell software to enterprise users. They replaced it with their kiwi logo and text similar to “FogBugz: The World’s Best Bug Tracking Software.  Start Now.” No text.  No screenshots.  No philosophy.  Just “Kiwi.  Start now!”

Conversions went way up. At the same time, they fell off the Internet in terms of SEO.  SEO and A/B testing exist to help the business. The business does not exist to help them. Despite the fact that that A/B test was successful, we couldn’t justify burning their Internet brand to continue it, the result was amusing.

Keith:  Right. Actually, one thing you got from a similar test from Fog Creek is that people love to watch Joel talk.

Patrick:  People love to watch Joel talk.

Keith:  I love to listen to Joel talk. I actually listen to the StackExchange podcast just to hear Joel talk.

Patrick:  This is why we’re doing a podcast right now, by the way, because Keith was so inspired by listening to the StackExchange podcast.

I don’t want to give the impression that all Fog Creek’s optimizations are my doing, by the way. I helped Fog Creek a few times with regards to their marketing, A/B testing and whatnot, but there are people in the company that are doing it pretty much every day. [Editor's note: Fog Creek folks are ridiculously smart and they're a wonderful company to work for.  Does being their data-driven marketing guy interest you?  Get in touch with them or get in touch with me -- they're hiring.]

One page frequently tested is the front page for FogBugz. For example, a page with a flat photo versus a design with a short three‑minute feature video versus a page with Joel Spolsky talking for an hour.  The video is indirectly a sales pitch for FogBugz, but it’s mostly a pitch of how we should do software development better.

People watch that video for the entire hour. This just blows my mind. They’ve shown me a graph of what the level of attention is at various points in the interview. If you can imagine the graph for a Justin Bieber song on YouTube where everybody is listening at the first second and then X percent listen through the entire song, it’s that graph… but stretched out to an hour.

Granted, there’s probably not too many 14‑year‑old girls in the market for bug tracking software. A very different audience wants to watch Joel Spolsky talk for an hour about FogBugz. After they watch him for an hour, they are effing sold. Where is that button? They want it now.

Keith:  Actually, that is an interesting trend. Joel talking for an hour is definitely above and beyond what I think most other companies can do. Video has always been the anathema of landing pages. You never put video on your landing page and stuff. Video now on landing pages is converting so much better than just text and I think it’s really going back to people don’t like to read.

Patrick:  Right. People do not read on the Internet. If you take one thing from this podcast, people do not read on this Internet. [Editor's note: It's a pity that of the tens of thousands of people who see this post, only about five will actually read this comment.  You'll know who they are because they'll race to mention it.]

Keith:  They will click on a play button and listen to a 10 second clip over reading a paragraph.

Patrick:  Yeah. It’s insane. This is one of those things where engineers have a totally different grasp of how the world works because most of us were precocious readers. We devour 600‑page Lord of the Ring books with no problem. That is severely anomalous behavior among the population at large.

If you install Crazy Egg, Crazy Egg will show you what percentage of people actually made it to a particular portion of a blog post or whatnot. The world, in general, is TL;DR after four words. It’s crazy. That’s why headers matter so much, by the way, because if they’re only going to read one sentence, make that sentence count.

Keith:  Crazy Egg, if you use their scroll map, you will have so much wonderful information on your pages, especially if you have any page that requires scrolling for more than maybe three clicks.

Patrick:  We just got done saying people don’t read on the Internet, but man, long copy. Long copy is those lovely pages that have hundreds and hundreds of paragraphs of talking you to death about the product. They just beat you into submission and then give you the buy button and then you actually buy. Do people actually buy from these, Keith?

Keith:  One of my clients has very, very large long, long, long sales pages. I think it’s 68 pages printed. I looked at them and I was like, “There is no way people read these.” While 100 percent do not read the entire thing, 40 percent read the entire thing. 40 percent.

Patrick:  That just blows my mind.

Keith:  It absolutely blows my mind. The interesting thing now is that the sales button is not at the end of the page, it’s somewhere in the middle, and yet people read, go to the sales button, actually continue reading, and come back to the sales button in order to click it. That’s just amazing.

That’s 40 percent. 60 percent either don’t read it at all or just skim around. It’s really cool because you can see exactly where on the page people will stop, even for a slight amount of time. There’s this picture of a kind of cute girl with a blue Mohawk on. I hope I’m not giving out too much but it’s not a public page so I think it’s OK. 60 percent of people stop at that picture. It’s 40 percent, 40 percent, 40 percent and then blue Mohawk 60 percent. The area is just bright yellow on the heatmap. Everyone loves looking at this person.

Patrick:  People love faces, by the way. Dave McClure has a great quote about this.  [Editor's note: profane, amusing, and not paid attention to nearly enough.] If you put faces on anything, you’ll draw attention to both the face and to everything surrounding the face.

One of my buddies, Ian, runs HelpSpot. It’s customer help desk software. He just put a photo of himself on the front page. It’s the size of the author photo at the end of this post — really tiny. He just put a photo of himself under the main content area of both default and the front page with the preexisting copy about I’m the founder, this is wonderful software, here’s why, yada, yada. Just adding the photo increased the number of trials by 20 percent.

I think it’s hardwired in people — biologically —  that we track gazes very well.  If you find photos of people looking at something and you track where their eyes are on the page, all the visitors are going to be looking on that line of sight too. Have that line of sight terminate in the form or the sign up button or whatever it is that you want people to take action on. Really, really works well.

Keith:  There’s a lot of good articles on that on Google if you search for, I can’t remember, what is it eye tracking and product placement?

Patrick:  I think it’s gaze. The magic word is gaze.

Keith:  They’ve done actual eye tracking experiments and it amazing that people will look first at the face and then where the face is looking. If you have a face with someone looking to the left and to the left is your purchase now button, then you have a much higher chance of people clicking on that button than anywhere else on the page.

Patrick:  Speaking about the faces, who here has seen a comely young lady in a headset? Girls in headset photos are the visual equivalent of Cosmo’s top 10 things that your employer doesn’t want you to know headlines. Those persist over hundreds of websites done by hundreds of different highly sophisticated companies because they effing work. Go to HeadsetHotties.com. [Editor's note: Some people claim they thought of Facebook before Facebook.  I thought of HeadsetHotties.  I have really really tiny sour grapes about getting beaten to market.] It’s a real website. Take a look at the comely photos of young ladies with headsets. Put it on your page. A/B test it. You’ll see it go up.

I’ve seen also great variations on that. A lot of engineers told that their software will do 20 percent better stuff for customers if it just had a photo of a young lady with a headset get very skeptical of that.  They’re just not willing to try it on their website for whatever reason. Hey, it’s your business. Ultimately that is your decision.

I once worked for a particular company.  They had an employee who they wanted to get contacted from a particular page.  Let’s call him Bob.  Bob is very much not a female, blonde, 20‑something with a headset, but we put Bob in a headset and took a photo of Bob and just put a photo of Bob on the pages with a line that said, “Bob isn’t pretty, but he actually works here. Send Bob an email.” Bob got a lot of emails.  This was a happy result for the company, since people were practically begging Bob to tell them about a five-figure enterprise solution.

So authenticity works too, but if you’re going to be authentic, be authentic by using a picture with a person’s face. It helps.

Keith:  All right. We’ve gone almost an hour and a half now. Some of this is going to go on the cutting room floor. I think that’s about time to wrap up.

Patrick:  All right. Thanks very much, Keith. We’re going to probably be doing this later. Feel free to drop us a comment either in the comment thingy below or on Hacker News or through the emails. You want to give your contact information? We’ll put it in the post.

[Editor's note: Patrick is patrick@ this domain.  Keith Perhac is k dot HIS_LAST_NAME@delfi-net.com We'll also read your comments on the Internets.]

Keith:  We’ll put it in the post. As always, Patrick is patio11 and I’m harisenbon on Hacker News and Twitter.

Patrick:  Thanks so much for listening everybody. We’ll see you next time.

Keith:  All right. Good talking to you.

Patrick:  Take care.

Keith:  Bye bye.

 

Transcript by CastingWords, with light editing by me.  It cost about $100, and was worth every penny, since it freed up basically an entire day of my time.  Assume any remaining errors are my fault.

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