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Kalzumeus Podcast Episode 11: Bootstrapping vs. Raising Money

Keith and I are joined by special guest Jay Winder, CEO of MakeLeaps, in this 11th episode of the podcast.  We talk a bit about doing business in Japan, raising money vs. bootstrapping as a SaaS company, how AngelList is going to eat the world, and the usual eclectic mix of topics.

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

What you’ll learn in this podcast:

  • Why you should negotiate from a position of strength and abundance.
  • How to raise a round of funding through AngelList while not being in Silicon Valley.
  • Why AngelList Syndicates are the future of seed stage fundraising.
  • How to manage relations with investors when you have lots of them.
  • How running a bootstrapped SaaS company is different than one which has raised early investment rounds.
  • How the SaaS market is different in Japan.
  • A bit about Jason’s new project, Sales for Geeks.

A brief announcement: Keith and his co-founded Rachel launched a new product recently called Segmetrics.  It’s Baremetrics, for InfusionSoft — gives you actionable, one-look insight into which of your InfusionSoft segments (e.g. traffic sources) are producing results for your business.  If that sounds relevant, make with the clicky-clicky.

Podcast: Customer Onboarding

MP3 Download (~60 minutes, ~59.3 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: Bootstrapping vs. Raising Money

Patrick McKenzie:  Hello, everybody. Welcome to the 11th episode of the Kalzumeus podcast. I’m Patrick McKenzie, here with my noted co‑host, Keith Perhac and our good friend, Jay Winder as CEO of MakeLeaps here in Tokyo.

Keith Perhac:  I’m Keith. Welcome to the 11th episode. I can’t believe that we got this out, literally one week after our last episode.

Patrick:  This is downright scary.

Keith:  This is scary.

Patrick:  It’s almost like we have an actual podcast.

Keith:  I don’t think so. All right. Cool. Welcome, Jay.

Jay Winder:  Thank you. Hello. I appreciate the welcome. I was looking at you guys doing a podcast behind a thick Plexiglas window and I think, “Geez, that looks really warm and cozy inside that little podcast igloo”, so thank you very much for inviting me in. It’s a pleasure to be here.

Patrick:  We’re happy to have you from outside in the cold.

Jay:  Well, we have an air‑conditioner right here.

Keith:  Hopefully you guys cannot hear, otherwise our editor is going to be very, very mad at us.

Patrick:  Very, very angry at us.

Keith:  In fact…

Jay:  Should we turn it off?

Patrick:  We were testing a little bit ago and it sounded OK.

Keith:  You couldn’t hear it.

Patrick:  Alright, so we’ll be talking about a few different things this time. Jay has a SaaS business called MakeLeaps. Why don’t you just give us a little bit of background on what that is for people to have some context, and then we’ll talk about recent MakeLeaps adventures.

Jay:  The best and shortest way to describe MakeLeaps would be a FreshBooks for Japan. It’s essentially an online platform that helps Japanese freelancers and businesses more easily create and send their invoices, whereas right now pretty much everybody in Japan uses Excel and they do it all manually, which is crazy, and we’re on a mission to fix that.

Patrick:  As of a couple months ago, you guys are funded out of a few Silicon Valley movers and shakers. You want to tell us a little bit about how that came to pass?

Jay:  Sure. Around one year ago, I had the good fortune to meet Naval from AngelList, who’s a good friend of my friend. The first time I met Naval, he asked me a series of questions about MakeLeaps because he’s interested in the Japanese startup ecosystem. I answered all of those questions and at the end of that conversation, he very generously offered to be an advisor, which was very nice.

We thanked him for that and then the next time he came to Tokyo, I got a chance to see him again. He said, “What’s happening with MakeLeaps? Where’s everything going?” I said, “Oh, it’s great. We’ve got this traction and we just hired this guy and we’ve got this partnership and this deal and blah‑blah‑blah.”

He looked at me and said, “Can I ask you a few more questions about MakeLeaps?”

I said, “Sure, of course.” For about 30 minutes, he asked me a series of about 20 rapid‑fire questions, which I found very fun. They were all on point and interesting, so I responded.

Then at the end of that conversation, he said, “Wow. That all sounds pretty interesting. If you would be open to it, I would really be interested to invest in MakeLeaps.”

Up until that point, taking funding and investment had been an amorphous idea, we’d read about it in TechCrunch, but actually having an offer from one of the top most well‑known people in Silicon valley, offered to invest in MakeLeaps, kind of like Michael Jordan saying, “Hey, would you like a game of basketball?” It’d be crazy to say no, even if you like basketball a tiny little bit.

That began a process where we started thinking deeply, myself and my co‑founder, Paul. What do we want to do with MakeLeaps? How do we want to manage it? Do we want to take on investors?

That was quite a complex discussion we had over quite a long time. The more that we thought about it, we realized, “Well, if we really want to build a big important meaningful business, it’s going to affect a lot of people in a meaningful way, funding is going to be critical” is what we ended up realising.

I realized that, the Bootstrapper method is absolutely legitimate, and we did that for four years, so, I am not detracting from that at all. That’s a great way to go, but we had a situation where we could get some well‑known people onboard our team at MakeLeaps.

We decided that, it would be a great idea. We went ahead and did the funding round of $750,000 that closed a few short months ago.

Patrick:  Some of the participants for that, were Naval, Dave McClure from 500 Startups, Hiten Shah, a few others. It’s funny, these days, there’s a mechanism called a “Syndicate” on AngelList, which might be new to some of you who are listening to this.

Typically, in the days of yore, three years ago, a funding round for seed stage investment like this would be done by some of the collection between a 5 and 10, or 5 and 20 angels. Typically the minimum for an angel investment is about $25,000, below which, it wasn’t really worth everyone’s time in putting the deal together. Between $25,000 and then, say $100,000 on the high‑end, you would put together $250,000 to $500,000 like that.

One of the emerging models on AngelList is that, various smaller angels who don’t want to do deal flow management for themselves, which means they don’t want to go out in the world finding people who are like Jay, convince them that they should be allowed to invest in the company.

They want to outsource the deal flow management to somebody else, outsource a lot of the vetting of the deal to somebody else that they trust, and be able to invest some money in the startups that person invests in.

They can follow them on AngelList, in a way that is not like following somebody on Twitter. They make an informal commitment to invest in startups that the syndicate lead invests in. Collectively, this is called a syndicate, and then, some magic happens. I am not sure what the magic is, but my understanding is that AngelList makes some sort of vehicle where the syndicate can each put money into the vehicle, or is it AngelList just brokers the arrangement and the angel invests directly in your company?

Jay:  The way that it works in practice is there’s a person that has a syndicate, like you say. There’s maybe anywhere between 2 to 100 people that are following a syndicate. Then the syndicate lead will say something like, “OK, guys. I’m going to make an investment into this company. Here’s what it looks like.” At which point, depending on Angel List settings, and I’m not sure about this, it’s either opt‑in or opt‑out.

If people want to opt into the deal, they can say, “Yep. We agree with this deal. It looks great. I’m in,” or if they want to opt out, they can say, “You know what? I’m not interested in this space” or something like that, they can opt out. With that in mind, it’s actually kind of interesting. You don’t actually know, if you’re leading a syndicate, the amount of investment money that you can get until you actually decide to lead a syndicate investment and see how many people join.

Any person that’s running a syndicate who’s fairly well known that says, “OK, we trust these guys and we want to invest into them,” that’s a very strong signal. As Patrick said, if you’ve got some spare cash sitting around from Google stock share sales or something like that, you can say, “I’ll throw in behind all these people.”

Then what actually happens is if you’re an entrepreneur on the other side, you perhaps might start to trend on Angel List. Then you start get a lot of attention and people start to follow you and people might start to say, “Hey. Can we hop on the phone for a call?” at which point you lose a tremendous amount of sleep if you’re living in the Tokyo time zone…

[laughter]

Jay:  …because they all want to call either very late at night or super‑early in the morning. You’re a bit of a zombie for a little while. Hopefully, you can close enough deals on the phone or you can get enough people interested in investing that you’re ready to go. You can pull together your funding round.

We got very lucky. We set out to raise $400,000 and in the end we ended up almost double oversubscribed at $750,000, which would not have been possible without AngelList, especially because we’re trying to do this remotely. There are already some difficulties, where somebody can’t drive from Sand Hill or wherever they happen to be living in San Francisco to come visit you guys in Japan.

That’s a little bit difficult, so there’s a little bit of extra, I would say, latitude that we have to spend a bit of extra time and effort in trying to assure people that we’re good people. Sure, we’re doing this in a foreign market, but it’s B2B SaaS. It all looks similar. The numbers are similar. The market is huge and exciting and all the rest of it. You close a syndicate deal and then what happens is there is a single line on the cap sheet in respect of that deal.

All the angels invest into a holding company and that holding company actually makes the investment into your company. You get a single wire and a single name on the cap table and that’s it. You’re done. You don’t have to chase people to sign agreements or do any of that kind of stuff. All of that is done and fully managed by AngelList, which makes having 60 investors a cakewalk.

It’s simple. All of a sudden, you get a big wire of cash and a single entry in your cap table and that’s it. You’re completely done. That was transformative for us. Moving forward it’s not going to make sense to raise money using something other than AngelList. It just makes it so easy and straightforward.

Keith:  That’s a glowing recommendation if I ever heard one.

Jay:  Yeah, it was great.

Patrick:  This is particularly true for folks who might be raising from smaller angels or angels who don’t have a strategic profile to them. For example, if you’re someone who previously has some successes as an angel or as an entrepreneur and is known to have the capability to open doors, then a startup like MakeLeaps or another startup would be crazy to not jump through any hoop you put in your way to getting a check.

Well, given that it’s a relatively reasonable process. If you require a custom document ‑‑ a custom negotiation of the terms of the agreement, as long as it’s something reasonable, there could be founder time invested into getting a $25,000 check from you.

If, on the other hand, you’re J. Random product manager from Google, you don’t particularly have any successes behind you. Your main capability of contributing to a business is the ability to contribute a check full of a meaningful amount of money, but not a gigantic amount of money, then startups, particularly startups in demand, don’t really have a lot of reasons to spend huge amounts of their time on the phone with you, when they could be spending huge amounts of the time on the phone with either a better‑known angel or with their customers or employees trying to move the business forward.

Moving the amount of pain, the transaction costs of doing business with you down opens up more deals to you, which is probably one of the reasons that AngelList is going to eat large segments of the angel fundraising market, particularly on the low or less‑established end.

Jay:  Absolutely. It’s either “click, click” and you’re done, or “click, click, phone call, send a document, get somebody to sign it. Did they sign it? Oh well, they went on a holiday for three days. Try to call them again, but they’re not around. You need that document to close your deal,” or “Click, click, you’re done.”

It’s very clear that “click, click and you’re done,” the way that AngelList has made this very possible, and simple, and easy, it’s great. I can’t recommend it enough.

Keith:  It’s also easier for the investor, as well, because you don’t have to jump through all the hoops, as well. You don’t have to vet it as well as you would if it was a one‑on‑one.

You have other people. You have that social proof working for that, as well. It’s a lot easier for people now to invest, as well as be invested in.

Patrick:  Right, and we’re not trying to convince anyone out there in podcasting land to become an angel investor because the mathematics of it are exceptionally unfavorable unless you already know what you’re doing and you have lots of money to burn. Be that as it may, even knowing that the underlying math was difficult, the actual mechanics of doing angel investing two to three years ago were a little painful.

I have two very small angel investments, and because there’s actual contractual language involved we have to run it by a lawyer. Let’s say that I spent a high portion of my very small check size on having a lawyer look over four pieces of paper and make sure that I wasn’t giving up the general store in those four pieces of paper.

That wasn’t really something that I wanted to do. It wasn’t something that the startup wanted to do.

It’s like, “OK, we’re both professionals. We both have different bases of IP, which we want to mutually know is not going to cause problems for anybody, so the lawyers will be involved.”

With AngelList, if everyone is using substantially the same paper, which has been vetted by AngelList’s presumably top‑tier, VC, yadda, yadda legal firms in San Francisco, then there’s less legal risk involved with that paperwork.

Jay:  Very true. What’s interesting about the whole process is you can choose the set of documents that you want to use.

If you’re raising, say, $400,000 on AngelList, people will see that as, “OK, they’re raising 400k, they’ve got over 50 percent committed, and they’re using, let’s say, Y Combinator SAFE documents. Oh, OK, that’s a very clear, very easy to understand structure. It all makes sense.”

There are all kinds of different SAFE documents, so you can pick the kind that you want, and say, “OK, here are the base default documents that we’re asking everybody to sign. That makes things easier, as well. When we did our round we had an investor or two say, “Listen, the terms are good, but we’d like this favorable term,” or something like that.

When you’re doing an AngelList syndicate and you’re already almost double overcommitted, it becomes very easy to say, “OK, we appreciate that you’d like to be involved. You want this favorable term, however, we’re already double overcommitted and everyone has signed documents that do not include this favorable term. If you’d really like to be involved we’d love to have you involved, but the documents are the documents.”

It becomes very easy and straightforward to say that. Negotiation becomes very simple because everyone signs the same documents, and away you go.

Patrick:  What Jay’s saying about favorable terms is important. Traditionally in angel investing there is a few axes that the deal can move along.

One is fairly simple, “What’s the price this deal is being done at?” is something, which is fairly uncomplicated, which has not always been true.

You can imagine, using very simplified math, if I’m willing to buy 10 percent of the company for $10,000 that puts the value of the company at $100,000, which is much lower than any company would actually be valued at, but simplified math.

Those two numbers, which sum up the price of deal, are one way to evaluate the deal. There’s other terms that might be involved with exactly how the math works out in the event of an acquisition, or a down round, or various other things in the company, like, say, whether you get liquidation preference.

A liquidation preference is typically in the interest of the investors, not really in the interests of the firm. Certain liquidation preferences are borderline abusive.

Which doesn’t mean that they were never signed.  A few years ago there was not the understanding in the entrepreneur community that a 3X liquidation preference is not a market term.

Also, supply and demand. People were saying, “I will only give you my money if you include a 3X liquidation preference.”

Like Jay said, if you’re oversubscribed and the funding round is happening with or without someone’s particular $25,000 check, you can say, “Look, the term that we’ve negotiated with everyone is,” for the sake of discussion purposes, “a 1X liquidation preference, ” or “no liquidation preference, and that’s kind of the deal. You can choose to do this deal or not do this deal, but we’re not going to negotiate consequential terms like that with you.”

Jay:  The way that we ended up saying it was, “Listen, for us it’s very important to keep good relationships with all of our investors. If they found out later that one investor got preferential terms over everybody else, then that’s kind of a big, serious issue.”

There was a point that I needed to make that was fairly important, and that was the way that we ended up responding to people who asked for preferential terms. “Listen, we’d love to have you involved in this, but we don’t want to make a situation where the other investors feel like they got a bad deal or any one particular person out of 20, 30, 40, 50 people didn’t get that same deal.

“In the interests of keeping good relations between MakeLeaps and all of our investors, we’d really love you to sign the standard documents. That’s very simple, and easy, and then you can be involved, and that’d be great. If that’s difficult for you, completely understand. No problem at all. Please let me know what you’d like to do,” is the way that we handled that.

That was very smooth, and successful, and an easy way to explain what we were doing and why without treading on anyone toes.

Patrick:  This is, incidentally, something which is useful, not just in negotiating investment, but in negotiating all sorts of contracts. It’s something that your vendors will occasionally do to you.

A, if you’re selling, say, SaaS where there is an actual, physical contract in play, and it isn’t the standard contract of adhesion ‑‑ presuming you’re selling on the several thousand dollars of services every year [inaudible 17:35] companies ‑‑ you should probably have a template agreement, which you give to all of your customers.

Your first negotiating position can always be, “Well, our standard offer is…” blah. If they say, “Well, we would really prefer….” some term in there, “…which is more favorable to us than what you have right now,” you can say, “Well, this is the standard thing we offer to all of the customers at the level of service which you’re currently willing to sign for.”

“If you want to upgrade to our super‑duper platinum enterprise thing, we could discuss individualized contractual language with you. But, at the $1,000‑a‑month level of service you’re at, the $2,000‑a‑month level of service, we really encourage the use of our standard terms.”

Maybe you win that deal, maybe you don’t. That’s a negotiating tactic that you can do, which is fairly low‑risk.

Jay:  Exactly. If you’re speaking from a position of strength where you have other customers signed up to that same deal, you don’t need that deal to make your rent payment, or something like that, then it’s very easy to do.

Say, “Listen, here’s the deal that’s available right now. If you can sign it, great, if not, no problem. Best of luck, and hope to run into you again in the future,” is a very strong negotiating position to be taking.

Patrick:  I had this once for Appointment Reminder, where I’m trying to get business associates agreements, a particular type of paperwork, signed between Appointment Reminder and all of our medical customers. Many of them had already signed it, but some of them were waiting on it.

I have gone out to the folks who were still on the not signed state and said, “Look, we have a standard BAA ready. I’ve prepared it for your company. Please sign it immediately.”

Some of them are saying, “Well, we have to run this by process A, process B, and process C.” Most of these are not large accounts.

My position has been, “You have neglected signing this contract for a while, which puts us both in technical violation of some regulations, so this really needs to get done this week, rather than being done after the lawyers get through with it. Our current documents work. We know they work. We’d highly encourage you to sign the correct document.”

Keith:  What I find a lot, especially in consulting, is what you said Jay. It’s talking from a position of confidence, and power, and “OK, I’m going to be able to make my rent this week, do I really need this contract if they’re asking for all this stuff?”

What I’ve really found is that the more concessions you make, the lower your status becomes, the more power the client has, and the more things that they’re going to demand of you. In many cases, not all of them.

I think always working from a position of power, and from a position of, “OK, this is standard. This is the way we do things,” and, like Patrick said, “If you want extra things, it’s going to cost this much for adding that on.”

What a lot of people don’t realize, negotiation is a two‑way street. It’s not someone telling you what you’re going to do. You need to work out what’s beneficial for both of you, so that you’re both on the equal footing.

Patrick:  The magic words for negotiation are “mutually beneficial agreement.”

Keith:  Exactly.

Patrick:  Like Keith was saying, sometimes people who are maybe a little closer to us in mindset hear the word “power” and they get a little bit scared about it. Maybe we could think of it less of it being a power relationship and more about you having a mentality where, “This is one deal out of a universe of many abundant deals that are going to happen over the course of your business career.”

Given that, you do not need this deal to close. You’re in a position to hold out for terms on the deal that make sense to your business and to say, “OK, if the terms of the deal that are being offered right now don’t make sense for the business.” Then we will shake hands, we’ll part as friends, and maybe we’ll do business in the future, but not under terms which don’t make sense for me in the present moment.

Jay:  Of course, the classic negotiating idiom is two people want an orange. One person wants the skin of the orange, and one person wants the inside of the orange.

[Patrick notes: There are many SaaS negotiations like this, where e.g. the buyer sincerely wants the software to be maintained and the SaaS company sincerely wants thousands of dollars, and neither realizes that the other would grant that request in a heartbeat rather than it being a key point of contention.]

Then somebody cuts it in half and says, “OK, you both get half,” where both people could get 100 percent of exactly what they want if they talk about it a bit more, and understand each other’s goals, and what they’re trying to do in trying to divide an orange.

“Just buy two oranges,” is what I think actually listening to that idiom again.

[laughter]

Jay:  From that position, I think it’s always good to understand your negotiating position against somebody else’s, but let’s not get too far into negotiating theory and all that kind of stuff, though it’s interesting.

Patrick:  One thing I want to ask is you’re a Japanese company. You’re completely founded in Japan.

You’ve been running in Japan. You’re towards the Japanese market. Why Silicon Valley for funding?

Jay:  Good question. I suppose the best answer is because Silicon Valley came calling. Naval from Silicon Valley came over, got to know us, met us, found out a lot of information about us, and offered to invest.

From that perspective, we could have gone out and aggressively looked for Japanese angels and done an angel round that way. However, the Japanese angel ecosystem is not one percent of what it is in Silicon Valley.

I recently had a trip to San Francisco and I checked into my Airbnb. I walked outside and literally ran into a MakeLeap investor, completely randomly on the street.

[laughter]

Jay:  I’d only actually met him via video chat. We had two video chats.

He walked past me, and I was like, “Oh, man, I’m pretty sure that’s Tom.” But I was like, “Do I go over and accost him, and say, ‘Hey, do you know who I am?!'”

[laughter]

Jay:  Of course, that’s what I did. I’m Australian. I can’t help it.

I went over, and I said, “Hey, do you know who I am?” and of course he responded as if he was about to be mugged. He took a step back, and I was like, “No, no, no. I’m Jay from MakeLeaps.”

He’s like, “Jay.” I’m like, “Yeah, Tom.” He was like, “Ahh.”

That is the sort of thing that you can experience in Silicon Valley. [Patrick notes: People have come up to me on the street in Silicon Valley and asked “Excuse me — are you patio11?!”  Craziness.] If you walk outside in Tokyo, you will have to throw a lot of rocks before you hit an investor, [laughs] or an angel investor. It’s not so common here.

As Dave McClure says, “Angel investors are the limiting factor to any startup ecosystem,” and I agree with that. The value that you get from an experienced angel investor to give you advice, and capital, and point you in the right direction is really super‑invaluable.

We found that, once we did the syndicate round through AngelList, a lot of people became interested in Japan and the Japanese market, as well they should. Japan is still 15 percent of the entire world’s GDP.

It’s still the third largest economy in the world, full of affluent businesses and consumers. It’s a really exciting space, so people see this opportunity, and it’s rare that a company, especially run by foreigners, is aggressively focusing on focusing on and targeting the Japanese market.

[Patrick notes: I am perennially annoyed when people — inside and outside of our industry — treat Japan like its an also-ran whose time has faded, or are unaccountably surprised when Japan proves to have a lot of money.  One common article in the business press about e.g. iPhone penetration rates could be titled World’s Third Largest Economy Discovered To Contain Money.]

I guess, because of that, we also got a little bit of interest from people who’ve always been interested in Japan and wanted to find a way to get into Japan a bit more. We became that opportunity for them.

Patrick:  The understanding of investing investors, VCs, angels, service providing firms, companies, entrepreneurs, et cetera, our ecosystem is really important because all these things are interconnected.

For example, not only does Japan have fairly few angels who have operating experience in technology companies, it has few enough…Technology companies in the sense that we mean the word technology companies.

There are many tech firms in Japan. Most of them are not SaaS firms. In fact, I would have difficulty naming five Japanese SaaS firms.

Jay:  It’s not a common model in Japan.

Patrick:  Not a common model yet, so there aren’t people who have successful exits at these firms, who then turn into angels and start giving money to the next generation of entrepreneurs. Even though that’s the probably the same generation of the actual people. There’s not the sort of established best practices here for people who can….

There’s understanding in the market in Silicon Valley that a SaaS firm that has a particular metrics ‑‑ “A churn rate of two percent is really, really good amongst most SaaS,” for example. That there are probably on the order of 20,000 people in San Francisco who could tell you that off the top of their head, where in Japan you could probably go to a lot of professional angel investors here and ask them to define churn rate and have them be unable to answer that question.

Jay:  I agree with that. Yes, that’s true.

Patrick:  The three of us all have high hopes for Japan over the next short period and in the long‑run on both having successful exits, having this information percolate through the various channels, both Japanese and Japan‑resident foreigners, and hopefully having the market mature a little bit more here.

Keith:  I’m the only one in the room who doesn’t live in Tokyo.

Jay:  We’re working on that.

Patrick:  We’re working on that.

Jay:  I got one of you guys to come to Tokyo.

[laughter]

Jay:  It’s just a matter of time, Keith.

Keith:  Yeah, I’m number two, right?

[laughter]

Patrick:  It’s true. I’m in Tokyo largely because Jason is here. He and I have been good friends for the last four years.

Keith:  Also, it’s Tokyo, so it does have a lot of benefits over Ogaki

Patrick:  Tokyo is not Tokyo for everybody, although Tokyo is Tokyo for me now, darn it.

[laughter]

Patrick:  Darn it, Jason, you were right.

Jay:  That’s deep. That’s deep, Patrick.

That’s true. I’m so glad you think that.

Keith:  I think you need another drink.

[laughter]

Keith:  I did want to ask, me being not in Tokyo, not as much in the scene, when I think of a Japanese startup, what I’m really thinking of, and what I see a lot of, are Japanese megacorps who have that SaaS division.  [Patrick notes: Many Japanese companies have an empire-building complex.  In the US, Salesforce has essentially one product.  Dropbox has essentially one product.  Basecamp has essentially one product.  Their Japanese analogues own domain registrars, web development agencies, and — in many cases — restaurants or hotels.  I kid you not.]

I’m thinking of a lot of companies that…like Recruit. Recruit has a ton of SaaS companies, divisions.

Jay:  “Intra‑preneurs.”

Keith:  Exactly, and they’re very different than a bootstrap or a SaaS that’s going to be invested in because they’re owned by a giant, multibillion dollar company, right?

Jay:  Right.

Keith:  It really changes the landscape, so there are fewer investors. Companies do not buy SaaS here like they do in the States.

Jay:  Yes, there’s definitely a lot less exits and acquisitions in Tokyo, much to the chagrin of all of the angel investors, especially foreign angel investors.

You will see a company like Recruit say, “OK, we’ve identified a need in this market. Let us build a solution for that market, rather than acquire the established current leader of that market that’s going really, really well.

“Then we’ll put $20 million behind their marketing campaign and, boom, now we’re number two,” or three, or one, depending on the market and the company, which is not great. Then again, you don’t necessarily want to look towards giant companies in Japan to really support the startup ecosystem.

Keith:  Not at all.

Jay:  It’s not a good strategy.

Keith:  I work with a lot of marketing companies, especially in [inaudible 28:35] area. For the last four years, I’ve been really pushing for A/B testing, and analytic testing, and stuff for marketing tools in Japan.

I was talking to, literally, the largest digital marketing firm in Japan. I was like, “Yeah, you know they have all these great tools, Visual Website Optimizer, Optimizely, all these things, Crazy Egg, that you can use to test.”

They’re like, “Yeah, we know. We’re really pushing hard to create our own platform to help our customers.’

I’m like, “Why don’t you just help your customers by…”

Jay:  “Introducing a tremendously successful thing that already works right now?”

Keith:  Yeah, it’s like, “Why do you want to build…?” I understand why they want to build the competition, but it’s like, “You could be helping them now and build that on the side.”

It’s like, “We’re not going to touch A/B testing, we’re not going to touch marketing, until we build this tool.”

It’s still not built. That’s four years ago.

Jay:  Sure, of course. Of course, yeah.

Keith:  That’s what happens, so now they’re late to market, and…

Jay:  Of course. People underestimate complexity in software endemically, especially in Japan. It’s like, “Oh, it’s software. Just somebody build it. Easy, done.”

Especially for invoicing. A lot of people will have their own solutions, or a lot of people will be considering, “OK, do we go with MakeLeaps or do we build our own solution?”

[Patrick notes: The build-versus-buy decision for anything at a SaaS company which isn’t something you actually sell should come down to “Can I do this before lunch?”  If yes, build.  If not, buy or adopt OSS.]

The way that I look at this is very similar to, let’s say, an infrastructure question where somebody says, “OK, well, Gmail looks pretty good with your 500 of the most qualified engineers on planet Earth 100 percent focused on this 24 hours a day, but I really want to be able to control my own infrastructure.”

It’s like, “OK, so what would you like to do?” It’s like, “Well, instead of using an established platform run by literally the smartest people on Earth, that are qualified to do this exact kind of thing, I want my own server.”

It’s like, “Great, so when there’s a problem at 2:00 AM, 500 of the smartest people on Earth are not focused on your problem.”

[laughter]

Jay:  “They’re eating free lunch because today’s Mexican day at the Googleplex. That’s great for them, but you’re screwed because your email server’s offline for four days and your business stops. It makes obvious sense to start…”

Keith:  Japan has a huge thing about “not built here.” The thing is, we have a ton of smart people, and we have a ton of smart people who love solving hard problems.

They love solving hard problems, and that’s not a bad thing at all. It’s a great thing, especially for new IT companies in Japan.

The problem is that a lot of people would rather be solving those problems than using a solution off the shelf that solves the issue, that solves the business need, right?

Jay:  Right.

Patrick:  I find, in dealing with larger Japanese companies, that when they’ve identified an intrapreneur and said that, “OK, this person has put in 20 years at the company, they’re a known quantity. We’re going to stake a few million dollars of the budget to build a competitor to Optimizely or Visual Website Optimizer.”

They don’t think of what Optimizely and Visual Website Optimizer were when they started, something put together by one person or a very small team, thrown together in six weeks, and then exposed to the market for feedback.

They think, “No, no. We’re going to try to escape to where they are today,” and with several tens of person‑years of engineering effort involved.

“OK, well, if it takes 50 person‑years of engineering effort to get to where this is today, that’s all right. We will hire 25 engineers, and we’re going to put them on a project for two years.

“In two years from now, we will be where Optimizely is in 2015.

Jay: “We will release our unmarketable product.”

[laughter]

Patrick:  Aspirationally in 2017, they’ll be almost where Optimizely is in 2015 as experienced by someone who doesn’t really understand the product because they never actually used it in anger.

Keith:  I think a lot of people are listening right now are like, “Oh, no. It’s not as bad as you say.” I have had literary three Japanese clients last year that this was exactly their problem. They would not MVP it. The contract was for an MVP. We worked out a thing.

It’s like, “Take this to your client. Start selling it and then we’ll start building the next one.”

They’re like, “No. No. We have to have all the features. It has to be complete. It has to have the bells and whistles, invoicing and all this stuff before we even show it to our potential customers.”

Jay:  Here’s an interesting theory on this that I heard recently which I kind of agreed with and I think it’s fascinating.  Typically, Japanese companies and people approach software the same way as they have successfully in the past approached hardware.

Keith:  We’re a hardware country.

Jay:  Exactly. You can’t show someone hardware that’s 20 percent complete because that’s zero percent complete. Hardware is binary. It works or it does not work for its intended purpose. People have tried to apply that same idea to software and it doesn’t work in 2015 now. I almost said ’14 but it’s ’15 now. It makes sense to roll out something that works to fulfill the purpose that it’s built for and then you iterate from there just like software.

Keith:  There are two comments I want to make. The first one is that there’s this great Dilbert cartoon where the boss is saying, “Measure twice, cut once.” Dilbert’s response, “Well, when thinking measured is infinite and the cost of cutting is zero, it makes more sense to measure once, cut once and then iterate quickly.” It doesn’t work with hardware.

I keep telling this to all my American friends or my western friends in general. They’re like, “Oh, Japanese IT, software must be so amazing.” I’m like, “No, it’s not.”

You think Japan, you think electronics. That’s true. Electronics are not software. Electronics are hardware. You look at all the hardware, all the electronics that come out of Japan that have been amazing and they’re all hardware based, the Walkman, the CD, the CD‑ROM…

[crosstalk]

Jay:  …PlayStation.

Keith:  PlayStation. Oh, my god. PlayStation.

[laughter]

Keith:  Word processors, the toilets. It’s all hardware.

Jay:  Magic toilet. Oh, god. I love my toilet.

[laughter]

Keith:  It’s all hardware.

Jay:  That’s very true.

Keith:  The software in Japan…You look even at a simple website, it’s horrible.

Patrick:  With exceptions for maybe embedded programming and video games.

Keith:  That’s about it. This is interesting. We built an OS back in, I think, ’85, I want to say, that is the kernel level OS for pretty much 90 percent of ATMs in the world, but it’s so low level. There’s no user interface. There’s no nothing. It’s built on top of…We built tools. We’ve built hardware. We built things.

Jay:  When you say “we'” you’re referring to Japan, which is interesting.

Keith:  I’ve been here for 12 years. Almost my entire business career has been in Japan. I worked at an internship, then I worked at a startup job during my college years in America, and then I moved out here.

[Patrick notes: Keith cofounded an RPG company.  His comment on that: “Want to know how to make a small fortune in RPGs?  Start with a large one!”  It’s a horrible, horrible business to be in.]

Jay:  Your formative years in Japan.

Keith:  I know. I wonder if it’s hurt me. People tell me I have a very different thinking about business than western…I like it. I think it’s a good way of thinking.

Jay:  We all bring our own unique experiences to our work in all of this in much the same way. I came to Japan when I was 19 to originally study martial arts. Now, I’m running a SaaS business. Japan has been an interesting country for us both to grow in because you’ve been here for 12…?

Keith:  12 years.

Jay:  How old were you when you first came to Japan originally?

Keith:  I was at 22.

Jay:  Interesting. How about you, Patrick? You’ve been in Japan also for a long time.

Patrick:  Yup. About 10 years and change now. I think I came out three months after university ended. I’ve been here, essentially, for the duration ever since. All of us have careers has been shaped by our time in Japanese organizations or in foreign organizations that were operating in Japan.

It’s a pretty fair statement to say that if you took a look at the a day in the life of one of our businesses, it would not exactly look like it would if we had grown up in Tulsa, Brisbane or yada, yada and have the business grow up with us there.

Jay:  That’s true.

Patrick:  Or San Francisco.

Jay:  One thing that kind of blew my mind was I had to return to Australia for a five‑month period. This was maybe coming back like seven or eight years. I had to run a business from Australia and I had to do some business in Australia. What struck me was how simple everything was. It was so straightforward.

Keith:  [laughs]

Jay:  I needed to do something. I make a phone call and I have the thing that I need. I needed a contract. It’s like boom. “Here’s what we want to do.” It’s like, “All right. We’ll sign here and…”

[crosstalk]

Keith:  No huge back and forth and all that.

Jay:  It’s like, “What the hell is this? I have like two things to get done today. It’s 10 AM and I’ve done three things now.” It kind of blew my mind.

Keith:  I had a client who would not discuss anything over the phone or email. It had to be in person.

Jay:  That sucks.

Keith:  We cannot come to an agreement on things except by meeting and talking. There’s no way to come to an agreement over email or a phone call.

Jay:  That the magic of SaaS business.

Keith:  [laughs]

Jay:  When every single of your customers is paying you $20 a month and somebody says something like that to you, you can…

Keith:  Delete the account.

Jay:  Exactly. You know what? That sounds great. I’d love to spend the next six months talking about your $20 a month account, but no. [chuckles] No. No. No. No.

Running a Low-touch SaaS Company In Japan

Patrick:  That’s an interesting segue. Like we said earlier, there’s very few SaaS companies in Japan operating at any sort of scale. Most of them that are US transplant like Salesforce does very, very good numbers here. Many US enterprise companies do good numbers by merging the traditional enterprise sales culture of the US with the stuff that works in Japanese market.

On the low touch end of things, there’s not that much. What have you done with MakeLeaps that’s been successful with getting thousands of paying customers on the lower touch end of things?

Jay:  Well, one thing that’s kind of interesting in Japan, I would say, is an incredibly high level of customer support. In Japan, it’s table stakes. That does not set you apart from any of the other companies in Japan that also have an incredibly high level of support.

Patrick:  Can I jump in with an anecdote there that happened to me today? I go to a hair salon. I’ve been there maybe twice since moving to Tokyo. The young lady who cut my hair both times is moving to a different branch of the same hair salon in Tokyo.

She sent me a two‑page, honest to God, handwritten letter thanking me for coming in, visiting her twice and getting my hair cut. Giving instructions that I can give the next person that cuts my hair and directions to the new hair salon where I can find her if I want to travel 15 minutes out of the way to get my haircut.

I will be getting on that train to get my haircut, obviously.

You can imagine this is somebody whose per-visit value is what, 50/ 60 dollars for a salon haircut here. That’s a level of care that most SaaS companies that have account values the $5,000 a year range do not send handwritten letters to their customers saying, “Hey, we’re just dropping you a line because we like you.”

Keith:  If you do want to send them, I recommend MailLift.

Patrick:  MailLift?

Keith:  MailLift is a handwritten letter by API.

Jay:  Does it work in Japanese?

Keith:  It does not work in Japanese, but a great SaaS idea for anyone who wants to start a handwritten API.

Jay:  That’s a good point. There’s actually a bit of a problem in Japan right now, I think, where older workers are not able to assimilate into a lot of the newer roles that are being created as certain sections of industry are phased out.

Something like that would actually be interesting idea to look after the rapidly growing section of Japan, which are the older seniors. As we all very likely know, recently, adult diapers finally began to outsell baby diapers in Japan, which is terrifying.

[laughter]

Keith:  It’s only going to get worse.

Jay:  That’s very true. That’s only the start of the trend. There are a lot of potential business opportunities for older people in Japan for sure.

Keith:  I think it’s interesting though. I’ve wondered about doing a MailLift version in Japan. The thing that convinced me against it was that why would a company not get their OLs or their, I guess, window watcher is the best English term for madogiwa. Why would they not get them to do it?

Patrick:  Well, there’s actually companies…They don’t have the API piece. API piece is what scares them because you would have to convince companies on integrating an API to get business, which is not something many Japanese companies are very keen on.

Jay:  Considering that they don’t understand the word API. [chuckles]

Keith:  You could say integrates with Salesforce.

Patrick:  There are even at least five of these in Ogaki where the company is typically a printing shop or something where they have the traditional mass-scalable printing equipment there.

They also have, essentially, little ladies who will handwrite documents that you take to them with the idea being that certain classes of documents in Japan can’t really be printed and still have the kind of heft to them, personal letters, certain forms of certificates and whatnot. These require a bit of skill with Japanese calligraphy, which the little old ladies have. If you don’t, if you are the poor, semi‑illiterate graduate of the modern Japanese educational system [Patrick notes: sarcasm tags] who can only type, then you’d go and pay a little lady $20 a page to handwrite your customer facing documents.

Jay:  Very true. That’s a good point, but the other thing that I find a little bit concerning and perhaps another reason to not start this one particular business is sometimes, in Japan, the act of doing something because it is time consuming, ridiculous…

[crosstalk]

Keith:  Don’t even get me started on that.

Jay:  …and all the rest of it. The act of doing that is what’s valuable. If you were to outsource that to somebody else for $20 a page, that act, essentially, becomes meaningless. It’s a concern that I will have.

Keith:  We talked a little about this in the last podcast where we were talking about getting the busy work done feels good. It’s an extension of that where taking the time, putting the effort even though it’s not what is the best for you or the company, it feels good and it feels right.

Patrick:  Also, seen from the perspective of the customer, I think Jay is right. That sometimes the conspicuous expenditure of resources as a way to signal commitment, that’s something you see in all societies. There are rituals for it everywhere. It something that Japan embraces a lot.

Jay:  Very much so.

Patrick:  For example, in Japanese politics, if the ruling parties is having difficulties, they send out the equivalent of US congressmen to stand at stations in Tokyo outside of the gate. They get on a soapbox and say, “This is the Liberal Democratic Party. Please support us. We want to work together for a bright vision of Japan’s future. This is the Liberal Democratic Party. Please support us.” The person is basically on loop for three hours.

Keith:  I do work with political candidates as well for marketing and stuff. They actually have people whose job is to repeat a speech on a megaphone as they drive around the city for eight hours a day.

Jay:  This is one of the areas where I take issue with Japan. I love everything about Japan. I love the people, the food. Everything about it is great. Noise pollution laws, where are you on this one Japan?

Keith:  [laughs]

Jay:  What the hell is going on? I say this without doing any research, the only civilized country that has zero noise pollution laws.

Keith:  We do have noise pollution laws.

Jay:  Really?

Keith:  Oh, yeah.

Jay:  When you say “we do,” you mean Japan.

Keith:  Japan has noise pollution laws. I looked this up because I have a noisy neighbor. I think it’s 80 decibels or something like that. It’s ignored for many, many things.

Jay:  I see. Keith, as difficult as I’m sure your situation is with your noisy neighbor, I’m a little more concerned about the people who are driving around with megaphones on Sunday morning!

Keith:  No. It’s horrible.

Jay:  For me as well. I’m a foreigner so therefore I cannot vote in Japan. However, if there was a candidate that said, “You know what? I’m against noise pollution. I’m going to make noise pollution laws in Japan.”

I would totally support them even though that support would be meaningless. The problem is that person could never be elected because he could never announce his platform to all the people to put him to be potentially elected.

Keith:  It’s going to change because this was the first year. This last election was the first year. I don’t want to get too much in the politics so let’s kind of cut it.

Jay:  We’re leaving out sex and religion. Let’s go into politics. Go for it.

Keith:  This is the first year they could do commercials. If you went on YouTube during elections, there were tons of political commercials. For the first year they’re actually allowed to do social media.  They were allowed to do blogs before but they had to actually write them themselves. You could not hire a marketing firm to do it.

Jay:  For $20 a page. [chuckles]

Keith:  You could have a marketing firm tell you what to do and then you do it but you had to actually physically do it. Those laws are changing. I helped a political candidate. I’ll be helping another one with their social media platform this coming election in…When is it April or whenever.

Patrick:  That’s probably something to nail down prior to taking politicians on as clients.

Keith:  There are a lot of business opportunities in Japan. In Ogaki, there’s very little. It’s pro bono. This is totally a, “Hey, you’re a friend of my wife. We hang out. I’d love to help you out. Let’s do some social marketing for you kind of thing.”

Patrick:  That makes sense.

Keith:  I haven’t done Abe’s — the Prime Minister’s — marketing campaign.

Patrick:  You would probably have to know when the election is if you’d be doing that.

Keith:  There’s snap elections. You don’t know.

Patrick:  That’s right!  We could schedule elections like a week from now.

Keith:  They did do that.

The Difference In Bootstrapping And The Venture Track

Keith:  We are kind of getting long on time. I do want to be conscious of everyone’s listening time because we have had complaints that three hours is a long time for a podcast. had always been bootstraped and it was a big decision for you to take funding. How has taking funding change the way you’re doing business from being bootstrapped?

Keep in mind people who are listening. This is not like, “Oh, I got $5 million of funding.” It was a sizeable funding amount but it’s not like you’re going off and buying Lamborghinis tomorrow.

Jay:  If I could find a Lamborghini that I could buy a number of without causing problems for my bootstrap, then I’d consider that. It’s $750,000 of funding that we have to use in a really good way to either, I suppose, build in the features set that is very compelling and that enables us to get to the next level of the business.

We have to use that funding to, essentially, get us to a point where we’re totally happy and ready to go out and do a Series A funding round, which we’re on track to do within three to six months from now depending on how it all goes.

Your question to how did the tenor of the business or how did the atmosphere change before funding and after funding is a really important one and a good one. It’s tremendously important to have good mentors because I have a lot of very dumb questions that I needed answered. “Well, if I sign this, does that mean that I don’t run the company anymore?” Kind of level of questions like that.

Of course, I’ve done a lot of reading. [Patrick notes: Jay recommends Venture Hacks and pg’s blog on this topic.]  I’ve done a lot of learning and I’ve gotten a lot of advice from people. When you do funding, it comes down to two things, economics and control. The extent to which you understand both of those is very critical when it comes to negotiating those kinds of deals.

For me, I was more concerned actually about the staff and how MakeLeaps staff would feel about…Suddenly, we have a lot of investors because that’s kind of confusing. They would ask all the questions that I needed to ask to understand really what was going on and how it was going to affect things.

I made sure to talk to everybody and say, “Listen, we’ve done very well up until this point. We’ve managed to get many, many users, many, many customers. It’s all very exciting. We’ve come to the point where people are interested to invest money into us.

At this point, you have to know that I’m not getting to let some person who could be destructive or cause problems for MakeLeaps into an area where they could potentially cause problems for us. We’ve been successful up until this point by doing what we’ve done. It’s not in anybody’s interest for us to radically change things like completely different in a crazy way when we’ve achieved really great growth up until this point.

For me, it was critical to, number one, understand the impact of investors coming into MakeLeaps. What would they expect? How they could offer value and how they could help us get into the next level? It’s important for the MakeLeaps staff to understand that it’s not going to change the tenor of the business.

In fact, if it has changed things in a very serious way, that’s my fault as CEO. I haven’t done my job well enough.

Number one, I want to find the right people. Number two, I want to explain the process and how we’re going to do it. Of course, we have the MakeLeaps vision — where we want to go and how we want to get there. That needs to be clearly communicated to both staff and investors.

One of the things that I’ve learned is…Well, there’s actually a great film. I think it’s called “The Watchmen.” There’s a particular character in that film. His name is Rorschach. He’s like this crazy guy. He gets caught and sent to jail.

This sounds like a sidetrack, but it gets really relevant in a moment.

Keith:  [laughs]

Jay:  Essentially, he ends up having to go to jail. In the jail, there are many of the criminals that he himself put into the jail. He’s standing there and they can’t wait to get their hands on him, beat him to death and all that kind of stuff. He looked at all the people that are standing in the jail and he says “You know what? I’m not stuck in here with you. You’re stuck in here with me.”

That’s what I realized about investors. It’s like I will talk about MakeLeaps for literally 24 hours with anybody who wants to talk about it. I’m very, very happy to discuss and talk. When people say, “You know what, I’ve been thinking for MakeLeaps. How about we do something like this? What do you think of this kind of idea?” I’m very happy to discuss anything with anybody about that kind of stuff. It’s my passion.

I sort of realize, “Well, hang on a minute. We’re getting with AngelList syndicate 60 people that are now financially interested in MakeLeaps and they’re intelligent because they’re investing in MakeLeaps.

Keith:  [laughs]

Jay:  They’re clearly cut above the standard person.

Keith:  They know what they’re doing.

Jay:  They know what they’re doing. They’ve had plenty of experience. For me, it was actually all positives. We never had any issues or problems because we had really great mentors. We had great lawyers that put together the deal well. We communicated what we’re going to do and how we’re going to do it.

Typically, when it comes to relationship breakdowns, it’s just a lack of communication about what everybody is thinking [Patrick notes: In business and in life!], so we made it a priority to communicate as much as we possibly could. We send out very regular investor updates on what we’re doing and how and current progress and all that kind of stuff.

I would say that we’ve been able to expand a lot and be able to do many different things with more resources. The core that’s got us to this point that’s been successful remains unchanged and that’s a good thing.

[Patrick notes: Seen from the outside, I’d identify the core of what makes MakeLeaps tick as a willingness to walk the line between being a natively Japanese company and a tech startup, Jay being the most force-of-nature CEO I’ve had the opportunity to meet, and a great willingness to just grind things the heck out.  Anybody can say “Try going to where your users are.”  Most people don’t sell $20 a month SaaS software by knocking on the doors of substantially every accounting firm in downtown Tokyo.]

The Benefits Of Raising Money

Keith:  I want to ask something a little more specific and you’re free to not answer this if you don’t want to. Where did you find that you had the most success with that funding? Is it building out your staff? Is it being able to do more marketing? Is it doing more events?

Jay:  I’m going to tell you guys something that you might not be happy to hear. It’s the same way for all bootstrappers. We bootstrapped for four years proudly. We’re happy we’ve gotten into this point. We’ve done very well.

We’ve received, I would say, slightly less recognition because we weren’t funded, and we weren’t in the media as much with things like funding announcements. As soon as we got funded, about a week afterwards, this one person I’ve known for a long time was like, “Oh, you got funded. Great. We’d love to do an interview with you.”

It’s like literally nothing has changed between now and when the money in our bank one week ago. Why are you interested to interview me now?

Keith:  It’s the social proof.

Jay:  Exactly. There’s social proof in that. There are certain things that have gotten easier and better as a result of getting funding, especially from well‑known people, but, as a bootstrapper, it’s always frustrated me. It’s like, come on, we are doing as well as these guys. In fact, better in many ways, but they are getting more press because they are funded.

Keith:  I do see that a lot with the bootstrapper community, especially some of the communities I am in. I don’t want to say, incestuous, but it is a closed circle. The people we know who are famous, they are famous within our circle, but if I was to talk to someone like at a newspaper, or someone in the larger startup community, they’d be like, “I have no idea who that is.”

It’s really interesting, because as soon as you get that funding, apparently, it’s this open door to, “Hey, we are a real company. We are a real boy now.” It’s frustrating, like you said. Nothing has changed.

Keith:  There’s an extra digit in our bank account now, but other than that, at that point, you haven’t even used that money yet.

Jay:  It’s a little bit frustrating, if you are operating a business, and people are suddenly interested in you, now that you’ve gotten funding, but that’s part of the game. At the end of the day, you have to figure out, how to make it work with your particular environment, the way that you have set things up.

If you can be successful and grow your business, and get plenty of media attention without getting funding, more power to you, that’s great. In Japan, people tend to respect social proof very much so…

Keith:  Did I ever tell you about the optical fiber guy, who came to my door, and try to sell me optical fiber?

Jay:  I heard this story, but it’s a good one.

Keith:  It’s a good story. I like this one. I had actually had optical fiber at this time, not through that company. He comes to my door, and he says, “You know, you are the last person in your neighborhood who has not had optical fiber installed.”

I thought about that, I am surrounded by grandmothers. I am the youngest person in my neighborhood. The three people on the side of me, I know for a fact, do not even own a computer.  They have no idea what a computer is, most likely.

He is trying to tell me that I am the last person with optical fiber, which I already have. This is interesting, because I know this works in the US as well. It is a very time tested proven strategy. It’s so effective in Japan. It’s not even crazy. I told this to my wife, and she’s like, “Oh, we should get optical fiber.” We have optical fiber!

[laughter]

Keith:  No one in the neighborhood has optical fiber but us.

Jay:  Keeping up with the Joneses.

Keith:  Exactly. It’s huge.

Patrick:  I am just realizing now, I bought optical fiber after hearing that pitch.

[Patrick notes: Seriously, I did.  I thought they were going to drop connections to the ASDL lines in the neighborhood or something.  What can I say, I’m a software guy, not a network guy.]

[laughter]

Keith:  It works.

[crosstalk]

Patrick:  Crying about it…

[crosstalk]

Keith:  Get optical fiber. There’s no…

Jay:  Not have it.

Keith:  Exactly.

Jay:  Absolutely, get it right…

Patrick:  Great reason for all you geeks to come out to Japan, you can come to Ogaki, where we have slow, slow one gigabit Internet…

Jay:  Two.

Patrick:  Two gigabit Internet, yeah, I am sorry. We upgraded in Ogaki. We’re where in Tokyo was in like 1997. [chuckles]

Keith:  What’s your speed right now?

Jay:  I’m not going to share how fast my Internet connection with you guys. [chuckles]

Keith:  No. I want to hear. How fast is your Internet connection?

Jay:  Oh, geez. I’ve been meaning to upgrade it one gig, which would be simple, painless and straightforward, but I think I’m still like 300 megabits.

Patrick:  Oh, man.

Keith:  Oh, god. That’s horrible. You’re almost American.

Jay:  I know and I’m Australian. What the hell.

Keith:  I was talking to a friend who was interning at Gawker. He’s like, “Oh, man. I’m so happy to be at Gawker because we have a 25 megabit connection.” I was like, “Since I moved to Japan, I’ve never had a connection that low.”

[laughter]

Keith:  12 years ago, when I was on a ADSL, it was faster than 25 megabits.

Jay:  Exactly. 10 years ago when I had like a wireless PCMCIA card, originally it was slotted into the laptop.

Keith:  It was still going at 350…

[crosstalk]

Jay:  …Of course. [laughs]

Patrick:  Anyhow, do you think we should be wrapping this up?

Keith:  I think we’re wrapping this one up.

Patrick:  Jay, do you have anything else you want to tell us?

Jay:  I suppose. Aside from the confusion where my name is Jason, but now pretty much everybody calls me Jay. I’m right in the awkward spot of transition my name from Jason to Jay. There’s still a bit of Jay, a bit of Jay all over the place but I answer to either.

Keith:  Should I go for Jay?

Sales For Geeks

Jay:  You can go for whatever you want. Honestly, if you make a noise in my direction, I will answer. However, even if you say Jay or Jay that’s fine. Speaking of which one thing that I’m pretty excited about that I should mention that Patrick has been helping me with a bit is I’m working on a new course called “Sales for Geeks.”

As a geek myself…I mean, people describe me as technical, but I can’t code very well. However, I’ve built and grown two IT businesses, one on the infrastructure side and one on the software SaaS side, so I do know a little bit about sales, communication and social skills to a degree.

Keith:  I want to mention that Jay is a force of nature when it comes to sales, networking or any sort of talking to people.

Patrick:  I’ve said for the last couple of years that Jay could probably get a meeting with the Japanese Prime Minister simply by showing up at his residence and refusing to be told no by any of the people in there. Four years ago, I said that like it was a joke. As I’ve become more friends with Jason, I think, it’s probably literally accurate.

Jay:  At this point, I should probably just do it to prove Patrick true.

Patrick:  [laughs]

Jay:  The Japanese, sometimes, if you’re being polite and friendly and you’re saying, “I need five minutes of the Prime Minister’s time.” It might be potentially possible.

At the same time, I also have a sales course to get out. Priorities I suppose. It’s very nice of you guys to compliment me in that way. As an Australian, I do struggle with compliments and accepting them in general.

Patrick:  What’s the name of that course?

Jay:  The name of the course, Patrick, is Sales for Geeks. You can access more information about this course at salesforgeeks.com.

Keith:  It’s such a deal!

[laughter]

Jay:  Order now and get a free set of steak knives. There’s no steak knife. Sorry. Order now, though.

Keith:  You’re doing it as a text course, an audio course, a video course, or…?

Jay:  I’m thinking video might be a good way forward, because in a lot of sales stuff a lot of it is quite visual. There’s a lot of body language. That factors into sales meetings in general. A video course would be a good way to do this.

Patrick:  We’re looking forward to seeing what you come up with. You can go to the website right now and start to get Jay’s advice delivered over email about this as he gets the course put together, and then you hear about it when it comes out.

Keith:  No commitment required.

Jay:  No credit card required. Sign up right now.

[laughter]

Jay:  Salesforgeeks.com if you’re interested at all in learning how to sell better. It would be great to have you onboard. I’ve got a bunch of stories, sales anecdotes, and interesting things that I’ve learned in a career of 12 years. I started my first company when I was 20. I’ve got a lot of stuff to share. If that’s useful or interesting to anybody, that would be great.

Keith:  I hate to talk Jay up this much. Actually, what am I saying? I love to talk Jay up this much.

[laughter]

Keith:  But, really, you’re up there with the three best salesmen that I know personally. I consider you, Ryan Delk, and Steli Efti definitely hands down.  [Patrick notes: Agreed.] If the three of you got into a room, either it would cause a singularity, and it would explode, or you would take over the world. It’s one or the other.

Jay:  Interesting. That’s very, very nice of you to say. All I can do is do my best to toil in the efforts of becoming the person that you both seem to think that I am.

[laughter]

Jay:  I appreciate both of your faith in me. I thank you.

Keith:  Jay, thanks very much.

[crosstalk]

Patrick:  We appreciate you guys being here with us for the long, long, long haul.

Jay:  It wasn’t that bad. It was about an hour and 10 minutes?

[crosstalk]

Keith:  …Yeah.

Patrick:  I was thinking more like the three years, which it took us to…

[crosstalk]

Keith:  Four.

Patrick:  Four years?

Keith:  Four years to get up to episode 11.

Patrick:  We ship babies and products faster than we ship podcast episodes, but it’s changing. We actually got up two in a month. Oh God, this is a regular thing to happen.

Keith:  This will be great.

Patrick: Drop either Keith or I an email about this stuff anytime, if you have ideas for what we could cover on the podcast.

Keith:  Ping us on Twitter.

Patrick:  Or you can ping us on Twitter.  Keith is harisenbon79, I’m patio11, and Jay is @JasonWinder.

Keith:  Suddenly, I feel like we’re on NPR. I don’t know why.

Keith:  “Thank you for listening to this edition of ‘This American Life.’ [laughs] This your host, Ira Glass.”

[laughter]

Keith:  Great show, by the way.

Patrick:  Great show, by the way.

Keith:  Thanks very much, guys.

Patrick:  Thanks very much.

Jay:  Thank you. Cheers. Bye‑bye.

Patrick:  Bye‑bye.

Kalzumeus Podcast Episode 10: Putting the “Family” in Family Business

Keith and I are back with the 10th episode of the podcast.  This time we’re talking about our wives and kids, how much they mean to us (lots!), and how we try to fit being good husbands/fathers around our mutual desire to keep growing the businesses.

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

What you’ll learn in this podcast:

  • What Keith has been up to with Summit Evergreen and what Patrick has been up to with Appointment Reminder.
  • How having children changed how we run our businesses.
  • How delegating tasks is key to making sure we can spend appropriate amounts of time/brainsweat on being good husbands and fathers, as opposed to optimizing Nginx config files.
  • How Japan’s poor systematic answers to the question of work/life balance decreases the birth rate here.  (Who said this podcast wasn’t educational?)

Podcast: Putting the “Family” in Family Business

MP3 Download (~53 minutes, ~50 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: Putting the “Family” in Family Business

Patrick McKenzie:  Hi, everybody. Welcome to ‑‑ what is this? ‑‑ the 10th episode of the Kalzumeus Podcast. I’m Patrick McKenzie, better known as patio11 on the Internet. I’m here with my buddy, Keith.

Keith Perhac:  Hi, this is Keith. We are on the 10th episode, three and a half years in the making. Probably the slowest podcast ever. I know every time we say we’re going to make these a little bit faster and do this a little more regularly. Hopefully, in this new year, 2015, we’ll actually get that done. Here’s knocking on wood.

Patrick:  Knocking on wood. I think we ship products and children about as quickly as we ship podcasts.

Keith:  [laughs]

Patrick:  In fact, I think that’s almost literally true.

[crosstalk]

Patrick:  This segues nicely the topic for today. We’re going to be talking about what it’s like to run a business as two guys who are very committed to being family men. Not just to grinding away and burning the midnight oil and the work stuff, as we might have done in our younger and stupider years.

Keith:  [laughs] I don’t know. I still do that on occasion, but having a family has definitely changed it.

Patrick:  Yeah, so we are going to talk a little bit about family stuff in a few minutes, but we want to steal a [inaudible 01:06] from Rob Walling and Mike Taber at the “Startups for the Rest of Us” podcast, which is one of my personal favorites. They start off every episode with just a little update on what’s new and exciting in their businesses. I thought, “Hey that’s kind of interesting to pattern after.” We’ll try it and see if it looks it. Keith, we haven’t heard much about Summit Evergreen recently. Why don’t you start us off with that?

How’s Summit Evergreen Going?

Keith:  Summit Evergreen has been going pretty well. May was our official launch. We’re out of beta now and we have, I don’t remember how many customers we have. We have a fair number of customers doing a lot of sales. I am really happy about that.

Patrick:  For the folks who don’t remember what Summit Evergreen is, because it has probably been two years for them, it’s Summit Evergreen in 30 seconds.

Keith:  Summit Evergreen is a courseware platform. It helps people create and sell online courses on the Internet. Think of it like Udemy or kind of like the courses that Patrick does, like the one on lifecycle emails.

The difference is that compared to Udemy or Skillshare or whatever, it’s completely you-branded. You are not just another guy on Udemy. It’s all about you. It’s on your domain, your URL and it’s all about your product and your branding. That’s what we do and we just actually released our New Year’s campaign, which is our annual campaign.

One of the biggest things that we find issues with is that people do not commit to building courses. Everyone always says, “Oh, I want to build a course. Oh, I want to build a product.” Number one thing that has people fail is they’re not committed to it. There is a big psychological impetus, a big psychological effect when you put your money where your mouth is, when you commit something of yourself to your own success.

We launched the Annual Plan, which we started January 5th of this year, so that was yesterday. It’s essentially you get 17 percent discount, two months off, if you sign up for a year. We hope that not only are people going to enjoy the Annual Plan but they’re also going to use that as stopping creating excuses for themselves. It’s not going to be, “Oh, I need to get this course out someday. I’ll do it when I have time.” It’s, “OK, I’ve put my money where my mouth is. It’s time for me to get this done, and I’m going to launch this year.”

The people who do that, we see they’ve launched courses in five days, in one day, in hours, in weeks. People who are committed, people who are committed, who put that line in the sand, those are the people who succeed and successfully sell their course to customers.

Patrick:  Summit Evergreen has been, for folks who haven’t been following the story, it’s like a natural outgrowth of the consulting work that you and your co‑founder, Rachel, were doing over the last couple of years.

You were working with some of the larger publishers in the Internet space who have these courses online and sell them for, in many cases, large amounts of money, both on a per‑course basis and on an absolute basis.

You’re bringing some of the technology that you custom‑built for these publishers to the scales, where somebody like either the two of us could actually implement it without having to free‑write the courseware in Ruby on Rails like I did.

Keith:  Exactly like you did. A lot of the problems that people have is that when they start their own course, they’re like, “Oh, if I want courseware, I either have to have something crappy that’s running on WordPress or I have to hire a dev and pay him $80,000, $100,000 to build it.”  [Patrick notes: Mine probably was a +/- $40,000 job if you bought it at market rates in Ruby on Rails programmer time.]

We took the happy medium. We took all the knowledge, all the things that we’ve learned, built a system that works for actual product creators instead of people trying to sell software.

Patrick:  Awesome. You’ve just launched annual pricing for it. You’re starting to get a little bit of customer uptake and your early‑adapter customers are getting to the point in the lifecycle where they’re actually on‑boarding their customers, so they’re seeing success with it. What’s the next three‑month plan for Summit?

Keith:  We have a bunch of joint ventures, and I don’t want to call them affiliates but people who have publishing platforms already. Not software but publishing houses. They have lots of content creators. They want to come in and they want to work on Summit Evergreen and get their content creators onto Summit Evergreen as well. That’s one thing I think is very big for the next year.

As far as software and features for our customers go, we’re looking at better integration with lifecycle email service providers, better integration for that customer retention.  If you’ve taken Patrick’s course, you know that your existing customers are the number one way you’re going to grow your business. Your existing customers are generally 70 percent more likely to buy than the new customer.

Focusing on existing customers to build out product orbits, to build out retention strategies and things like that, that’s the way you’re going to grow your business. First quarter, second quarter 2015, that’s really what we’re looking to focus on, is increasing that customer retention and increasing peoples’ abilities to build product orbits.

Patrick:  That’s a great way to demonstrate additional value to your customers too, because many of them don’t have the know‑how of, say, a Brennan Dunn or a Nathan Barry, where those guys have, through a lot of hard work, made a bunch of products which naturally feed into each other.

They’ve got, basically, a self‑supporting ecosystem where they can step people through, “Make your business a little more successful by buying our book. After you’ve got the business a little bit more successful, that opens up new challenges for you, and I have a course which happens to slot directly into these new challenges,” to both keep increasing the value to the customer and then keep increasing the value to the business or content creator over time.

Keith:  Exactly, but one thing I do want to mention is that people look at these “product orbits” that they’re called, like Brennan Dunn, Nathan Barry, Amy Hoy has and they think, “Oh, I can never get 12 products out” or “I can never get three products out.” You only need one or two products, or two or three products, and they’re not hard to make.

If you look at Nathan Barry’s “24‑Hour Product Challenge,” which he did again this year ‑‑ really, really amazing. He and Amy Hoy both did it. Amy Hoy put out, “Just F‑ing Ship,” which she put it out in 24 hours. It’s a saleable product, she made some good sales on it and it doesn’t have to be this amazing course.

There’s a lot of content you can make at that beginner, beginner level. Those kinds of gateway products are really more effective as product orbit than larger products.

Patrick:  That makes sense. You want to hear my update on Appointment Reminder?

Keith:  I was just about to ask. What’s been up with Appointment Reminder?

How’s Appointment Reminder Doing?

Patrick:  I’ve kind of lit a fire under myself for the first time with Appointment Reminder due to my daughter being born.  I’ve been running Appointment Reminder for four years now. It’s been like the redheaded step‑child of my business for those four years.

I wasn’t really passionate about the problem space. I always treated it as an afterthought, even though every year I said, “OK, my goal for this year is to finally do some major work on Appointment Reminder.”

Right around when my daughter was born in October, I started to get kind of serious about it and, with the thought that, “OK, I’m going to execute on this seriously for 12 to 18 months, get it to a happy point and then do a check‑in on whether I want to continue with that business or spin it off to somebody, and sell the business and start doing something that I enjoy a little bit more.”

Since committing seriously to Appointment Reminder, it’s actually been almost fun. I spent two months last year working in a very “new dad,” fits and spurts fashion on doing infrastructure for on‑boarding my first couple of employees into Appointment Reminder. They’re actually consultants, not employees, but finally getting some help on the sales and support front, building the CRM integration that would let the sales rep do her work, yadda, yadda, yadda.

In the process of managing that sales process, I’m actually starting to do a little more of the day‑to‑day grind on it, which is helpful because if I don’t respond to inquiries from people then they don’t buy software, so I’ve been responding to inquiries.

We’ve lined up two opportunities for major integrations with platforms that trades businesses use. I’m working on those this week and hoping to ship them by the end of the month.  [Patrick notes: Looks unlikely at the moment.  The below-described customers backed out of their soft-commits.  Yay, enterprise sales!]

Both of them have a sponsoring customer, where we’ve got, basically, a soft commit. I sent them a one‑page letter of a text that they agreed to where, if we ship this integration by the end of the month, then they commit to buying Appointment Reminder at whatever the price is. The price is somewhere above where the publicly available plans are right now, but not hundreds of thousands of dollars.

Speaking of publicly available plans, I’m finally taking my own advice and charging more. As of February 1st, pricing is moving from $29, $79, $199 to the entry point is going to be $99 for a modestly higher quota than we’ve done before.

That’s actually scaring me a little bit. I was talking it over with somebody. I wanted the new entry point to be $49, and he said, as Keith has said on occasion, “Have I listened to myself for the last couple years?” The most successful clients that we have are the ones where the businesses are executing at a certain amount of scale. They literally have full‑time people who are just slaving away on the phones everyday. Appointment Reminder can replace that effort for much less than the cost of a full‑time person.

In contrast, we’ve got a lot of customers who have, say, five appointments a day. 5 times 20 workdays in a month is 100 appointments. They get value out of Appointment Reminder and they pay us $30 a month, but they’re not the heart of the business.

Honestly, it’s been brutally difficult to build up a business to a reasonable scale on $30‑a‑month chunks, so I’m going to be refocusing on the types of businesses where it’s worth at least $100 a month to them to have this problem solved, which is largely the trades businesses, medical, et cetera. Ooh, medical.

Keith:  [laughs]

Patrick:  We’ve had medical customers for Appointment Reminder for about two years now, but it’s been kind of on the DL, hush‑hush kind of thing, for HIPAA compliance reasons. We were kind of skirting the edges of HIPAA compliance, so we had promised HIPAA compliance to people on a very limited basis. They required us doing custom legal work with each customer that had gotten on‑board with it.

We weren’t ready to scale then. As of some engineering and process work that I’ve put in in the last two weeks, we’re finally ready to scale HIPAA‑compliant accounts for Appointment Reminder, which is going to require me going out to the 50 people who have medical businesses that are using us but are not on a HIPAA‑compliant account at the moment and getting them to sign a business associate’s agreement, which is the last bit of paperwork that we need for them.

Then, I’ve already flipped a switch on the back‑end to start treating their accounts in a HIPAA‑compliant fashion, which means…I won’t bore you with the details, because it could take the whole podcast, but we have to encrypt their information on a disk, which we’re doing for everybody now, and we have to enforce some procedural safeguards about access to their accounts, like enforcing a password rotation strategy, which we don’t do for normal accounts.

Keith:  I’m curious. Are you going to be upgrading those plans to a higher tier for that HIPAA compliance, or no?

Patrick:  As of February 1st, we’re going to have HIPAA‑compliant accounts available on the pricing and plans page. They’re just going to be straight‑up 2X what it would be for the same account tier at a non‑medical provider. Medicine is a business, right? You charge 2X as much for literally the same thing, but we promise you formally that we’re doing all the right things with regards to security, which we only promise informally if you’re an accounting firm, for example.

For our early adopters, for these first 50 doctors’ offices that are using us, I’m going to get in touch with them this month and say, “Look. Formally, you’re using $500 worth of services a month and you’re paying us $50 a month, but since you got in early and you’ve been with us for the last few years, I’m going to grandfather you in at that $50 a month or whatever it was pricing, contingent on you making sure to get this document signed for me this week. Because I need you to sign this document so that if, knock on wood ‑‑ this never happens ‑‑ but if the Department of Health and Human Services audits us, I need to have these business associate’s agreements in place with all of our medical customers.”

Similarly, if our medical customers get audited, they need a BA with us or they’ll fail the audit automatically. Many of the folks in the medical industry, especially on the lower end of the scale, not the major hospital chains but independent doctor’s offices, have been kind of dragging their heels on compliance with HIPAA, as they drag their heels on a lot of things.

Keith:  I can imagine. I’ll be very interested to see how the $99 entry-level plan works out for you. I think you’re right. It’s going to get rid of a lot of the low‑tier, high‑support customers. You’re only going to have people who are really serious about business. As we’ve stated before on the podcast, $99 to someone who’s serious is really nothing.

Patrick:  It’s literally like less than one‑third of the cost of publishing this episode of the podcast.

Keith:  [laughs]

Patrick:  That’s not even the time costs. We have plus or minus $250 of hard costs associated with publishing a marginal podcast episode.  [Patrick notes:  Transcript, $90.  Audio editor, $150.  Bandwidth, ~$100.  Finally getting a podcast out the door?  Priceless.]

Keith:  You figure, like I just bought a $20 recording software. You just bought a $20 stabilizer. It adds up. You look at some of our customers for Summit Evergreen, the people who are successful, the people who have big businesses who are getting a million dollars of revenue through Summit, they are people who have support staff. They have Zendesk or Freshdesk, they have a CRM, all of which are more expensive than Summit Evergreen, even though our lowest price point is that $99, right?

You think of a CRM like InfusionSoft? It starts at what, $150, $300. EntraPort, I know, is $350 a month. $99 is small potatoes to real businesses.

Patrick:  By the way, if you don’t follow my blog and didn’t read the end of the year update, starting to be public Appointment Reminder numbers. It’s currently at about $6.5K a month in monthly recurring revenue.

Keith:  Very nice.

Patrick:  Plus an undisclosed amount on Enterprise plans. My goal for mid‑2015 is to get that to $15K a month in monthly recurring revenue, which after you subtract out the costs of good sold for the business, so basically my massive Twilio spend and also after you subtract out the kind of on‑target compensation for my consultants, then that leaves me with about plus or minus $10K a month of profit for the business.

I think if it hits the magic $10K a month number, it will be in a good place for either me continuing it or for spinning it out into a variety of possible acquirers. We’ll think a little bit more about that. Why I want to spin it out in 6 months, as opposed to 18 months, is a story for another day. We’re not public about that information yet.

Welcome Lillian!

Keith:  Good. We want to talk about family today.

Patrick:  Yes, we want to talk about family. Can I give the news about the new entry to my family?

Keith:  I’m going to say no, but then I’m going to say yes. Yes. [laughs]

Patrick:  Ruriko, my wife, and I were pleased to welcome Lillian, our daughter, into the family as of middle of October. I know the date, but I don’t want the Internet knowing the date, because for some reason that is treated as secret information. It allows you to open up credit card accounts in the name of a two‑and‑a‑half‑month‑old baby. Who knew? That brings us up to a total of three in the family. Keith and company, you guys are up to four, right?

Keith:  We’re up to four, yeah. I have a four‑year‑old and a two‑year‑old now.

Patrick:  Both of us previously did time in the salt mines at Japanese organizations, so we are no strangers to overwork. Depending on the day, I think both of us kind of occasionally get a little too wrapped up in this. I think that’s fair assessment for me and maybe for Keith as well.

Keith:  [laughs] That’s a good explanation, I guess.

Patrick:  Yep. I’m doing my deep thoughts and where I want my career and life to move and what’s really important to me. Spending 12 hours a day doing integrations for software is probably not it.

Keith:  Let’s talk a little bit about our life before this entrepreneurial stuff. We’ve talked about when we were at the Japanese mega‑corps and how it was soul‑crushing, and we worked, God, 16‑, 18‑hour days, et cetera. When we left that…

You left before me. I kind of carried over that same work/time ethic, and I was working around 16 hours a day, I believe, at that point. 16 to 18, I guess. How about you? When you left your company and got over that initial shock of, “Holy crap. Now, I’m free,” how much were you generally working?

Patrick:  It went all over the place. I had a good six months there, and you might remember this, of just total burn‑out, where I did virtually nothing and just slept for most of every day. Probably a bit of undiagnosed depression going on there too.

Then, after I stabilized in the business and started to spin up on consulting, it went all over the place. The most consistent thing about my business for the 2010 to 2012 timeframe was inconsistency. [joking] Bah-dum-bump.

There were many days where I did absolutely nothing. There were many days where I just answered email for 20 minutes to an hour and then called it a day. Then, there were some days where ‑‑ at the time I was courting Ruriko. On a day where she was working, there was basically nothing else for me to do in Ogaki other than either play League of Legends or work on my business. There were some days where I got up in the morning at 11:00 or so, dragged myself out to a cafe, had some breakfast, and then just coded straight for eight hours and then went home.

Keith:  There were some days when you did the same thing, except instead of coding, it was League of Legends.

Patrick:  Yeah.

[laughter]

Patrick:  Or somebody once did a time graph of my Hacker News comments, and it is impossible to identify core sleep hours for me, which is a little disconcerting. There are some days when I was hacking on work or work‑related things at 4:00 AM in the morning and heck a lot more where I slipped into like 2:00 PM.  Lots of inconsistency.

One of the things that, since getting married and particularly since having a kid, I’m trying to get on a “more human time schedule.” My schedule today was pretty representative. I woke up at 8:00, played around with Lillian until about 9:00, and then left for the cafe at 10:00.

I typically take one hour a day to go to a cafe, have breakfast, listen to podcasts or something, kind of plan out my day. Then, I got into the office at 11:00 and I’m going to be at the office here from 11:00 to 4:00 working on a combination of, A, publishing this podcast and, B, my three goals for the day on what I want to get done for Appointment Reminder.

Then, at 4:00, going home, family stuff for the early evening. Then, I might do maybe an hour or two of work later in the 10 o’clock‑ish timeframe, which is peak hours for me.

Keith:  It’s interesting to me that you mentioned waking up, you said at 8:00 or 9:00, and playing with Lillian and then you went to the cafe, because when I quit my job, I already had my first daughter. There was still within me that I can work whenever kind of timeframe.

I would sleep in. The kid wakes up at 5:00 or 6:00 or whenever she woke up, because she was a baby. My wife, gracious that she is, would take care of her in the morning. I might sleep in if I had been up ’til 4:00 coding. I might wake up early and start coding. But I had that free‑form schedule, because the baby was just a baby lying around at the house.

I would go into office, but it was so free‑form. The number one thing that, now I have to have an actual time schedule. I have an actual time schedule each day. The reason for that is because my girls are in school now. They’re in preschool and they have to be at preschool at a certain time.

I have meetings starting at a certain time, because now I know that I can’t just have a meeting whenever because I have to time it with taking the kids to school, getting them ready in the morning, making sure everyone’s fed, making sure I’m fed. Same at night, kids come home 4:30. They practice their piano, do whatever.

Dinner’s at 5:30, because if dinner’s not at 5:30, they’re not getting in the bath. If they don’t get in the bath, they’re not getting into bed. They’re not reading their stories. They’re not going to bed. Suddenly, it’s 9:00 and they haven’t gone to bed yet.

It’s interesting, once the kids reach a certain age where they have a schedule, your schedule then 100 percent changes because you have to apply what you’re doing to them.

Patrick:  This is applying magic of consulting pipeline management to the day‑to‑day management of a household.

Keith:  To be perfectly honest, it has helped my business so much to have this rigid structure. We’ll talk about this more in a second. Having the structure is just really important, both from a work‑life balance perspective and then also from a productivity perspective.

Patrick:  I think the word “forcing function” might be relevant to that. Either of us could probably have pushed for a rigid, defined structure earlier in life, but having children concentrates the mind and gives you both a rationale for figuring out what the changes you need to make in your business/day‑to‑day productivity/life are to accommodate these sudden new demands on your time.

In a way that, since failure is not an option, given that we’re fathers, fatherhood succeeds where a bunch of New Year’s resolutions in the previous years did not.

Keith:  That one interesting thing. A lot of start‑ups and even Japanese companies, they talk about, “Oh, if you have a family, well, you’re not going to work hard for us. You’re going to be focused on your family.” I find myself not only working harder, but also being more productive because I have that sense of failure.

If it was just me and I lost my job, meh, so what, I’ll go find another job. If I lost my job having to feed a family of four, it’s a lot more stressful. It motivates me to succeed and do better, because I know I have so much more to lose. These people, my daughters depend on me.  [Patrick notes: Keith has a slightly different take on motivation than I do.]

They can’t go out and get a job. They depend on me to feed them, to clothe them, to put them in school and also to be a good father. I have to improve what I’m doing and improve the work that I do in order to be more successful for them. It’s no longer just my enjoyment or my life on the line.

Patrick:  Yeah, totally understood. I think if we get into an extended discourse on manhood or adulthood in the modern age, I definitely did not feel at, say, 29 [Patrick notes: I am 32] that I was a bonafide adult yet, despite running a business that was theoretically making some other folks lots of money.

Then, got married and didn’t quite feel like an adult yet. But now that I have a little infant who is easy to break and will literally die if I do not treat her correctly, I suddenly feel like a certified adult. Yeah, I’ve been kind of like kicking things into gear on that.

Let’s talk a little bit more about that Silicon Valley mindset, though. I orbit Silicon Valley at a certain level of distance, partly through Hacker News participation and partly because I had a number of consulting clients or less formal business connections out there.

I used to go there maybe twice a year or so to catch up with people. A very common thought in the start‑up ecosystem is that you’ve got to make hay while the sun shines. Your 20s are the time to work like an absolute dog, do 70 or 90 hours a week, get an exit. Then, after you have the exit, you can get married and have kids, if that’s your thing.

A lot of the folks in Silicon Valley look a little askance at that being your thing. It’s like, “Oh, he wants to have kids. Nothing wrong with that.

Keith:  [laughs]

Patrick:  Be that as it may, it’s one of those curious youth‑focused myopias that the industry has. There’s many, many jobs, which are objectively speaking more intense on a timescale or less forgiving of juggling multiple obligations than, say, working at a Silicon Valley start‑up or even founding a Silicon Valley start‑up is.

If you’re a partner at a law firm, you can’t just roll into the office at 2:00 PM and say, “Well, sorry everybody. Late night partying,” which most start‑ups will tolerate pretty decently, if you only do it occasionally.

Keith:  It’s interesting, because my father and my grandfather are both entrepreneurs. My grandfather, I think he started his main company at 35. My dad was, I think, 40 or 42 when he started his company. By current Silicon Valley standards, they were ancient. Who’s going to be an entrepreneur at 42? But they built huge, successful companies.

Patrick:  Can I tell you a priceless anecdote on that?

Keith:  I would love that.

Patrick:  Someone who read to meas being about like 23, asked me when I was 30, on a trip to Silicon Valley, “Aren’t you supposed to be a VC now? I mean, your career is pretty much over, right? You’re 30.”

Keith:  [laughs]

Patrick:  It’s like, now that is a forehead‑slapping inducing moment for me because, oh man, you’re so young. You understand nothing yet. I think both of us plan on doing this essentially forever. Probably 98 percent or so of the value that we’re going to create in our careers is in the forward mirror as opposed to the rearview mirror.

Keith:  Definitely.

Patrick:  It’s so crazy. This is one of the reasons that I can never commit to doing the Silicon Valley lifestyle, just because the social construction of that lifestyle seems to be, frankly, bonkers.

Keith:  Not all of it. You can’t generalize because there are some amazing things going on. You and I both went up there and were talking to a lot of people. It felt like college plus two.

Patrick:  College plus two. There’s so many things about that. [Patrick notes: I have a theory that several Silicon Valley ecosystems pretty much explicitly pitch working at a startup or founding one as a surrogate class that you do to earn the respect of your surrogate teachers.  This is very effective for a certain psychograph of high-achieving Stanford grads who have spent their entire lives doing anything required to please teacher and get an A on the exam.]  We might do that in a different episode. Let’s talk more about our beautiful daughters because they’re much more fun.

Keith:  [laughs] I actually want to talk about something interesting that we briefly mentioned on, which was how we have these time constraints and it’s forced focus. I remember a little while ago there was a talk about comedy on Twitter and how comedy on Twitter and how discourse on Twitter was changing the way that comedy worked and not improving, but creating a whole different genre of comedy because it was limited to those 140 characters.

It was talking about how limitations to art forms create better art forms in certain situations. It’s the whole limitations create creativity. I really think it’s the same with work. When you have forever to do something and you have no constraints and you have no set budget, let’s say. You have no set budget either for money or time or what needs to get done, things take a long time.

You decide, “Oh, I’m just going to do it myself.” You don’t have that focus because you don’t have any external constraints. We were talking about, especially when the kids go to school and, even now with you, you come home at a certain time. I have a hard stop. 5:30, lights go off in my office. I’m at home.

I can work after that. After the kids go to bed, I can go back to work, but at 5:30, I have to stop no matter what. Now, I have limited time and I have these hard stops that I must obey. A lot of people think that’s a bad thing and it’s not. It’s a good thing because this is the basis of business.

Delegating Responsibilities To Save Our Sanity

Keith: Because whenever you’re running a business, whenever you’re doing a business, there is so much more to do than you have time or the ability to do. You have to learn to delegate. You have to learn to prioritize. Having these external forces, these external walls making you, these limitations, it forces you to be smarter with your time.

It’s no longer viable for me to spend 20 hours deciding if we’re going to use Apache or nginx and tweaking the config files and everything, because there’s 100 other things that I need to be doing with my business besides setting up this one server. What do I do? I delegate it to someone. Because it takes five minutes of my time. It might take them 20 hours. That’s fine. That’s what I pay them for.

Patrick:  Do you find that you do more delegation now that you’re a little more constrained on the amount of time you can put into the business?

Keith:  Delegation has always been my hard point. I always want to do things myself because I love solving the problems, but it’s gotten to the point where I have to delegate. To answer your question, yes. I delegate much, much more.

I had done that talk at MakeLeaps up in Tokyo and you had re‑tweeted that. We were talking about meeting notes. The biggest thing I’ve done is delegating meeting notes, so that I record the calls. They go to my note‑taker, and they pull out the to‑do items and everything. I’m not sitting there rewriting all my to‑dos and putting them in Asana or JIRA, making all my calendar invites and everything like that.

Anything that is not moving the business forward, I think, needs to get delegated to someone on my team.

Patrick:  This is historically one of the big differences between your business and my business, because while we do roughly similar things ‑‑ we were both consultants for a while, we both have product businesses now with different levels of consulting still remaining in the business ‑‑ I’d always been kind of like a solo shop until recently.

You have had, for the last couple of years, a team of contractors who assisted you with the provision of consulting services and now help you out with that day‑to‑day business administration. It’s been a major thing for me that I was a solo bootstrapper, accent on the “solo,” for the first eight years or so of running my business. That changed recently.

I think it probably wouldn’t have changed but for the birth of my daughter being a forcing function. It must have been the TMBA guys, “Tropical MBA,” another great podcast, who said that there’s three levers that you get to adjust productivity in a business. You have your time, your level of savviness and money that you can throw at problems.

If you want to increase the number of sales that your business is doing, you either have to throw your time at making the sales, throw savvy at producing systems or being better at sales than the average bear, or throw money at the problem, either lead acquisition or in paying someone to do your sales work for you.

Like we said a little bit ago about constraints driving the business, back when I was salaryman, I had no time and I had no money. 100 percent of why Bingo Card Creator worked was savvy, savvy and more savvy on the media marketing front. That probably actually helped develop my savvy muscle, because I was exercising it so much.

Once I went on to doing my own stuff full‑time, I didn’t have as hard a constraint on time any more. While I probably increased on absolute levels of savviness, the percentage of my maximum capability of savviness that I was using on a day‑to‑day business and the percent I was growing in terms of savvy probably decreased, because there were a lot of problems where I could have solved them with additional thought but I just threw hours at it because I suddenly had a lot of hours to throw at things.

Keith:  Right. It’s interesting, because not only do you have a lot of hours to throw at things but menial tasks are easy to do, right?

Patrick:  Right, and they certainly feel like you’re winning when you’re doing them, which is the most toxic thing ever.

Keith:  I just took all my addresses from Evernote and put them into Excel so I could print out Christmas cards. Like, “I was very productive today,” except for the fact that that took me eight hours. That’s a full billable day that went away. Or I could have hired a VA to do it for $10, $15 an hour. What’s the bigger win there?

It feels like I was so productive, but when you look at the benefits to the company or just the benefits to my life, that’s eight hours I’m never going to get back. I could have done so much in those eight hours. But it felt good while I was doing it.

Patrick:  I think some of the work like that has that seductive quality of feeling like work, even though it doesn’t meaningfully drive the business forward. I’ve been doing a lot of architecture/underpinnings work to get Appointment Reminder in a better situation to move more accounts in the next six months.

Yesterday, for example, I spun up a new server to decouple the marketing site from the infrastructure for the main application.  I’m glad it happened. It has needed to happen for a few years now, but rationally speaking I should probably have found a sysadmin available for this and just thrown a couple of hundred bucks at them and had them do it, rather than losing that day or two to make a 90 percent solution.

I’m trying to get better at that. I’m finally working with a salesperson to do some of the sales activity. I have a, knock on wood, repeatable sales process in place for her, so that I copy and paste it out what I’ve said and done before that actually results in us closing deals. Then, we’ll have her turning the crank at it everyday, rather than me turning the crank on it.

Identifying As A “Solo” Entrepreneur

Keith:  Exactly. I think it’s interesting, that you had that pride of being a solo entrepreneur, a solo founder, a solo product guy with your software. It’s interesting because, when I started doing the consulting the products, I already had one child, right? I never had that time freedom. I think it gets really interesting that, now that Lillian has been born and you have those time constraints now, you’re like, “OK, now I can’t do this solo thing anymore. Because if I do the solo thing, I’m going to be spending all my doing this. I’m never going to see my kid.”

Patrick:  Yeah. There’s ways I could reconfigure the business to make the solo thing still work with both achieving business objectives and not crunching my quality of life at the same time. But it’s like, “Well, you get a certain number of decisions that you’re allowed to make, to move to levers.”

At the end of the day, I like this identity of myself as solo entrepreneur but I’m not willing to compromise on my family, because that’s a terminal value for me. That’s not on the table. Then, it’s like, “OK, do I compromise more on what my desired identity is or do I compromise more on what the desired trajectory for the business is?” I was like, “Well, the solo entrepreneur chapter was a great chapter in my life. But starting a new chapter, I feel like I’m kind of ready for that.”

I might cry a tear or two about my internal conception of what my business is like, but that’s the only change that’s going to happen to it. On the positive side of the ledger, it’s going to grow much faster and help other people out for supporting their families too, give my customers a better experience and let me do more fun work on a day‑to‑day basis. Hmm, tough decision here.

Keith:  Exactly, exactly. For me, that self‑identity I think is important but you also think, “OK, growing the business isn’t just for growing the business,” although with personality types like us, it’s kind of like a game, right? You want to grow the business because we like seeing the numbers go up.

Patrick:  It is totally WoW gold for me.  [Patrick notes: I care quite a bit about my metrics for each year, almost entirely for ego reasons.  Crushing my last year’s numbers makes me feel like I’m winning the game.  In terms of actual money?  Not nearly so interesting.]

Keith:  It is, it really is. But at the end of the day, growing the business and making the business perform better gives you two major benefits for your family. One is, the more automated your business is, the more time you get to spend with your family. Two is, the more successful your business is, the more money you have in order to have that financial freedom with your family.

I went to the States for three weeks a couple of months ago. I was talking with one of my dad’s friends. He’s retired now. He was talking about when he was in his 30s, he had built up a number of brick and mortar stores. He had managers and people were managing them. He was sitting at the pool with his co‑founder on a Wednesday afternoon, just sipping margaritas.

He was like, “Isn’t this amazing that we have this huge multimillion dollar business with 10 stores throughout the area? We’re sitting here on a Wednesday afternoon, sipping margaritas at the pool.”

Patrick:  Man, that is the life. Aside from the margarita. I’d be doing iced cocoa.

Keith:  [laughs] I’d get bored with it. I would get bored with it, but I’d like the freedom to do that.

Patrick:  Definitely.

Keith:  For me, the business automation, the freedom gives me two things. One, it gives me the freedom to spend the time I want with my family. It gives me the freedom to focus on the parts of the business that I want to focus on. I don’t have to worry about putting out the payroll checks and making sure that all the checks get out there, and pressing submit on all the forms, because someone’s doing that.

I can go in and say, “OK, we need to re‑look at our automation funnels.” Or, “Hey, this marketing page is getting kind of stale. Let’s re‑do it.” Or, “Hey, why don’t we call Jeff and set up this awesome new joint venture?” It gives me the freedom to be able to do that when you have a successful business. It gives you freedom when you have an automated business. It gives you freedom not only in your business life, but also in your personal life.

Patrick:  Yeah. One of the things…I don’t know, I have a weird relationship with money. I think that’s true of many people. We both got paid at the Japanese scale when we were working in Japanese organizations, which for somebody right around our age, it’s like plus or minus $30,000 or $40,000 a year. It’s not exactly a secret ‑‑ both of our businesses are doing a little bit better than that these days.  [Patrick notes:  n.b. Keith’s is a whole number multiple of my business and that whole number is not 1.]

Keith:  [laughs] My wife’s very happy, because she can now buy butter. That’s her major thing about me starting my business, is now we can buy butter instead of margarine.

Patrick:  The biggest concrete change it’s made to my family’s quality of life is, for semi‑related to Lillian being born reasons, we decided to move from Ogaki to Tokyo. The rents here are…

Keith:  Astronomical.

Patrick:  Pretty outstanding.

Keith:  [laughs]

Patrick:  My rent is literally more than my last salary was in Japan. Obviously, this would not be a viable option, at least not living in the apartment I currently live in, had we stayed in that trajectory, but it is…I won’t lie, when I see the rent get debited from my bank account every month, there’s still a little bit of, “Eek, that’s a whole lot of money,” But the business allows my family the opportunity to live in a place that my wife really loves and I’m really starting to like, and that I think will be a bit better for our daughter.

Keith:  Actually, it’s interesting that you mentioned that, because that’s something that we talk about constantly is, because of the business and the way I do my business, we have absolute freedom to be wherever we want. The problem is, when the kids…the kids are still in preschool. We don’t have this problem yet, but when they go into elementary and junior high, we’re suddenly stuck at a place.

We can’t go off to the US for three months because we want to, so it’s really making us make the decision. OK, what do we want to do? Do we want to raise them in Ogaki, which is not a bad place but it’s not cosmopolitan? There’s old ways of thinking. Do we want to live in Tokyo? Do we want to live in Osaka? Do we want to go to the States? My wife wants to go to southern Italy. I’m not learning Italian. [laughs]

Patrick:  [laughs]

Keith:  But it brings up a lot of lot of questions about what do you want to do for the family and what do you want to do with your life. If If I was a salaryman, there would be no way to make this decision. It wouldn’t be a decision. I could not make this decision. This is where my job is. This is where I have to live.

Patrick:  Or the decision might be made for you without consulting anyone.

Keith:  Oh god, yeah. The “Hey, now you’re working in Tottori for no reason.”

Patrick:  Japanese companies, for those of you that haven’t worked for them, have this wonderful cultural thing called tanshin funin (単身赴任) which means that the bosses can come up to on Monday morning and say, “Hey, guess what? From Tuesday, you’re going to be working out of our New York office,” or a place much less desirable to live than New York. “BTW, it’s just you. Your family won’t be going with you. We’ll start you off there for three years, but we could call you back at any time, or move you anywhere else at any time.”

Keith:  Yeah, and that’s not only abroad either, because abroad, maybe you’d move your family over there, although most people don’t. They have them inside Japan as well. You’re a three hour bullet train ride away from your family, everyday except Saturday and Sunday.

Patrick:  I know an engineer who was close to us in age range and life circumstances. He just got told that, “Oh, I hope you’ve had a great time living in Nagoya, where you’ve lived your entire life. We will now name one of the most rural prefectures of Japan where we have a factory. You are going to be supervising it, starting tomorrow. Have fun.” Japanese companies, oh boy.

Keith:  [laughs]

Patrick:  That’s another discussion.

Keith:  But it fits in with our discussion of family.

My wife actually works with me now. She does our sales and marketing on the Japanese side. She’s really become an amazing marketer. She has her teaching degree, and she was going to be a teacher. One of the things that teachers have in Japan is, the first three years, you don’t get to choose where you go. In fact, you don’t get to choose most of the time, but the first three years especially, they send you to some god‑forsaken place for no reason whatsoever.

Gifu, where we live, is a fairly large prefecture compared to other prefectures. Other prefectures, it maybe takes an hour to drive from one end to the other. Ours is about…what four hours, three hours? It’s a huge prefecture.

We’re in the absolute south, and they just love to send all the new teachers from here to the north. She’d live five hours away by car. At that point, it’s like, “I have a family. I have a husband, I have a kid. Am I going to live five hours away for three years, just to become a teacher? Then, maybe I’ll get to come back?” It really puts some big questions, and she decided to not become a teacher because of that.

She had the highest ranks in her school. She was number one ranked for all her teaching certificates and everything. She didn’t become a teacher because they would have forced her to move five hours away, and I couldn’t go.

Patrick:  I think a lot of people will make the other decision too, which is given the needs of their career they will sacrifice the dreams of having a family on that altar ‑‑ one of the reasons why the Japanese population growth rate is hitting the lowest of low levels.

Keith:  It’s interesting. Everyone always talks about, “Why aren’t people having kids in Japan?” There are two very big reasons. First of all, we’re worked like dogs because if you have no time and you’re too tired when you get home, there’s no way you’re going to have kids. The second one is, there’s no societal way to raise kids here. All of the preschools are completely full. I had to wait outside for two days to get my kid into preschool.

There’s no babysitters. There’s no after‑school services or anything for little kids. It’s getting slightly better, but not good enough. The reason is, Japan didn’t have nuclear families until recently. It used to be you lived with grandma and grandpa, and they helped take care of the kids. Now, no one wants to do that. Even the grandmas and grandpas, they’re like, “I don’t want to live with my kids. I want to have my own life.”

But society is not catching up to that. This idea that we have in the US of play dates, where you send your kids over to someone else’s house and they all play together ‑‑ then, one day they all come and play at your house et cetera, and the other parents get to take a day off. They don’t have that here.

Patrick:  Or the institution of babysitting. If you explain babysitting to an average, middle class Japanese person, you get looks of unrestrained terror on their face.

Keith:  In fact, I’ve actually been told, “Why would you trust your kid to another person? How could you?” Especially a 16‑year‑old or an 18‑year‑old. “I don’t know, that’s how I was raised. I [laughs] never had any problem, I’m still alive.”

Patrick:  This is one of those things where I think sometimes cultural differences are oversold, but this is definitely an American thing, where it’s like, “Yeah, sure. I’d like to entrust my four‑month‑old infant and my house and all of my possessions to a 12‑year‑old girl from the neighborhood. My only reason for trusting her is that she is from the same neighborhood, and that one person said two sentences of recommendation on her behalf.” It sounds totally reasonable.

Keith:  [laughs] When you put it like that, I don’t know how my parents ever decided to do that. One of my babysitters was actually named Candy, believe it or not, when I was younger. I don’t think she lasted long. [laughs]

Patrick:  Anyhow…

Keith:  [laughs]

Patrick:  Funny we should mention that, but given that it takes a village to raise a child, burden tends to fall in family in Japan, rather than falling on the rest of the village. One of the things that I’m hoping to getout of growing the business is we’re hoping to be able to support Ruriko’s mother moving to Tokyo. It’s been something on her to‑do list for a while, but not something that she can afford on a pensioner’s income.

If we were able to help underwrite that, that would both achieve a goal for her and make life a bit easier for us in having close family close by, helping to raise Lillian.

Keith:  I think that’s amazing. That’s the first I’d actually heard of that. I think that’s amazing. I think it’s good to have those business goals that are not business goals, right?

Patrick:  Yeah, like there’s a purpose to all this grinding that we do everyday.

Keith:  Exactly, exactly. I have a goal for this year that I’m not going to say out loud, because I don’t want to jinx it. But I was talking with some of my friends. One of my friends, in particular, he says to his accountant, “Give me one number. This is the number that I need every month in order to live the life that I want to live, so I don’t have to worry about money. It takes into account all my general expenses. It gives me a $500 or $1,000 buffer every month that I can do fun stuff with. Give me that number.”

That’s the number that his SaaS has to reach every month. That’s the number that he shoots for. That’s what he focuses all his attention on, is raising that MRR number to that point. It’s the same for me. I have a goal that I want to do this year, hopefully in the summer. In order to do that, I have to have a certain amount of money coming in from the business. That means I have to automate it. I have to make sure that the business is growing in the right direction, because even if I make the money and the business goes down, we can’t do it.

It has to be far enough that we have that safety net and that number, and that’s our goal is to be able to reach that and to have this fun thing that I’d like to set up.

Patrick:  I would suggest just as a micro‑tactical thing, put that goal on your dashboard. I had my revenue goal put for Appointment Reminder on my dashboard at the bottom of the screen, which is the wrong place for that.

Keith:  [laughs]

Patrick:  Because as the business got more successful, the goal got pushed down such that I would only ever see it if I Control+F’d and searched for it. Stick it to the top of the screen instead, so that everyday or every Monday, you check in and say, “OK, where are we with regards to plan?” Give yourself a little bit of a kick in the pants to do the work this week, to get you a fraction closer to it.

Keith:  Actually, I think we’re going to need to start winding down this episode but I did want to mention one thing off of the having that number in front of you. In another life, I did the inter‑office dashboards. It’s essentially giant TVs with the KPIs, the numbers that matter for the business or matter for that department.

There’s this great psychological effect that, when you have that number in front of you constantly, you’re subconsciously always thinking about that number. You’re always thinking, “OK, how can we increase that number? How can we reduce that number, if it needs to be reduced? What can we do to move that number?” It’s no longer this thing that I’m thinking about once a week in the shower, “Oh, yeah. We have to increase our opt‑in rates,” let’s say, “or decrease our churn rate.”

It’s something that is always in front of you. Having those numbers ‑‑ not a ton of numbers, like maybe five to six that are important to you and show you the core of your business, psychologically, it’s a huge motivator for getting to accomplish those goals.

Patrick:  It totally tracks with my experience. It’s easy, even our really important numbers like yearly revenue, if you don’t have it automatically updated, you might not know where that is. That’s sort of a surprising statement, right? But until getting my bookkeeping systems improved recently ‑‑ which, by the way, a shout to Bench, they’ve been instrumental in that ‑‑ I did not know my yearly revenue until I did taxes every year. I had a rough guesstimate like, “Oh, it’s certainly above 100, uh…”

Keith:  [laughs]

Patrick:  There were a bunch of times over the years where I had laser‑like degrees of precision with regards to my conversion rate, or I could tell you how many customers I had down to like three significant digits. If you asked me how much money the business made last year, it would be like “Um, I don’t know.” Yeah, graph it somewhere and make it automatic, but if you have company events, make that one of these things that at the weekly standard meetings, “And remember, our KPIs are X, Y and Z currently. The goal is this. Do your best on moving them in the right direction over the next period.”

Keith:  It’s very important, like you say. You said, “X, Y and Z.” It’s important not to have a ton. Everyone starts thinking, “Oh, I’ve got to monitor all these numbers.” These numbers are all‑important, but when you have too many numbers, you’re not looking at any one.

Patrick:  Right. You can spend an unlimited amount of time in Google Analytics, on optimizing the conversion rate to email sign‑ups of people who are entering through this particular blog post…but that’s not ultimately where the core growth of the business is going to come from. It’s not where the major changes to your life or your employees’ lives are going to come from.

Keith:  It goes back to those what we were talking about earlier, with the hard stops ‑‑ the limited time, limited focus. Pick three, maybe five at the most. These are the things you need to focus on. Just like in my to‑do’s every day, I know I have a limited amount of time. I pick three goals that must be done and two stretch goals. That’s my to‑do for the day.

Patrick:  Makes sense. All right. Well, I think we’re in a pretty good place for this episode of the podcast. Thanks everybody for your patience. Keith and I are, knock on wood, going to be trying to get these out a little more frequently, although it sounds like it feels some deja vu.

Keith:  I think we’ve said this for the last two years now. Although I have to say, this podcast was only about 40 minutes, 30 or 40 minutes. Very easy to knock out. Hopefully, we can get these out a bit more often.

Patrick:  Yeah, I’m looking forward to it. As always, we’d appreciate your thoughts on the podcast, whether the new format works for you and what you’d like to hear about. Drop either of us an email. My website is at www.kalzumeus.com, which…well, you’ve presumably figured that out, if you’re listening to this.

Keith’s is at Summit Evergreen, where you can sign up for some email about his service, if you’re interested in that. Our email addresses are readily accessible.

Keith:  All right. Thanks very much, Patrick. Thanks everyone for listening.

Patrick:  Thanks a bunch, Keith. Thanks everybody for your time, and we’ll see you again in a few weeks.

Keith:  Cheers.

Kalzumeus Podcast Episode 9: Customer Onboarding With Samuel Hulick

Samuel Hulick, one of the guys I trust most with regards to SaaS user onboarding, joined us for this episode of the podcast.  I met Sam first when he was writing a book on the topic.  The best evidence I can give you for the proposition “Sam knows more than the vast majority of people about user onboarding experiences” is the fact that he’s written up 25+ of them publicly (e.g. Basecamp’s) and that the writeups are of very high caliber.  Check them out sometime.

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

What you’ll learn in this podcast:

  • What mistakes SaaS companies frequently make with regards to user onboarding.
  • How to start preparing users for success pre-signup, using site copy and appropriate expectation setting in marketing.
  • How SaaS companies often botch product tours, and how you can make yours serve the user rather than serving the product team.
  • How to use lifecycle emails to make customers more successful.
  • How organizational issues at SaaS companies often directly cause problems in the artifacts given to customers, and how you can avoid this.

Podcast: Customer Onboarding

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Transcript: Customer Onboarding

Patrick McKenzie:  Hideho, everybody. This is Patrick McKenzie, here with the ninth episode of the Kalzumeus Podcast. Our guest today is Samuel Hulick, who is behind useronboard.com. My usual co‑host, Keith, couldn’t make it today.

I moved down to Tokyo recently [Patrick notes: And will talk about that more some other day.], so it’s a bit of logistical nightmare getting everybody together, but hopefully that’ll work out itself over the next couple episodes. Anyhow, it’s great to have you here, Sam.

Samuel Hulick:  It is wonderful to be here.

Patrick:  I think today we’re just going to talk a little bit about what you’ve noticed in your experiences as a consultant/author on the topic of user onboarding, what software companies typically do well, do poorly, how they can improve on it.

Also, on a meta-level, I’d like to ask about your experiences of building up the reputation as an expert in this emerging field of dev‑related topics, and how that’s worked out for you personally in your career. Sound good?

Samuel:  I would be delighted to cover all of that.

Patrick:  Awesome. I guess, first question. Sam is one of the few people I trust on the topic of user onboarding.  I trust Sam largely because he’s done maybe 20 public tear‑downs of websites, saying, “Hey, this is a SaaS company. I signed up for their product.”

He makes copious screencasts/screenshots of the product during the onboarding phase. If you’re not familiar with that term of art, onboarding is basically the experience immediately after you sign into the product for the first time. It’s analogous to unboxing in the retail world. Sometimes we call it the first‑run experience, too. Anyhow, onboarding is getting someone shoved into the software.

Sam did public tear‑downs about this for various websites, ranging from Gmail and Basecamp, down to no‑name websites like mine, and just highlighted, “OK, here’s what they’re doing well. Here’s what they’re doing poorly. Here’s what my recommendations would be for doing it better.”

One of the things that I noticed as I was reading a lot of Sam’s write‑ups is that they’re really, really good. These are the sort of things that I used to do for consulting clients. Mine were not nearly so in‑depth or detail‑oriented. I would just say, “I A/B tested things around this before.”

I would do X, Y, and Z, but I had no, really, theory of the mind of the customer that was informing X, Y, and Z, where Sam is much better at the theorizing behind it. Anyhow.

[Patrick notes: I think I was excessively self-deprecating here with regards to not having a theory of the mind.]

Samuel:  I’m honored that you think so.

Patrick:  After building you up so much…

Samuel:  [laughs]

Patrick:  What’s the general takeaway for software companies about our onboarding processes? What are the easy ways that we fluff things up right now, and how can we do that better?  Hmm, that sounds too generic, but let’s roll with it anyhow.

How You Structure Your Teams Spills Over Into How Your Product Is Experienced

Samuel:  I think that probably the biggest mental hurdle to get over ‑‑ well, a couple things. One is I oftentimes will look at how the organization is organized. There’s the term Conway’s Law, which is that the output of a team will be reflecting the way that that team was organized. If one department doesn’t talk to another, the parts of the application that they’re in charge of will likely not talk to each other.  Things like that.

[Patrick notes: This observation is almost painfully on-point at larger software companies.]

I find that a lot of times, when you’re looking at how a product is produced or how it comes to be, there’s typically a marketing department or team, where they’re organized around driving awareness and acquisition, sign‑ups, and whose responsibility just ends after sign‑ups a lot of the time.

Then you’re looking at a product team, where they’re driven around creating new features and driving ongoing engagement. There are often  really any humans in the organization that are really incentivized around bridging the gap from sign‑ups to highly engaged users.

Much of the time, if there’s an onboarding issue in the user experience, it’s a lot of times derived from the way that the teams were split up to begin with.

On top of that, a lot of times, onboarding seems to be something of an afterthought. I look at a lot of similarities between onboarding in a product, like a SaaS product, and tutorials in a video game.

[Patrick notes: I would explicitly point out Blizzard games or the Half-Life series, which quite literally have this down to a science.  Play the first 5 minutes of Diablo 3 or World of Warcraft or Hearthstone or Half-Life and observe how they’re simultaneously effective at telling a story, manipulating the player’s emotional state, and also introducing several core UI elements of a piece of software whose user-visible complexity rivals that of MSWord or MySQL.]

A lot of times, people seem like they get really carried away about making the “core” game, or the essence of the software product, without really looking at the problem to be solved as, how do you even get people engaged, to begin with?

I wouldn’t say that onboarding is necessarily something that I would recommend waiting till the very end, when all the resources and time are exhausted and trying to staple something on after the fact.

I would really look at your product as the essence of what you’re doing is creating some amount of success in people’s lives. The onboarding process is getting people transitioned from a situation that’s probably frustrating them, because that’s why they’re trying out a new product, to a situation that they’re a lot happier with.  Then, they pay you money for that pain relief.

That is my general take on the matter, as a brain-dump.

Patrick:  Sure. I largely agree with everything in that general take. It’s something that I often went to clients and other people in the SaaS industry and try to impress upon them.

Again, for reasons like you were talking about with Conway’s Law, and the fact that this is not tracked anywhere in the organization, most companies are unaware of this.

Depending on the SaaS company, if you have a free‑trial sign‑up model, where folks can have a way of testing your software out, somewhere between 40 and 60 percent of the people who start a free trial will never log into the software a second time. They get that one free‑trial experience, and then they’re out of there.

Given that the first five minutes of the use of the software is all a lot of people are ever going to see, you really have to make that first five minutes absolutely sing if you’re going to convince, literally, half of the market for your software that they have to do just a bit more work to get the change in their life that your software is promising to them.

[Patrick notes: I occasionally experience pushback from the phrase “change in someone’s life”, but I honestly think that that is about where we should aim as software entrepreneurs.  You don’t need to have the impact of a religion or their spouse, but you should be at least aiming at “washing machine.”  Take a person who has never had a washing machine, introduce them to a washing machine, bam, that is a major improvement in their quality of life.  That is, approximately, how much you want to revolutionize a business process with your software offering.  (Or you can try to do it in B2C, but it’s really, really hard, and I only recommend doing so if you have a lot of money to spend, for reasons I’ve discussed before.)]

Patrick: Instead of just typing some information into the computer, they’re going to have to go to bat for your software with other people in the organization. They’re going to have to change the way they how do some process at their job. They’re going to have to change their habits over months and years to get value out of it.

That long trek to changing those habits and unlocking the value starts with just that first five minutes, so that first five minutes absolutely cannot be a blocker to them.

Samuel:  For those listening, I’m nodding vigorously right now. I completely agree. The 40 to 60 percent, I’m very thankful for you making public claims in that regard, because then I get to reference that in my material. Very, very much agree.

[Patrick notes: I’m a little afraid of citogenesis in the Wikipedia sense, so feel free to share stats from your own businesses if they agree or disagree with that range.  It is my rough rule of thumb for B2B apps sold on a low-touch free trial model.]

Samuel: I would also say, one thing that you touched on is it’s really important to make those first five minutes really great, but at the same time, I wouldn’t constrain the definition of onboarding to just that first‑run experience. A lot of times, when I see onboarding done really well, it’s because they have a really smart automatic‑trigger life‑cycle email campaign that follows, or things along those lines.

Then also, even before sign‑up, just orienting people around the value that your product offers and setting expectations and guiding their motivation and momentum in the right direction. If you think you’re signing up for one thing and you’re getting another, that’s an onboarding problem, but certainly the heavy weight could’ve been lifted long before that person signed up.

Patrick:  I have a priceless anecdote about that, actually. Everybody does experiments, right, with traffic channels, different acquiring customers, whatnot. I presume they won’t be too mad at me for talking about this.

Fog Creek has FogBugz, which is a bug‑tracking product for developers. Due to an AdWords campaign at one point, Google was sending people to the landing page who were looking for things like [bug for tracking boyfriend’s car].

[Patrick notes: Back in the day, I did occasional consulting for Fog Creek.  Assume that I caused this problem.]

The landing page, at the time, did not disabuse someone of the notion that FogBugz was the right product for them. They got some very interesting feedback in the customer support channel about, “I don’t see how I track my boyfriend’s car,” “How do I start tracking my boyfriend’s car?” et cetera.

Samuel:  [laughs]

Patrick:  You can think of that as an onboarding problem. Obviously, the solution was tightening up our Google campaign so that we’re no longer paying them a lot of money to send people who want to do various illegal activities with software. Setting expectations is really important.

I like that you mentioned life‑cycle emails. Some of the best individual wins that I’ve seen companies get are just circling back with someone in an automated or semi‑automated fashion, a day or two after them signing up, and saying, “Hey, you signed up for blah the other day, but it looks like you haven’t gotten around to using it. Here’s how to get started.”

Then you’re giving them X, Y, and Z, where if you can, X, Y, and Z are triggered based on their actions in the app. For example, hypothetically, if I was writing one for GitHub, and somebody had signed up for the paid version of GitHub, but 48 hours later they didn’t have a single repository in their paid version of GitHub, I might ping them and say, “Hey, thanks for signing up for GitHub.”

“Github the place where you want to get all your source code, but you don’t have your source code in yet, so here’s how you can start by getting your source code into GitHub. Or maybe that isn’t your job. Maybe that’s someone else’s at the organization. Here’s how to give them the instructions they need to start using your company’s new GitHub account.”

Samuel:  I completely agree. I think that looking at what are the external pressures that are forcing that person to be trying out new software to begin with, and being as aware of those as possible, is a total no‑brainer.

Especially B2B software, understanding who’s the person who needs to sign off on this check being cut, is there an IT review of some sort that needs to happen, can you create a PDF that they can slide across the desk to their boss that explains the ROI of your product instead of hoping that they can come up with something clever on their own ‑‑ those are all things that I would highly recommend doing, for sure.

Patrick:  That ROI calculation is priceless. I actually do that in a scalable fashion for Appointment Reminder. Somebody, several weeks into a trial, once emailed me when I said, “Hey, your trial is coming towards the last couple of days.”

Since I have their credit card already, it’s just like a courtesy notification, like, “Hey, we’re going to charge you in three days. If you don’t want this to happen, cancel now.” That is not actually the copy I use, but that’s the sense of it.

They wrote me back and said, “Hey, Patrick, really appreciate the email. I’ve got a question. My boss is asking me for an ROI calculation on this software. I don’t know what ROI means and I don’t know how to calculate it. Can you do that work for me?” I’m like, “Well, since it’s going to help you pay 80 bucks a month for my software, I can certainly help you out for that.”

I attached an Excel spreadsheet, where I made some assumptions about their level of use of the software based on what I had seen in the database about them and assumptions on their cost structure as a business. I said, “OK. It turns out that this is saving you,” make up a number, “$500 a month. It only costs you $100, so that’s an ROI of 500 percent.”

Then, right after I sent that email, I’m like, this calculation is generalizable to everybody, and there’s approximately nobody who would hate hearing that they’re getting 500 percent ROI. I just changed the email that they’d gotten that eventually prompted them to ask about ROI, such that the computer automatically calculated the ROI if they were getting a happy number.

[Patrick notes: Maybe this would be easier to understand with a visual aid?  Here’s the “trial progressing well” email, which goes out on day 20 for trials which the system has heuristically decided that the customer is likely happy with Appointment Reminder.  I’ve taken the liberty of marking it up a bit to direct you directly to the ROI-focused portion.

Appointment Reminder ROI Calculation in Email

]

If it calculated the ROI and they were getting an unhappy number, it instead sent them a second email, which was ‑‑ informally, it’s called “trial unsuccessful,” although that’s not actually in the email to them.

It basically says, “Hey, I’m a small businessman. I understand that sometimes I want to do something in a given month, and life just gets so freaking busy, and I’m not successful with getting that done this month. I totally understand how that might’ve happened to you, too. If it did, drop me an email. I’d be happy to extend your trial by another month.”

Maybe a quarter of people who get that email will write me back and say, “Hey, I wanted to use it. I just got busy. Can you extend my trial?”

Then that gives me an opportunity to both talk to them, figure out, if there was an issue with Appointment Reminder, how do I fix it such that they won’t need the second month. Also, the value of a trial that bounces out of your system is zero. The value of a trial that’s still in your system is nonzero.

To a first approximation, it’s always to your advantage just to give people the extra trial, especially if you don’t advertise that you’re doing that ‑‑ which, oops, I just told the podcast with 40,000 people, but none of you will pay me money so it’s fine.

Samuel:  [laughs]

Patrick:  Life‑cycle email is where it’s at.

Samuel:  I concur. Yeah.

Patrick:  One of the things that I see trip up folks a lot when they’re doing onboarding is sometimes the folks who are in charge of onboarding ‑‑ and this goes back to your organization point ‑‑ might not be the folks in charge of product.

Prior to customer.io and ‑‑ shoot, what’s the other dot‑IO company? Intercom.io, which gives people who are less technical the ability to set up these complicated life‑cycle email chains without having to necessarily dig into the code of the product to do it for themselves.

A lot of the marketing or customer success teams might have had a little difficulty hooking up life‑cycle email. In addition to life‑cycle email, what are tools that someone who might not have total control of the technical aspect, what could they do to influence the customer in their onboarding phase?

Samuel:  Hopefully I will be able to point to something that I am making sometime down the road.

Patrick:  Oh, please do.

Samuel:  In the meantime, I am a big fan of Jonathan Kim and what he’s doing at AppCues. That’s a piece of third‑party software that I would recommend people check out.

This maybe is cheating a little bit, but looking at live‑chat software, like Olark, just being present in there and understanding where your onboarding experience is breaking down, to me is really, really valuable. Most people who are faced with the onboarding dilemma in their company tend to be more like user experience or product, but just don’t really have the resources to pull it off.

Even if you’re just living in that world and can just say, “Guys, people think that they’re signing up for a bug to track their boyfriend’s car or whatever. Can we just make a copy change or something like that?”

Typically, those can get pushed through. It’s not like it’s a whole new feature, things like that. I would really recommend having live chat in that moment, because you can find out where one person’s going wrong and then make changes that affect the untold thousands of other people that will be following them.

The Fundamental Feedback Loop Of Low-Touch SaaS Companies

Patrick:  That is, by the way, just one of the generic secrets of running a SaaS company at scale. You do lots of stuff that doesn’t scale, and then use the stuff that doesn’t scale as fuel for the mass‑scalable approaches that affect the rest of the customer base that doesn’t talk to you.

Whether that’s automated email sequences, website copy changes, whether it informs your general marketing strategy, whether it drives changes to the product to make things easier to understand, et cetera.

Samuel:  Completely. One thing. I was speaking with Nick Francis from Help Scout the other day, and he made a really great point, which is, even if you’re using your own product or eating your own dog food, you’re not dog‑fooding your own onboarding experience. You’re not signing up for your product over and over every day.

A lot of times, you can be pushing out changes over the course of three weeks or three months that change A, B, and E, collide somehow and mess up your onboarding interface and the onboarding experience, but it’s a real blind spot for a lot of people. That’s another big reason that I really recommend getting a live‑chat box, like Olark or something like that, installed, just maintaining a presence there.

Patrick:  That’s actually a really good point. One of the exercises that I used to go to with consulting clients was, roughly on a quarterly basis, I would have people take out an actual, honest‑to‑God, physical credit card and sign up for the product. Not on the staging server, not through the API, not using autofilled details provided by the browser.  Buying the actual product from the actual production system. Put in a credit card, buy it, and see if everything works, and see if everything was optimally optimal.

I think sign‑up flows, purchasing flows, et cetera, they have a great tendency to go stale, because they get implemented by a junior Rails engineer in the first two months of the company, and since they <airquotes>”work”</airquotes> nobody ever looks at them again, until you break them in such a way that sales go to zero.

Samuel:  It’s crazy to me. I mean, you spend so much. Your team breaks their backs to create features that people would bother signing up for, and your marketing department is killing themselves trying to get more and more people to sign up for them, and then looking at just even getting people introduced to that or finding some sort of wins.

Then, even if they defy all the odds and get that far and they’re ready to pay you, like let’s put a ring on this, and then that experience breaks down. It’s super frustrating, so yeah. I completely agree.

Patrick:  You would not believe how many times you have really good, passionate product people in a room, these folks who would not tolerate a single comma out of place on a preferences screen, and you put them in front of the credit‑card form and ask them to buy their own product.

They put in their credit‑card number like it’s written on the credit card, with spaces, and the form blocks them from doing that.  “Your credit card number cannot contain spaces.”

Flag on the play. Why are we telling a human to do something that a computer can do better? Let’s fix this.

Samuel:  I completely agree.

Patrick:  That can be your takeaway. Just take out your credit card right now, try to buy whatever it is you sell.

Anyhow, one more thing on the topic of user onboarding, before we go in a new direction.

Samuel:  Sure.

Patrick:  I’d like to talk about one of my favorite tactics for improving the onboarding experience, even though it is a bit resource intensive: the product tour.  There’s the less‑invasive changes you can make to an onboarding process, like changing the marketing copy for the sign‑up to establish expectations better, changing the life‑cycle email copy or the life‑cycle email timing to rescue more of the people who might not have a hundred‑percent‑successful first‑run experience.

Or to not even rescue people but assist them in being more successful with the software, for folks whose decision‑making process just naturally doesn’t occur at their company in a five‑minute increment.

The more resource‑intensive thing that I do for my own products and do for a lot of clients is implementing a post‑sign‑up tour in the application. I was wondering if you could distill some experiences that you’ve had of doing that with clients, sighting it on the Internet, and dot‑dot‑dot.

[Patrick notes: Verbal ellipses?  Sure, why not.]

Samuel:  That is an area, philosophically, I have some issues with it, to be honest. I somewhat hesitate to anti-recommend it, given that you’ve presumably done a lot of experiments and had great success with it.

[Patrick notes: Careful Samuel and all you other guys!  I have actually done a lot of experiments about this particular thing, but because there is finite experimental bandwidth and because often we don’t have enough traffic post-signup to get results before the sun goes nova, I will often ship things based on my/the team’s best guess as to what user behavior is without actually testing them.  People assume I never do that because I talk about A/B testing so often, but that assumption is dangerous.

I also have to point out that, in the context of user tours, I am aware of ones which were major wins and ones which were “worthwhile to do but won’t make a difference to our overall numbers” and other ones which had to be yanked out of the product at a later date, for a few reasons.  Like any tactic, they’re heavily sensitive to the particulars of one’s own use case, one’s implementation ability, and uncontrollable vagaries.]

Samuel: I don’t want to pooh‑pooh it out of hand, but I think that there are a couple issues of going down the road of basically what you might call a tool‑tip tour or something like that, where you’re spotlighting different parts of the interface or things like that.

[Patrick notes: Tooltip tours are in vogue because they’re comparatively easy to implement, relative to all the other ways of doing a tour experience.  Unless you put a lot of thought into what you’re actually getting people to do with the tooltips, they are not value creating.  I see many more tooltip tours that are vexatious than ones which, like the Blizzard example earlier, excite the user while simultaneously instructing them on how to get started with saving the world from orcs and poorly managed projects.]

Samuel: One, going back to my initial point of tacking onboarding, stapling onboarding on at the very end of the product cycle, a lot of times, I think people use it to literally cover up user‑interface issues that they have. A lot of times, people will use it as a crutch to say ‑‑ I’ve literally seen a button that says, “Create project,” and there’s a tool tip that points to it that says, “Click this to create a project.”

There’s a really wonderful Flickr group that Jason Fried from Basecamp started a long, long time ago, called Signs on Signs, where he takes pictures, or he did at the time, took pictures of a sign in a library that says, “Please be quiet,” and then there’s a sign attached to that sign that points to it that says, “Look at this sign,” or “Attention, please be quiet,” or things like that.

A lot of times, if your interface is messed up, adding more to it that literally points to the parts that are confusing is not something that I would recommend. I would really recommend just fixing it to begin with. There’s that.

I think another issue with tool‑tip tours and things along those lines ‑‑ I’ve seen your Appointment Reminder tour, and it does not qualify for this critique, but a lot of others, I think, do ‑‑ is that they’re very focused on introducing people to features or introducing people to parts of the interface more so than they are at guiding people to actually accomplish something.

A lot of times, you’ll see six tool tips that all show up at the same time, and it says, “Click here to do this,” or “When you need to do this, go over here,” things like that. They’re not actually walking you through getting something accomplished. They’re just basically asking you to remember where to go when you’re faced with a situation in which that button would be useful.

[Patrick notes: This is, indeed, a failure case.  I pointed it out at one consulting client and asked who to talk to to get it fixed, and was told that nobody “owned” the tour, which is another failure case.  They thankfully came to the conclusion that that was suboptimal and tasked an engineer on it.]

Samuel:A lot of times, when I see tool‑tip tours done poorly, it’s because they ask people to learn by remembering and not learn by doing, which is not the case with yours.

You focus on one thing at a time, and the entire thing is about let’s just guide you through, hold you by the hand, and get your first appointment scheduled, and understand what it’s like, what kind of phone call you’re going to be getting when that happens, and things like that. I would say, not in your case, but a lot of times, that can be an issue.

Then, one other thing to really look for with tool‑tip tours is that they can be, how would I put it, sequentially fragile. There are a lot of times where, if your plan is to get people through maybe a 15‑step tool‑tip tour workflow, but if there’s an issue where somebody thinks they’re supposed to click on one button, but they’re actually supposed to click “OK” within the tool tip or something like that.

All of a sudden, it disappears. Getting back into it, do you start back at step one, or step seven, where you left off? Things like that. Using that as a highly linear narrative device can go sideways really quickly. That’s another thing to be concerned about.

Patrick:  Just in terms of building stuff, when I build out tours, partly because I’m aware of the fact of sequential fragility, there is generally an easily accessible bailout button for the tour at all stages of the process. When somebody bails out, it should probably keep them in a consistent state that doesn’t totally hose their account.

That’s not universal on all tours. Either you give them a wiped‑clean account, or, ideally, you would just give them full control over the interface, but keep the state of the account as whatever they were just seeing, to not have the leaky abstraction of, OK, the tour‑mode stuff was actually just fake objects created in a fake state that we displayed to you, but it was actually a lie, which is how a lot of them are implemented.

[Patrick notes: Why?  Well, since the tour will often involve running through the core use case for the application, it will necessarily plug very deeply into the core workflow / business logic / etc.  That is a non-starter at some places, so rather than changing the core workflow / business logic to accommodate a special tour state, they just fake the existence of the happy path of the workflow with smoke and mirrors.  Appointment Reminder’s tour, by comparison, is done with maximum verisimilitude (and a whole lot of elbow grease, which involves some hackery deep in the bowels of the application, like a special case in our outgoing phone system which detects Hollywood phone numbers of the (555) 555-XXX format, short-circuits actually attempting to call them as you’re directed to do in the tour, and then simulates the results of interaction by a human with the phone call that would have happened but for the short-circuit).

Samuel:  We almost think about, I can almost guarantee that you, myself, and every listener for this podcast has downloaded some sort of mobile app that’s been greeted with a series of welcome screens, and gone swipe‑swipe‑swipe‑swipe‑swipe to just get through it to get to the actual thing. Then not know what was covered in the thing that you just skipped over and not really know how to proceed from there.

I would say any kind of intro or tour or anything, create it around helping people make progress and move forward, but don’t absolutely depend on that.

I would design for a null state, where, basically, OK, is it still going to make sense and we’re still going to be communicating the most important things when the dashboard is empty or things along those lines, and not really count on the hand‑holding as your only source of orientation and motivation.

Put Better Default States In Your UI For New Accounts

Patrick:  Definitely. Speaking of null states, often, if you’re in a project‑management app and you have no projects, the first screen will say, “You have no projects.”

Samuel:  Right, kind of accusatory.

Patrick:  I would always say, rather than saying, “You have no projects,” OK, if you’re in development mode, sure. Whatever. Put that up there, like zero of zero results returned for projects.

When you’re shipping that to actual customers, just a quick, one‑line if statement, replace it with a, “Here’s how you can get started creating a project.” Then most people just put an arrow that points to the “add new project” button or they say, “Click above on ‘add new project’ to get started.” Rather than that, I would give a little bit of goal‑oriented instruction.

Samuel:  100 percent. The only thing I would add to that is not only prompting them to fill it up with something, but also, “Here’s the value of doing that to begin with.”

Patrick:  Exactly.

Samuel:  “You don’t have any projects yet, but this is where you’ll be able to see which ones are at the biggest risk of not shipping on time. Click here to add your first one.” Something like that, to me, that’s my general recommendation. Because just changing it from, “You don’t have projects” to, “Click this button to create one,” it’s not making it a meaningful action.

That’s a term that I use over and over again when I’m looking at onboarding experiences. Do I even know what I’m doing, or do I even care about what I’m doing? Can you help me at least get to one, if not both, of those?

Patrick:  One of the things I really like is when you provide people with a vision of the future they’ll have if they’re using the software, ideally a vision more focused on them than just focused on your software. For example, I think Baremetrics does this very well.

They’re a company that slurps data out of your Stripe account and presents a variety of metrics for you. My recollection is, when you start using Baremetrics, in the pre‑slurp state, it’s got nothing to show you. Rather than showing you, “We’ve got nothing to show you,” they show a grayed‑out version of their real stats.

It’s like, “Wow. You can see all of this stuff, except for your business, if you just click the Slurp button and give us however much time it takes to do the Slurp out of your account thing.”

Samuel:  That can be like a PNG. You don’t have to build in a feature that has all this mocked out or whatever. Yeah.

Patrick:  Is that how it’s pronounced, PNG?

Samuel:  I always call it “ping.” I don’t know. Do you just say the letters?

Patrick:  OK. Here it’s PNG, but then again, I’ve lived in Japan for the last 10 years.

Samuel:  Do you call it a J‑P‑E‑G, or a J‑peg?

Patrick:  Wow, I don’t know. It’s different than “jiff.”

Samuel:  [laughs]

Patrick:  “Jiff,” and then, I don’t know. It’s been too long since I’ve been in a Japanese office, despite being here for 10 years.

Samuel:  That’s something to celebrate, I guess.

Patrick:  Oh, yes. Every day that I’m not a seller man is one more day of actual life. Yay.

Samuel:  [laughs]

How Samuel Set Out To Become, And Became, The “User Onboarding Guy”

Patrick:  We covered onboarding tours a little bit. We covered a bit of the design of UX when someone is getting started with a product to feel like they can get more success and not just have to do meaningless busywork until they get to the good stuff.

We covered a bit of life‑cycle emails and whatnot. I’d be a terrible businessman if I did not mention the fact that if you go to www.lifecycleemails.com, there’s a course from me teaching you how to do that. A little plug.

I mentioned you have the blog at useronboard.com. Maybe blog isn’t the right thing. A site, where you go into this customer‑onboarding thing in a bit more detail than people typically do in a blog post, and you do tear‑downs of folks’ user‑onboarding experiences, the pre‑sign‑up process, the sign‑up process, the post‑sign‑up process. You dig into what emails they send.

Samuel:  Slideshows.

Patrick:  I thought this was really, really smart back when I first got to know you, in that you very clearly said that, “OK, there’s a million UX designers out there. I’m going to be the one that just takes user onboarding and owns that.”

How’d that work out for you? I know you wrote a book on it later, and we can talk about that in a moment, too, but I presume you also do a bit of consulting and whatnot?

Samuel:  I would say that going after a niche has been a highly lucrative decision on my part. The consulting and the book sales have both been really strong. Really, it’s been a pretty fun ride.

Patrick:  Awesome. Mind if I rewind the tape to a little bit before the fun ride and whatnot? What got you into this in the first place?

Samuel:  Interestingly, you were saying that I wrote the book later, but the book was actually what got me into it to begin with. I was a user‑experience generalist for years. I was at this weird in‑between place.

Looking at things like conversion‑rate optimization is not typically something that’s part of the UX wheelhouse, but I was always really, really interested in ‑‑ I think that you’re actually probably a good representative of this mentality of, “Let’s find out what the problems with this flow are and empirically demonstrate that we have improved upon it.”

To me, I guess, the job to be done of what somebody hires a UX consultant for is typically not that. I really struggled with that for a long time, looking at a competing set of passions that were between qualitative and quantitative, so user experience versus conversion‑rate optimization, and then the ever‑contentious term “growth hacking.” [laughs] Was that as well.

They all embody the same thing, which is aligning your success around your users being successful and paying attention to whether that’s happening and where that’s breaking down, and then being able to measure the impact of the way that you’ve improved upon it.

Let’s see. Where do I even start here? I decided to write a book, because I wanted to take a product to market, but I didn’t want to go six months to a year into developing some sort of a SaaS product and then take it on the chin with a bunch of rookie mistakes about just how to price something or how to create a landing page that sells it or how to have a product launch or things like that.

I thought, instead, “I’ll just have a really constrained product, in the form of an eBook. Surely I can write that in a couple weeks.” Which was, spoiler alert, not the case. [laughs] Then be able to just get my toe in the water by getting something out there and just go through that experience and learn from it.

Very naively, I put up a landing page for the book, and I titled it “Customer Growth.” It was basically all about “Grow your customer by helping your customers grow.” That was the one‑liner for it.

A lot of issues there. One, that’s not a thing that people explicitly care about. It’s more of I would have to write a very philosophical thought piece on why people should care about it to begin with, and convince them of the value of the subject, before even convincing them of the value of the book that covered said subject.

The best way I can describe it is nobody was sitting down and saying, “You know what? We have this problem with this thing that I’ve never heard of. I wonder if there’s a book out there on it.”

Patrick:  Amen. If you have to convince the market that they’ve got a problem, that may be an option, but you need to have a previous success behind you or a war chest or maybe VC investment.  [Patrick notes: But that wouldn’t be my first choice for any of those folks, either!  Pick the screamingly obviously high-impact problems first.  Plenty are left unsolved.]

For those of us who are just getting into business for ourselves, you should not be targeting problems that you have to explain to people that they have. You should be targeting problems that they know they have, that when they wake up in the morning, it’s one of the one or two things that is keeping them up at night.

That’s a mixed metaphor. One of their one or two top hair‑on‑fire problems for today. Virtually, every mistake I’ve made in business in terms of product selection has been not targeting those, but that’s another podcast entirely.

[Patrick notes: I do not regret Bingo Card Creator or Appointment Reminder, but if I got a do-over, I’d pick something higher saliency in a tightly defined commercial niche that I would like exploring and knew I had “unfair” advantages in.  That would probably be selling software, though there’s an interesting meta question in whether I would be any good at selling software but for the experience of BCC/AR and taking advantage of the doors they opened.]

Samuel:  The one thing that I did right, though, was fully committing to getting the book out before I started. As I guess we’ll get to in a second, there were definitely some hard stretches in the middle, where people would ask me how the book was coming or something like that.

I would very truthfully tell them that I was glad that I didn’t know how hard it would be before I started or I never would’ve started. I was equally true about how hard it was, and also equally true about how glad I was that that wasn’t the case, because I was fully committed when I started and I was just absolutely going to see it through.

I put up the landing page, wasn’t really sure how I was going to go about writing the book or establish my expertise. Obviously, Nathan Barry’s information out there was a big source of help and inspiration. He’s pretty email‑list‑centric. [Patrick notes: For a reason.  Email is the secret weapon of low-touch marketing like airplanes are the secret weapon of modern militaries.  It’s not a secret at all — if you don’t have them, you’re giving up a tremendous advantage.]  I was like, “I guess I should start an email list and see. Maybe I could get up to hundreds of subscribers or something.”

Literally starting at zero, not even having an email list, that was like, “OK, I’ll put up a landing page, get people to sign up.” I had to figure out how were people even going to be getting to the landing page. This was the definition of a cold start, I guess you could say.

As a UX consultant, generalist, at that time, a lot of times I would do something very much like the tear‑downs that are on the User Onboard site right now. I was like, “Man. I’m already writing the book,” which is really hard, because I’m a painfully, painfully slow writer, which is another issue. I was like, “Am I going to try to guest‑post on other blogs?”  [Patrick notes: I did a guest-post tour when I launched my Lifecycle Emails course.  I cannot recommend it for generating sales, though for someone with less of a platform it might make sense for audience building.  I think I wrote six good essays on the topic for other people, and seen in hindsight, six good essays for my own purposes would be better than six good essays for other’s sites.  I think I have about $3k of attributable sales as a result of that, and even if you double the number to count ones which I missed due to the vagaries of tracking, I’d rather have the essays than the money, both for the initial results and for the residual portfolio value.]

Samuel: That’s even more writing on top of writing the book. I’ve heard sometimes you just basically get a really deemphasized link in the byline, and it results in three people signing up. I can’t spend 15 hours on a blog post and hope that that happens.

I was like, “Man, if only I could share these tear‑downs that I’ve been doing.” I’d feel weird, because they were commissioned and paid for and not really owned by me. I was like, “Oh, I can just pick a company and not ask them to pay me for it and just do whatever I want with that.”

I just picked a company at random, which was OpenTable, and recorded the experience, and I was like, it just didn’t really come out right. Their onboarding experience is very confusing, or nonexistent, almost.

I had to scrap that one. It was getting kind of late into the day, and I was like, “Maybe I will do this. Maybe I won’t. All right, screw it. I’ll try one other company.” That company, once again, just completely at random, was LessAccounting. Your listeners would probably be ‑‑ it’s kind of in a similar space, I guess.

Patrick:  LessAccounting, for those of you who don’t know it, is a bootstrapped software company that is basically a stripped‑down competitor to Quicken.

Samuel:  There you go, yeah. Also, they seem to really maintain a presence in the bootstrapper community and stuff. That’s what I was referring to.

Patrick:  Oh, yeah. It’s a funny little bit of community inside baseball, I think. Sometimes we overestimate how much folks know about the <airquotes>”scene.”</airquotes> If you hang out at Amy Hoy’s conferences and go out to BaconBiz every year or go out to MicroConf every year, then you’ve run into the LessAccounting guys and you know who they are.  (I would bet you that the average Quicken-using accountant or bookkeeper in Normal-Bloomington does not.)

[Patrick notes: I think this is observation is widely applicable.  Our community is simultaneously bigger than we realize and yet smaller than we think it is.]

Patrick: I happen to know that for a lot of the world it’s the first time they’re hearing about it right now. By the way, they’re good software. You should use them. A plug. Yeah.

Samuel:  Actually, speaking of which, that was back in November of 2013, so not even a year ago, I was one of the people who didn’t know who they were. I’d known them just because they’d been around for several years, didn’t really know that they were highly involved in the bootstrapper “scene,” or whatever that might be.

I was like, “All right, they seem friendly enough, at the very least,” went through, created the tear‑down, put it up on SlideShare.

I think it was the end of the day, and SlideShare messed up the formatting and the aspect ratio. I just wasn’t really happy with the product, but I was like, “I’ll just go home and talk to my wife, and tell her I blew another day while I’m trying to get this book out.”

I posted it, and the next morning I got an email from one of the co‑founders of LessAccounting. I see it in my inbox as the subject line and see who the email’s from, and I was just like, “Oh, no.” I was sure that when I clicked on it, it was going to be him coming and being like, “Oh, thanks a lot for airing our dirty laundry and pointing out how our onboarding experience isn’t working, and who even are you?”

It turned out to be completely the opposite, that he was like, “Thank you so much for pointing all these things out. We already made a bunch of the changes that you recommended. I see you’re writing a book. How can I help promote it?”

It was just total night and day from what I was expecting as a worst‑case scenario, really just a super‑supporting response. He wound up featuring it on the LessAccounting blog, and that was really the very first thing that I did that got a decent amount of traffic and a decent amount of sign‑ups for the email list and things like that.

Patrick:  Awesome. I think this strategy is very generalizable, and in fact, folks have done it in a lot of circumstances, and it often works well. Dustin Curtis is a designer. He basically made his name by taking a few big Fortune 500 company websites, doing redesigns on them.

I might have issues with that particular work product, but that’s neither here nor there. 37Signals, back in the day before anybody knew who they were [Patrick notes: 2002 — Basecamp and Rails were in 2006, I think?], just did unsolicited redesigns of the FedEx application and said, “Here’s all the mistakes that FedEx is making.”

It wasn’t actually FedEx, because I think they were probably worried about getting sued, but it was a purple‑looking delivery company.

[Patrick notes: I apparently misremembered this — it appears to actually mention FedEx.  Their BetterBank was a better example of a generically attacked problem.  Though I’m fairly certain that somebody has done a You All Know Whose Website I’m Talking About redesign without actually using the trademark — can’t recall who at the moment.]

Samuel:  [laughs]

Patrick:  They just had purpledelivery.pdf, with the redesigned with the purple delivery company’s Web app, which featured package tracking as a first‑class citizen rather than the 15th thing that you wanted to use.

Especially, if you do this for other people who are closer to the us‑es of the world than the Fortune 500s of the world, folks, often, the first impulse will not be send a cease and desist or be very annoyed at you. It’s like, “Hey.” Folks describe me personally as Internet famous, which is a funny, funny word.

To this day, my heart lights up anytime someone shows any bit of attention to one of my products. If you want to screen‑grab everything and show what I’m doing wrong with the world or how my pixels are out of place, I won’t think, “Oh, he’s insulting my pixels.” I’ll think, “Yes! Totally! Someone noticed me! That’s awesome!”

Samuel:  Just to briefly touch on the whole unsolicited‑redesign thing, I can see how I’m in a similar space as that, but personally, I’m really not a huge fan of unsolicited redesigns as a thing, largely because it’s a very surface problem.

You’re basically saying, a lot of times when you see them, especially on Dribble or things like that, it’s, “I didn’t think this was pretty, so I made it prettier,” where you don’t really know what’s working that well, what’s not, what kind of constraints the team is faced with. You’re probably not even necessarily the primary audience that the product was intended for.

For a lot of reasons, when I’m creating a tear‑down, I try to be very, very conscious of the fact that there are real people who had made this under real pressure, and it was to serve a job that may or may not be something that was…I’ll literally go through the sign‑up process to create the tear‑down.

It’s not like I’m even really genuinely trying to make it work for me in that moment. There’s already that, and maybe I’m not even a key audience member at any point in time. There are those issues.

Then also, I’ve actually had conversation with people, where maybe I’ll say, “Yeah, deciding to do that made me scratch my head,” or “That doesn’t really conform to the “best practices” or whatever that might be.” The design team will be like, “Yeah. Yeah, we hated it, too, but it’s working really well.”

Not having visibility into the conversion funnel or whatever that might be, and then also just not knowing about what kind of internal pressures they’re dealing with in the office, I really, really try to say, basically, “Objectively, these are what our best practices are, or not, considered to be generally within the community.

Then also, anecdotally, as a user, I was legitimately confused when I went through this.” Really, really distance myself from saying, “This is objectively wrong” or anything like that.

Patrick:  Right. I think that is a great attitude to have about it in general, and probably a karma‑maximizing attitude, if you’re hoping to borrow an audience as a result of publishing these things.

Also, I think, as somebody who has worked in a lot of companies and seen the sausage get made, it absolutely tracks with the internal human/political/resource‑based constraints on why something might not be totally optimal. There’s a lot of times where, heck, I’ll own it. I won’t blame the client, I’ll blame myself.

There are something that I have shipped where I could point to you X, Y, and Z decisions of the things that shipped today and say, “I hate X. I hate Y. I hate Z.” I had 100 points of awesomeness in that engagement, where awesome is an arbitrary resource. Fixing X would’ve required 20 points of awesomeness. We just had other things to spend awesomeness on, so we just shipped it out the door.

Samuel:  There you go.

Patrick:  Often, a particular team or person in the organization just did not want to budge on Y, and they had been really cooperating on some other part, and so you trade tit for tat. That happens all the time in real life.

Anyhow, going back to the book for a moment.

Samuel:  Yes.

Patrick:  You release some of these tear‑downs, and both the folks who were, quote‑unquote ‑‑ I hate that word, tear‑down, by the way. I’d like to say, “build‑up.”

Samuel:  [laughs]

Patrick:  You released some of this feedback on people’s onboarding processes. Some of the folks who were featured in this feedback found it really, really useful to them, like the guys at LessAccounting.

They spread all over the Internets to these people’s preexisting networks, as they said, “Hey, someone has taken this interest in our business and given us really useful feedback. We could read the writeup.” Thus, you got, what, a few hundred or a few thousand people to subscribe to your email newsletter?

Samuel:  Specifically, in the early, early days, it was maybe a couple hundred, when the book was still called “Customer Growth” and people probably didn’t really know what they were signing up to get.

Through the success of the tear‑downs ‑‑ so I did the LessAccounting one, and I was like, “Well, that went well. I should do another one.” Then I did Basecamp, and then that one got shared a lot. I think that wound up Designer News, the front page, for quite a while.

At that point, it was suggested to me that I stop using SlideShare and instead create a site that’s dedicated to those, where I could control the conversion timing, the asks, basically. I also just wasn’t really a super‑huge fan of the user experience on SlideShare, either.

Patrick:  Can I circle this point and star it, guys? There’s a lot of folks who put their best work on 3rd party sites. In my case, some of my best work is on Hacker News. In other folks’ cases, it might be on Dribbble, on Twitter, on Facebook, on Medium, et cetera, on GitHub, a major one for the developer community.

For things that are central to your career, building up a public portfolio, you really want to be able to control all aspects about that, both how the work is presented to people who will be future decision‑makers about your career and what you emphasize about it.

If you embed something in GitHub, you’re going to end up with a very GitHub‑y experience for that, regardless of what it is. The way that people consume that artifact that you have put on GitHub will be a very GitHub‑focused consumption experience rather than a you‑focused consumption experience or a them‑focused consumption experience.

Samuel:  Yes.

Patrick:  I would strongly encourage, from both a UX point of view and a “maximizing the future value of your passport to your future self” point of view, that you put your best work on your own darn website. Think about wrapper‑type issues, like:

Should I put a logo on it?  [Patrick notes: If it represents more than a work-week of effort from you you’d be crazy to not spring $100 or $200 for a logo.  I strongly feel like the logo, the dedicated web presence, and the non-zero effort put into documentation for A/Bingo were reasons it redounded to my favor.]

What sort of asks should I be having on the page? Whether that’s asking someone for their email address, or, for those of you who might not be selling a book but might be selling freelance or consulting services, maybe you ask them to send you an email and ask for a quote, or “Send me an email. I’d love to have a Skype chat about this if it interested you.” You convert them and do a request for a quote or something on the Skype chat, et cetera.

Yes, asterisk, asterisk, asterisk. You should absolutely have it on your own website. Which is, by the way, to this day, why ‑‑ well, aside from Hacker News ‑‑ almost all of my writing is on either my own blog or on my other sites. Most of the things that I produce even for free, the canonical source for it is on my Web presence rather than other people’s Web presences.

I love GitHub, don’t get me wrong. In the absence of contracts that I can neither confirm nor deny exist, my job is not to make GitHub money. It is to make my family and I money while producing stuff of value to society, so I tend to keep that on my own Web presence rather than theirs.

Samuel:  I completely concur.

Patrick:  Anyhow. You did the smart thing. You moved some of the stuff from SlideShare. By the way, you can still host stuff on SlideShare. Just put the embed in the write‑up in your own site, and then it will collect the links and citations that people are looking for.

Samuel:  There you go.

Patrick:  That’s what I do for all my presentations, by the way. You’ve created a Web presence for this.

Samuel:  Right. I guess, at that point, it was very clear, like, “Oh, user onboarding is the thing that I should be talking about, not a component of this very vague thing that I want to talk about.” I guess a good litmus test is, if you’re going to be writing an eBook, is it something that people would find helpful?

Are you doing it to help people, or are you doing it to preach at people? I made the shift from preaching at to trying to help when I made the shift from writing a book on customer growth to writing a book on user onboarding.

At that point, too, that’s when I bought the User Onboard domain, because useronboarding.com was already taken, created the site in a weekend, and transitioned the slides over to that, and then just kept coming out with new tear‑downs. Basically, it was like one a week at the beginning. At that point, the email‑list sign‑ups went from a couple hundred to a couple thousand, and then even further from there.

Nicely enough, the book’s already been out. I didn’t really launch it very well. I set out to do it so I could learn rookie mistakes, and boy, did I make some. A really nice thing about it, too, is having an ongoing Web property, there’s some repeatability to it, I guess you could say.

Every time I put out a new tear‑down, I know that’s going to result in X‑hundred more newsletter sign‑ups and Y more book purchases, or whatever that might be. It’s been nice to have as just an ongoing asset, for sure.

Patrick:  This is something that I really like about this emerging publishing model.  In the old model, you contract with a publisher, you write a manuscript, they pass it through a few other professionals, put it out, and it goes to bookshelves across the country, it sells a thousand copies. Then is available for back‑ordering from anyone who wants it, but nobody will because they are very launch‑focused.

When we control the assets and we control the marketing plan, we cannot just have a launch‑centric approach to the value we’re creating. Most of the value’s not created just by launching something. It’s created by building something of value and then figuring out what the right recipe of things is to get people to be exposed to that thing of value, and you can tweak and adjust over time.

Even in the ‑‑ going to use a word I hate ‑‑ information marketing space, a lot of it is very launch‑centric. I think that’s partially because a lot of folks who are broadly in that space don’t produce things of value, and then after the market figures out that the new thing that has been produced is not of value, sales go to zilch. For people who generally produce books, software, et cetera, of value, they often have a substantial long‑tail component to the sales.

If you follow the usual email/launch‑centric approach, where you’re collecting email addresses, the thing launches, you get 10,000 people or whatever with an offer to buy the thing in the first two weeks, then you typically will get a spike at launch day or in the first two weeks.

There is residual value to having that, both in terms of quantifiable money in your Stripe account, residual value, and also in the fact that you can point, in conversations with people three years from now, you’ll still be the guy who quite literally wrote the book on user onboarding when you’re talking to potential consulting clients. Or if you have a new book, it will be by the author of the bestselling book on user onboarding, dot‑dot‑dot.

Samuel:  For sure.

Patrick:  I wrote one book, by a nontraditional publisher, Hyperink, called “Sell More Software,” on Amazon. One of the things that traditional publishers tell you is, “You should write a book. Not because making a book will make you money, because it won’t, but because having written a book on something is great for consulting.”

I always thought that was self‑serving BS.  I still believe it is self‑serving when the publisher tells you that, but it is not totally BS. There are some clients who really, really connect to having a book available on Amazon. I happen to know that there’s a few copies of mine boxing around at Fortune 500 companies at the VP level, which surprised the heck out of me.

Samuel:  That’s awesome.

Patrick:  I also produced a video course two years ago about life‑cycle emails, and that just has, as I write more stuff for my email list and people get added to the email list, and then eventually, 30 days later, they get a brief blurb about the life‑cycle email course in one of the emails that on‑boards people onto my email list. It produces just a nice, happy Chinese water torture of sales over time.

Samuel:  [laughs]

Patrick:  I don’t do any active promotion for it, and it’s been out for two years. It’s probably still made $10,000 this year, [Patrick notes: for values of $10,000 equal to $7,500] which is a pretty nice place to be for not doing additional work. Would you mind if I asked, how many people do you have subscribed to your email list these days?

Overnight Success, Isn’t.

Samuel:  A little bit over 11,000.

Patrick:  That’s actually right about where I am, at about 12‑ish or so. One of the things that I frequently get when I’m talking to people about making stuff and then selling it, about the Internet, is that folks have unrealistic expectations about what “Internet fame” is.

11,000 subscribers to an email list is not a number that you have to be an international celebrity/Internet man of mystery to hit.

You and I are both, total mortals, we take the not too difficult to comprehend tactic, of doing the thing we were good at in public, and saying, “If you want more of this stuff, give me your email address, I am hooking that up to an easily available mail provider, which costs less than a cable bill, a month, and then, just continuing that for a year, in your case, or 10 years in mine.”

Oh boy! Can’t believe that I have been in the industry for 10 years now, blows my mind.

Samuel:  That’s also worth noting too, I have been in the industry for 10 years now, too. I would not consider myself to be an overnight success by any meansI think a lot of whatever success that I have found in the last year has come from paying attention to things that you’re writing and putting out there about like, “Yes, you can do this.”

You don’t have to just be toiling in obscurity. You can do a very reasonable amount of effort put into creating something that people find valuable and be able to benefit from that. It’s very, very achievable.

Patrick:  I totally got everything that you just said there. One of the things about overnight success that always staggers me is that Peldi, the gentleman behind Balsamiq Mockups. Balsamiq Mockups have the first like first year of sales of, virtual of any software company that I know about, aside from one that $500 million obviously injected into in year one at $300 million in adds and sold $200 million in software.

The absolutely meteoric graph that first year, Peldi had a great presentation where he showed the meteoric graph. That’s what it looks like from the outside. From the inside, and he shows a graph that expands 28 years in the past for as long as they’ve been in software game in various companies, where obviously, for the first 27 years or so was zero software sales.

Then, overnight success. Overnight success didn’t take overnight. It took 27 years. But then people selectively edited that down when they’re talking about it.

Yeah, very important to point out that overnight I was just doing, I call it the grind, just get up, day to day, bang out some code, write some emails, try some experiments. For, I’d say, maybe after four or five years of doing it, a thousand people knew who I was.

Samuel:  I like the metaphor of pounding the rock. Totally in agreement. I think it’s also a thing that you don’t have to be that long tail of toiling in obscurity, like I was mentioning it before. I could have been doing things so much smarter, so much earlier.

It wasn’t like I’m a radically more experienced or smarter designer now. I just had to do an inch more smartness around being able to distribute that information, I guess.

Patrick:  Kind of like operationalizing it, in a business sense. Oh, that just sounded like a management consultant.

Samuel:  [laughs]

Patrick:  Sorry, guys. Anyhow. I totally agree on that. That’s one of the reasons I have my blog, one of the reasons why I really like the openness in our industry, from folks like Paul Graham, Joel Spolsky, all the way down to folks like me, Nathan Barry, et cetera, where you don’t have to make all the mistakes to learn all the stuff anymore. It’s great. I’ve made so many mistakes so you don’t have to.

Samuel:  Hiten Shah has been another person I would certainly put up in that pantheon of helpfulness as well.  [Patrick notes: Hiten is writing again, after a long hiatus.  Check out his blog.]

Patrick:  I’ve learned many things from Hiten over the years. Man, could do an entire podcast just about intellectual influences for stuff that I do on a day‑to‑day basis, probably get up to 200 names.

Samuel:  You should. I would absolutely listen to that.

Patrick:  Putting it on my list. Intellectual influences. Sorry, just writing that down. Anyhow.

[Patrick notes: I’m serious about doing this, but it would be a lot of work and might not be interesting for folks who don’t play inside baseball, so tell me if it is interesting to you.]

Samuel:  [laughs]

Patrick:  I’ve learned this over time. I think one little asterisk that I put, often, when talking about the topic of learning from other folks is that you should generally balance learning from other folks with doing for yourself. Just because I know a lot of folks who, they’re working the day job, the day job’s taking up a lot of their creativity/mental energy.

They listen to podcasts. They read the blog posts. They even go to conferences, watch the presentations. It’s like they’re perpetually in training for the championship bout that never comes.

Samuel:  Right. That totally resonates with me. For a very long time ‑‑ if this was school, I would be so ready to take the test right now, but nobody’s sliding that test onto my desk or whatever. Very much felt that way, for sure.

Patrick:  I felt like that myself for many years prior to actually starting a business. I would encourage all of you guys ‑‑ take the plunge. Doesn’t have to be a life‑changing, burn‑the‑ships decision or anything. Just start a blog, if you don’t already have a blog.

If you got a blog, start an email list. If you’ve already got an email list, put a stake in the ground on a product that you want to get out and make the progress towards actually getting that out there. Launch it. Everything about life gets better after shipping things.

Samuel:  I think it’s important to emphasize, too ‑‑ this is probably actually where I picked it up is from you. Don’t discount the expertise that you already have.

Patrick:  Yes.

Samuel:  Just because you’re not a nationally recognized name or whatever that might be, if people are paying you to do something, then that is enough expertise for you to be able to disseminate that information in exchange for an email sign‑up or something along those lines.

Patrick:  Getting somebody’s email address, you are not proposing marriage. It’s just like, “Hey. If, in this one interaction we’ve had together, you think that it might be useful possibly having a relationship with me in the future and hearing even more valuable stuff, here’s an easy way to accomplish that.”

I know many, many geeks have an anti‑email bias. I did, too, as an anti‑spam researcher, because I only saw the absolute worst of email for years and years. A lot of folks are not offended by being asked for an email address. Even if 50 percent of the audience is like, “I never give my email to anybody,” you can read the blog at your own pace. That’s fine. The other 50 percent, though, their email, those are quite valuable to have.

Samuel:  I think that it’s an important distinction to make, too. I certainly completely concur with that, but at the same time, I wouldn’t say just start a blog to have a blog or start a podcast to have a podcast. The lens that I would use on that is just start contributing things that people find useful, and whatever the delivery mechanism is.

Patrick:  Yes. Absolutely true. I totally agree with that. I also think that the effectiveness for these sort of things, both in terms of reaching an audience and creating a value to that audience and in terms of helping out your career/business interests, goes way the heck up once you find that thing that you’re good at.

I started my blog the same week that Bingo Card Creator shipped [Patrick notes: July 1st, 2006, crikey I’m old], and the original idea was I’m just going to write down stuff about what I did for Bingo Card Creator.

That blog really only hit its stride maybe three or four years later, after I figured out the thing that I had a comparative advantage against versus the rest of the Internet, that little, itty‑bitty intersection between engineering and marketing, and started writing about that a lot. It resonated with a lot of people. It actually, knock on wood, changed other people’s businesses for the better in a lot of cases.

The more I wrote about that, and the more I wrote about it in a particular format that you might be familiar with if you’ve followed my blog or podcast, et cetera, for a while, because I’ve got a style ‑‑ that style worked.

Whereas a 500‑word update on, “Here’s what I did for SQL optimization today,” there’s probably a post or two on my blog about that, which five people have read and nobody found tremendously valuable, and there’s much better SQL optimizers elsewhere on the Internet.

Samuel:  I guess, when you talk about going after a niche, whatever that might be, looking at the gaps in between really big things. For me, marketing and product, there’s user onboarding, or for you, between engineering and marketing. A lot of times, I think that’s a place that you would look.

Patrick:  That is good. It’s going to sound a little weird, but you can have a very happy, fulfilling, rewarding career just by being the spackle between different teams in an organization.

Samuel:  That’s why they have consultants. Otherwise they would have already staffed for it.

Patrick:  [laughs]

Find The “Known Groan” To Find A Profitably Exploitable Niche

Samuel:  If I could make a recommendation on niche‑finding…

Patrick:  Sure.

Samuel:  Actually, I was preparing for this, and I was like, “What do I do that I didn’t get from Patrick McKenzie [laughs] , that’s not already out there?”

One thing that I haven’t seen anybody really write about ‑‑ the people that I recommended it to have found it helpful ‑‑ is to pick a term, almost like if you wanted to compete for SEO or whatever, just like the presence of mind.

I very quickly realized that there was not the user onboarding guy. Specifically, that being a term that A, people had an emotional reaction to, like, “Ugh, onboarding.” I call it the “known groan,” when people are like, “Ugh. Yeah, ours sucks.”

Patrick:  [laughs]

Samuel:  Looking for something that they actually have some sort of emotional, I guess, revulsion to. That indicates that it’s a hair‑on‑fire need, like you were mentioning before.

Also, it’s a specific phrase, term, or something like that. Really, the actionable part of this recommendation is once you’ve…Maybe if you have a few different ones that you think you might want to try, set up Google Alerts for them.

If you’re getting flooded with stuff, you’re probably too broad. If you’re not getting anything, then people don’t care about it. If you’re getting three to four or five a day of new articles that are coming out, that have that term in the subject line, that’s a very strong indication that you can own that niche and it’s a niche worth owning.

You can be the person who comments. Every time somebody sees a user onboarding post, I should have some sort of presence there. I can leave a comment, or I can link to it through the user onboarding Twitter account or something. I have that Google Alert, and it’s been just tremendously valuable for me. That’s my tip of the week. [laughs]

Patrick:  I think that is a useful tip. One of the things that I struggled with in my own consultancy/larger business interests that there wasn’t really…I had an idea for what I was good at, but I don’t really have a word for it. I bounce around a little bit.

Other people created words for that sort of thing. “Growth Hacker” is a created word to identify some niche for a particular type of individual, and then allow them to go after it. I don’t particularly love that created word, but there might be better cases for it.

Anyhow, that’s neither here nor there. One quick question before we get off the topic of your book. Do you mind if we share with the audience what the results from that book were for you?

Samuel:  Financially speaking?

Patrick:  Financial or more important than that, either way.

Samuel:  Yeah. Either of those sound good. As I mentioned, I really did not do the launch super‑well. Being a hypocrite cost me thousands of dollars, I think [laughs] , in that scenario.

One of my strongest philosophies is paying attention to the last mile. Don’t tack onboarding on at the end. Make sure people are oriented around the value that they’re going to be getting, paying attention to those switching moments, so on and so forth.

I literally was editing my book up until hours before I launched and spent probably about one‑fiftieth of the amount of time I should have spent on the sales page. Worked really, really hard to build up the email list to a few thousand people, and blasted them at a page that was really confusing to them and did not emotionally engage them or anything like that.

Fortunately, because of the robustness of just having built up the list, trying to warm it up before I launched, and sharing the ride, I guess, as we were going, I still made 7,000 and change on the launch day, but there were some very forehead‑slappingly obvious problems with the sales page itself.

Fortunately, that’s, again, a nice thing about not just basically optimizing for launch and then trying to keep as much money from it as possible.

Being in it, invested in the long haul, and seeing it as an ongoing asset, I guess, for lack of a better term, I was able to make those changes within a couple weeks, and saw that things were not going to be nearly as dire as they appeared to be on launch day.

Actually, I just pulled up the launch‑to‑date stats in Gumroad. Also, I recommend Gumroad for those out there. One more person who’s a very happy customer. Probably by the end of the week, I’ll cross over the 70K sales number.

Patrick:  Awesome. Congrats.

Samuel:  Thank you.

Patrick:  That’s probably the first time I’ve heard a 10X increase from launch to lifetime. Actually, it makes a lot of sense in software. Man, the power of having assets. Just last week, Bingo Card Creator sold its 10,000th license.  [Patrick notes: I will note that while this asset is quite impaired these days, due to less traffic for some reason I’ve never really poked into, it is still trucking along quietly powering classrooms and underwriting lifestyles of the rich and famous maybe half our new-and-improved Tokyo rent.]

Samuel:  Awesome.

Patrick:  Only took 10 years.

Samuel:  [laughs]

Patrick:  Or eight years or whatever 2006 to today is. The power of having assets.

Samuel:  It’s also something where that is basically what I used to make in salary. Not only has it led to more consulting work, higher‑priced consulting work, and things like that, but just knowing my family’s not going to starve if something weird happened, just having that as an ongoing source of revenue is very comforting, I guess you could say.

Patrick:  It allows you to also optimize for other decisions. If you’re the typical person with a salary job, you have to have that salary job, or else the rent does not get paid for next month.

If you are the typical freelancer and somebody comes to you with a proposal, and you’re not really feeling it about this client, it’s not exactly the kind of work you want to be doing, or maybe they’re giving you pushback on your rates or whatnot, you might think, “I have to make these compromises in this business relationship because your rent is due next month, and I need to sell these hours.”

Where, if you have a baseline, even a small baseline, you get to be really picky about things. It’s like, “I don’t have a great option for consulting next week. I could take a middling option to consult for the next four weeks, or I could just wait and see if a great option shows up.”

That lets you be more selective with your clients, lets you pick the kind of work that you want to be doing. In a lot of cases, it actually is better for your clients.

Samuel:  Nodding vigorously over here, once again.

Patrick:  There were a lot of consulting clients where we heard the outlines of what they want and said, “Look. I am not the right guy for this, so I’ll just give it to you straight. Here is the right guy for it. You should have him do it instead.”

If I was more constrained by financial stuff, I might think, “I’m not the right guy for this but…” or “For my rate per week, I could be the almost halfway decent guy for it.”

When I go into clients, I have the ability to say, “You brought me in to do the best possible work and get you the best possible results, so we are only going to do projects which will be my best possible work and get what I think, before doing the project, is likely to give you the highest results. If you are not amenable to that, that’s fine. There are many consultants out there. I can recommend you to one of them.”

Samuel:  I totally agree. It’s at this point where I know the unit of work that goes into creating a tear‑down is going to result in roughly a certain amount of money coming back in book sales every time I do it. When I’m bidding on a project, I’m like, “How many tear‑downs, basically, is this project going to be?”

The number, financially, that I would get out of doing X tear‑downs is often a lot higher than what a client would be willing to pay for the same amount of work to work directly for them. Or at least it’s a healthy way for me to keep that in perspective, so there’s that.

Another nice thing is, as I mentioned way earlier, I’m in the very, very early stages of creating software for the onboarding space, and so I put out a survey. I didn’t even drive that much traffic to it. I haven’t sent out an email linking to it to my email list or anything, just tweeted it out a couple times.

At the end of the survey, I said, “It was really great of you to complete the survey. As a thank‑you, can I send you a coupon for 15 percent off the book?” It’s a nice opportunity to be able to be generous. There is something that you can offer, and also, at the same time, I don’t care if somebody buys it for 15 percent off.

If that’s going to be a triggering moment for them, then great. I’ve already made a couple hundred bucks just from putting out a survey. Which, I’m almost getting paid to do customer development. That kind of thing is really nice.

Patrick:  I really like your idea of writing the book before writing the SaaS product, for a lot of reasons. I think probably my next‑next project is going to be a SaaS, just because, a long story. I could do an entire episode on this.

Appointment Reminder is not exactly holding the fire in my belly, and I wanted to get into some sort of ‑‑ since it turns out the thing that I’m really good at and that my audience really trusts me about is making money for software companies, I want to make “making money for software companies” as a SaaS business.

Samuel:  That makes a lot of sense.

Patrick:  I’m probably going to be thinking in the next 18 months about how to actually turn that into something. It’s a heck of a lot easier to make the SaaS business after you’ve written a book on it and proved that there is an audience that cares about that topic.

Is empirically willing to pay you money about it than it is to just parachute into a field and say, “Well, I don’t have any evidence that people are willing to pay money for solutions to this, and if they are willing to pay money for solutions, I don’t know who that is. I’m going to spend the next six months writing Ruby code anyhow and see if it works.”

Samuel:  You’re going to be spending a bunch of time trying to build up that audience regardless. Looking at Rand Fishkin, with what he did with SEOmoz at the time, where he put out “The Beginner’s Guide to SEO” and got all that attention and built up his audience around that, and then were like, “Oh, we should create tools to serve this audience that exists now,” you can very clearly see the transition from one to the other.

Patrick:  I want to just do a little bit of a callback to something we were talking about earlier. You mentioned how, when you were writing your book, you had really, really hard stretches, like, “Man, this is taking much more time than I expected it to be.” Creative work is occasionally a beast. I have a funny story on that.

I’ve been saying since last August ‑‑ not the August in 2014 but the one in 2013. Yeah, I’m good with math that way. Since last August, that any day now, I was going to be releasing a course on conversion optimization.

Knock on wood, any day now, [laughs] hopefully before the birth of my daughter at the end of the month, I will be releasing a course on software‑conversion optimization. It’s on softwareconversionoptimization.com if you guys want to take a look at it. If you could, yay, great.

[Patrick notes: See the postscript.]

That’s the other thing I really like about the asset‑building approach to business, as opposed to the “grinding it out for the day job” approach to business. I am trying to just push the pause button on pretty much everything, aside from responding to routine email, business‑wise, for much of the next six months after my daughter is born, just to be able to be present for that, which is something that is difficult to do if you’re committed to the standard W2/working‑professional life.

Samuel:  There you go. Count me in as a first‑day purchaser of said course.

Patrick:  Oh, awesome. Thanks very much. I should also mention that I think I had bought yours as well.

That’s funny. There’s lots of stuff on the Internet that teaches various worthwhile things, like your stuff on user onboarding. Like any other business, I have a budget for training employees [Patrick notes: The business has only one employee and there is a heck of a lot he doesn’t know.], and I think mine runs to ‑‑ I’m going to check with the accountant ‑‑ probably on the order of $2,000 a year.

My business makes, well, let’s say “mid six figures” in turnover. That $2,000 is not a lot of money. When you divide it over the fact that I only probably read 10 business books a year, that means I’m spending an average of $200 on each of them. Or maybe not books. Courses, products, what have you.

Then you figure, OK, if you can price things at $200 and then have businesses be happy to pay for them, like I’m happy to pay for your stuff. Then you aggregate that over even a small number of people, that turns into a real amount ‑‑ maybe life‑changing isn’t the right word, but definitely life‑impacting amount of money for an individual running the training business, in a really short amount of time, as a producer of useful stuff.

Samuel:  I wholly concur.

Patrick:  Thanks very much for coming and getting interviewed on the podcast, Sam. It was really awesome to have you. If folks want to hear more from you, where should they go?

Samuel:  I would recommend useronboard.com, as we’ve mentioned. On Twitter, also UserOnboard, and on Twitter as SamuelHulick, which is just my name as one word.

Patrick:  For those of you have difficulty spelling, like I did, it’s H‑U‑L‑I‑C‑K.

Samuel:  S‑A‑M‑U‑E‑L H‑U‑L‑I‑C‑K.

Patrick:  Awesome. Thanks very much for being on the program. Knock on wood, we’ll have another podcast available in about two weeks or so, assuming I’m not called away by either work duties or baby duties, and it will likely be on the subject of churn. I hope you guys can catch it. Thanks, as always, for showing up for the podcast, and we hope to see you next time.

Samuel:  Awesome.

Patrick:  All right. Bye‑bye.

Brief Postscript On My Conversion Optimization Course

This podcast was recorded a few weeks ago, when I was still holding out hope of getting the Software Conversion Optimization course out sometime before my daughter was born (later this month).

At the time I thought “One more quick sprint and I’ll finally finish this thing!”, but between the course and the impending baby I was under incredible stress and it was compromising both the quality of the work and my mental availability to support my wife.  Ultimately, I’m disappointed that I haven’t shipped this yet, but I’d be far more disappointed to not be a good husband and father, so in lieu of continuing to provide a slipping shipping date I’ll reiterate that “It will ship at some point, when it is ready.” and “If you pre-purchased the course and are in any way not happy with waiting, get in touch with me and I’ll refund you.”

If you’d like to hear when the course ships (and also get a free eight-ish lessons on software conversion optimization delivered over email), you can sign up here.

Kalzumeus Podcast Episode 8: High Touch Software Sales with Steli Efti

I recently met Steli Efti, founder of Close.io, in Palo Alto, and did a podcast episode with him.  Transcript and links below as per the usual.

Sidenote: I listen to a lot of podcasts and have been using Marco Arment’s Overcast app recently to do so.  It was the best $5 I ever spent.  Give it a whirl.

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

What you’ll learn in this podcast:

  • Why engineers speak a different language than sales people.
  • How we can get over our reluctance to do sales to sell more software (without selling our souls).
  • Tactics for getting over the pain of rejection when doing sales calls (and sales generally).
  • How to qualify prospects so you don’t waste time pursuing deals which you’d never, ever close and can instead concentrate on the deals which your personal attention will cause to close quickly.
  • Why Steli shuttered a multi-million dollar consultancy to focus on Close.io’s SaaS product.

If You Want To Listen To It

MP3 Download (~80 minutes, ~54MB) : 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: High Touch Software Sales

Patrick McKenzie: Hi, everybody. I’m Patrick McKenzie and this is the — I don’t even know what this is – episode of the Kalzumeus podcast. Thanks for staying with us.

Keith, unfortunately, can’t make today. He and his wife and daughters are having fun back in Japan, but I am here in sunny Palo Alto, California with a buddy of mine who founded a company. We’ll talk you a little bit about the story later, but he founded a company, which these days, it’s Close.io, a YC funded company. Meet Steli.

Steli: Hey, guys. I’m super excited and honored to be on the podcast, a big fan of it.

Patrick: Steli, can you tell us a little bit about your background? I’m more from the engineering side of the house and you are… not.

Steli: I’m originally from Greece, born and raised in Germany. I’m basically a high school dropout that has no credentials whatsoever, completely unemployable, and never had a real job in my life. I’ve been an entrepreneur my whole life.

A lot of times I joke that the entrepreneurial super power that I use to move things forward is the hustle in sales. I love communicating. I love people. I love moving things forward, on the business end of things. I’ve been an entrepreneurial salesperson my whole life.

For the first few years, small businesses, boot-strap businesses back in Europe, and then seven and a half years ago sold everything I had, bought a one-way ticket to come to Silicon Valley, follow the legend of becoming a tech entrepreneur with the mission to be the stupidest person in the room. I’ve accomplished that every day since.  [Patrick notes: Silicon Valley sometimes seems to have almost Japanese norms with regards to modesty among founders, where the more self-evidently untrue statements like that are, the more you have to say them.]

I first built a business that spectacularly failed in a very painful way. This is the second venture, which took a few turns left and right, and we’ll talk about that, but that, thankfully, today is doing really, really well.

Patrick: One of the reasons I wanted to have Steli on the program is that Steli is one of the most successful sales guys that I know. I know it’s a personal weakness in myself that I’ve learned enough about sales and marketing to be dangerous, but I tend to always reach immediately for the low-touch sales, for things that can be automated, that play to my strengths.

Doing search-engine optimization, working on copywriting, working on scalable email strategies, lifecycle emails, that sort of thing, with the goal that I never get on the phone with anybody, and that I send as few emails as possible. That’s worked out pretty decently for my business.

But there are definitely times where I’ve thought, back when I was doing consulting, that, “Man, I just totally botched this opportunity for a $50,000 consulting gig because I was insufficiently aggressive following up with folks.”

Or, when I’m working on an Appointment Reminder, where the top-level accounts [Patrick notes: I’m speaking about the publicly available Office plan which costs $200 a month, not enterprise sales] have lifetime values in the $6,000 region that would totally justify me getting on a phone, and then yet I think like a lot of people listening to this, I have no idea of where that even starts. I think we want to talk a little bit about ales for software entrepreneurs and how you can use this to make your business better.

Maybe before we do that, talk a little bit about the elephant in the room which is that all engineers are socialized from a very young age to hate sales and everything it stands for. That Hacker News anecdote was priceless. These guys launched Close.io which is a CRM basically for sales guys for sales guys. It launched on Hacker News, what was it, two years ago?

Steli: January 2013.

Patrick: January 2013. The first comment on Hacker News was about your pricing strategy. Not about…not about the pricing strategy, it was about the pricing. It was like, “$125 a seat, that’s outrageous! I could build this in a weekend!”

One of your engineers actually wrote back and said, “Well, you shouldn’t see $125 in the context of that’s a lot of money to pay for software. You should see it in the context of if each of your sales reps was getting even one more lead closed a month into a deal, this would be worth much, much more than $125.”

I wrote back on that, “This is how a smart sales guy answers a pricing objection. Value-oriented pricing, it’s a wonderful thing.” Turns out that was a lot of the engineers, actually.

Steli: He was super proud that Patrick called him out as a sales guy, as a smart sales guy, he’s like, “I’m not even a sales guy!”

Patrick: Yeah, we’ve got this unfortunate and inaccurate socialization in the Dev community that all sales guys are like the characters on Glengarry Glen Ross, it’s the, “Always be closing! First prize is a corvette, and second prize is steak knives, and third prize is you’re fired!” Caricatures of sales guys. I’ve never seen the movie, my understanding is that intended as a caricature but some people idolize it.  [Patrick notes: You can see an analogous thing with Social Network, where Mark Zuckerberg is in the text of the piece designed to not always be a sympathetic character and yet some of the incidents which are supposed to make the audience wish for his comeuppance are things which developers really connected to.]

But be that as it may, that’s not actually what sales is about. You’ve talked a little, a while ago you guys basically did sales consulting for software companies. You would either tell them how to set up sales operations for software companies, or you would actually be the guys who would man the phones and sell the software to various prospects. Talk a little about software sales, how it fits into the picture of a software company, and the picture of the buyer’s company.

Steli: Maybe even before I comment on that, on the whole sales versus engineering culture clash between the two groups. I have just a few thoughts and observations that I’ve made over the years. I do think that engineers in general and sales people speak different languages.

Patrick: Definitely.

Steli: Therefore, there’s a lot that is lost in translation when they interact with each other. What I’ve seen is that building up empathy between the two groups can be incredibly valuable, educational to the individuals as well as to the company as a whole.

We would have retreats where we would have engineers do sales training, and they would have to pitch the product or do simulated cold call and a sales person would be a very difficult customer. Have them go through the pain of what makes sales difficult, so they can empathize more with it and then also train them on how to get better at it, and vice versa.

Have sales people be in small product brainstorming sessions and actually make them understand that you can’t just say, “Can we make this faster?” Or, “Could you just make, quickly just add this little feature that does this?” But actually have them think through all the implications of product development. How little is not really little, or this easy feature is not really that easy, and have them understand from an engineering point of view what it takes.

Once these two groups know a bit more about how each other’s work looks like and what is hard about it, and what it easy? Magical things happen.

Improving Software Sales: Low Touch vs. High Touch

Patrick: Definitely. I also think that there’s opportunities that are under-explored in a lot of software companies to make the sales team’s life easier with software. Most of the time when I’m talking about things that I build say in my consultancy or for my own products it’s using engineering to achieve marketing outcomes.

But you can also have engineering to achieve sales outcomes. Building, like you guys have built an internal CRM that you’ve spun out into a product.

But even those companies that already have CRMs or they already have an existing sales process, it’s amazing what you can do with a cronjob and 100 lines of logic in a Ruby application just to smooth that process along, or systematize it a little better.

Maybe we can talk about that in a minute. Let’s talk about for the folks here for don’t have a “sales function” at their software company yet, it’s just at solo-founder, they’ve got a website, people come to the website, they probably buy SaaS and in business we have a distinction between low touch sales and high touch sales.

Low touch is the 37signals model. You have a website that does most of the selling for you. Folks are brought to the website via some combination of search engine optimization, paid acquisition, etc. They get to the website, the website tries to get them into a free trial. The free trial is going to be the primary sales channel, and then maybe there’s some email that’s getting fired back and forth generally in an automated drip-email kind of fashion, or lifecycle emails.

Occasionally, the founder will write emails, but the understanding is that the founder isn’t really making the sale at that point, it’s convincing someone who has already convinced themselves on the software to get over the last hump.

High touch sales is the other end of things, where folks are broadly speaking, they’re getting on the phone, getting on emails, writing person to person communications with particular decision makers at the company. Man, there’s a lot of art and science in this guys. It runs billions upon billions of dollars in business in the economy. But in the SaaS industry specifically, there’s tiers of sophistication of software, where it makes sense to have high touch sales.

At the way high end we have large-scale enterprise sales where you’re selling to literally Boeing. That process takes between 6 and 18 months. It’s going to require typically that you send out the sales guy plus a support engineer who can answer all the technical questions.

You send them out to the office, they do a custom presentation that they’ve built specifically for Boeing’s use case. The presentation happens, and then go and take them out to a steak dinner where business is actually contemplated. Then this continues for several months and then maybe that deal happens, maybe that doesn’t.

The new innovation in the SaaS industry is that typically speaking the account manager, let’s make it the sales guy, the account manager/sales engineer team is only really viable for sales that are in the $75,000 plus, plus, plus region a year. You can read the classic essay by Joel Spolsky called Camels and Rubber Duckies. [Patrick notes: Still one of my favorite Joel on Software essays.  One of my bucket list goals is that someday folks cite individual essays of mine by name ten years after publication.  Maybe in a few more decades.] He says that basically there’s no software priced between $500 and $75,000.

Why is that at $500 you can convince a single person to put it on their credit card, $75,000 you can send out a sales rep and a support engineer to their organization and do the PowerPoint dance to get the 15 different decision makers on the same page. The interesting thing that’s happened in the 10 years since Joel wrote that essay, is that SaaS arrived, and the wonders of monthly billing in that you can actually get accounts with lifetime value between $500 and $75,000.

My understanding of it, is that after an account gets to maybe $80 a month in value to a $250 range, if you model it out as having a term-rate in the five percent or less region, then we’re talking about $1,500 to several thousand dollars of lifetime value. Then it suddenly starts to make a lot of sense to have somebody call them. Does that make sense to you?

Steli: Yeah. I do think that the volume frequency matters, so if you’re on the low end — let’s say the customer lifetime value that you have is, let’s say 2K, you can’t have a sales person call tens and tens of leads that don’t fall into that, to close one of them. You would have to have a high close rate and a high frequency rate of people that are in that bracket.

Everything that is above 5-10K is probably a more comfortable space in terms of customer lifetime value, so you want it to be in the few-hundred dollars a month range, ideally. But that dramatically varies on your market, your churn rate; like how long you actually are able to retain customers, how high is the volume of these leads that you’re getting.

All that needs a little bit of mathing and experimenting and exploring around, but typically I would say if you can estimate that a customer is worth a few thousand dollars, it’s definitely the right spot to try out inside sales and inbound sales, and see what magic you can work there.

Patrick: “Inside sales” is something that a lot of folks might not have heard before. Typically, there’s a distinction between inside sales and…I think it’s “outside” or “outbound” sales?

Steli: Outside/outbound. This is complicated, you’re right. There’s inbound and outbound sales. “Inbound” describes selling leads that are coming to you — signing up for webinars for your product trials, whatever it is. “Outbound” describing you cold calling, knocking on doors, going out to people proactively. That’s inbound and outbound.

Then there’s inside sales and field sales, “inside” being any sales person that doesn’t leave the building to do their job — so email, call, webinars or web conferencing. Then “field sales,” the people that actually have to get on a plane and fly to Boeing and spend a week there to make the deal happen, or the door-to-door sales guys, whatever that is.

Patrick: Inbound sales are probably where most of the SaaS companies, who might be listening to this, are getting it started with sales.

Steli: Yeah.

Patrick: Somebody’s come to the website. They’ve signed up for the free trial of the software, or they are on our email list. What is the next step for us, if we want to get started with inbound sales? I know that it’s easier than we think it is, but…

Steli: But it’s also harder.

Patrick: …to just hear somebody say it.

Steli: It is actually very easy. There’s two channels where you can communicate with somebody that comes to your website and signs up, either for your trial or your demo or your eBook, or whatever you do.

One is, if all you have is their email, you send them an email. The purpose of that email can be to learn more about them, qualify them further and sell them — although I would say that email is typically better for giving people information, maybe scheduling a call.

If you actually want to convince somebody to sell somebody on something, a phone call or in-person meeting are still a lot more richer environments, more successful environments, to make that happen. You could use an email to try to get on a call with somebody, or if you’re asking them for a phone number, you can pick up the phone and give them a damn call, which is something too many startups don’t do.

Patrick: Amen. Totally guilty of this myself, but it’s probably…in a good month I do maybe 10-15 calls regarding Appointment Reminder. If I was based out of the US and actually operating better — like if I was in sales and marketing mode for a week — I could very easily do 10-15 a day.

Steli: Most people that run a SaaS business and bootstrap or single-founder, their minds would be blown to even consider talking to 10 people. They’ve built the entire business in a way that prevents that interaction on that level to happen, because phone calls are seen as old-school, non-scalable.

Also, for people it’s a lot more comfortable to write their thoughts and have time to articulate that in writing. If rejection happens or something else happens, or they don’t hear back, it’s much more comfortable to have rejection happen in your Inbox than actually have it happen live, in real time, from another human being.

Patrick: Yeah. My first exposure to the distresses of being on the phone, I wasn’t in a sales job. I was a customer service representative at an office supply company, which you would use to buy things like paper or… staples.

Steli chuckles.

Patrick: Anyhow, I was the guy that you would call and say, “Hey, I want 400 pens,” and I would have to figure out what that actually was in the system, type up the order for you, and hit Go.

Occasionally, I would get phone calls about the fax orders. It’s not a sales job. It’s literally calling to follow up about an order someone has already placed. Maybe you said you wanted 400 pens, but what color do you want? What sort of a point? Or, “You said you wanted 400 black pens. Do you want 400 black pens like the BIC model, or do you want 400 pens of something that’s branded, or what?” I would give folks phone calls.

Often, if you call an office and say, “Hey, I’m Patrick McKenzie calling for — name of company here,” you immediately get, “We don’t want any,” and they slam the phone on you, and, man, I felt so bad when that happened.

Steli: Yeah.

Patrick: I actually got a bit of a thick skin about it for those two years, and then promptly lost that thick skin when I started a software business.

Steli: [laughs]

Patrick: Yeah, rejection is tough.

Constructively Dealing With Rejection

Steli: Yeah. Let’s talk about that a little bit, because I think that the whole point of rejection is probably one of the things that I see most common between sales and entrepreneurship in general, having to reprogram ourselves on how we respond to rejection. Because if you live your life in a way that tries to design for avoiding as much rejection as possible, there’s very little things you can do. Almost nothing in sales, and very little in entrepreneurship.

Here’s a couple of thoughts on the rejection piece, and then I want to give some, “How do you get started, and how should I call somebody who just signed up for a trial? What even do I tell them?” Let’s talk about those two things.

On the rejection piece, for whatever reason, we’ve all gotten here with whatever programming, social conditioning, our little bags of DNA, our character, whatever that is. Everybody dislikes rejection. There’s not a single person on earth, no matter how awesome they are, that likes to be rejected.

The question is, how can we figure out a way to deal with that rejection in a way that’s not too horrifying, too painful, too emotionally taxing? Early on, there are a couple of practical tips that I have, that are kind of super-hacks for our own brain, that are easy to do but can make a big difference.

One simple thing is to reprogram the scoreboard to, instead of focusing on the wins, understand that the losses are your stepping-stones towards your wins. We’re all SaaS people, conversion rates, metrics — so let’s say that you figure out that if you call 100 signups, that only 10 of them on average will actually want to speak to you, have a great conversation, and then end up buying the product.

That doesn’t seem that exciting. “I’ll have to call 100 people, and only 10 people will say yes.” Let’s say that the math works out, and that’s a good investment of your time, just as an exercise. Most people would focus on that. They would say, “Well, what I have to do is get 10 people to say yes every day.” They focus on the success.

You have a good day and bad days, and days don’t average out equally. Sometimes you have a good day and you get the first 10 calls, all of them say yes, they love it, and they buy from you, and you lean back and say, “All right, that’s it. I got my quota for today. I’ve got 10 wins. Let’s take the rest of the day off.”

Then you have another day where you have a bad day, and out of the 100 calls, nobody buys, and all of a sudden you’re off quota.

Instead of focusing on the 10 wins, what you can do is focus on the losses, and say, “I know that for every nine noes I get, I will get a yes.” I’m not trying to earn the success, I’m trying to work my way through the failure. Let’s say you put together a little scoreboard every day, and you make 90 little boxes. Every time somebody tells you no, you check off a box.

Patrick: I like this.

Steli: It gives you the satisfaction of progress, you check off boxes — that always feels good. Now all of a sudden, every time somebody says no to you, it’s not just a no, but it’s actually another check for your box, so you’re progressing your day.

If you focus on that, just going through that number of calls and that number of rejections, success just happens automagically, by itself. You don’t even have to keep track of it.

If you know your numbers better — if you actually knew how much revenue you would make per call — you could have a little box, and pennies, and every time somebody tells you no, you throw in two dollars into the box, and you know, “I earned another two bucks, because it brings me closer to a win that’s worth X thousands of dollars,” whatever it is.

If you use these little programs to focus on taking rejection for what it is, which is a stepping-stone towards your end goal. Then all of a sudden it’s important because you have to take all these steps to get to your end results, versus trying to avoid them and make big jumps to only have successes, only have people saying yes.

Patrick: Yeah. I think this morale management for the day-to-day grind of entrepreneurship is really important.

It comes up in a lot of circumstances too, not just sales — A/B testing, for example. A/B testing, if you’re doing it right, probably 75 percent of your tests close with a null result and you “learn nothing.” Neither a win nor a loss on the test. If the remaining quarter, half of them are a win, half of them are a loss, versus what you had before.

What I always tell people is, “You’re not learning nothing if you get a null result on the test. You learned on more thing that was not the best thing you could be focusing on right now.” If you’re getting no, it’s not just “no.” There’s a little bit of signal attached to the no, like “No, we’re not in the market for this,” or “No, I don’t have authority to buy this,” or “No, the price is too high.”

Then you can drill down into these later. If you’re always getting, “No, price.” “No, price.” “No, price,” then maybe you need to think on your pricing strategy, or the positioning of the software, to add more value.

Steli: Yeah.

Patrick: Although, people won’t be telling you, “No, price.” Charge more!

Steli: [laughs] Always double your prices.

Patrick: I got out my catch phrase for the day. We’re done. We can stop recording.

Steli: Yeah.

Patrick: We have a low-touch SaaS business. We have leads coming in.

Steli: Yeah. We ask for the phone number.

Patrick: We sent them an email. How do you ask for somebody’s phone number?

Steli: You can have it as part of the form — and we all know that means that conversions will go down — but in the early days I would recommend you to do it regardless of conversion going down or not, because those phone calls are going to be very educational. This is customer development.

You call people, and you actually learn from them. How did they find out about you? What do they like? What do they not like? What’s important to them? You get a real chance to interact with people and learn, beyond just the clicks on a website, beyond even when they send you an email.

In an email, I can just write words, but there’s a lot of context missing through tonality. I could write saying, “This is not for us right now.” Now, you don’t know anything about how exactly I mean that. Did I say [hostile tone] “This is not for us right now!” or did I say [casual tone] “Eh, this is not really for us right now.”

These two things point to different opportunities. One seems a lot more hostile, somebody that doesn’t want to be bothered. The other one seems a lot more friendly, maybe a little hesitant, even, about his own judgment. There’s different reactions which, in an email, you don’t know.

Patrick: Right, and since it’s a synchronous kind of contact, you can drill into that rejection right now.

Steli: Yeah.

Patrick: Is that, “This is not for us,” like “We will never be right for this,” or is that more of a timing thing? Did something happen at work? I can empathize with that — I run a small business, myself. Would it be better if I got in touch with you two weeks from now?

Steli: Exactly. Or even if you just say, “Oh, how come?” and the person says, “Well, your website promised X, but I found out your product does something totally different.” That’s valuable. Wow, if you hear that more than once, you know you’d better change the wording of the website.

Patrick: You’d better change the website!

Steli: Versus, if you only get two emails that say, “It’s not for us,” you have not really learned that much. There’s still a lot of assumption that needs to happen. You have to assume and interpret what that could mean.

Patrick: Particularly in less technical markets, I find that. I sell to office managers for a large portion of Appointment Reminder, and these are not naturally loquacious-on-the-Internet kind of people. They tend to write very short, clipped emails, and when I get cancellation reasons from them — which I ask for when folks cancel the trial — it’s often two to three words.

If they could write less than that, they would, but it bounces their castle if they don’t write at least 10 characters.

Steli: [laughs]

Patrick: Folks will write, “Didn’t work for us,” or “Too expensive,” or yadda-yadda. It’s like, “Wait. We’d love to have a deeper conversation about this.” Which, if I was on the phone with them we would, by the nature of that, be having a deeper conversation.

Steli: Yeah. In the early days, I would actually tell everybody to ask for a phone number, and don’t worry about the conversion rate so much. Then call these people, and have a conversation with them. Welcome them to the trial.

Patrick: OK, we’ve called folks. We’re welcoming them to the trial.

Steli: Yeah. Then you can do some very simple things. You can say, “I want to welcome you to the trail. I saw that you just signed up. I just wanted to hear, how did you hear about us? What do you want to get out of the trial? What’s your primary goal?

“I want to make sure that you get the most out of the trial. I want to make sure that this is going to be a success for you, that you’re going to get value out of the trial — out of the investment of time in our product.”

Then you have people tell you, “I heard about you from a friend,” or “I heard about you from this or that website.” That’s always good to know. Then they tell you, “Our situation is, we’re looking for a product and it needs to do this and this, so we wanted to check it out.”

Usually, the first bit of information you get is really valuable, but there’s so much more to dig into. We sell sales software, so they say, “We’re just ramping up our sales efforts, so we’re looking into systems.”

That’s obviously not enough information for me to really know who they are, understand if our product is a good fit, and see if I can point them in the right direction for them to get the value out of it and become a customer.

I would ask, “Tell me about it. What kind of sales do you guys do? How many sales people do you have? What are some of the challenges, some of the goals that you have? We’re going to dig into this to really understand your situation.”

This is not just about selling them. It might be that you find out, “Oh, wow” — within the first three minutes — “you should not be using my product. This will never work for you.”

This is a great opportunity to turn something negative around and do something positive, and tell somebody honestly, “Listen. After hearing what you’re telling me, you shouldn’t be using us. Our product is better for a different use case, but here. I’m going to point you in the right direction. I’m going to give you a recommendation for something else.”

Patrick: Yeah, I’ve had this. I’ve done this before, and it’s both the right thing to do — it buys goodwill with people — and you’ll be surprised how often folks will try to toss you a bone on that sort of thing. I had a customer, a prospect for Appointment Reminder. I was on a phone call with her. Let’s say that I largely sell to little fish and then trout, and she was like, “Yeah, I represent a whale. A big, big white whale.”

In the first three minutes it was like, “We don’t really whale-hunt here. But I happened to know there’s a well-regarded company that’s our main competitor. They go after whales, and that’s all they do. I know one guy at that company socially. Let me give you his direct number, and you can give him a call. I’m sure he can set you up with something.”

She was really happy about that. She’s in a medical profession, so she knows other people in the medical profession, and when her friends who are not whales say, “I called the big 800-pound gorilla and they didn’t even want to talk to me,” she’s like, “I know somebody who will take care of you,” and she sends them an email and copies me on it. It’s like, “Hey, meet Patrick. He’s the best guy in this. He will take care of you, blah, blah, blah.”

Telling her, “This is not going to work out. I’m not going to waste your time on this, I’m just going to get you a more successful resolution with my loyal competitor here…” Telling her no has raised my sales by like $300 a month, these days.

Steli: I’ve seen this work at so many different companies. People are just blown away when you tell them no. When you tell them, “You should not buy,” people are so positively surprised by that interaction that they’ll try to do something good for you. It’s crazy, sometimes people will not take that no for an answer.

They’ll say, “No, but I really think we qualify for this and I really want to buy this now from you.” You say, “Whoa, whoa, whoa. I’m trying to do what’s right for you,” and then they’ll try to convince you why they will qualify for the product in just a little bit of time.

Sometimes we tell people, “Hey, if you have less than X amount of leads a year, just use a whiteboard or a spreadsheet. You don’t need a CRM at that stage.”

Then they’ll challenge us on that and say, “Well, but we communicate a lot with our customers and we’re going to grow, and I want to use the right solution. You guys are awesome.” They’re going to fight you to buy your product. Sometimes we turn people down and then we see them just self-sign up, just put in the credit card and buy it regardless.

People are not used to that, and it will make a big mark. It will make a big difference — and it’s the right thing to do.

For a SaaS business anyway, you don’t want customer that are going to create a lot of support and then churn a few weeks after, because it’s not worth it.

Patrick: I think this is the fundamental thing that engineers do not get about sales. It’s not about just extracting moneys from people’s pockets unwillingly. That’s theft. That’s a great business model until you’re thrown in jail…

We’re doing value-creating businesses, and for a lot of markets, a lot of customers, they don’t naturally seek out stuff. The classical SaaS model, where it’s just low-touch and they have to generate all the forward motion in the relationship, doesn’t result in success for them, doesn’t result in success for their companies, doesn’t get them the best solution that’s out there on the market — so we need to nudge them in the direction of success a little bit.

That has, as a side effect, nudging a little bit more money towards your pocket, but it’s money that you’re getting for providing the value-creating service that, yeah, is the business we’re doing, and for creating the best outcome for them.

Oftentimes, the job of sales guy at a company isn’t so much…there’s the selling the person you’re talking to, but often you have to organize them a little bit about how to buy the product.

An example, something I did over email — and it’s something that I automated later — was somebody said, “I’m going to be the end user of Appointment Reminder.” They never used those words, but the “end user” is someone who’s actually pushing the keys and they input data.

“I’m going to use this. I’m the person who’s going to own the system, but my boss is the person who has the credit card, and my boss has said, ‘If you want to buy this software, I need to see the ROI for it.'” The office manager says, “I, not being a businessman myself, do not really understand this ROI thing, or how to calculate it. I Googled it. Wikipedia was kind of confusing. Can you calculate the ROI for me?”

I said, “Well, I am a businessman, and I love math. Sure, I would be happy to calculate the ROI for you.” That gets her over an internal objection. I’m not selling her. I’m basically selling her boss, by proxy, by giving her the ammunition she needs to make that sale to the boss. That’s kind of sales 201 — empowering people to be your champion internally.

How To Do Sales Without Feeling Like You’re “Doing Sales”

Steli: Yeah. Empowering champions internally to go through, to successfully navigate the internal sales process, to enable the organization to purchase your product.

I think, going back to that initial call, even if you’re like, “Well, I know nothing about sales…” You don’t need to. All you need to do is pick up the phone, call people, be nice to them. Say, “Hey, welcome.” “Welcome” is all it takes. “Welcome to our product. Welcome to the trial.” Then ask them what their goals, what their motivations, what their needs are, and try to really get to a level of understanding.

I think engineers are actually really good at that — better than the average person — of not just taking the first layer of information and being satisfied by the dramatic extrapolation of that that they make in their own mind, but actually asking, “What does that mean? What do you really mean by that? What do you guys really try to accomplish with this or that?” and get to a point where they didn’t just paint the outline, but they actually painted the entire picture for you.

Now, once you know who the customer is, what they need, what they want, what they’re trying to accomplish, what internal challenges they have, selling should be its easiest, enabling them to accomplish all these things with your product.

Telling them, “Well, you came to the right place. I’m happy to tell you, if you do X and Y, you’re going to get Y outcome, which is what you really want, what you really desire, and I can help you accomplish that. Here’s what we need to do to get that done.” That’s all it takes to be successful at sales. Or telling them, “Well, you came to the wrong place, but let me help you get there anyway.”

Patrick: In the happy case situation, where our product is a good fit for them, we’ve talked a little bit about, “OK, I understand” — by the way, echoing people’s words at them is a really effective communication technique in general, and works in sales as well.

Say, “Yeah, I understand that you’re really looking to decrease your no-share rate by adopting this software. I understand that you guys run a sales process which has 25 people in three time zones, and the management is getting crazy. I understand that…” whatever the pain point is.

“As it turns out, our software is actually a great fit for that. We have features X, Y, and Z, which will get you up and running pretty quickly, and I’m happy to assist you with doing that.”

Then the scary part is the engineer comes up to me, “Uh, there’s that closing thing?”

Cliff notes on every sales conversation ever — it’s like, “Conversation, conversation, conversation,” and then what we would call in marketing a call to action at the end. In sales, they have the thing but they call it the “call to close” instead. What is closing, and how do we do it?

Steli: It’s a great question. First of all, let me tell you if you ask for the close — which is basically asking the other party to become a customer, commit, give you the credit card number, whatever it is; the transactional point in which they become a customer.

If you ask them for that, if you proactively verbalize, “Do you want to become a customer? Do you want to purchase our product?” you’ve separated yourself already from the majority of the market, or even the majority of sales people that do “sales,” but are afraid of asking the question because they are afraid to hear the rejection.

There’s two simple ways to do it. One is just to ask for it. Let’s all do it together, “Do you want to become a customer of our product?”

Patrick: Do you want to become a customer of our product?

Steli: There you go.

Patrick: Wow. I think I must have said something like that for consulting engagements over the years. I think I’ve probably said it only twice for Appointment Reminder. It’s kind of crazy.

Steli: It’s crazy, right?

In certain cases where it’s clear that they’re not going to be ready to answer yet — it’s the first call, they tell you they have a 200-person team, and it’s a bigger customer, and you’ve just answered a couple of basic questions — they’re not yet there, to be able to say yes or no to that question.

What you ask instead, which is one of the most powerful questions you could ever ask, is, “What is it going to take for you to become a customer of ours?” It’s a very important question, especially for startups, especially when you’re early in the cycle.

Too many times I see founders talk to a bunch of “potential customers,” do their customer development — lean startup — and then they come back and they say, “Oh, I got all this great feedback, people loving this idea. They’re totally going to buy it.”

More often than not, just because I was nice to you doesn’t mean I have real buying intent. Just because I visited your site and liked an article doesn’t mean I’m going to purchase the software, so asking me, “Hey, what is it going to actually take for you to become a customer?” is going to do a couple of things.

Number one, if I have zero buying intent, I’m going to probably say it. Either I’m going to have a really weak answer to that like, “Eh, I don’t know” — that’s a red flag. How could you not know what it would take for you to buy? Or they say, “Well, I really like what you do, but we wouldn’t buy before 2018. Our budget is already allocated for the next few years.”

Again, you know, “Nice guy, but I shouldn’t probably waste my time on this.”

Patrick: Or one of the other classic things is, “Yeah, we don’t have budget. We’re a startup, too. We’re trying to get to a round of profitability. I just can’t justify $50 or $100 or whatever.”

You’re like, “Yeah, great. It was great talking to you.” I’m not going to work myself into a conniption if we don’t get the sale here.

Steli: Yeah. We’re not going to schedule three follow-up calls, each an hour, and send you 10 emails and case studies, to then realize what we could have learned in the first 20 minutes — that you are not in the market to purchase something.

Patrick: This process, by the way, is called “lead qualification.” You can do very automatic lead qualification, like lead scoring for example. SaaS companies typically will do two things. If, in the free trial, they’ve done X and Y and Z, then they have a higher score. If they’ve done nothing, then they have a lower score.

Or maybe demographic-based lead qualification, like if they work for Boeing a higher score for enterprise sales lead qualification. If they work for a flower shop, you’re probably not going to sell them a $100,000 software solution.

Anyhow, you can qualify stuff with a phone call, and then rather than feeding into some sort of magic state machine, just use your human intuition and your human brain, and take next steps appropriately.

Steli: Yeah. Important with that question you ask, “What would it take for you to become a customer?” is to actually follow up on that question until the virtual event happened, where they purchased.

Let’s say they say, “Well, I really like this. I will bring this back to my team and we’ll talk about it and see what they think.”

“Oh, interesting. What would happen if they actually like the initial outline of what you gave them? What would happen next?”

“Well, next we would probably schedule another call and have some more stakeholders participate and ask questions.”

“Cool. Let’s say I answer those questions to the satisfaction of all the stakeholders. What usually happens next?” You don’t just stop at some point. You actually continue asking, “What happens next?”

“Well, next you would have to talk to the legal department and go through a procurement process.”

Most people at some point instinctively want to just take that and run with it and go, “OK, cool. Thanks for all the information.” They hang up and they think they already know everything. Don’t. Fight that urge.

Ask, “Right, so we go through legal, we go through procurement. By the way, have you done this with any other provider that’s similar to us in the last one or two years, successfully?” That’s a good indicator that they actually…

Patrick: That is a great qualification question. You never want to be someone’s first SaaS provider. You also probably never want to be someone’s first consultant. Your life will be very difficult.

Steli: You don’t, so say, “Have you done this before, and what was the process like? Is there anything we can learn from that? OK, let’s say we do these things. What happens next?”

“Well, then you have to go and talk to my grandmother, then the palm reader…” until they say, “Yeah, then we’re in business.”

Cool. What you’ve accomplished now is a couple of things. Number one, you’ve seen if there’s any red flags in that process that you know will never work out. Number two, you mentally put them in the mind space you want them in — a future where they’re a customer. This is the kind of future you want them to be thinking about.

Patrick: They’re already visualizing that there exists a possible alternate universe in which they write you a check or give you a credit card.

Steli: Yeah. That’s a good thing.

Then, the third thing is, they’ve created together with you a roadmap of the buying process, so now you know everything it’s going to take to make that deal happen. Do you know how many times founders or sales people will come to me and they will say, “Next week we’re going to close this defining-moment deal. This is going to change our lives, and everything is ready, and I know it’s going to happen next week…”

Then the next week, it’s crickets. Silence, so I send them an email and say, “What happened with the deal? Did it close?”

They say, “Well, there was this thing that I didn’t anticipate. They actually also want me to go through the procurement department…” How could that be surprising? What that means is you didn’t do your job qualifying them, understanding the buying process — so every step of the way you’re surprised that there’s one more thing you have to do, and you get frustrated by these evil customers that want you to do these unreasonable things.

Patrick: If you could see me now, guys, I’m face-palming because I have been that guy.

Calibrating Your Expectations and Pipeline Management

Steli: Yeah, we all have. We all have been there. Nobody’s above that mistake. The question is, there’s a simple solution to that. You need to go through those steps. Ask somebody, “What will it take for you to become a customer?”

Have them tell you so you have a real understanding, “What will it take for me to close this customer? Am I willing to go through all these steps, invest all this time?” Have a realistic picture of what it’s going to take.

Or, if you think they’re already ready, and they love what you’re doing, just ask them a question. “Hey, it seems like it’s a great fit. You’re excited, I’m excited. I think this is really a good solution. Are you ready to become a customer today? Should I take your credit card? How are we going to do this?”

This is uncomfortable for folks, because it’s kind of confrontational. You might have to confront the other person, or be confronted by the person, saying “No,” or “I’m not ready,” or “I don’t think I’m going to buy.”

But the great thing about that is that it shouldn’t be about you winning everything and never being rejected. It should be about you learning as much as possible, and also about creating outcomes. Sales is a lot about just creating outcomes. Yes/no. Just build an outcome. “Maybe” is a deathtrap. “Maybe” doesn’t point in any direction or any timeframe. You know nothing, and it occupies mind space and mindshare.

Yes and no are equally good. They are a result. You can learn from it, you can check it off, you can put a number somewhere, and then you can move on in life. For entrepreneurs, it’s so important to be able to move forward and not have things that are in constant limbo, “We don’t know about this” space, which is a deathtrap.

Patrick: This is one of the fundamental things about pipeline management. Pipelines are to a sales process what a funnel is to a marketing process, where some amount of folks are in the tap.

With sales pipelines it’s like you have a certain number of stages that go through our customer’s typical buying process.

We have customers who are in any given stage in the buying process. We have 20 people who we have initial calls scheduled with. We have six people who we have follow-up calls scheduled with. We have three folks who we are under contract, two folks who we are providing services for, and then one person or firm service has been provided, we have cut them an invoice, we’re waiting on payment.

The job of the sales team — and the rest of the organization, really — is just pushing people from the left side of the pipeline to the right side of the pipeline. One of the reasons the pipeline thing is important is, if there’s a bubble at any stage in that process…

We’ve got folks who we’re having initial conversations with. We’ve got folks who we’re talking to the purchasing department. We’ve got folks who we’re providing the stuff for. We’ve got folks who our invoices are out.

We have no folks who we’re having follow-up conversations with right now. You can kind of figure that bubble is going to percolate towards the right side of the pipeline, and that sometime in the near future there’s going to be a month with no revenue in it, and that’s going to suck.

When you start to identify those bubbles early in the pipeline you’re like, “Oh, guys. Make an extra special effort to get those early conversations happening, to push people into…get a yes or get a no, but get stuff on the calendar for having the follow-up conversation so that we can push them through the rest of the pipeline.”

Steli: Yeah. If you manage your pipeline well, you kind of see the future, which is part of the beauty of SaaS anyway. With subscription revenue you can project what’s going to happen next month and the month after.

But the other thing is, one thing that I find beautiful about sales is that it really rewards people and processes that are results-driven, and it really punishes activity-driven people and processes. Too many times, I talk to people that will be like, “Well, we have all these great deals in the pipeline.”

I say, “Awesome. Tell me a little bit more about that.”

“Well, there’s this company, this company, this company.”

“Cool. How long have you been talking to them, and what are the next steps, and when do you foresee closing these customers — or not closing them?”

That’s when it breaks down and they’re like, “Well…” They’re so happy about creating conversations and having meetings and hearing from people that they like what they do, that they don’t want to move over to the uncomfortable part, which is actually creating the outcome, the yes or no.

They are very happy about the, “I have three logos I can put on a PowerPoint presentation and then say, ‘We’re in early conversations with these folks,'” rather than having just one — or no logo – and, “We’ve learned that this didn’t work, but we tried,” where we had a real result. They bought, they didn’t buy.

Sales really rewards outcome-driven activities, and managerial pipeline is all about, “Are things actually moving from left to right?” Because you can have thousands of things in every stage, but if nothing has moved, your business is dead. That’s it. You’re not getting any new customers.

Patrick: In addition to sale rewarding outcome-driven cultures, outcome-driven businesses, outcome-driven individuals, also traditionally sales guys stereotypically are smarter than the average bear with regards to numbers, but the numbers are typically tied up in, “What’s my commission going to be?”

But sales at companies which are very metrics-focused, where we know to a T that if we get 100 initial consultations, we’re going to get down to 20 meaningful conversations with decision-makers, which is going to result in five proposals that we sent out, and we’re going to close three of them…folks who have that level of understanding of how the math shakes out for the funnel, or for the sales pipeline, they do very well in life.

Since that’s copacetic with the engineering skillset that a lot of people have and the numerical inclinations of a lot of engineers…if you’re a product person, talking to people about their pain points and then saying, “The pain points which you have just articulated map up with some things we have made. These things we have made can make those pain points better…”

It’s not actually rocket science. This is something you can learn to do, and learn to be — knock on wood — a little less uncomfortable with, and you can often find out that you’re really darn good at it. I don’t do it enough for my software products, but in my consulting career pretty darn good at the sales…with the exception of the ones where it was just a total face-plant.

Like you said, that’s the cost of doing business. Face-planting is better than perpetually, “Will I, won’t I? Will I, won’t I win that engagement?” Get to no.

Steli: If you’re not face-planting once in a while, no matter how good or successful you are, you know that you’re not learning anything. You’re not pushing hard enough. You’re not trying things that are daring enough, because you’ve got comfortable, and you’re just operating within that comfort zone which is the borderline of your growth now. You can’t go beyond that.

No matter what you do, if you don’t get rejected once in a while, you know you’re in an unhealthy place. You’re in a place where not enough growth happens, because you’re confined within what you have accomplished in the past, and what you’re now good at.

Patrick: This reminds me of a conversation I had with one of my father’s buddies when I was six or seven. He was a lawyer. I had a vague idea that, “Lawyers take cases to trial.”

He said, “Yeah, I’m a very good lawyer.”

I said, “Oh, do you win all your cases?”

He said, “No, of course not. If I won all my cases, I’d be a very bad lawyer.”

This was very confusing to the seven-year-old me. I asked, “Why?”

He said, “Well, there’s this thing called making a deal before the case gets to trial, and if you’re winning all your cases, you’re making too many deals on cases that you would have won, so you should be a little more aggressive about taking stuff to trial.”

Similarly, if you’re winning all your sales conversations, something is going wrong either with the number of leads you’re pushing through the sales pipeline, or your lead qualification thing. It’s possible to win all of your sales conversations by only taking the folks who are deepest in your ecosystem. They’re your truest and best fans, totally the sweet spot for the app. It was an easy layup to get the sales, and you get all those easy layups.

But, you could maximize revenue for the business by going, “OK, what’s one ring out from that?” Maybe it isn’t someone who’s been reading my blog for five years. It’s someone who’s been reading my blog for five months.

You do sales, SaaS, so I assume you sell to a lot of other SaaS startups. You sell to startups selling to tech companies, or whatnot. Then at some point you realize, “We could also sell to startups selling to medical. That has new challenges. Let’s see if we win those deals, or let’s see why we lose those deals. We’ll feed that back into the marketing of the product, get into a place where we can win those, and take the lumps because we know we’re learning from them.”

Steli: Absolutely. First call, you pick up, you welcome people, you ask them a few questions to really understand them, and then you either ask them if they think they’re going to buy, if they’re ready to buy, or what it’s going to take to buy. If you do these things, it’s a perfect sales call. You’re 10 out of 10.

Patrick: …and you’re already better than 90 percent of the market. It’s insane.

Steli: Oh, yeah. You do that for a while, and maybe you want at some point to test what would happen if you don’t take their phone number in the form, but you actually email them and ask them for a call, and look at the numbers. But in the early days, I would always use that form.

Either way, if you have a SaaS business and you have a way to make more than just $10 a month on a user, using the phone as a way to onboard them, activate them, and close them, is going to be an amazing tool. If you don’t use that, you’re literally leaving thousands, millions…

Patrick: A lot of money on the table.

Steli: You’re losing a lot of money, leaving a lot of money on the table.

Patrick: Right. An additional thing there, by the way, relevant to your interests. If, like me, you’re pretty time constrained on the SaaS business, I specifically architected my business when I was early on, to never require sales calls. I was employed over in Japan, and didn’t want to do sales calls at 2:00 AM.

I still don’t want to do sales calls at 2:00 AM, but let’s say I can push myself to make five a week — not as many as the leads I’m getting. You can just choose to only call X percent, and then do scalable approaches on the remainder and see, “For the folks I talked to, did I close more than we closed on the folks that we don’t talk to?” If not, red flag on the play.

Figure out the sales process. If you closed more, then that’s either an argument with yourself or with the rest of the business for, “We should be focusing a little more of our attention on active selling to the rest of the folks,” or it’s an opportunity.

Atlassian does this. They have a sales team. They say they don’t have a sales team, but they have a sales team; people who call and get closes.

But if a medium-touch approach for them in a given month converts a higher percentage of trials than the low-touch approach — the totally scalable automated thing — they file bugs against the low-touch approach.

They say, “something has happened, such that our standard medium approach is answering more customer questions, resolving more customer objections, getting more customers successfully onboarded than the low-touch approach, which means the low-touch approach is broken. Fix it.”

Then they fix it until the numbers go back to parity again. Then they focus on that, because that’s the part of the business that they really enjoy/institutionally like.

Then a couple of months later it’s like, “OK, we’re going to pull 10 percent of the trials off the rack and give them a call and see what the conversion rate is. If it’s at parity with the low-touch group, that’s great. That’s where we want it to be. If it isn’t — if the sales reps are effective at doing their jobs — that’s a bummer.”

Steli: I love that. That’s a great hack, organizationally. That’s cool.

Patrick: I think that’s why they say they don’t really have sales teams. They do have a sales team…I love you guys, but you have a sales team. But maybe they think it’s not a permanent sales team. They’re bug scouts in the organization, who happen to do sales for a bit of that bug discovery process.

Anyhow, I think that wraps up our conversation on getting started with sales for SaaS folks.

You guys had a very interesting trajectory, and it’s one that I think resonates with a lot of people here. You had a Y Combinator-funded startup that was in kind of an unrelated space, and then you pivoted over to being sales consulting as a service. Then from that consulting business, you pivoted into the current product business, which is Close.io with the CRM.

Why Steli Shuttered A Very Successful Consultancy

Patrick: Can you talk a little bit about your consulting business? That was a pretty good business, right?

Steli: Yeah.

Patrick: Just hum a few bars for me on that one. How many people did it get up to, or yadda yadda?

Steli: We had probably all in all, in-house plus the people that work from other locations, 60, we were on trajectory to cross the three-digit very, very soon. We’re a multi-million dollar business that was growing really fast. Basically, what we did is we built what we called a secret sales lab in the heart of Silicon Valley, who we would work with Venturebeat startups that at least had a series A, and we’re doing B2B.

The vast majority, 80 percent of all customers were SaaS product. Many of them, products that you guys know, have bought.

We would either do sales consulting, what we would call sales exploration, help you figure out how to go from a few customers and some revenue to a model that’s both predictable and scalable, where you can just plug in salespeople and you know exactly what should come out of that.

We had these customers, it was a lot of consulting, helping them, exploring, testing different sales strategies, generating numbers and then looking at that and figuring out what the right model is for them, and then we had a few customers that were already in scale companies that are now about IPO and on the IPO track that would say, “Hey, we have already 50, 60 salespeople. We’re hiring as quickly as we can. There’s these 10 verticals we’ll not going to get to in the next two years, but we know there’s money.”

Patrick: Can we just write you a check and…?

Steli: Can we just write you a check, and send you the leads and you just close these deals for us? We’re these two schemed outsource skilling part and then the more early staged consulting part, and became experts when it comes to selling for startups and the unique challenges and unique approach that you’re going to have when you do that.

Patrick: One of the nice things about the Valley, and I’m a bootstrap guy, I think that’s what makes me happy. Every time I come out to the Valley, and I work physically in Palo Alto right now, it’s sort of an air here.

One of the things that causes the air stat, there’s an ecosystem around startups where you guys have a very, very successful business step. Professionally, I already said the word “millions.” That’s a lot of millions, figure after 60. You’re making millions a year, basically getting the outsource sales product for a lot of these folks or telling them how to set up their first sales department.

Similarly, there’s a lot of business in the ecosystem out here. There are shops, like say Pivotal in San Francisco, which provide various services to the ecosystem.  Somebody raises money, they need to make an app or they have an existing website, they need to make an iPhone app and Pivotal is like, “We can take care of that and it’ll only cost you $200,000″ or that sort of thing.

There’s something that I get told every time I come out here is that given my skill set with the marketing automation, could just hang out my shingles and the Patio 11 Marketing Automation Agency and I would have billings of $5 million within a year. That’s true. Not really where I want to go with my life, but it’s a nice card in the back pocket if my family’s ever starving in the snow.

There are a lot of businesses like that. It’s not just the meme about selling shovels in the gold rush. It’s not. It’s B2B services that’s the nature of most of the business in the economy if you get right down to it. You’re selling tomatoes to pizzerias.  [Patrick notes: I think every time the words “selling shovels in a gold rush” are mentioned engineers suffer, because we’re socialized to believe that it is somehow disreputable.  Software is a gigantic industry which itself consumes a lot of software, for the obvious reason.  It is as valid a market as any other industry for B2B products, and is flush with cash.  Many people who deploy the shovels meme think that cash comes from venture capitalists, but despite the impression you might get from reading TechCrunch, most software is not bought by three guys in a dorm room with a $1.5 million check coming in but rather “boring” profitable companies who pay $1.5 million in payroll every two weeks.]

Software as a service companies have a very predictable…The reason this works is software as a service companies have a super predictable path from really intelligent sales guy to money. Just like their customers have a really predictable path from installing software as a service product, increase revenues by 20 percent, similarly for the other stuff.

Anyhow, it had a really successful consulting business, why don’t we still have a really successful consulting business? Can you talk about the journey that got you to Close.io?

Steli: That’s a great question. When we started, right from the get-go, there were two factors that played into our decision to actually build an internal product. Number one, we knew that in order to support all these different sales complaints for different customers to different verticals, there’s a lot of complexity involved. We knew that we would have to use software to manage all that.

Just selfishly, we hated all CRM systems and all “sales software” that was out there and thought, “No way are we going spend eight, nine hours a day using that kind of software. This is just going to make our lives suck.

We didn’t want to use anything that was out there and then two of my cofounders…We have three cofounders. I’m more the sales/business guy and the other two guys are product and engineering people.

Out of that lens and bias, we’re like, “Well, let’s just build our own thing and we’re going to make it exactly do what we want it to do.”

That was it, there was no real vision. We didn’t even know what that meant. We didn’t even know exactly what the product will look like. We just said, “Let’s just build something that does what we want.” Then, all right, what do we want?

We now have two customers after two weeks and we need to do this and this. Maybe it would be cool if you could just click a number and it calls it, so I don’t have to use a phone or something else. It does it in the software.

That’s how we got started. Then, as we started hiring and recruiting more and more people, we would use the software as a recruiting tool.

We would tell people, “Hey, we have this secret sauce, that if you do sales for another business you won’t have, and I’ll show it to you. You can clearly tell that we really care building products for sales people to be more successful.”

Patrick: You, the sales guy, should work with us. You’ll have access to the secret sauce, your job will suck less because there’s none of that using crappy software all day to do the job of a sales guy. It’s basically wall to wall calls and then recording the calls in the software.

The part of your job that is not the call sucks less. If this makes you more successful your sales guy there’s typically some sort of incentive structure there, this will directly impact the bottom line for you. It’s basically B2B sales to a single person.

Steli: Exactly. It helped us hire a lot of people, helped us make our sales people more successful, and then happier. Retain them all at a much higher rate than a typical sales organization will retain people.

Then what happened is that slowly but surely we had more and more campaigns with more and more sales people, and I know we’re the only CRM system or sales software company that literally had engineers sitting in a room next to sales people that were doing different kinds of sales.

Looking over their shoulders and going, “Why are you doing this? This makes no sense. Why do you have to click three? Why do you use this piece of paper all day long to make notes? Why can’t our software be better at that?” Fixing the problems, as well as have sales people turn around and be like, “That part of your software sucks, dude. I hate that this does this.” Iterate on it from a completely different perspective.

Patrick: This doesn’t happen nearly enough at companies, by the way, guys. Engineers embedded in a sales organization or embedded in a marketing organization. Believe me, if you can code your way out of a paper bag, for those of you who don’t run your own businesses yet, and just want to get the taste of coding to improve outcomes, walk into any other team in the company and say, “Can I watch what you do for a day?”

At the end of the day you’re going to have a notebook full of, “WTF! They do what with spreadsheets? That’s insane!” Man, was it back in the day, I was working with an SEO who was attempting to figure for some SEO-related reason, “I have a list of keywords in column A, I have list of keywords in Column B, and I’m going to figure out all the keywords that are in A and not in B.”

Every engineer in the room is like, “OK, that will take me two minutes.” This guy, college graduate, would literally spend several hours every day doing this manual keyword comparison. You can literally do this script.

We’re going to save you two hours every day forever in like five minutes. It’s going to be great. If wanted to it can also alphabetize them for you, it’s not that hard. But yeah. More product Devs, more product companies should go with the embed the product team in the entire organization and see what’s broken.

Steli: What’s broken?

Patrick: Yeah, build much better stuff. It’s also a great way to get at that.

Steli: We did that for a while, and then we actually started having a real product philosophy, and starting thinking this is how sales software should actually look like. Forget about everything else that’s out there, it’s really not helping anybody selling better.

This is what sales software looks like, and sales really is communications so it needs to be communications software. Let’s kill data entry because it sucks, and sales people are horrible at it, it produces a lot of bad data.

Let’s empower them, the people, to actually get all the answers they have through the software versus having to go to engineering and be like, “Well, I need this specialized list of all leads that have been called and emailed, but haven’t replied, but I don’t get all that data from my sales software so can you write a query in MySQL, and find all the data for me, and spend 30 minutes of your life doing that? Then I’ll come back tomorrow with another list?”

All the engineers went, “Well, why the hell is the software not answering the question? Why do I have to spend my time doing this manually?” Step by step we developed this philosophy and then the software got better, then it got a lot better.

Then all of a sudden our sales people would show their friends who in sales the software. Bragging about this is what we use for our job, and we would start getting emails or our sales people would come and say, “Hey, we could totally sell this software to this company. I showed it to them, they’re totally interested!”

I have to say that it would be cool to claim the credit and say, “Then I decided that as the CEO that this is the future of the business.” But it wasn’t. I actually resisted that a lot, because I was like we’re printing money over here, and this is actually a complex business to grow and I have a lot of things on my plate anyways. We’re going to get distracted by this, releasing the software as a product.

That external demand grew, and then the internal resistance started building. There was a small group of people internally that started lobbying like we should release the software. We should release the software. Let’s just launch the software! In every meeting, in every opportunity they were lobbying, hey the software, the software.

Those two voices from the outside and inside grew, and grew, and grew until I caved. Literally that’s what it was. It was no strategic decision making, literally I just went, “Well, fuck it. Let’s launch the software then, eventually.”

I thought that because the services business was big, and I thought that we knew that we had something special with the software. But I knew also, I’m a realist, so I knew this market is crowded as hell, it’s a very competitive market. We don’t have a ton of money to just spend on this experiment.

We have to have a small team work on it, so I thought it would take forever for the software to get anywhere near the services and consulting business. In January 2013 I said, “You know what? This is a small team of four people, you guys are the product team now. Go do whatever the hell you want. Launch it.” As an entrepreneur I like to say you’re almost always wrong with everything. I just get used to that. Once in a while, you’re actually happy you’re wrong, and this was one of those cases.

Where the software had a great first month, and then it had a great second month, then it had an even better third month, and it just grew, and grew, and grew at a really fast pace with very little resources. Then very quickly it outgrew the services business with a fraction of the cost.

At that point, or coming near to that point, it was long clear to us we have something that’s working way better than this other thing we had that was working, so we should start focusing more and more of our attention on the software versus the consulting business.

Patrick: Two things I want to drill into there. One was that, let me take the one that was more recent first, because I actually remember it. You mentioned that the software business was, the revenues were rapidly approaching the consulting business but at a lower cost.

That’s like the traditional margins in consulting are generally broadly speaking somewhere in the 20 to 40 percent range, give or take. The single biggest cost for the consulting company is the direct cost of the person who is doing the actual work that gets billed out to the client.

That cost is always going to be in there, always going to be the largest cost to the consulting company. It generally, there’s not much you can do to reduce it. You could hire less senior people, but then you get less senior results, and that’s not building a wonderful consulting company. On the flip-side, software service is huge upfront cost to develop it.

Then you push the go button and you start getting literally 90 plus percent margins on software, and a little less for the two of us because both of us have telephony embedded and there’s a hard cost associated with telephony, so we have non-zero cost of goods sold which means how much money you spend for a marginal customer to actually service them.

For many B2B SaaS businesses, it’s literally like our cost of goods sold is the strike account, so 2.9 percent plus 30 cents. Then the rest of the 500 bucks a month we just keep, then multiply that by 1,000 clients and life gets pretty good.

OK, you have the ridiculously successful business, you have the software business that you OK as an experiment, it wasn’t like, “Let’s dive two feet into that.” It’s just I’m going to break off a strike team to do the SaaS business, and oh, my God, it’s blowing up. We have one really successful business, we have a nascent business which looks like it has more legs than even the most successful business. How do you decide to make the transition? That’s not a no-risk transition.

The math of working a successful consultancy is that after you have a successful consultancy, you have a successful consultancy. FYI when I say that the margin for a consulting business is 20 to 40 percent, if you multiply 20 to 40 percent by the billings for a given year which you can extrapolate from them having 60 sales guys, that’s literally what they could pull out of the business every year with no work that they’re now additionally doing. But you decided to double down and go into a VC funded SaaS business trajectory which has substantially more execution risk.

Steli: Let me elaborate a little bit on this. I don’t want to come off too one dimensionally in that everything was just amazingly successful, and now how can use decide between amazing success and incredible success.

That was not our problem. It was not as simple as that. The consulting business was successful but it was also freaking hard. Painful. You had to manage, at some point we had to manage cash flow at a level that we had no clue what we were doing.

Patrick: It scares the heck out of you, yeah.

Steli: Also there’s these periods where you can’t keep up with the demand, then there’s periods in our business where there’s zero demand, like December for instance. The last two weeks of December, the first week of January, there’s no sales happening during that time.

All the customers you would close, we would close in the last quarter of the year. We would close at the start of the late of the second quarter of the year. You have certain bubbles where sales don’t happen as much, where selling isn’t as effective in B2B, you still have all the headcount. You still have all the employees who still get their salary.

Patrick: Their paychecks are due on the 15th and 25th of the month.

Steli: Every month, doesn’t matter what happens. Once you’re at the highest scale of revenue, you manage cash flows at a level where we were just not equipped to. We made some mistakes and that got us into really tough waters at times, and it just creates stress.

Patrick: Yes, cash flow stress is…I’m buddies with a lot of folks who run multimember consultancies and the single biggest stress factor probably, the real employees cost money. You’ve got to make their salaries every two weeks and the lifecycle of billings in consultancies typically does not line up with that.

It’s often for very successful companies like great team, 20 people working for it, best brand in the business, yadda, yadda, they don’t know whether they can make payroll four weeks from now. It’s kind of insane.

That happens in solo consultancies too. I had instances where it was like I had to get a particular engagement I had run up the cost of my wedding on prospecting trips to America, and then I was holding in the other hand an invoice for the same amount of money.

It was like, “OK, race. Does the credit card go over the limit first or does the invoice clear first?” Then that happened several times over a two year period. Much more stress than running SaaS businesses that were big for me.

Steli: That was a big part of it. There was a lot of stress involved in that business. There’s also as we were growing that stress became more painful. You had to deal with a lot more management issues, cultural issues, human resources, just keeping the entire thing afloat and running was just a very, very hard business.

That played a really big part. At the end of the day as an entrepreneur you only have so much time, you only have so many hours in the day, so many opportunities that you’re going to follow, you can’t do everything.

You have to make decisions on like, “Do I want to spend all my life chasing this opportunity or that?” When one business is literally pushing a little stone up a mountain and it gets bigger and bigger, but it gets harder and harder and more painful — and the other business is tipping the little stone down the mountain, and it just naturally gains more and more momentum — it’s clear where the opportunity…momentum is the signal that you should follow, as an entrepreneur.

For us, it was just clear. We loved our product. We loved the services business, but we also kind of were burned out, after a few of those crazy highs and lows. I think when we saw that software business take off at that pace, multiple things happened.

Number one, we were thinking, “OK, this is clearly something that could be a massive success, and has this natural momentum in the market, so we’d better focus on helping that become all it can be. We can’t just split our attention.”

There was also a certain level of relief, of saying, “Wow. What would a world look like, where all we do is software, and we don’t have to manage this crazy amount of overhead and crazy amount of cash flow, and get subscription revenue?” As you said, you add more customers. You don’t necessarily have to add more cost immediately.

Patrick: Often, more customers don’t translate into more work or more stress, either. It’s just, as long as the server is up, it’s equally up no matter whether there’s 100 people paying you a month, or 1,000 people paying you.

Steli: Yeah, exactly.

Not to say that any of these decisions were easy or super-clear to us, for a while there was this back-and-forth of thinking, “Well, should we hold onto both things?” I wanted to. Just emotionally, I would have liked holding onto both businesses.

But then as time goes by, it’s clearer and clearer that it’s irresponsible to try to do that, and all of a sudden you start wondering, “What could we actually do on the software side, if I didn’t spend 80 percent of my time managing the other business?”

You start feeling like you have two relationships where you’re equally irresponsible to both parties and don’t make the necessary investment in them to help them become really all they could be, so you have to make a choice and say, “I’m going to commit fully to one or the other. It’s unfair to both to try to hold onto both things.”

Once you have to make that decision, now you have to decide what do you do with all these employees? Which ones can actually transition over to people that are going to work on the software business, and what do you do with the amazing people that can’t?

That’s really why it’s so hard to let go, because you’re like, “Wow, we’ve built this amazing group of people and talent. We would never want to let them go, but we can’t also hold onto everybody. It makes no sense.”

Patrick: That’s also one of the not-so-hidden advantages of Silicon Valley which is, in a lot of other locales the surrounding ecosystem couldn’t exactly conveniently absorb 60 very well-trained SaaS sales guys. Where, in the Valley…I don’t know how you actually managed it, but I’m presuming 60 very trained, very effective sales guys could all get jobs within, what, a week?

Steli: Not all 60 were in-house. The team that was in-house was much smaller. We’re talking 25-30, so half of that. But all of these people got jobs in the Valley. A majority of them are directors of sales, VPs of sales of high-growth, amazing companies. A lot of them became managers or executives at companies that were our customers, naturally.

We made sure that everybody got an amazing opportunity, and used what they learned with our business to take the next step in their career, in many cases with companies they were doing sales for anyway.

Patrick: This is a fairly common trajectory in consulting, by the way. I know some folks in the audience might not know this, but employers often say, “We’ve gotten used to working with Bob over the last two years. He’s been instrumental in our blah, blah, blah efforts.”

For an ongoing consultancy, there’s often a discussion between the consultancy and the client like, “Can we” — I hate this word — “‘buy’ Bob from you? Or work out an arrangement where we can recruit him without violating your various covenants that are in place?”

Steli: Yeah, it happens a lot.

Patrick: Yeah, it’s great. If you can get your existing clients a satisfactory resolution, it’s like nothing changes about your business aside from, “Rather than cutting us a check and paying us half the money, you just hire on the guys who you had working on sales, directly. Now you’re their employer of record. Congrats.”

Steli: Yeah. I’m really proud of that transition, and the relationship with all of the people. Not only that all of them remained friends — all of them became customers. Even the ones that went to companies that weren’t using our software turned around the company to purchasing the software product from our side, so all of them are customers, all of them are friends, and we have really great relationships.

But again, the actual day I had to announce this and have one-on-one conversations, let people know that, “This is the direction of the business moving forward, and some of you will move with us and some won’t” — single hardest day of my life.

It sucked, and in that moment you don’t have the advantage of hindsight to know everything will work out well — and people don’t, so it’s a terrifying event for people. But I’m glad how everything turned out. It was still very difficult to do that.

Patrick: Yeah. I can barely imagine.

I think this is something entrepreneurs might not…I guess many of us have a pre-entrepreneurial career where we had the employee mindset — I certainly did — but I think entrepreneurs, we have our own little culture about stuff. We’re like, “Yeah, you get a company shot out from under you, that’s no problem.”

“Real people,” who have jobs and expect a paycheck every two weeks, getting separated from a company when they didn’t see that coming is a really big problem!

Steli: Yes.

Patrick: I think we’re like, “Oh yeah, fail quickly. We’re going to dissolve the company and start a new one, yadda, yadda.” We owe it to employees to find them…a “soft landing” is a term of art, but it’s a useful term of art.

Find them a transition plan that minimizes the stress for them because employment isn’t just a business relationship. It’s the one business relationship that’s sort of a sacred trust, too. You’ve got to take care of those folks. I’m really glad that you managed to do that in that forthright and mutually — tri-party mutually — successful manner.

I think this is probably running to the hour and a half that these podcasts usually run, so where can folks find out more about Close.io if they want to — aside from Close.io?

Steli: Close.io is a good way to get started. If you go to close.io/blog, when you go to our blog there’s a lot of sales content that people can read, and a lot of people seem to like it. People can just get in touch with me personally if they want to, if they want to chat sales, entrepreneurship, or anything else. Just steli@close.io. We do have an email course to no small part…

Patrick: Yup, Steli took my course on doing lifecycle emails.

Steli: Yeah.

Patrick: It worked out for you, right?

Steli: It worked out. I don’t know how many thousands we’re making more every month because of it, but it’s a lot, so we owe a lot to you.

Patrick: I’m going to write that down for a testimonial for the page. “I don’t know how many thousands we’re making from it, but it’s a lot.”  [Patrick notes: I should really do this.]

Steli: It’s a lot.

We have a startup sales email course for people that thought some other things were interesting and they want to learn more. Actually, you can learn both more about startup sales, and learn what I learned from Patrick, in terms of putting email courses together.

Patrick: Awesome. Thanks very much, and I’ll sign off for myself. I’m Patrick. I always love getting emails from people, so please drop me an email. It’s patrick@kalzumeus.com. Presumably that’s spelled, wherever you’re listening to this.

If for some reason you aren’t on my email list yet, you really should be on my email list. It’s at training.kalzumeus.com. Just give me your email address and we’ll send you stuff that you enjoy.

One announcement that is upcoming from me, I’ve been working on a conversion optimization course for the last several months, all about B2B SaaS businesses, getting them more trials, more sales, yadda, yadda. It will hopefully be functioning later in July.

If you look on the bottom of this podcast, there will be…I guess I’ll just give a Bitly link. Bitly/kalzumeuspodcastsconversion.  [Patrick notes: Unshortened link is here.]  Just click that, and you can get an announcement when that course launches. I’m hoping to get it done in July.  [Patrick notes: I’ve been working on it most days for the last several weeks, but unfortunately, launching in July is not realistic.  We’re moving to Tokyo next week.  Sign up and you’ll hear when it is ready.]

Thanks very much. It was an awesome conversation. I particularly like how we got into actual nuts and bolts of it for SaaS businesses but for the LTV in the 5K-10K range, because I’ve worked with companies that have started fits and spurts in sales. It’s really made a difference for the business.

Thanks so much for showing up, and for all you guys in the audience, hopefully we’ll have another one in another month or two, and we’ll see you next time.

Steli: Thank you so much. Bye, guys.

Patrick: All right. Bye, guys.

Kalzumeus Podcast Episode 7: Launching New Products

Keith and I recorded a new episode of the podcast last year, but we didn’t get around to releasing it.

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

What you’ll learn in this podcast:

  • How to pick a small, self-contained product, which is good to cut your teeth on as a dev-turned-entrepreneur.
  • How Keith extracted Summit Evergreen out of his consulting work (improving infoproduct businesses).
  • How to use concierge onboarding to increase conversions and decrease churn of SaaS businesses.
  • That it is possible to build a very successful consultancy without being quote-unquote Internet famous.
  • How to use Standard Operating Procedures documents to have employees do repetitive tasks without needing to actually automate them, while you’re still exploring for the best procedure for completing those repetitive tasks.

If You Want To Listen To It

MP3 Download (~115 minutes, ~85MB) : 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: Launching New Products

Keith Perhac: We’re started.

Patrick McKenzie: Hello everybody and welcome to…What is this? The eighth episode of the Kalzumeus Podcast. [Patrick notes: There was an episode #7 in recording sequence, but due to some issues, we haven’t gotten it ready yet.  It will retroactively become the 8th episode.]

Keith: Indeed it is.

Patrick: I’m Patrick McKenzie here again with my co‑host, Keith Perhac.

Keith: Hello, again.

CreditCard.js: A Nice Product, Both For Customers And The Founder

Patrick: Let’s see, we’ve got a fun day planned ahead of us. First thing we’re going to be talking about is Creditcard.js and that’s in eponymous creditcardjs.com.

Keith: That’s because that came out today, I believe, on Hacker News, which will be about two weeks from when we actually get this up. [laughs]  [Patrick notes: Actually recorded 8+ months ago.  Sorry — life happened.]

Patrick: Predictably, just to give you folks an idea of what it is, it’s well executed CSS, JavaScript and HTML which does the standard static credit card form. But it does it well, such that when you start typing in a credit card number with a four, it knows that it’s a VISA and it does error correction and does the Luhn checking in real-time without having to submit it to your servers.

This is like every credit card form that you’ve ever coded in the last five years, except it’s done well without you having to work at it for three hours. It makes a very good self‑contained product, I feel. Something that can be built over the course of a few weeks, tuned to within an inch of its life, and then sold to people.

Because it’s sitting in the critical path on taking money from every website ever, it’s worth quite a bit of money relative to the amount of time I feel it would take to build, and can be sold to many people in parallel.

Keith: If you haven’t read the Hacker News commentary on it, or forgot about it, the community is pretty divided on it, and ironically enough, so are we.

Patrick: I think it’s a wonderful idea that’s going to make this guy tens of thousands of dollars, and Keith is like, “Oh, you could do that with open source in the weekend.

Keith: Yeah. I have to say, normally I am not on the side of open source will solve everything and I should be able to get it for free. I am more on the side of paying for it if it saves me time. This is especially apropos because I just launched my first SaaS product last Monday. This Monday, which we’ll be talking about in a little bit, I had to build the credit card form for that.

I am uniquely capable of saying, “OK, I know exactly how much time I spent in putting up my credit card.” That being said, the credit card JS right now, is $150.00 during their beta, and $250.00 after that. It’s one year of upgrades and unlimited use, is what I believe their licensing says.

Patrick: I think it said that the licensing is per-site.

Patrick: If you have 15 clients, you’re going to have 15 licenses. I think it’s rounding error next to the amount of money you typically put through a credit card form, and also next to the amount of time you’d spend in building that from scratch. I think I have probably been involved in 10 projects like that for consulting clients.

Conservatively, over those 10 projects, they have a $100,000 invested in their credit card forms.  If I could just take this off the shelf, drop it in and say, “All right, it’s going to cost a total of $1.5K and I’ll get to the more valuable AB tests” rather than having to re‑implement this from scratch every time, I would be doing that every time and all the time for consulting clients.

Keith: What we are talking about really is for a company or someone who does this all the time maybe it is a better investment. I actually would the opposite. If you were a consulting client, or if you are a consultant and you are doing this constantly it would be better to have your own solution instead of paying $250 for each client you install this for. If that’s billable to the client that’s something else.  [Patrick notes: Strongest. Possible. Disagreement.  He’s talking crazy talk.]

The reason I say this is because like I said, about a week and a half ago, I built the credit card processing on my site and I needed, essentially what this does? What this does is it makes a really pretty form and it detects the card number like Apple site does, where you put in a 42 and it automatically says, “Oh, this is a Visa” or you type 34 and it says, “It’s an American Express.”

It formats it out nicely so it’s got the spacing right, the name on the card, the expiration date, the security code that has a little about html. Here is where you find your security code, if it’s an AmEx, here’s where you find it, if it’s a Visa, et cetera.

It’s very nice. Coding it from scratch would be absolutely horrible. If you were planning on coding it from scratch I highly recommend not, and buying this instead. The problem is I use Stripe. Stripe has a lot of great open source solutions that they don’t need Stripe to be running on. One of them is I believe they call it jQuery.payment or payment.jQuery or something like that.

Patrick: Google it.  [Patrick notes: I Googled it for you.  It was, indeed, jquery.payment.]

Keith: Yeah, Google it, Stripe Payments, it’s really easy. But it has all the same functionality for the JS. It does not have the pretty form which I think is really the crux of this argument.

Patrick: That’s what I generally want to buy, considering pretty is not a strong suit for me. But I do tend to disagree. Stripe’s jQuery payment thing: I like it. I’ve integrated it myself. I took my nice pretty form done by a designer and then ended up integrating the javascript myself, and it’s an hour’s spent of hooking up javascript events to HTML divs and whatever with that funky dollar syntax, and it doesn’t make me any money.

Keith: This is true.  If you run a business, you have to do a balancing act.  It took me two hours to reproduce creditcard.js on my site. An hour of that was finding the stripe payments processing code because I had never heard of it before.

Patrick: This is one of these times where he’s my best friend and I want to punch him in the face because his charge out rate is $500 an hour and he’s arguing about $150 to save him two hours. [laughs]

Keith: But it was a good learning experience for me. That’s another thing. If I was rushed, I’m not debating whether this is a good purchase or not. Really, I’m not.

Patrick: A punch in the face.

Keith: [laughs]

Patrick: Shall we move on to something else?

Keith: Yeah, let’s move on to something else.

Patrick: For those of you who haven’t already got credit cards up on your site or if you feel that the user experience is not optimal and you want to try AB testing or something to see if you catch more transactions, take a look at creditcard.js.

Keith: I will say. I will say 100 percent I’ll stand by that. Try out creditcard.js. I would A/B test it. A/B test it against your current one, against creditcard.js. They have a 30‑day money back guarantee. If you see your sales dropping or you don’t see improvements, tell them. “Hey look. It didn’t work. It didn’t work as advertised.”

Patrick: As one of the two resident A/B testing gurus I can’t say I’d pop this in an A/B test right away, because how many transactions would you need to be running a month to get statistically significant data there?

Keith: I have clients that could do it in a week. [laughs]

Patrick: Well, yeah.

Keith: I have small clients. I have four people clients that could do it in a week.

Patrick: Yes, but they do run tens of thousands of transactions, right?

Keith: Yeah, they do.

Patrick: If you got tens of thousands of transactions a week, totally pop this in an AB test. If you haven’t quite gotten to the level of tens of thousands of transactions a week, just put your finger to the wind. Take a look at their landing page and say “Is this not as good as what I have currently?” If it’s not as good don’t include it.

I’ve given this advice to a lot of my A/B testing clients like so.  Earlier on in the funnel when you have high volumes and have a relatively high conversion rates like to email submissions,for example, it’s easy to just find volume to do A/B testing. But at a certain firm size, like even in the say $10 to $50 million range A/B testing the credit card form can be kind of difficult just because you don’t have the massive volume on transactions.

Typically at my companies they would be doing high value transactions. Even at $10 million that might be only a thousand through 10,000 transactions which won’t be easy just to get to statistical significance.  It will take a, emperor, era, reign, age thing.

Patrick: What is the English word for that?

Keith: Era-century? Era, I think?

Patrick: No, like 平成、is what?  [Patrick notes: Sorry if you don’t understand Japanese because this part of the conversation will be pretty unintelligible but we know what we’re talking about.]

Keith: About 25 years right now?

Patrick: Yeah, I know that. Heisei is an example of what? I keep coming back to the words “imperial reign…”

Keith: Imperial era.

Patrick: Imperial era, that’s right. This is how we count years in Japan by the way. What emperor is reigning during the relative period of time and how many years. But, yeah, you won’t achieve statistical significance before we have a new emperor and every Japanese company has to update every payment form. That’s going to be a lot of fun work.

Keith: That’s a lot of chances for business.

Patrick: Apropos of nothing, a world created by programmers would have no dates, time zones, imperial reign things, all of it…

Keith: Or sales tax.

Patrick: Sales tax. These things just like burning with fire. Why did we ever come up with this [laughs] ?

Keith: It’s going to be interesting because as you know, next year our sales tax goes from five percent to eight percent. It’s an increase of three points. There’s a Japanese law that all prices have to written with sales tax included. Every single sign in the country will have to be reprinted.

Then one year later they’re going to be raising it to 10 percent and we’ll need to rewrite every sign again. [laughs] We said we weren’t going to get in on that.

Keith Discusses Summit Evergreen, His New Product

Patrick: Launch?

Keith: I’ve launched my first SaaS. Going well! It’s Summit Evergreen.

Patrick: You should give people the elevator pitch because I don’t think that you talked about it all that much on this podcast yet.

Keith: We have not. As you know I do consulting for a lot of clients. A lot of my clients are info‑product people. What is the name for the product? I can see you cringing right now behind your glasses or…

Keith: What do you prefer as the name?

Patrick: Productized consulting or even sometimes I refer to the form factor, like the e‑book or video courses. Anything sounds better to me than info product because info product pushes my Internet marketing neuroreceptors and they are not happy neuroreceptors.

Keith: I hate the word e‑book with a burning passion, so let’s do video course.

Patrick: OK, a video course.

Keith: Patrick put out his Lifecycle Email course which is amazing if you haven’t checked it out. I am completely unbiased in that. I do a lot of consulting for clients who do video courses or just pure text courses, mainly video. One of the things that is difficult to do, especially with a video course, is to provide value over a length of time. You can say, “Here’s my course.” They get it all. It’s like, “I paid $500 for this and it was done in a day and now I don’t know what I got for that $500. I have a lot of content, but I am not led through it.”

The idea is that you take your content, you have your video course, and it’s a real course. When you go to a community college, they don’t just give you all the books and say, “All right, we’re done.” It’s this back and forth between the teacher, the content, and you. It’s doled out over time. I think that’s one of the key parts of a video course. It’s the same as your Lifecycle Email course is that it’s doled out over time. It’s not, “Here’s everything. Go at it.” It’s first we do this and then let’s build on it.

Patrick: One of the problems with critically hitting people with a wall of case, or dropping five hours of video on somebody on one day, if you actually look at the analytics for who’s successfully watches and takes action on it. (Ultimately the goal for both parties on it is them taking action on it.)

As a gateway to them taking action on it, they need to actually watch the lesson. A lot of people watch the first hour. Less people watch the second hour. It trails off. The fifth hour, five to ten percent of the people who bought my course, actually watched the fifth hour, which is sort of unfortunate.

Keith: Another thing that I noticed when you have the entire course, interestingly enough I got access to the Lifecycle Email course all at once because Patrick was nice enough to skip me forward. [Patrick notes: Keith thinks that my course was dripped out to customers, but he’s not actually correct.  It was all delivered at once.] One of the issues with it is that you tend to skip the things you think you already know.

It’s like, “Oh, I already know how to write a welcome email. I’m just going to skip that part.” That has a detrimental effect on both the customers feeling towards the course as well as their understanding of the course. Especially, if you build off things that you might have skipped, then they’re going to feel lost. That’s going to turn into churn.

Patrick: We might need to explain what churn means in this context. Just going back on for a second on that one, as a teacher and someone who has done one of these products before, sometimes a video that says on the tin that teaches you something you think you already might know might have a tactical implementation tips might have has wildly disparate value that people don’t always realize are there.

For example, I had consulting clients who are already sending dunning emails. Dunning emails are just emails which tell folks that they owe you money and attempt to collect it.  I won’t tell you the whole spiel now. There are good ways to write down done‑in emails. and there are bad ways to write done‑in emails.

There are a lot of clients or a lot of companies that sell SASS or some product that gets billed every month, will send out a done‑in email like, “You’re credit card failed, please update.” That will be the entire text of the email. There are better ways to do that which get higher rates of audience compliance. If you get customers to comply with the instructions to pay you money that’s worth staggering amounts of money on scale.

Keith: Yeah, exactly.

Patrick: People might skip that video because they think they’ve already implemented dunning emails. They think: “How hard is the dunning email? It is two sentences long.”  I have had consulting clients where I was in the building able to direct them through re‑implementing that and made them five or six figures for thirty minutes work on their emails. That’s unfortunate.

Back two steps, you mentioned that it helps decrease churn when you increase people’s perception of value and get them to consume more of the content that was in the video course. What do you mean by churn in that context? I think a lot of people are coming from it, “Wait. The business model is a one‑off sale. We don’t have churn in a one‑off sale.”

A Brief Note On The Challenges Of Infoproducts In Some Markets

[Patrick notes: Keith has extensive experience working with clients who sell B2C infoproducts in particular markets where, by nature of the type of customer, many customers experience buyer’s remorse and attempt to cancel the purchase.  The following discussion is not quite so relevant if you e.g. sell books on Rails development or software.]

Keith: That’s a little dirty secret of “video course.” I put it in quotes, because you know what I wanted to say. At any sale on the Internet. A one‑time sale is not a one‑time sale as long as that a credit card was used for the purchase. The reason for that is, first of all, most video courses have a refund policy.

If people are not happy within that refund policy, say that’s thirty days, then they will refund. That’s what I mean by churn. In a refund, you’re losing money. You already gave out the course, they don’t like it. They’re refunding. Then you say, “Oh, I just won’t let them refund.” That causes another big issue which is…

Patrick: That’s something you never, ever, ever want to do.

Keith: Which is charge backs. OK, so the credit card company, how many days is a charge back now a days? 30 days?

Patrick: 180 days, Keith.

Keith: 180 all right. For 180 days after someone has purchased your product, they can go to their credit company and say, “I didn’t like this. I want a refund. It wasn’t me.”

Patrick: Anything that merchant did not live up to their claims on the website. You will almost invariably lose that charge back.

Keith: You will indeed. That charge back will not only take your money and they will charge you a hefty fee on top of that for trying to take someone’s money.

Patrick: I almost had one of these for the Bingo Card Creator. They’re annoying. It’s a cost of doing business. I understand this happens once or twice a year for reasons which are only somewhat in my control. You get the $30 for the product back. I just got assessed a $15 fee from the bank.

Keith: That $15 is from Stripe who is nice about it. Other processors will have $25 to up to $100.

Patrick: Yep, because it’s largely a manual process for chargebacks. They are not handled through APIs like Stripe is.

Keith: You want a refund policy. You don’t want to piss off your customers because they will hurt you more than it costs you to give them the free product. That’s what I mean by churn. You want people to be happy. You want people to find value from your product. Not only because you want to help people, which you should do, but also because it will financially hurt people if they are not happy with it.

Patrick: I should note that the base rate of refunds is wildly disparate depending on what the audience for the product is. For example, in the B2B case, refunds are very rare both for video courses, SaaS, virtually anything you sell to businesses. The refund rates are scandalously low. I think I had on order 250 sales of my course, and two refunds.

One of which they refunded so that they could buy the more expensive version instead, so net one refund. A baseline B2C rate of refunds, let’s see. Bingo Card Creator has a very high refund rate because I am very aggressive about offering customers refund to solve customer service issues. That’s on the order of 2.4 per cent in most years. Higher this year due to a PayPal fraud ring.

Keith: Video courses…Didn’t you have a higher one?

Patrick: Yeah. Especially as you get closer and closer into the dun-dun-dun Internet marketing space, the refund rates approach like the double digits range where if you are getting close to that, something is wrong.

Keith: Yeah. I think refunds are the dirty little secret. No one ever thinks about that when they are creating their product. “Oh I made a million dollars in sales this year.” Well, fifteen percent refunded. That is 15 percent of your revenue gone. [Patrick notes: Again, in most industries relevant to you guys, if you have a 15% refund rate that’s a four alarm emergency for the business. This should never, ever, ever happen to you.]  You really have to care for your users. Going back to the topic at hand, that’s what a dripped course does and a dripped course.

A dripped course is a course that’s doled out over time from the time that the person purchases. This is a very common thing in video courses and what not. The problem is that there’s no real software that supports this right out of the box. Most people either build their own solution like Patrick did.

Patrick: Don’t do that by the way.

Keith: It’s really a pain in the ass honestly. The other thing is to do a launch and then drip it out manually, which is what they do when you use WordPress or what not. Essentially what happens is, on launch day, you say everyone’s buying on this day. Then, for the next, at the beginning of the week, I am going to launch the next week of content.

The problem with this is you can only do that once. If you want to sell it again, you got to do it again. What people end up doing is they make an e‑book, because e‑books are very easy to evergreen.  [Patrick notes: Keith is here using evergreen as a verb to mean “To sell in an ongoing fashion rather than as a one-off sales event.”  Think more like selling books and less like selling movie tickets, although it is actually the case that sales for most books are, like movie tickets, highly front-loaded.  Still, in general, you can sell books outside of the “new release” window and its attendant publicity, but this doesn’t happen to movie tickets.] They are very easy to make once and sell to everyone.

Keith: This is one of the interesting conversations that I had a multiple times on hacker news as well. How much do you consider an e‑book to be worth?

Patrick: I think that varies wildly depending on what’s in the e‑book. Let’s say hypothetically that e‑book is being sold to businesses and has something that will eventually increase their revenue or reduce their costs.

Keith: Let’s talk the highest cost an e‑book could probably get you for a business as a downloadable pdf.

Patrick: OK as a download a book pdf, I think you could definitely do things like Nathan Barry had done with higher tiers.

Keith: He puts things together with the e‑book.

Patrick: Just a flat downloaded pdf. I’m thinking somewhere in the $49 to $99 range.

Keith: Yeah exactly. How much is your life cycle email course?

Patrick: $497 or something rounded to $500.

Keith: Yeah. Do you think you could have sold that as e‑book for $500?

Patrick: I think it would be very difficult to convince people that it was worth $500 as an e‑book.

Keith: Actually, I do this with my consulting clients as well because many of them do the e‑books because it’s very easy to evergreen. They launch once and they forevermore say, go to my site, my shopping cart page, buy the e‑book, and then you’ll have it. Then they’re like and that’s worth $50‑$60. The problem is that’s worth $50‑$60, that’s great. You’re not going to sell a $2,000 or a $3,000, or even a $500 e‑book like that.

You can take similar content, add video, add downloads, add all these other extra things in there and drip it out over time to make it more valuable. That’s what the course does. That’s what my system does, Summit Evergreen.

Let’s you do is take your video course, take your audio course, take your written course, take your download, take your feedback, and drip it out over time in an evergreen fashion. Based on whenever a person purchases, they run through the whole course. Just like the course that Patrick wrote from scratch. How many months did that take you to build your courseware?

Patrick: I think it was, I want to say, two weeks. That’s like an engineer’s two weeks, so it’s probably really four weeks.

Keith: Four weeks?

Patrick: Yeah.

Keith: As a very good engineer, with the framework, and you would have done processing with Stripe before. You knew how to hook up their API. You used a lot of code from other places, yeah?

Patrick: Copy/pasted in the entire user model from Bingo Card Creator.

Keith: [laughs] So we’re really talking, if you have all the modules and everything, great, very easy to set up, four weeks of engineering time.

Patrick: It’s easily in the five figures of engineering time.

Keith: It’s a large project.

Patrick: That’s often a cash cost for a lot of Keith’s customers because these people who do training on the Internet do not necessarily have Ruby on Rails developers just flowing out of their ears. When Keith’s clients come to Keith, they pay Keith cash money to set up systems to sell this.

Keith: That’s one of the things that we’ve been doing. We’ve looked at the ways that people have marketed their video courses, ways that people need to look at their video courses, and not only the data. Patrick you say that you only have 250 customers.

I say “only” not with any derision, but with love. I have some clients that have 10,000, 20,000, 30,000 users running through theirs. What do you have for user analytics. Do you have anything?

Patrick: Nothing.

Keith: Exactly, you are not alone in this, this is another one of those dirty little secret like refunds. Once people buy the course, are they using it? Even if they don’t run a refund, did they use it? What did they like? What did they not like? What should I do for my next course?

Patrick: I’ve done ad hoc surveys after they bought it. Talked to them individually, and there’s a page I can go to in Wistia which will showhow many people watched a particular video, and if I do the math there at, I could figure x over 250 equals over 25 percent of the people or only 10 percent of the people watch this video so question mark.

I supposed that could tell me something. I haven’t spent any time or built any analytics software to help me do that in a more systematized manner.

Keith: I think that’s really important because you can learn a lot from not only are people watching but who’s watching it. We’ve done dives into our analytics. This is basis of what the software we built. OK, let’s look at people who are refunding. We’ve found out that 70 percent of the people who listed their occupation as “education” refunded. Now we have a…

Patrick: What are you proving? That teachers are terrible, terrible market?

Keith: [laughs] If only me had created some Bingo cards or something for middle aged teachers in the Midwest.

Patrick: If there’s anyone on this podcast who does not yet understand it, do not go after the education market. Please, save yourself a lot of time and pain.

Keith: [laughs] What I was saying with that was now we have a flag. Now, that customer has a flag. That client has a flag to know when an educational customer gets within that refund period, at about that three week market, they should send extra support emails. They have a little flag that says send an extra support email that says, “Hey is there anything that we can help you with?” That helps in reducing refunds a ton.

Patrick: I really love this mid-touch idea where it’s not high touch like an enterprise sales process where your first contact with the company is, “OK, I’m going to give the sales guy my phone number. He’s going to call me, invite me out to a steak dinner, and then attempt to sell me a $750,000 solution.”

It’s not low touch like Bingo Card Creator where my idealized interaction with the costumer is never talk to them at all. They just deal with the website and email, “Give me $25.95″ and I never learn their names.

Somewhere in the middle where customers are sufficiently engaged with the product or they’re savvy enough or whatever the combination of things is. They can get all the value out of the product without even needing me to touch, talk to you. That’s fine. They can do it. Then, there’s customers who might need a little prodding or handholding, can be offered that prodding or handholding, but at scale and at such manner it doesn’t require basically one to one use of the company’s time and the customer’s time.

Concierge Onboarding

Keith: This was a key word that we brought up a lot. I am going to skip ahead one and then come back to one. Patrick and I went to MicroConf Prague, or MicroConf Europe in Prague, what three weeks ago?

Patrick: Yeah.

Keith: What was one of the key words there that we keep saying?

Patrick: “Concierge onboarding.”

Keith: Concierge onboarding.

Patrick: OK, concierge is probably one of the most important word that I’ve learned or has come into fashion in the last year or so for selling software on the Internet. Mind if I take concierge for a little bit? Back in the olden days, where it was just high-touch sales and enterprises selling things to other enterprises for $100,000 and there was a sales guy involved, and steak dinners and fancy bottles of wine preceded invoices.

There was this thing that was called “professional services.”Professional service was basically consulting that you had to use to get the software to be in some state and functionality, but the company was very rarely interested in consulting as a profit center. It was you would sell someone $20,000 of consulting to enable an $80,000 license sale of software.

Concierge onboarding is taking the core of that idea and applying it to the SaaS model. Instead of $100,000 licenses, it’s $50 to $500 per month. What concierge onboarding is rather than someone coming to your website and saying “I want the Small Business plan. It costs $80/month. I interact with their automated onboarding process.

Click, click, click, I interact with their automated onboard email sequence. Click, click, click the thing, never talk to anybody, OK it’s thirty days later and I pay my $80 on my credit card.”

Keith: If you’re lucky.

Patrick: Yeah, if you’re lucky. Twenty five percent of them if you’re very, very good at it will pay the $80 on the credit card.

You affirmatively get in touch with somebody that is a prospect for your service. They’re a lead or a trial. They just signed up for the service. You say, “Hey. There’s some configuration or data import or learning curve associated to getting up and running on this. We want you to grease the skids, grease wheels, of that onboarding process for you.

For example, if it is an analytics product, you’re going to have paste some JavaScript into your website.  You might not be technical and that might be difficult for you. Tell you what, I will log into your website and do the copy pasting for you. You tell me your FTP username and password. I will get it done.”

In my case, Appointment Reminder  often  requires importing somebody’s contact data base into the appointment reminder system. There’s actually isn’t a system that takes an arbitrary data dump from any arbitrary patient or contact management system, converts it into an Excel file, and allows you to see arbitrary columns and import them into the data base.

Just tell people, “Look, get me any data file in any format that you can come up with, send it to me via email, I will figure out how to proxy it and import it into the system for you.”

On the assumption, that has been proven out in data, by the way, that OK, if someone comes in the door and says, “I want a $200 account.” Twenty five percent of them are going to actually convert into paying $200 a month and that’s happy. Seventy five percent of them who have their data imported into the system will actually convert into paying $200 a month.

That adds literally thousands of dollars to the lifetime value to move someone from the 25 percent chance of conversion to the 75 percent chance of conversion via importing.

Keith: Since there’s not that many people doing concierge right now. Once you have your data somewhere, it’s very hard to move out.

Patrick: Right, right. You don’t even have to use any Microsoft nastiness to make it difficult to get people’s data out of the system, you can just let friction work.

Keith: Right. [sarcasm]You can export all of your Google data, all your Facebook data to a nice, easy‑to‑understand Excel document. Then what the F are you going to do with that?[/sarcasm]

Patrick: If anybody ever wanted to leave the Appointment Reminder platform, I would be so happy to export them an Excel file of all the data they have in the system. Since nobody’s going to import that for them to free, that’s not really a competitive risk for me.

Keith: Right, exactly. The people who are going to import that for free are people who are directly your competitors.

Patrick: Or, to phrase it the other way, if someone gets their data from one of the competing appointment reminder platforms or one of the complimentary patient management platforms I will be happy to walk over any sort of engineering issue to get that data into my system just to make it easy for them to get up and running.

Keith: Exactly, exactly. Remember, your competition is not just your competition. You’re their competition. The better services you can get in getting their data into your system, the better you are.

Patrick: I feel like we’re kind of rat‑holing on that import thing.  Back to concierge on‑boarding. I’ve seen companies that have successfully implemented it across their entire range of accounts.

One thing you can do just to get a baseline for how much that’s is going to cost you in terms of founder time or customer support team time or customer success advocate time or whatever you want to call it.  Offer for a week to a small selection of people who are on the higher value plans.

“We saw you signed up for the higher value plan.”  Don’t actually call it that. “Thanks for signing up for the office plan of the software. As a special benefit to you, I’d like to make it as easy as possible for you to get up and running. Why don’t we spend an hour on Skype to walk you through it?” That’s what Brandon Dunn does.

“Or can I help you with the data import? Just send me the stuff I’ll take care of it.” You do that five times, 10 times, figure out what your average cost of doing it is, and then run the numbers. What percent increase in conversion or percent decrease in churn rate do you need to justify doing that for all the customers on the higher tier plans?

You can offer it as an explicit benefit on the pricing page. Let’s say Appointment Reminder is priced based on how many appointments you use per month, and it’s the primary axis of segmentation between customer types. You’ve got to figure that some of the doctors who are on the $29 a month plan would be happy to pay more money if it was less painful for them to use.

Importing things manually by retyping is painful. I might say, “If you’re on a plan at least one level higher like the $79 plan we’ll take care of that importing stuff for you.” The doctor might say, “I only run enough appointments a month to do the $29 plan, but I’ll bump up to the $79 plan and not have to have my office manager lose her fingers retyping our customer data.”

That gets $50 a month times average customer lifetime of two years. That’s an extra $1,000 in my pocket just for offering what is, from my perspective, perhaps 15 to 20 minutes of scripting.

Keith: Same with Summit Evergreen. We’re concierge on‑boarding everyone, especially in the first trial, right now. Most of the people who are starting off at this not only didn’t have an idea, they already have a product somewhere. They have it on WordPress, they have it on…who else is really big right now?

They write their own systems, et cetera. I have a lot of people who have all their data in GitHub and Markdown and they process it themselves. We’ll say, “We’ll take your data, we import it into the database. You have a theme? We’ll help you convert your theme and import it into the system, and you’re up and running in a couple of days.”

Once you’re up and running, it’s so much easier to stay in that system, and it’s so much easier to get what you want to do done instead of spending all your time, like you say, wearing your fingers down to the bone reproducing what you already have.

Patrick: This is something that’s really important for basically any system where you’re trying to convince someone from moving off a working system they already have. Eventually, I think Keith will be moving into building this sort of system or selling this sort of system to people who it’s their first rodeo at the products on the Internet thing.

People who, in general, for selling business tools, the people who are easiest to convince to start using something and who have the highest budgets for it are not people who it’s their first rodeo. [Patrick notes: This is important, guys!] They already have a working system. It has some sort of disadvantage associated with it.

You convince them to move to your system, and then start charging them money for it and learning what your system needs to do to grow into the other under‑served segments of the audience.

Great example of that: Rob Walling recently launched Drip, which is a life cycle email/drip marketing management tool. I’ve been building drip marketing systems for years. Many of my clients would be on something like MailChimp. There’s pluses and minuses for using MailChimp for drip marketing. We’ll just leave that out there.

If you go to a J. Random Client and say, “You should switch to this new guy’s system,” all of them are going to tell you, “We have something that kind of works right now. We might have a bit of dissatisfaction with it, but it cost us $10,000 to get it up and running the first time and, honestly, nobody here has enough time to spend a week rewriting it for your tool.”

What Rob Walling will do is say, “If you will point us at a series of blog posts or an existing email campaign, we will screen‑scrape with our eyeballs everything out of that, get it up and running in our system, and then all you have to do is turn the key on your site. Re‑target your form from submit to MailChimp to submit to the Drip thing. Then, boom, you’re live on us. No work required on your part, hardly.”

Then the inertia works in his favor rather than working against him. “I’m up and running on Drip now, why would I use anything else?”

Keith: Pains of changing are really things you cannot discount. Once someone’s on something, the inertia to stay on that system is very strong. Even if you have overcome that inertia to we’re going to switch to the new system and there’s a bump on the road then the whole thing can come crumbling down.

We’re actually on MailChimp right now. Love MailChimp. We have more experience with AWeber. We’re going to move our [Patrick notes: heavily NDAed] number of people from MailChimp over into AWeber, and they have a nice import feature. We decided before we move everyone over we’re going to test this once. Good thing we did because it will send a confirm email to every single person on that list that has already opted in.

They have to reconfirm their email address to get into AWeber. We were all ready, we bought the account, we had everything. At that point, we were like this is a bump. We could probably call support and deal with it, but MailChimp is good. They’ve treated us well. We’ll just stay with that.

Patrick: That’s not just a bump, by the way.

Keith: That’s a pretty big bump. [laughs]

Patrick: I have an idea of what client he’s talking about.

Keith: No, it was me.

Patrick: That was you?

Keith: That was Summit Evergreen, yeah.

Patrick: Figure if you ask for a reconfirmation, unless your list is incredibly hanging on your every word, you’re probably going to lose between 60 and 80 percent of them.

Keith: Oh God, that’s a low‑ball.

Patrick: I think I would lose 60 percent on my list if I asked them to reconfirm their email addresses today given that about 50 percent of them open every email. I might get 80 percent compliance on the yes, I want to continue getting email from you.  [Patrick notes: 40% is thus calculated via Bayes theorem, which is a college-level way to say “3rd grade multiplication.”]

Not to brag, but I think I have higher than the average emailer kind of loyalty for my list.

Keith: On the other hand, it’s not just loyalty. You’ve already been on a list. This is kind of going rat‑hole, but I just want to say this really quick. You’ve been on a list and they send you a reconfirm. First of all, you think maybe this is spam. Maybe you just trash it. Maybe you don’t open it. Maybe you email Patrick and say, “Hey, I got a reconfirm,” which I’ve gotten before.

I’ve had people email me that have been moved over to a new list and said, “Hey, I’m already confirmed, but I’m getting a reconfirm. Apparently someone’s trying to spam me from your address.” You just created so many support handles and support issues.

Patrick: It’s possible that someone has affirmatively moved your email from Google’s new promotions tab into their main inbox because they want to see it every time, but the reconfirm notice goes into the promotions tab and they don’t see that and suddenly they don’t get an email anymore. There’s just lots and lots of issues.

That’s one of the reasons why email marketing tends towards stasis. After you have a system that’s working, you don’t want to nudge it. Sort of like doing a DevOps.

Keith: Oh, God, yes.

Patrick: If you’ve ever gotten a particular version of Ubuntu running on your server, never upgrade it ever.

Keith: There’s a reason that I still have sites running on Slicehost generation one servers now owned by Rackspace…

Patrick: Obviously, you have to update your kernel everyone once in a while or there are going to be security vulnerabilities, and I understand that. I Just know, the last time I did the kernel update on Rackspace I had six and a half hours of downtime.

Keith: Exactly. I think that’s good about concierge servicing.

Patrick: That’s concierge stuff. Concierge is a tactic Keith is using for Summit Evergreen. Let’s talk a little bit more about that topic because there’s some interesting things that people who are doing their first SaaS business might benefit from.

Customer development is a catch‑word in the industry. I like Keith’s thing here for doing customer development. Basically, Summit Evergreen is an extraction out of his wildly successful consulting practice.

It’s not like the typical thing where I think I’m going to make schedule management for massage therapists, and I have not ever run a massage therapy business or whatnot so I don’t know if there’s a market for that yet.

In customer development, hopefully you would go out to the massage therapists and ask, “What do you use for schedule management? Do you have a burning schedule management problem in your business?” prior to building a solution and attempting to sell it to them.

Otherwise, you’re going to find that you make a solution that targets a problem that nobody has. Keith knows people who had businesses who sell meaningful amounts of money on these online courses have problems with the online course management.

They paid him previously meaningful amounts of money. Like meaningful amounts of money in a consulting sense rather than a $50 to $200 a month sense ‑‑ to solve these problems.

Are you comfortable saying what an average invoice is for somebody, one of the clients doing this?

Keith: I am, unfortunately, not.

Patrick: Let me pick a number out of thin air from my consulting experience as a ballpark number for having a high‑level consultant work for your business. Let’s say it’s $40,000 a project. If you have a successful consulting practice and you’ve been selling some certain segment of business, $40,000 services to get that aspect of their business better, then you know there must be someone who has at least enough burning desire to fix that problem such that they’re willing to pay for a software as a service offering if that software as a service offering is some percentage as good as having your expertise in the business for one week or two weeks or however you schedule your consulting engagement.

It’s highly unlikely that Keith is going to go to market now with Summit Evergreen, which is priced at whatever.

Tiered Pricing For SaaS and Infoproducts

Keith: Starting at 99.

Patrick: Starting at 99. What’s your pricing model for this?

Keith: 99, 250, and 500, I believe.

Patrick: What’s the pricing axis for that?

Keith: How do you mean?

Patrick: What determines whether I pay $99 or I pay $500, aside from the names of the plans? Naming plans are really, really important.

Keith: It’s all the names of the plan. No, I’m kidding. [laughs]

Patrick: I’ve honestly seen companies like that. No lie, guys. Seriously just putting the name “Enterprise” on something makes it more valuable than having the name “Hobbyist.” Can I tell my anecdote that I always tell about this?

Keith: Please.

Patrick: When I was working at a Japanese company, we needed to use Crazy Egg for something. Crazy Egg, shows you where you’re clicking on the website or where your customers are clicking on the website. I was the engineer in charge of this project. I ran the numbers.

We needed the hobbyist plan of Crazy Egg for nine dollars a month. I submitted an expense authorization form to my boss saying we needed the hobbyist version of Crazy Egg. It’s nine dollars a month which is about 1,000 yen.

My boss opens up the Crazy Egg page, scratches out hobbyist, writes enterprise, scratches out nine dollars, writes down $500 or whatever the equivalent in yen is, returns the form to me for re‑authorization so he can send it to his boss.

I said, “Boss, boss! We don’t need to spend $500 a month. We only need to spend nine. I’ve run the numbers. I’m very sure that we’ll have plenty of headroom under that.”

He says, “F if I’m going to my superior with the word ‘hobbyist’ on it.” It was worth $490 extra a month just to save face for an interaction between two people at this company which would have been over in less than five seconds.

Keith: This is one of the core marketing concepts that, surprisingly, a lot of people doing video courses do not get which is tiered pricing.

Patrick: SaaS companies don’t get this either, by the way.

Keith: It’s amazing. It’s absolutely amazing. At any pricing point, there is someone who will or will not pay it based on that. The idea is that you have a price point for whatever someone is willing to pay. If they’re only willing to pay $100, you have a $100 plan.

This, of course, you don’t want to have a five dollar plan. If someone is willing to pay $500 to $1,000 you better have a plan for them. Otherwise, they’re going to be on that $50 plan and you’re going to be out $900.

Patrick: Right. In the economics literature, there’s words for this kind of stuff that we’re just beating around the bush here. “Customer surplus” is the difference between what someone is willing to pay and what you actually make them pay.

Let’s say the value to my business of adopting this technology would be $1,000 so I’m willing to pay up to $1,000 to adopt that. Let’s say it’s $2,000. I have a 50 percent discount rate. I’m willing to pay up to $1,000. You charge me 50. That means I just received $950 in customer surplus from you.

One tactic to capture the customer surplus is called price discrimination — charging people different prices. Price discrimination in the classical market is sort of difficult because you have to offer…this isn’t a legal requirement or anything. Just operationally, it’s difficult to offer people the same product at different prices in such a way that you can maximally discriminate on their propensity.

SaaS does that by doing the nice, traditional, three to five column SaaS pricing tier thing and thinking really, really carefully about what’s in those three to five columns. Knock on wood, aspirationally, you think really, really carefully. The actual practice of a lot of SaaS companies is what a junior engineer threw up three years ago and no one’s touched.

Keith: This is really sad.

Patrick: On the plus side, if you ever work in a SaaS company, take a look at that pricing page. Do one to two days of really deep thinking. Every element on that page is should get asked: “Whose perception of the pricing offering is it supposed to modify and how?” Make a new version and test it. You can often add 25 percent plus to the enterprise value of the company for two days of work.

BTW, there are a lot of people who charge a lot of money for pricing advice just because the leverage on it is absolutely astounding.

Keith: If you improve someone’s pricing page and they improve their end of year sales that’s worth however much money they made that year because they’ll make it again next year and the year after that.

Patrick: It’s not just the bottom line. The leverage doesn’t extend just to the bottom line, it’s to the enterprise value of the company. [Patrick notes: If your company is valued at, say, 5X sales, and a change to the pricing page causes sales to go from $40 million to $50 million, that change isn’t worth $10 million, it is worth $50 million.  Or at least that’s the number to claim if you’re a consultant trying to justify your rates.] It’s absolutely insane.

Keith: Which is why, actually, our tiers…you asked what our axis is. Our main axis is the number of customers. Since it’s Evergreen, it’s not the overall number of customers, it’s customer per month. If you got 200 new customers this month then you will probably want to buy this tier. If you’re expecting 500 new customers a month, you’ll want this tier, et cetera.

Patrick: This is one of the good patterns for both SaaS pricing and info product, video course pricing, too. Align the price with customer success. It’s one of the reasons people like micro metering models. I generally hate micro metering models for pricing most things, unless it’s basically a purely transactional thing like PayPal or Stripe or whatever where you’re getting a percentage of every transaction.

The one good thing that you can say about those is that they scale pretty directly with customer success. If someone sells $100,000 of stuff through Stripe they pay $3,000 or whatever in Stripe fees. If they sell a million dollars it goes up to 30,000. Stripe captures some percentage of the upside is their business grows and becomes more successful based on the Stripe platform.

Sometimes, SaaS are priced in a way that does not necessarily align them with customer success. That’s often unfortunate. As an example, I don’t know if they would appreciate me telling the name of it but there was a company I was involved with, and they sell to developers. One of their pricing axes was how many repositories we have.

The count of repositories in your organization is a very imperfect proxy for your business success. I don’t know if this is actually true, but the word on the street is that Google has exactly one repository stored in Perforce or something ‑‑ one repository across an organization that makes like $100 billion a year.

There’s a lot of two-man Ruby on Rails consultancies that have 100 repositories just because Ruby on Rails and the Git model encourages you to have a repository for everything you do.

If you’re thinking of charging J. Random Two Person Ruby on Rails consultancy orders of magnitude more than you would charge at Google for a product that is approximately the same value proposition, your pricing might need a little tweaking.

Keith: This is one of the advantages, I think, that Bit Bucket has over GitHub because GitHub, for their private repositories, does what you’re saying. I’m almost positive you’re not referring to GitHub in that.

Patrick: No.

Keith: They do, do that. They’re competitive pricing. You get five private repos for five dollars or something. It’s nothing. Like you said, I have 50 repos sitting around, and I want them private because either they’re client stuff or they’re small things. I hope that’s a yawn and not you viewing me in disgust. Good. [laughs]

That’s one of the things I like about Bit Bucket. Bit Bucket’s pricing model for private repos is not on the number of repos, it’s the number of contributors you have to that repo. If you were doing a project where it’s just you then, yeah, it’s just free storage.

If you’re doing any business and you have more than 5 to 10 people in a repo, then they’re going to charge you for it.

Patrick: I really like scaling on team size because team size, again, it’s a imperfect approximation for the value received from a given product. It’s a really good approximation of ability to pay simply because somebody who has 10 employees in the company, no matter what their job title is, no matter what their salary is, if they have 10 employees then the company must be spending at least $20,000 a month on something.

Therefore, kicking your price up from $50 to $250, no needle at the company, changes as a result of that.  But when you 5X your prices it very much makes a difference at your company. I don’t even think it’s on our pricing page, but Appointment Reminder will kick you in from the $29.00 bucket to the $200.00 bucket if you have. I don’t know what the number is off the top of my head ‑‑ it’s like three employees or five employees or what not.

I’ve never had a single complaint about that.

Keith: And Atlassian is great, because that’s their whole marketing for the on demand service, and their normal service. They have the 10 for 10. Ten dollars a month for any product for up to 10 users. It’s great for small companies. I have exactly 10 people, actually, working for me. I have 10 people. I have six or seven of their products now, so I’m not paying $10.00 unfortunately.

As my business grows, as I get more people in my business, and I have the money to pay their salary, of course I’m going to move to the next level in Atlassian. Because first of all, they’ve been really good to me up until now. Second of all, all my data for the last five years is in there.

I’m not going to move to Red Mine, or what not, and move five years of customer data, and everything into that new system.

Patrick: It’s funny because I assume that Atlassian probably has an export feature, and…

Keith: Oh yes they do. Very good.

Patrick: …They don’t try to lock you in, or anything. It’s just the nature of all businesses. Like we were talking earlier, after you have a working system that impetus is in favor of working in things that actually matter in the business, and not twiddling around with trying to move to a different software solution, and save, what is from the business perspective, a minuscule amount of money.

Keith: The pain point has to be very high before you are willing to switch over. Actually I did just switch over one of my systems, which we’ll talk about in a bit if we have time.

Patrick: By the way, for those of you who are thinking of doing a SaaS right now, so if you’re going to follow our advice, and target a SaaS that is targeted to business, or launch a SaaS that is targeted to businesses, that last bit we just said about there are huge switching costs involved in doing anything, so if there isn’t a lot of pain you wouldn’t do the switch should inform your idea of what should make for a SaaS.

If you are talking to potential customers, and the idea, the pain point that you’re going to target is not one of the top two most pressing issues in their life right now, don’t do that. Do one of the top two things. As a business, I’m a very busy guy. I have run four products. I have thousands of customers and off ‑ag0ain employees. Things are going on. And I have way, way too little time to deal with it all.

If you’re not on my top two issue list, I’m not going to buy your thing. I could tell you, “Oh, that’s nice. It sounds like a great idea. The UI is beautiful. I love it. I might even implement it someday when I get a moment.” But the truth is, I never get a moment. I very rarely have time to get things that are lower on the priority stacks than the top two things.

So if you were trying to sell to me or to the generalized class of small business owners who I kind of represent, sell solutions to the top two problems. I wonder what my top two problems are.

Keith: I can tell you right off the top of my head what mine are ‑‑ billing and product management.

Patrick: Mine are probably getting more customers at scale for Appointment Reminder.

Keith: [laughs]

Patrick: Seriously. Someone out there will eventually crack the Da Vinci code of getting scalable customer acquisition for SaaS businesses. And that person is going to be a billionaire.

Keith: This is another thing. So you say your top two. Let’s take me for example, with my billing and project management, and top two pain points. Those are my top two. However, if someone had a SaaS and it’s like scalably increase your business, then that would be number one, right there.

Patrick: To the magic money wand. Please wave the magic money wand for me.

Keith: Exactly. If there is something that I can pay money to, and the return on actual money is greater than the amount of money I am paying, then it’s a no‑brainer. I think we had this conversation one time. Maybe it was just you and me.

We were talking about the price of accountants, and there was a very expensive accountant that we were talking about, and it saved someone a very large amount of money ‑‑ about 20K. Let’s just throw out a number.

Patrick: I’ll put actual numbers. I thought I owed the IRS $14,000. My accountant charged me $5,000 to do my taxes for the year, which is on the high side for accountants, was able to reduce that $14,000 bill to, I kid you not, 11 bucks.

Just because he had comprehensive knowledge of the US‑Japan Social Security Totalization Agreement and the US‑Japan Technical Implementation Notes for the US‑Japan tax treaty.

Keith: Apparently you were also overpaying for the last three years as well.

Patrick: Yeah. You probably could get me that money back too. You just haven’t done that yet.

Keith: After hearing this story…I have a slightly expensive accountant ‑‑ not that expensive. But people in Japan, especially in this area, who are very thrifty, would keep saying, “Why are you paying that much for an accountant?” I’m like, “Because he makes me more than I am paying. He saves me more money on my taxes than I am paying him. Therefore I am happy.”

Patrick: Right.

Keith: And a huge amount of stress at the same time.

Patrick: Oh God. I had to do taxes and those of you who’ve done taxes know that it’s like pulling teeth, and it gets harder every year for me, because my business gets increasingly complex. And b) there was the stress of knowing, “OK, there’s some way to optimize this.

“And I’m not sure what it is. Every minute that I spend optimizing my taxes is a minute that I don’t spend optimizing duh, duh, duh, increasing the number of accounts on Appointment Reminder'” which rationally should be the only thing I work on aside from all the other things I have to work on.

Keith: To pull back real quick, the number one thing you should be focusing on is things that make people money. That’s the number one thing that people will buy. If your service can make someone money, they will buy it. The number two one is, hitting those top two pain points. What are the things that people hate doing in their business or in their personal life?

I say business because B2B prints money. B2C is really F’ing hard. What are the two pain points that you can solve easily? And push for that.

Patrick: Not to beat on the anti‑B2C drum again, but to beat on the anti‑B2C drum again…

Keith: [laughs]

Patrick: With the amount of money flowing around in the venture capital world right now and also the likes of Facebook, Apple, Google, etc., who are basically driving the cost of software down to zero because it’s a complementary good for their various ecosystems that allow them to print money, I don’t think that there’s really great opportunities for small businesses to do quite so well in B2C software anymore.

There was a thriving Mac market of $30 softwares a couple years ago…

Keith: Nothing.

Patrick: …Back in the post‑shareware days, and now, even though the market is probably expanding due to the presence of app stores and whatnot, Apple has basically designed the mechanics of the app stores to encourage churn and encourage the pricing to go to zero.

Keith: You have to sell quantity.

Patrick: Because the happiest outcome in the world for Apple is there’s an app for everything and none of them cost more than 99 cents. That will allow us to sell a lot of our $600 iPhones.

Keith: Exactly. They just released Pages, Numbers, and whatever the other one is, not word. I wish it was word. No, that’s pages. I don’t know. Keynote. Keynote. For free. The latest version of Mac OSX is free. Windows is now five dollars or something like that? I don’t know if that was a limited time or not, but I think the upgrade to Windows eight was five dollars, if I remember correctly.

Patrick: Was this in one of Joel Spolsky’s strategy letters, where he’s like, “Commoditize your complements”?

Keith: Yeah.

Patrick: This is totally coming true in the software business. The big platform companies have decided, “OK. Software is now a complementary good to the service that we offer.” With Facebook, it’s the social graph. With Google, it’s controlling navigation on the Internet/advertising.

With Apple, it’s the hardware. They want to make the software experience…people say, “Oh yeah, we have a developer community. We want them to build wonderful businesses on our platform.” But they want you to build wonderful businesses by pinching your margins to the absolute bone.

Similarly, while your margins are getting pinched to the absolute bone, you’re going to be competing with people who are venture‑funded based on the huge size and growth opportunities on these platforms, who are capable of having negative margins, just because they have made money behind them.

There was a photo‑sharing startup that recently got shuttered.

Keith: Everpix.

Patrick: Everpix, yeah. They spent two million dollars to make a hundred thousand dollars. So many parts of that story make me kind of sad. One is that by all accounts, their service was actually really useful and people loved it.

But it would have been an awesomely successful business making $30,000 a month or whatever. If it was a solo founder who had built it up as a labor of love by himself and then was getting to a point of significant success, where at $30,000 you’ve covered the day job, you have a legitimate business. You’d start reinvesting into it by hiring people ‑‑ one person at a time, and then slowly ramping up.

Due to the “throw gas on the barbie” venture capital model, they had seven full‑time employees. The payroll cost was on the order was like two million dollars over a two‑year period.

It’s very hard to make the math of, “I’ll pay my employees two million dollars and take in $200,000 of revenue work out overtime.” They didn’t have the hockeystick growth curve that would convince the VCs to stake them with another four million in the hopes that they eventually got to a hundred times where they were.

Keith: I do want to put some numbers in perspective. Two million for seven people sounds like a ton of money. Over two years, it’s still 140k per person per year. It’s definitely not anything close to bootstrapping, but it’s not like they were blowing money on their employees.

Patrick: Right. Yeah. They were probably taking below‑market costs in San Francisco. There’s a breakdown of their numbers that we’ll link to in the show notes, but their payroll costs were so much…If you compare their total payroll cost number to their total salary number, it’s pretty clear that they were not getting the “standard benefits package” you would expect as a white‑collar worker.

Keith: In the San Francisco area?

Patrick: Right. They’re getting below‑market salaries. Presumably, any one of the employees of that company could have worked at, without loss of generality, Google or Facebook and gotten the famous free food, and free massages, and paid health care for you and your family, all those other things that you typically get if you’re working as an engineer.

It’s not that they were setting money on fire for salaries, it’s just that venture capital allowed them to grow the team heavily in advance of where the business was. That gamble did not quite work out.

Keith: Right. Exactly.

Patrick: It burns two million dollars of venture capital guys’ money. I’m not really concerned about that because you pay your money and you take your chances, when you’re an accredited investor.

Keith: But when you’re bootstrapped, especially like us…

Patrick: Right.

Keith: …I don’t have seven million to burn. [laughs]

Patrick: Right. Getting back to the point of where you guys as small businesses might be, if you have a venture capital funded competitor in the market, like let’s say you were in the Everpix space, today might be happy for you, actually, because you have the option to go swoop in and rescue 30,000 customers from, “Hey, your service is getting turned off? Maybe you should use us instead.”

But the two years prior to this, it’s like, “Well, there’s this beautiful, well‑designed app which has seven full‑time employees worth of effort expended into it, and it can afford to outspend me 10 to 1 on customer acquisition, because they don’t have to be profitable at it.” That’s not a happy place to be. So don’t do B2B

Keith: Sorry.

[laughter]

Patrick: Do do B2B.

Keith: Do not do B2C.

Patrick: Don’t do B2C where you’ll be competing with people who can afford to lose money on every sale and make it up on volume or, at least, will until a Series A Crunch kills their company. I don’t want to rub it in the nose of these guys. I’m sure they are great people and…

[crosstalk]

Keith: No. I think they are great people. I think it just was not really shitty luck, but just shitty circumstances for them.

Patrick: Yeah.

Keith: They did have a great product, by the way.

Patrick: It’s the mob. Venture capital, nine companies out of every 10 companies are going to fail. But, if you invest enough of them, eventually you invest in Facebook or Google ‑‑ which is a great outcome if you have a very large portfolio. Perhaps less of a great outcome if you’re confined to any one company.

Keith: Exactly.

Patrick: People often ask me about it — man, this is a tangent — It’s my first job in the industry. Should I get a job at a funded startup or should I get a job at Google, or Facebook, or whatever? Or should I do the solo bootstrapper thing, or should I get a job as programmer at a non‑technical company?”

Keith: That’s a…

[laughter]

Keith: …Hard question.

Patrick: That’s a hard question.

Patrick: We should do an episode about that. I’m going to table that discussion for a while…

Keith: Yeah, let’s do that.

Patrick: …Because it will make this podcast go six hours long.

[laughter]

Patrick: What was next on the agenda?

Patrick’s Upcoming Course On Conversion Optimization

Keith: I think we were going to talk about what is following up the Lifecycle Email course.

Patrick: Yeah. Originally, I announced I was going to launch it in August. Then stuff happened. I have a health issue. I might talk about that later. But it didn’t happen. Knock on wood. End of November/early December in July, I hope to launch a video course, similar in character to the Lifecycle Emails product, talking about conversion optimization and A/B testing for software companies.

This is something I did a lot of work on in my consulting days. As we’ve mentioned previously, I’ve quit consulting, but people continued coming back to me and saying, “Hey, what would you do at our page like quickly, not just to increase sales of the product or to increase the number of trials we had on a monthly basis?”

I think that’s something that I can probably have some fairly decent advice about. I do it informally for friends still and have racked up some very fun anecdotes they’re going to let me share publicly. I’m going to productize that and see where it goes. Then, probably, pitch it at the price points roughly similar to the Lifecycle Email course. I guess I don’t want to talk about too much of the plans there because I do need to have some reason for you guys to come to the landing page.  [Patrick notes: You can pre-order the course here.]

[laughter]

Patrick: I’m not trying to sell you stuff, but I am trying to sell you stuff. But I’m only trying to sell two percent of you stuff. The funny thing about courses like this and whatnot it’s like, “OK. There is,” whatever is in 8,000 people on my email list 1,000 of you opted in for dedicated emails about this product and this topic in specific. Nowhere near 8,000 or probably even 1,000 folks are going to buy it.

I want to produce as much value as possible for everybody in the audience, with the knowledge that I want to spike the value creation with regards to, say, 50 to 500 of the audience who are going to whip out the company credit card and put down that 500 buck, or 2,000 bucks, or whatever it is that it eventually gets priced at.

Keith: This is a great topic for our next podcast, if our next podcast is not what we had just talked about, which is the idea of ‑‑ Nathan Berry talk about this a lot ‑‑ marketing by telling everything you know, teaching everything you know.

I think we’ve touched on this before. Not even marketing. Just tell people everything and be very open with what you do.

[crosstalk]

Patrick: I don’t know about everything, honestly.

Keith: Maybe not everything, but…

[crosstalk]

Patrick: I was a “let it all hang out” guy back in the early, early days of being a card creator. As I’m older and wiser now, there are some little aspects I would put on these “totally one hundred percent radically transparent and give everyone access to your QuickBook files.”

Keith: I was thinking more of knowledge instead of hard numbers.

Patrick: Knowledge, I don’t know. Isn’t it like some sort of picture book, storybook, written by hippies about…

Keith: [laughs]

Patrick: Have any of you ever read this book where there’s the Warm Fuzzies and the Cold Pricklies. You give Warm Fuzzies to people and, “Wow, you give a Warm Fuzzy to someone, and you magically get a Warm Fuzzy yourself.” Cold Pricklies, they don’t work like that.

Keith: That sounds really familiar. I don’t think I’ve read it, but…

Patrick: I really think there is actually some hippie book that says this.

Keith: [laughs]

Patrick: Teaching people things in the B to B context is like a Warm Fuzzy generator. You do not lose stuff by having your information out there. I’ve had consulting clients, where I was doing a presentation internally at a consulting client. They said, “We would like to take this on behalf of the people at our company who are currently not at this presentation. We’re sensitive to your desire to not cannibalize the value of your advice, so we won’t tape it if you’re not OK with us taping it.”

I appreciate that. That’s very thoughtful of you. From my business perspective, not only do I want you to tape it and show it to everyone in the company, but also, if it’s OK with you, let’s tape it and put it online. Let’s get it in front of 100,000 people. Nothing about my business is going to get worse if it gets publicized that this is the advice that I would give your company.

Keith: We should definitely go into that in detail. There’s a ton that we can go into with that.

Patrick: Next podcast then.

Keith: Next podcast. One of the things that I want to mention, going back to the A/B testing course, your next course that you’re putting out. I launched my product on Monday. I’ve been doing this, very similar consulting as you, for three years now, so conversion consulting, OK this page doesn’t work right, this is how we need to structure things to funnel.

Patrick: Can I time out here for a second, by the way. Keith and I ran consulting businesses which had different core client bases but very similar levels of sophistication involved and the advice that we would give clients. We had roughly similar price points — within an order of magnitude within each other.

Roughly similar geographic distribution of customers, Japan, the United States, wherever the work found us.

One thing that was not the same about Keith’s and I’s business was that I have an “Internet profile” and Keith a little less of an “Internet profile.”

Keith: That’s an understatement.

Patrick: I just wanted to throw this out there. OK, I am looking at Keith here and can I name a number at Keith. Keith is looking at me with a look that says “don’t name numbers.” Let’s just say his business is bigger than mine by a lot. There are a lot of people who tell me that “Consulting is great if you’re Internet famous like you are. You cannot be high in consulting unless you’re Internet famous.” You have been disproven by counter-example here.

Keith: I have no English website. The new product that I have is all in English. For my consulting, I have no English website. My only website is in Japanese and I will promise you the majority of my clients are not Japanese nor can they read Japanese.

Patrick: The primary customer acquisition channel was, “Oh, did you get your job on oDesk?”

Keith: No, that was not oDesk.

Patrick: Correct, it’s actually doing a really good job with clients and getting referrals by word of mouth. You don’t need 100 million clients to build a very nice consultancy for yourself.

Keith: Exactly. What I was going to get into there is I launched my first product. The blinders you get when launching your first product is absolutely crazy. It’s very…I don’t want to say it’s easy. I am used to going into other people’s systems, into other people’s sales funnels, and saying, “OK, here are your main bottlenecks.”

Then, one of the reasons is that I am not super close to that funnel. I haven’t been working in it for three years, five years, so the thorns stick out like you wouldn’t believe. We have been working on this product two years now.

When you’ve been working on it as long as that, you notice that the thorns don’t seem so thorny. I am looking at my own conversion pages. These are totally not optimized. I should really get a consult to come and look at these.

Patrick: You guys laugh. You get the equivalent of banner blindness when you’re working on your own products. I was once working with consulting client. We were looking at the sign up page or something and I said, “the decision X, Y, and Z that you’re making on this sign up page are clearly suboptimal. Let’s do something about that.” They’re like, “I copy pasted that from a Appointment Reminder.” I was like, “What. No, you didn’t.” I looked at the Appointment Reminder. “Oh God, you did. What idiot was in charge of this website?”

Keith: Yeah, it’s pretty amazing. A lot of my clients are really savvy, really smart people. It is amazing because the mistakes that really smart people can make with their own product, because they are so entrenched in it, are just mind blowing.

Patrick: Or there’s so much going in the business, we don’t make optimal decisions about where we spend our limited pool of resources. If I am running a business, so if you were Homunculus economicus, the rational decision maker. If you were Skynet, just decide I have 100 points of resources amongst all the aspects of the business.

You would distribute them at points of maximum leverage for the business. That would mean that everybody’s business would be 99.95 percent spent conversion optimization on their sign up page and .05 doing everything else.

All my consulting clients gave me the death glare there. All of them disagree on me on that. OK, I’ve got my little own take on things. None of us distribute our resources rationally.

Instead, we do the stuff that makes us feel good. Stuff that we think are important, but isn’t important. The day to day grind it out of the business where it’s not urgent but it has to be done anyhow, like responding to emails from people who couldn’t figure out how to click confirm in the email lists.

Doing stupid business administration stuff which we should outsource but we haven’t figured out how to outsource exactly. Bookkeeping for me until I got a bookkeeper.

Stupid wastes of time that chewed up two days of my life, I lost my wallet and so because I have not yet delegated to my relationship to the bank to anyone else, I had to call thirteen banks and say, please reissue my credit cards. Now, after they get reissued over the next week to two weeks, I will have to re‑type them into 50 systems. That’s not going to be the core source of growth for any of my businesses this year, but that happened.

[laughter]

Keith: Something derailed it.

Patrick: Sometimes its controllable, I’ve spent lots of times this year, something that I did and I’ve should have known that it wouldn’t have been worth nearly as much as working on conversion optimization. For example, in building my own drip course delivery system, like Keith was talking about, I scratch coded that in Ruby on Rails. Somebody approached me, Ryan Delk, from Gumroad, asked about maybe using Gumroad for it.

This is funny because it’s something that I would have posted it on Hacker News, but since I said it in real life and didn’t immediately download myself. I actually said it, “Oh well, you charge five percent of the sale and I don’t think it’s worth five percent of the sale.” Instead I am going to spend weeks of my time implementing them from scratch, and ruby on rails, and doing half a good a job as you guys could do it. Conversion rate optimization.  The Gumroad purchasing experience is so good.

Keith: It’s the best purchasing experience that I have ever had online. I have been looking at Meteor. Sasha Grief made a Discover Meteor online course which is great. I went to buy it. The checkout experience was so nice that I emailed Sasha and said that was the best checkout experience of my life. That is how good Gumroad it. It is amazing.

Patrick: They are more like towards Amazon. Amazon has I don’t even know how many hundreds of millions of dollars of time invested into making the checkout experience, making shopping actually fun.

Keith: I think Gumroad’s checkout experience is easier than Amazon.

Patrick: I think it’s quite easier than Amazon. On the scale that people would probably use, Amazon, easy to check out with. They remember your credit card. They do all the “obvious” UX tricks that are not obvious at all. Then, there are a lot of businesses that you do business with where it’s, “Oh my God what idiot made these decisions.” It’s some junior engineer because they don’t have a UX guy on staff and they don’t care about it.

There was a hotel. I was trying to give them $4,000 towards a hotel stay. They wouldn’t take my $4,000 because they said, “you’re credit card is invalid,” I swear I retyped that thing 15 times. I finally figured out by, I kid you not, manually inspecting the F’ing JavaScript that that the thing that’s making my credit card invalid was putting spaces in between the four digits, digit groupings, on credit cards.

Keith: Was it a Japanese company?

Patrick: No, it was an American company. It was a multi‑billion dollar American company. I wanted to take my laptop and throw it out their window because of…”Do you hate your customers?”

Keith: It’s such a solvable problem.

Patrick: I think I should call them out. Starwood Hotels.

Keith: Really, I hear great things about them all the time, but not their online service.

Patrick: Apparently, the reason why I use Starwood Hotels is a mutual friend of Keith and I said, “Oh, they’ve got the best credit card/reward perk thing ever.”

Keith: And they do, they really do. They have a great perk system.

Patrick: I did lose the credit card. Hopefully it will get reissued eventually and Amex gets me the new card. The website [moans] .

Keith: Jale, that was actually a bad day. They have not realized that there’s a space between my first and middle name and inserting that space will not pull out.

Patrick: Oh, don’t get me started about names.

Keith: We’ve done this I suppose a couple of times.

Patrick: I have the entire list of 40 falsehoods programmers believe about names. It bit me again when I was getting my credit card reissued. I will go on a little rant here about life, the universe, and everything. I think we’re living in this a dystopian cyberpunk future already. We’ve don’t realize it yet because our lives are pretty much livable these days. If you don’t live in “the system,” you’re just totally F’ing screwed.

This doesn’t just affect just middle class Americans or Japanese people that often because we’re middle class. By definition, we are in the system. If you’re not in the system: welcome to Kafka. It’s so bad.

I had a bank. The bank could not accept my report of losing my credit card which was in the wallet that I lost without photo identification from me, which was also in the wallet that I lost. This is despite me being customer of the bank for 10 years.

The manager knows me by name. “I am sorry Mr. McKenzie.It’s just procedure. I can’t take this down unless you show me your card to let me that you are the same person who has been coming here in the last 10 years.” This is Japan by the way, where there are only two white people in this town. It’s either Keith or I.

Keith: People still mistake us.

Patrick: He has a beard. I don’t. Whatever, all white people look alike to us. This topic almost makes me feel Marxist. None of the people who are doing scholarly literature on it, the differences between classes, would be surprised in the least by, “Poor people don’t have photo identification on them all the time, necessarily. Upper and middle class people do.”

Middle class people don’t see that you needing photo identification to vote as a big imposition. People who are not as acculturated into the middle class might see that as an imposition. If you get broken out of the comfort zone for you, you realize how totally non-fault tolerant a lot of the systems are right now, like losing your identification makes systems is a very non-fault tolerant. Systems we designed, too.

I don’t want to sound like a Marxist act now. We can say The System with capital letters as something that is controlled by other people and that we are not responsible.

Keith: No, no.

Patrick: As programmers, we are responsible for this kind of user experience in our own stuff. As programmers, we often think that we understand what email addresses we use, what user names we typically use, what email address and password we use to sign up for a typical website. This is a highly questionable assumption for many user populations.

I will bet you that if you don’t remember the email address that you used to sign up to your own website that the experience you get is totally sucky. Just try that. Pretend I don’t remember what my email address is. What’s the recovery path for that?

For a lot of services, there is no recovery path. You go to the website, you type in the email address and password you think you used. It tells you “One of those two things is wrong. I’m not going to tell you which.” You can type stuff into that thing all day and it will not help you.

Then you go to the password recovery form and type in your email. Often, for spurious security reasons, the password recovery form will not tell you whether the email you typed in is actually an email that they have on file. Which ‑‑ by the way ‑‑ I want to punch in the face anybody at your company who made that security decision.

The reason being if I type in my email address into the password recovery form and you tell me yes, you got the email right, the email is on the way to do the password recovery. Yes, that does disclose the existence of that email address being in your database, which could leak that to an attacker.

On the other hand, if you only allow an email being in your database once, the fact that someone can use your sign‑up form and see whether the email has been used already leaks the same information. It’s just pure spite and hatred for your customers that you don’t tell them that email address is wrong or that email address is right when doing logins or password recovery.

Keith: I had a system. I can’t remember where it was. I went to get my password because I had forgotten it. I seemed to remember which email address it was. I put in my email address. It says, “We found your email address, it’s on the way.” Wait 5 minutes, 10 minutes, 20 minutes. It’s still not there.

I put in another email address that is very similar but I know is completely bogus. It said, ‘Your email is on the way.’ Whatever you put in, for security reasons, it would tell you that the email is on the way.

Patrick: I’ve been involved in systems like that before. A well‑implemented system, if you’re 100% convinced you want to do this into this, will send you an email regardless of whether you’re email is in the system or not. If your email wasn’t in the system, you wrote it correctly, it would say, ‘We’re sorry, we didn’t have any information on you.’

I was told by a security officer this is a great trade‑off. It doesn’t disclose the existence prior to proving they control the email account. After they’ve proven they control the email account, it’s not a totally horrible user experience.

It is a totally horrible user experience because you have to wait five minutes for the email to show up and then they check it. It’s like “your princess is in another castle.”

Keith: Especially with Gmail and G Apps supporting the plus. I have tons and tons of email addresses that all go to the same place, one for each system, in fact.

Patrick: I have a dirty confession to make about the plus and whatnot. If you actually read the RFCs for what pluses are supposed to be used for, it’s pretty much just for convenience for the user. I have a lot of people who might be listening to this podcast. If you think I’m talking about you, it’s not you, it’s someone else that’s listening to the podcast.

They think they’re very smart and sign up with my name plus Kalzumeus at Gmail.com to be able to filter it out if I ever start spamming them. When you try to log in to this system, you forget that you used the plus Kalzumeus and so your email address would not actually be in the system.

What I do is my log in form checks both foo@example.com and foo+kalzumeus@example.com.

Keith: It takes out the plus first?

Patrick: Right. It takes out the plus first, tests for the existence. If you provide the plus on the log in form, which no one remembers to do, it will do what you expect it to. That saves them. I have a running counter on my dashboard. The title about it is “Hacker News Users Who Thought They Were Smarter than They Actually Are.” Currently 47.

Keith: That is going into my software. That is the next feature I am pushing live. That is going in front of building fixes. [laughs]

Patrick: That’s users acting against their own interests. As programmers, we often act against our users’ interests by making processes which are not fault-tolerant for our business.

Keith: It’s amazing. It’s the same thing with blinders. If someone had written on Hacker News that I was doing this, people would jump on him that he was raw meat and they were a bunch of hyenas, honestly.

Patrick: I don’t know. I think if someone said, “I have a security rationale for this,” that would get a lot of thumbs up for them.

Keith: I think it would be very split. The point I’m saying is people are much more critical and much more able to be critical about other people’s mistakes than their own. That’s not out of spite or purposely, it’s just the blinders issue.

Patrick: The ability to consider an issue in isolation gives you a much higher resolution into the intricacies of the problems associated with it than when you’re seeing the entire freaking system at once. When you have a system that has 40,000 lines of code, your password recovery function doesn’t jump at you as the one thing that you should be working on right now.

Especially for B2B SaaS where the lifetime value of customers is, at any given point, in thousands of dollars in terms of future revenue for them. Not having someone cancel their account because they can’t figure out how to log into your system is sort of a win.

I would encourage you to make that interaction not totally suck.

Keith: Harping on the forgotten password thing, this is very interesting. I always thought who uses Forgot Password. I have all my passwords stored in Chrome or Key Pass or Last Pass or whatever.

Patrick: This is another one of those inabilities to empathize with the user.

Keith: Yes. I thought this until a couple of years ago when I was watching the logs because we were doing some purchasing testing or something. As I’m watching the logs over maybe a 20 minute span, I could see people — so‑and‑so requested password, so‑and‑so requested password, so‑and‑so requested password.

How many people are forgetting their effing password? It obviously was real users. It wasn’t going at a high rate. The usernames were completely different. People were requesting their passwords. People forget their passwords like you wouldn’t believe.

Patrick: There’s honestly some users for whom passwords, they’re done with that nonsense. They just jam on the keyboard and then every time their session gets timed out they request a password again. I’ve seen that usability report.

There was actually an open source project that was supposed to support that as your primary access tool for websites where every time you wanted a new session you would have to click a link on your email. I don’t think they got any traction. It’s not crazy.

Keith: It’s not crazy. It’s obnoxious but not crazy.

Patrick: Close to crazy.

Keith: We’re not going there.

Patrick: Not going to rat‑hole. This is the talking about making money for software business. This is not the rat‑holing about little, tiny implementation details podcast.

Keith: We’ve gone an hour and a half. We want to cut here or we have three more topics? Two more topics.

What We Learned At Microconf (In 2013)

Patrick: I would love to talk a little more about stuff we learned at MicroConf.

Keith: I would, too.

Patrick: We talked about concierge. That’s the big one.

Keith: I took, I shit you not, 13 pages of notes in the first day. It was a two day course, three day conference?

Patrick: Two day conference.

Keith: Two day conference. I have an F‑ton of notes. I’m flipping through them now. Is there anything that went out to you at front?

Patrick: I have vague memories of MicroConf here, partly because it was similar to me as the one I attended in Vegas so a lot of stuff is it’s interesting but I’ve heard it once. The stand‑out talk, for me, was probably Rob Walling going into what he did to 10x his business.  [Patrick notes: Rob’s talk was videoed and is available here.  Also, you should come to MicroConf if you are at all interested in bootstrapped software businesses.]

He bought a business called HitTail . It was at 1X of revenue. I’m not sure he would be happy with me mentioning the 1X out loud so just say some certain amount of revenue.

Over the course of the next 12 months, he went into a build up the product, learn about the marketing approaches, and then scale the marketing approaches series of three steps that he goes into in a lot of detail to increase the amount of revenue the product was making by a factor of 10.

It’s a kick in the pants for me because I think that would be an awesome process to go through with Appointment Reminder in the next 12 months given that I’ve pussyfooted around for the last three years or so. Also, a lot of stuff is very applicable for every Software as a Service business.

Finding out paid channels which actually work for customer acquisition for you. You test six of them, only two work. Then the two that work you throw money on them until they’re not profitable anymore at the margin. There general rule of thumb in Software as a Service that we don’t grow up knowing that you’re told at some point and find to be true is that you want to spend one‑third of your lifetime value on paid customer acquisition when you can get that, which requires you to know what your lifetime value is. There’s a fairly easy formula for that.

Your easy LTV formula: The amount of money you charge per month divided by your churn rate. That’s it. There are hardly formulas that you can talk to a CPA and learn things about like the time value of money and the discount rate and what that would do to it. Don’t need calculus, just do this simple division.

If your plan costs $50 per month, five percent of customers turn every month, that means 50 times 20 is $1,000. Your lifetime value is $1,000. Done! Spend in the $300 range to acquire a new customer. That’s typically something that you want to do.

If you spend $800 to acquire a new customer, it takes forever to get payback on that and you will have a cash flow deficit in your SaaS business. There are ways to get beyond a cash flow deficit in the SaaS business, but they’re very stress‑inducing and they make your business very, very risky.

You don’t have an iron‑plated guarantee from God that the five turn rate is going to be maintained over the course of the next 20 months. You generally don’t want to take that level of risk in a business. If you’re only spending a third upfront there is less risk involved there.

Keith: My biggest takeaway from MicroConf. I will be flat‑out honest. I am not what you would call a businessman. [Patrick notes: Hah. Yeah, we’re both totally unqualified for the jobs we do every day.] I am a designer and developer who, I think, is very good at finding holes in things. I find holes in funnels, I find holes in conversion, I find good technical solutions to solve business problems.

Managing a business such as how to make sure that everyone’s working on the right thing, make sure that people are up‑to‑task is not my strong point.

Patrick: Keith and I are both similar in this regard. Hackers in the PG sense, we like complicated systems and finding the ways they break and then breaking them to our advantage. Whereas, the mechanics of running a business is something that we just got decently good at for both of us, mostly out of having to.

Also, the fact that if you look at what you want to get from life, the universe, and everything, or from your career, this little, itty bitty slice of your life…maybe you want more time.  The Foolish Adventure guy (Tim) has a great phrase for it: time, income, and mobility are three things you could potentially want to get from a career.

Time, we are both family men. We like having free time with our wives and, in Keith’s case, Keith’s little girls. Income, reasons to have it are fairly obvious. Mobility, like running your business out of Japan rather than running it out of San Francisco or New York or any of the other big tech hubs. We could potentially run our businesses from anywhere our laptops are.

In terms of getting those things out of your career, there is a bunch of levers that you can hit. Both of us, I was a programmer back in the day and Keith was a designer back in the day, that’s one lever you can push, and you will get a certain amount of benefits of working from pushing that lever very well.

There is an asymptote that you approach as you level up as a programmer, I’m going to learn Ruby on Rails in addition to learning Java, and I’m going to become the best darn Ruby on Rails programmer I could possibly be. Don’t get me wrong, that is a very successful career path for a lot of people.

There are a lot of folks who are uncomplicated programmers. They just program up to instructions that were given to them. They work for Google for 50 or whatever hours per week and get paid very well for doing that and love their jobs and lives, et cetera.

Keith: You do have to look at it like that. You say they’re told what to program. They could want to be a system designer at Google. It’s still the same thing. There’s a very different thing between yes, I want to work at the best of my field or I want to take that out and grow my own business. That’s the crux.

Patrick: Right. The trick for both of us is we took some level of ability with our “core skills,” the stuff our employers were paying us for back in the day, and then drizzled on a wee, little bit of the minimum viable businessman on top of the core skills. I use the word ROFLstomp when other people do it. I’m not sure I’m comfortable saying we ROFLstomped. Let’s go.  We ROFLstomped capitalism, basically.

Keith: Honestly, if you had said three years ago, five years ago that we’d be in this position, I would have laughed like you wouldn’t believe.

Patrick: When was three years ago? 2010. January 2010 I think both of us put together maybe $5,000 a month at our jobs, our Japanese salaryman jobs.

Keith: Together? Yeah.

Patrick: If you had balled the two of us together, $5,000 a month at a Japanese salaryman job probably working 70 plus hours a week each.

Keith: Something like that, yeah.

Patrick: Pretty miserable. I was very, very miserable. Keith was…

Keith: I was having days that were less miserable than others, but not many.

Patrick: Don’t become a Japanese salary man. We’ll talk about Japan, the universe, and everything in another version of the podcast.

Keith: Later.

Patrick: Don’t become a Japanese salaryman. Our careers had a fairly nice trajectory over the last three years, largely from this combination of the core skills we bring to the table and increasing that core skill set and then marrying it to the understanding of business and running things on top of it.

Even without necessarily being Harvard MBA levels of adjusting capitalization tables and whatever they teach you to do at Harvard MBA.

Keith: We have no idea what they teach you at Harvard MBA.

I won’t say that’s holding back our business because obviously not, but it is holding back growth in some aspects because I don’t know how to manage people other than the standard this is how I would like to be managed and this is how I managed my development teams in the past.

The idea of managing an entire company where I’m managing not only projects with the developers but also how’s billing going, how’s payroll going. Have you talked to the accountant about reducing our taxes somehow?

Patrick: This is one reason I still don’t have employees, just because I’m not ready for that level of responsibility. All my friends who have gone to multi‑member consultancies — Keith being one of these — say you get 10 employees together and suddenly you’re responsible for $100,000 every two weeks to make payroll.

If you do not make payroll, people’s families starve. Not going to do it. Not ready to do that yet.

Keith: Exactly. Actually, at my old job they offered to put me as vice president of the company, and I said, “I am not willing to do that because I do not want the success of this company on my shoulders. I would rather go out on my own and do it.” I think I’ve done fairly well.

Anyway, going back to what we wanted to talk about with MicroConf. I feel so bad about this because I forget the two of their names. The TropicalMBA guys. I think it was Dan and…

Patrick: Dan and Ian.

Keith: Dan and Ian, thank you.

Patrick: From formerly the Lifestyle Business Podcast. Now it’s called Tropical MBA Podcast. Very good podcast, by the way.

Keith: They were amazing. Everyone was amazing, but they spoke closest to me because they were talking about growing a business.

Patrick: Can you believe that was their first speaking gig ever?

Keith: Really? No, I did not know that. It was amazingly good. They were just talking about how to structure your business so that you don’t have to deal with minutia. They gave an example that really hit home to me. Steve Jobs, complete control freak, as much of an anal control freak as I am, no one eclipses Steve Jobs. Anyone who has worked with him, anyone who has read anything about him would probably agree with that. How does someone with that level of detail into everything be able to control a company with how many thousands of people? 5,000, 10,000. I don’t even know.

Patrick: Apple has X tens of thousands of employees. A lot of them are retail workers in the US now, but there’s let’s say 10,000 engineers and knowledge workers at Apple.

Keith: Let’s just say 10,000.

Patrick: 10,000 knowledge workers.

Keith: How would someone with that amount of microscopic detail‑orientedness be able to manage that? It’s obvious. He doesn’t manage it. How would things get done to his specifications? The answer is that ‑‑ and what Dan and Ian said ‑‑ is he only interacted with I think it was seven people in that entire company. Out of 10,000 knowledge workers, he interacted with seven people.

Those seven people were essentially extensions of him. They were close to him. They understood how he thought. They understood what needed to be done to move the company forward in his vision or in the company’s vision.

Dan and Ian called those types of folks lynchpin employees, essentially people that you can delegate an entire section to, an entire job to, who are able to think on their own for their own stuff and move the company forward in a solid, single direction.

That spoke miles to me because it is so difficult to find people like that, both who you can trust almost implicitly and who can be given the managerial task of managing another 1,000 people with their own lynchpin employees.

Patrick: And who also want to be employees. One of the problems I’ve heard about on the grapevine, as it were, is that the kind of people that do really well at a) I need a combination of the responsibility to bring this project in without much management from above and b) I also have to be expert enough to manage the people below you and think on your feet and whatnot.

Those kind of people exist. They’re called entrepreneurs. They start companies and they often don’t aspire to being the number three guy in charge of server architecture at a tech company.

Keith: Exactly. Exactly.

Patrick: Figuring out how to identify, groom, and hire those folks is a useful skill to have if you are trying to build up a large company. It wouldn’t be too useful for me.

Keith: That was my main point.

Patrick: That was your takeaway from Dan and Ian’s. The one I got from it was having repeatable processes for just about everything in the company.

Keith: Yes. They call them SODs. In my business, we always call them SOPs ‑‑ standard operation procedures.

Patrick: This is something I pulled off their podcast, actually, a couple months ago. It made my life much, much easier because it allowed me to get one task that’s recurring and obnoxious off my plate. Shoot. Broke a rule from my SOP. I should have never called customer support “obnoxious.”

I love my customers. I love my customers.

I have been supporting Bingo Card Creator as literally the only person who had ever sent an email with regards to Bingo Card Creator from July 1st, 2006 to approximately July 1st, 2013. That is eight years of handling all the customer support load.

Keith: I want to make a quick disconnect. Patrick always talks about how he always talks about emailing the support and it’s like the Blue Google or the Green Google, ha, ha. There’s a $40,000 a week consultant [Patrick notes: Nah, my last rate prior to the recording of this podcast was only $30k.] answering emails from 50 or 60 year‑old elementary school teachers, who don’t understand what the Blue Google or the Green Google is. I just want to throw that out there real quick.

Patrick: It wasn’t a huge amount of time, but it was meaning it to be shackled to a machine every day to answer the email within my not quite promised, but want to get to emails within 24 hours generally, or 24 business hours. Stopped doing email on weekends, so it was one of the best decisions ever.

If you send an email during the middle of the workweek, I want to have a response to you the next day, your time, in the workweek. That’s my desired level of service for this product.

In 8 years, I probably answered 10,000 emails about Bingo Card Creator, which means literally hundreds of times that I’ve explained to someone how to reconfigure a printer, or how to use the, “I forgot my password button,” or, dot‑dot‑dot. Dealing with the technical support issues of the largely nontechnical customer base with the product, which, while it’s been improved over the years, is not the world’s easiest to use.

My skills do not generally reside in making wonderful, easy‑to‑use products. Yes, I’m done with that! The way I’m done with that is, I have a standard operating procedure document, which is two pages long. The first page is a statement of principles for the company.

My principle is that, and I joke about it, but I genuinely do love my customers. I got into the business in the first place because I have awesome respect for teachers, and want to make their lives easier, yadda, yadda. I would always rather satisfy a customer rather than having their money if those two ever come into conflict.

I have a hair‑trigger on the refund button. If they say a minor issue caused them to miss the class periods that they wanted to do the event in, I’m very sorry for that. I’ll very happily refund them for that.

So my SOP just states my 12 principals, I have a roughly general nature about that. The second page of the document was, “Here are my top 10 customer support issues that I’ve dealt with for the last eight years.”

I gave these to my virtual assistant who I hired through Pepper. It’s named after Pepper Potts, by the way. don’t tell Marvel that or there’ll be a hammer of Thor dropped on their heads.

Anyhow, I gave it to my virtual assistant, and said, “OK, here are the general principles I run my business by. Here are 10 specific issue that customers often come to me about, and here’s Snappy which is the system I use for ticketing.” It’s a very good way to have a lightweight, low ceremony way to share an inbox, basically.

“You are now tier one customer support, which means if someone has an issue, that you are the first point of contact. If it’s one of these 10 issues, deal with it according to the rules I’ve set out here.”

“If it’s something like they need a refund, then tell them, “Look, Patrick will process you a refund within the day,” and here are a couple of words to say that.” But one of my principles is, “We do not copy‑paste stuff. We are humans talking to humans,” because I’m very big on that.

I gave it to my virtual assistant. I said, “OK, this document is a living document. If we discover that there is an eleventh most common customer issue that you can deal with using our tools, or we can build you a new tool to deal with, we’ll add that to the document such that the business grows over time and that this can be…If I need to get a different virtual assistant or a different employee doing this in the future, we can have them start where you left off.”

Then, for the first couple of weeks, I sat in when she was doing these tickets. She would write the response to the customer and then I would take a look at the response she had written, and say, “OK, Sugar.” [Patrick notes: For avoidance of doubt, that is her name.]

“Sugar, thanks for writing this response to the customer. I have a bit of feedback for you on how to handle this situation in the future. Great job.”

Then, after that, it was just passive monitoring for her. “OK, Sugar is pretty much keeping it up.”

After that it’s no monitoring. I don’t even know how many tickets we’ve dealt with this week. Honestly, unless something happens, I don’t care because she’s perfectly capable of handling that by herself. Apparently, she rather likes it. The money works out very well for her and very well for me, so yay.

I now went down from maybe 20‑30 issues on Bingo Card Creator per a week to 2‑3, which also means that I can afford to often not check email for a day because, probabilistically, there will be no email that got past Sugar, which is nice. This is something that I’m now thinking of, “OK. What other stuff can I systemize in my business?”

Keith: It’s interesting. As a consultant, there’s a lot of the day‑to‑day stuff that can be systemized. Dan and Ian gave the same thing where they said…They were posting a blog post or something. There was some part of the business where they were like, “Only I can do it.”

They had a consultant come in, who was good at writing up these SODs. He says, “Well, there’s 12 steps. You can replace this entire thing, all your thinking, in 12 steps.” He wrote out the SOD, and he says, “Give this to anyone, and they can reproduce exactly what you were doing.”

Patrick: Yeah. This is a cycle I have gone through with a lot of people. In the beginning, for any sort of new operation our company is doing, it’s just you throwing stuff at the wall and seeing what sticks, using your magic entrepreneurial powers of deduction. Then, after you figure out what sticks, you describe some theory of why that works or some process of how it works.

You operate on the process and see if the process still works without you using constant levels of supervision or decisionmaking authority on it like, “Is the process at least as good as me?” If the process works, then you have options of giving that process to another person or maybe totally automating the process.

Keith: Exactly.

Patrick: Then, you move on to a different high‑leverage area of the business, and throw stuff at the wall, and see what sticks.

Keith: Like you said with Pepper, ‑‑ Pepper and Sugar, I love that. [laughs]

The documents are living. This isn’t something like, “Now that I have said it, we can never change it. This has to be the way it works.” If things aren’t working with the person who’s in charge of it or they know of a better way, then you change it.

Patrick: Yeah.

Keith: You find the better way to do it.

Patrick: This is one of the nice things about not rushing to automate things.

Patrick: I’m a software guy myself. I know we love automating stuff. There’s a lot of issues where it’s like, “OK. My first inclination for how to…” What’s an actual thing that I would think should be automated?

Keith: How about updating ‑‑ this is something I do a lot ‑‑ a registration page for a once‑a‑month webinar?

Patrick: OK, that sounds great. Let’s make a data description language or a DSL, a domain specific language, for generating a one‑time webinar pages which we will all add a cronjob to automatically update this thing, yadda, yadda, yadda. Wait, wait, wait. We’re going to spend 10 hours of work, which we could be doing optimizing landing things and whatnots.

[crosstalk]

Keith: Optimizing so many of your pages.

Patrick: The high‑leverage stuff in the business. Instead, we’re throwing it into automating this thing that really doesn’t take all that much time or require all that much brain effort. Rather than doing that, we’ll just describe the process for doing it, then hand it off to somebody who has much less pressing demands on their time than we have.

Then, if we need to change that procedure, it’s as simple as changing our minds and changing the document.

Keith: Instead of rewriting code.

Patrick: Without us having to rewrite code. I default to not rewriting code because code, after you’ve written it, it’s nice that it keeps executing for forever. The downside is it keeps executing for forever. You need to maintain it.

There’s going to be some sort of technical debt that you built into it. You’re going to need to make sure that system stays running for the rest of your life and the security patches, yadda, yadda, yadda. There’s definitely times to write code. Don’t get me wrong. We’re both from in software business, but I try it with people first.

That’s another reason it counts to do concierge onboarding, by the way.

Keith: Exactly. It’s like, “What is the amount of time it would take for you to create an import function, or to create guiders, or all that? And what is the amount of cost it would take for one of your support staff to just take half an hour to walk everyone through?”

Patrick: Or, in the early days of a product, if you’re not sure, “Should my concierge onboarding be me hand‑holding them for an hour through the entire setup process? Should I do the setup process by myself? Should I just ask for their data and import that for them? Should it be me doing a guided tour through only the demo of the product but not actually using their data? Dot‑dot‑dot…What is the optimal way to get people through this funnel?”

In the early phases of the product, building those things out in parallel would be a whole lot of engineering expense, whereas just trying it, like, “OK, I’m going to take five customers and do them through my first idea. I’ll take five customers, do them through my second idea, take five customers, do them through my third idea,” and see quantitatively and qualitatively, was the experience useful for the customers? Did they understand what was going on?

Does it seem to be working for me? And then for the stuff that is working, invest in automating that or making tools to semi‑automate it. The mid‑touch. Oh, I love the mid‑touch.

Keith: The mid‑touch. Yeah.

Patrick: I think we’re coming up on almost two hours.

Keith: We’re two hours in right now.

Patrick: That seems to be a good point to cut it off.

Keith: If you’ve stayed with us this long, we applaud you.

[applause]

Keith: That was not canned clapping, by the way. That was actually us clapping.

Patrick: We are still the lowest‑ranked podcast on the Internet with our regular every three months or so release cycle.

Keith: We’ve been doing this for about two years now and I think we’re on episode eight.

Patrick: Yeah. There’ve been some less‑official ones in the middle there, but yeah…

Keith: Yeah.

Patrick: …Episode eight or so. Anyhow, thanks very much for sticking with us, guys. We’ll see you next time, same bat space, same bat channel. You can check out Keith’s product, Summit Evergreen at summitevergreen.com.

Keith: Yup.

Patrick: My email list is at training.kalzumeus.com. Good stuff coming to that in the near future, including about my new product launch, which will, knock on wood, happen at the end of November, early December [Patrick notes: July!  Seriously, and sorry for the delay.  Health issues happened.]

Patrick: Thanks very much. Thanks very much for sharing your time with us and we’ll see you next time.

Keith: All right. Have a good day. Cheers.

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.