Thoughts on Paul Graham’s “Scale”

29 Jul

Paul Graham’s latest essay is one of his best. Several of his recent essays have focused on traction (growth, scale), which leads me to believe it’s something at the top of his mind.

My guess is, the largest issue facing most YC companies is a lack of traction. Thus, PG writes about distribution, thinking through and trying to help future founders looking for their distribution “secret.” In his latest essay, he talks about doing things that don’t scale – personally recruiting users, taking manual photographs of AirBnB host’s apartments, etc.

This is one of the biggest problems with startup marketing advice today. It’s all tactical. There’s little strategy: few thoughts of “how does this apply to my situation?” PG’s advice makes a ton of sense to a newly-formed company, as he points out. For a company trying to prove traction in order to raise a Series A, such advice is less clear – will recruiting users manually really make a difference as you try to acquire your next 1000-10k users? In such cases, investing in more scalable traction channels makes more sense.

Without a framework to think about traction, the tactics you’ll hear about daily – cheap ways to drive clicks via StumbleUpon, how to lower the CPC on your Facebook ads, or hacks to get more followers on Twitter – will overwhelm you. This is why we introduce the Bullseye Framework - a systematic way of thinking through the many customer acquisition channels that a startup could use.

It’s hard predicting what traction channels will work for a given startup. What helps is thinking through channels that could work for you given your company stage. By thinking through the universe of marketing tactics and narrowing them down to what’s likely to work, you can have an educated and well thought-out approach to getting traction: real customers and real growth.

This framework allows you to read through (excellent) articles like these and apply relevant tactics to your startup. There’s some awesome stuff in there, but to any company with real revenue or growth, things like commenting on blogs probably doesn’t make sense. It isn’t a core action that will lead to growth.

Paul Graham is absolutely right. Founders make their companies succeed by pushing through the early phases and doing things that don’t scale. Often, by narrowing their focus to just a few traction channels that make sense given their stage. Then, by later focusing on more scalable channels (in AirBnB’s case, referral loops, Craigslist distribution hacks, word of mouth, paid advertisements and Facebook integrations), they build them into billion-dollar companies.

Writing and Hidden Influence

17 Jul

I recently found out that an executive at a major big data corporation reads my blog. He emailed me to comment on something he learned from one of my posts. #humblebrag.

It’s crazy to think about: if I sat down and had lunch with this person, I’d feel every bit his junior. There are 1000 things I could learn from him, and maybe 20-30 he could learn from me. Instead, online, my thoughts are the ones he’s paying attention to, simply by virtue of hitting “publish”.

Another funny thing came from this article. Here’s the money quote:

It’s generally accepted that you can’t grow a software business charging only $5 per month, so the chief argument in favour of the bottom tier is always that “these guys will move up through the plans”.

The whole article is well worth reading, but I found it hilarious that something I wrote in my boxers at 1am became “generally accepted” pricing wisdom. You’re welcome, world.

Writing has a weird way of attributing that influence to you, even if not necessarily deserved. Countless times I’ve read blog posts and articles in the past that have shaped my thinking, but can’t actually remember who wrote it. In cases like these, the author has hidden influence, where they shape the way individuals think about things but don’t necessarily receive credit. More than any other medium right now, publishing online can give you this influence.

It’s also easier and faster to get than before thanks to the proliferation of social channels. In fact, one of the valuable things about following thought leaders, investors and entrepreneurs on Twitter is because you can see what they read. Who’s thinking influences them, and how does it fit into their worldview? For example, I know of 4-5 VCs that read Ribbonfarm on a regular basis. Even though Venkat (the guy behind it) is a blogger and a consultant, his thinking and writing still influence the investment theories that control hundreds of millions of investment dollars. That’s hidden influence, whether Venkat realizes it or not.

What’s valuable is turning this influence into real productivity outside of your writing. Venkat could probably raise a small fund (or an associate position) by leveraging his audience and readership. Charlie Hoehn could get basically any job he wants, and I have lots of plans for things to do post Traction Book (email me if you’re curious).

This applies to companies as well. If you’re trying to grow your business, shaping the way people think is more valuable than gold. It’s the driving force behind multi-billion dollar advertising industry. Savvy companies like Unbounce and Hubspot understand that creating educational content that shapes their customer’s thinking is valuable. In fact, it’s the main driver behind each company’s respective business.

For instance, Unbounce’s series of case studies, how-tos and posts about how to improve your online marketing all seed the idea that your marketing strategy should include a healthy dose of custom landing pages. They then show you how to rock awesome landing pages to get more customers. And, once you believe that customizable landing pages are a core part of your traction strategy, Unbounce is the first company you’ll buy from.

Right now, this influence is best achieved through writing. I’d consider myself somewhere between readable and average as a writer, but even I’ve reaped the benefits of having some amount of hidden influence. As attention becomes more and more scarce online, framing the way people think about things becomes more valuable than simply getting them to view your content (though both are valuable). This is something I’m trying to think about in both my career and my writing.

My Experience in a Sensory Deprivation Tank

4 Jun

Over Memorial Day weekend I crossed off a bucket list item and spent an hour in a sensory deprivation tank. Minus the saltwater (still) stuck in my ears, it was a really cool experience.

Way nicer version of the isolation tank I used

It’s a weird experience, and definitely different than anything I’ve ever done. You’re weightless (or as near to it as I’ve ever felt) and can’t see or hear anything.

The first 10 minutes were tough to get used to. My mind was racing, still caught up in the email/friends/work loop that it too often cycles through. Once I settled in, it was an amazing experience – peaceful, meditative, and just a good chance to chill out and think. Afterwards, I felt more relaxed than I have in months, like the post-shower calm you feel after an intense workout.

It was also a little depressing watching my thoughts during this process. I try to stay grounded and think about impact (as opposed to money), but find it challenging. Regardless of intent, too many of my thoughts revolved around money or success in some way.

My buddy Scott wrote a great post about money last week that I’d encourage you to read. Along with my co-author’s post about money (and how his perception of it changed after becoming a multi-millionaire at 26), I’ve realized the problem with my thinking is that I haven’t defined how I measure success. And with no personal definition of success, our culture kindly defines it for me as money, power, fame.

This is really easy to fall into, and is only really fought against by choosing different scales by which to measure yourself. The stoics suggest always choosing internal rather than external goals. Instead of  ”I will make a million dollars by age 30″, they’d choose a goal you can measure internally. Something like “I will start 2 businesses and spend 40 hours/month on each of them by age 30.” This is measurable, and most importantly allows you to feel accomplished because you put in the effort. It’s a process you have complete control over, and will get you closer to that external  goal. Taking the time to reflect on my principles and how I’m applying them was really helpful in this case.

The rest of my experience in the isolation tank was really cool: deep calm punctuated with small hallucinations. It’s an experience I’d definitely recommend again to anyone, especially if you’re feeling stressed or like you want some time to reflect.

 

How to Get the Most Out of Meetings

21 May

Taking meetings with smart people is extremely valuable. There’s no faster way (that I’ve found) to learn and build a relationship.

This comes with a catch. Busy people are, well, busy. Meetings with the busiest of people tend to last 10-30 minutes – this doesn’t give you a lot of time to ask about whatever it is you want to know.

While at lunch with the awesome Scott Britton, I talked through the basic question framework I use when meeting a busy person. I like to learn as much as I can in a short period of time, then spend the rest of a meeting building a relationship. In general, I’ve found the less you talk about business and the more you talk about stuff you both care about (women, careers, ideas, interests, whatever), the better relationship you have.

Let’s see this in action. If I wanted to learn about running a sales team, here’s what I’d ask:

1. What’s the 80/20 I should know about sales? What if you had to boil it down to 2-3 things?

2. What do you wish you knew when you started running a sales team? Why those things specifically?

3. If you were in my position now, what would you focus on for the first week? First month? First 6 month?

4. At what point would you re-evaluate how things are working? What metrics would you look for in doing such an evaluation?

Asking these few questions will take you right to the heart of whatever you want to know, and have the added benefit of nearly always sounding intelligent. If you can follow these basic questions with more specific ones based on their answers, boom. You’re suddenly impressive!

Why Real Businesses Don’t Charge $5/month: Part 2

8 Apr

In my earlier blog post on pricing, I talked about how there are two ways to increase profits as a B2B company: increase LTV (which I covered) or decrease CAC (cost of acquiring a customer). Let’s take a look at increasing profits by decreasing your CAC.

Your access to (and the efficiency of) distribution channels has a larger impact on your CAC than just about anything else. The more it costs you to acquire a customer, and the longer it takes to receive a return on that CAC investment, the slower your company will grow if you’re plowing profits back into growth. CAC relative to LTV is the single most important determinant of a successful company in a B2B setting, as it directly determines how fast you can grow. (Note: this is why in competitive, new markets like payments, a well-funded startup has a large advantage. PayPal raised nearly $200m, and paid a $10 referral for every new user. If they had to wait a year to make a profit from that new customer, there’s no way they would have grown as rapidly. To companies like that, CAC is almost irrelevant).

This is a hard lesson I learned with the first iteration of Roommatefit. When I started the company, the idea was to sell a personality-based matching solution to colleges and universities. After looking at the data behind roommate conflicts and student retention (basically, if you have a crappy roommate you’re far more likely to drop out or transfer), I thought there was enough of an opportunity to create matching software and sell it to colleges and universities. I went through the customer development process, got some great feedback, built a product, sold it to a few early customers and raised a small round of funding.

Only one problem – I was totally ignorant of my CAC.

The biggest problem was that there was no way to reach these university decision-makers at a scale that worked. Really, my potential customer base was about 3000 people. This group is extremely small, highly targeted, and not very active online: all of which made it near impossible to reach a sizable portion of them via Adwords, SEO or other traditional online ads. After unsuccessfully testing partnerships, trade shows, email marketing, content, and magazine advertising strategies, the last viable marketing channel was field sales.

Field sales didn’t make sense either… which I figured out after a year doing them. Given the university market’s incredibly long sales cycles, our mid-four-figure pricing, and the cost of making a sale (multiple phone calls, emails, whitepapers and demos), the cost of our time was thousands more than what we’d bring in for every marginal sale. And, as much as I tried, I couldn’t see that changing in the future.

People much smarter than me – people like David Sacks – get this concept. In fact, one of the main reasons David started Yammer was because of the distribution opportunity he saw in applying viral marketing to an enterprise channel. He realized that no other companies (at the time) were applying viral mechanics – which have a near-zero CAC – to reach enterprise adoption at scale. Successfully executing on this distribution channel allowed them to get acquired within 4 years for $1.2 billion dollars. All because Yammer was able to acquire customers basically for free.

The two major ways B2B businesses are drastically decreasing their CAC are through content and email marketing. This growing popularity is largely due to the rising cost of other channels. Now that other platforms are mature, it’s much harder to buy a customer via Adwords or Facebook ads at very low cost. The channels are just too crowded and competitive.

This is why it’s important to test other traction channels: if you start using one early enough, before it inevitably becomes crowded, you can benefit from a low CAC and little competition.

A Startup Guide to Competitive Research

19 Mar

After reading this fantastic post last week, I started thinking about how startup founders will sometimes jump into an idea they’re excited about. The problem is, many of them have no idea how to research it properly.

I’ve seen quite a few people start a company thinking of the riches that will soon be theirs, only to realize that their idea isn’t going to work. I almost had the same thing happen, but instead went through a serious process of idea research, which I cover below. Instead 0f spending 3-4 years of my life working on something with a high likelihood of failure, I’ve been able to do some other cool stuff.

The basic idea was this. College tuition is ridiculously expensive, and different people receive different value from their educations: a computer science student from Harvard has vastly different earning/job prospects than an English major from the same school. However, these two students pay the same tuition and borrow money at the same rates, which are based on family income. In financial terms, a student with an engineering major from a top 50 university is a low risk for default, but priced as if they defaulted at the same rate as English or other majors. Thus, the idea was to give lower-interest student loans to engineering students – they’d receive a cheaper education, you’d receive a solid return from a low-risk asset.

Strong idea (I think), but I wanted to make sure that it was something that could work. I did all of this research to answer 3 simple questions:

1. Could I create something more valuable than what currently exists?

2. If yes, could I reach people to make them aware of my superior product/service?

3. Assuming things go well, could I make enough money to run an interesting business?

To answer whether or not your idea is better than the competition, you need to do some competitive research. Since most people start a company based on an idea (and not the size of the potential market), that’s where we’ll start.

Competitors

Your idea should have competition in some way, shape or form. Mine certainly did. If there’s no competition, it might be a sign that there’s no market for what you’re doing. In this step, you want to answer question 1: Can I create something more valuable than what currently exists?

The fastest way to find your competitors is to do a Google search for a relevant market keyword. For me, it was “private student loans”. Take a look at the Google AdWords that appear with your results. Any company with an ad budget (and thus an ad) means they’re likely a serious player – they have money to afford a marketing budget, and probably some idea of what it costs to buy a customer.

By clicking through each of your competitor’s Google ads, you can also see how they position themselves on their landing pages. What benefits are they selling? Are any of them claiming the same benefits you’d be bringing to the market?

This is a good sanity check – if some of these competitors do the same thing you’re planning to do, it doesn’t mean you have a bad idea. You could still out-execute them on distribution, or have a better product. After looking for competitors, I found that SoFi and Upstart were doing somewhat related things, on top of the many banks that do private student lending.

Once you know your competitors, it’s important to then get a feel for their company strategy. The way I usually do this is by looking at their jobs page. Depending on what positions they’re hiring for, you can figure out the direction they are heading over the next few months. For example, based on the campus ambassador job at SoFi, it looks like a key part of their growth plan is to have campus reps get fellow students to use SoFi.

I also checked out the Crunchbase for both companies, and saw that SoFi raised $77 million to roll out their lending program to other MBA programs. Based on this (and a careful reading of their company website), I figured that they are planning on giving out loans themselves, instead of just connecting alumni and students. This is a big deal, because it means that they were likely struggling to get alumni to fund students OR they realized that being a market intermediary wasn’t a good spot to be in. As you’ll see later, this was red flag #1 with the idea.

Although my idea wasn’t really web-driven, when doing competitive research on other web-based companies here are a few other things I look at:

  • Compete to see their traffic data, and which way it’s trending
  • Quantcast to get a rough feel for the demographics of their average customer
  • AppData (if they have a Facebook or mobile app) to see how engaged their users are

At the end of this stage, you should know three things: who your biggest competitors are, the basics of their company strategy, and how you are (or will be) different from what they’re doing. If you think your approach has more value, time to dive a bit deeper.

Distribution

Now that you know you’ll bring more value to the market than the competition, it’s time to figure out if you can reach your potential customers. Researching how you will acquire customers (and how your competitors do) is rarely done. This is unfortunate, because it may be the most valuable part of your research. Having a rough idea of how much it will cost you to acquire a user informs just about every major decision you’ll make – what you’ll charge, how much you need to raise, how much of your marketing spend should be on advertising, and what marketing channels you should test.

Luckily, with all the free tools available you can get a really good idea of how your major competitors are driving customers. First, you can use Google Trends to look at the popularity of your competitors in the space. Who has been mentioned more often over the last months? What blogs/media outlets have covered them?

Doing this will give you a good idea of the blogs or media outlets that would be receptive to running a story about what you’re doing. This type of information is really important. Early on, while you’re still figuring out what you’re doing, copying competitor’s distribution channels is a good way of getting some early traction.

Next, you want to look at your competitor’s (likely) two largest sources of traffic – paid advertising and organic search. One of my favorite tools is SEMrush, which you can use to get an estimate of your competitor’s search engine traffic, organic keywords that are working for them, and where their traffic is coming from. In the case of SoFi, I was able to see that they did no advertising, and most of their search traffic came from people specifically searching for “SoFi” or related terms.

This can be really helpful in web-based businesses. For example, take a look at the SEMrush data for Dropbox:

Screen Shot 2013-03-18 at 4.02.03 PM

From this, you can see that they have made SEO a focus of their strategy, and are working on expanding to other countries through paid search and organic SEO. That’s a good thing to know when figuring out how to attack the market. It means that you’ll have to do a really good job executing on SEO, or choose a different vertical.

That most of Dropbox’s traffic is organic is further borne out by taking a look at Alexa‘s clickstream data. Here’s what that looks like:

Screen Shot 2013-03-18 at 5.12.12 PM

This information tells you that Dropbox is doing a good job of driving traffic via Facebook, that Youtube accounts for a surprisingly large percentage of their visitors, and that they have many people searching for them in Europe. Overall, if I was looking at starting a file-sharing competitor, I would write off SEO as a channel through which I could beat Dropbox. They’ve done a great job, and it’d be extremely difficult (and take a long time) to achieve the types of rankings and traffic they have through SEO.

If I thought I could potentially do well with SEO, I’d use the following tools to dig deeper into this channel:

  • Open Site Explorer to see where they get their links from.
  • Sign up for a free trial of SEOmoz to see where the competitors rank for different terms, and determine how hard it would be to rank for certain keywords.
  • Take the free trial of HitTail to see if there were potential opportunities to rank for certain longer-tail SEO keywords.

Lastly, I’d use the Google Keyword tool to figure out how much it’d cost me to buy search advertising, and see how much my competitors are paying for certain search terms. If it’s a lot, I now know that advertising may be a difficult way to acquire customers, and start looking at other channels.

At the end of this process, you should know a few things: how much traffic your major competitors are getting, where that traffic is generally coming from, what sites have linked to them, and an idea of whether or not SEO and PPC could work for you as acquisition channels. If not, start thinking about others - viral, partnerships, PR, etc. Starting a company with some idea of how you’ll attract customers vastly increases your chances for success.

Market

Lastly, you want to know how large your potential market is. This involves a lot of googling to answer the following questions:

Who are the major players in the space, and what is their total revenue? What is their market cap (if public)?

  • Here, use the 10k’s of publicly traded companies to research total revenue, profits, expenses, and profitability history. Pay special attention to net income and expenses – where are they spending the most money? Are their profits growing or shrinking? Why?

What are people saying about the industry? What are some recent blog posts or press covering the market or its major players?

  • Use Google’s search tools to see most recent blog posts or press mentions over the last month. How often is the market covered? Who covers it, and what are they saying about the market and the companies in it?

Is it a growing market? What gaps exist that I can leverage, and how entrenched are the players in the market?

  • Here, look for industry reports and revenues of companies in the space. Also use Crunchbase to see if other companies raised money at increasing valuations in the past 6 months. That’s a strong indication that they’re seeing some kind of growth.

What do my potential customers care about?

  • Use Delicious to see what popular articles people have tagged as memorable. What do they care enough about to save? For example, if you are thinking of doing a web analytics startup, take a look at some of Kissmetric’s most popular posts to see what people are interested in and found valuable.

At this point, I also set up Google Alerts for certain key terms in a market. For example, with our hypothetical fire-sharing competitor, I’d create alerts for the top 3 competitors and a few key terms (e.g. “file sharing” + funding) I wanted to monitor.

I’d also subscribe to a few relevant blogs that covered the space, and follow relevant players (and reporters who cover them) on Twitter. In the case of a file-sharing company, I’d follow Aaron Levie, the CEO of Box, Dropbox’s CEO Drew Houston, and a few TechCrunch reporters that you can see often cover Dropbox and the file-sharing space - Josh ConstineSarah Perez, and Ingrid Lunden.

You can also do some basic market sizing by using Facebook ads to determine how many people are in your potential market. Noah Kagan talks about that in a great post here.

Lastly, get out of the building and talk to people. Having conversations with industry experts will expose you to problems and ideas that you can’t find on your own. Often, these people will be happy to talk to you – in my case, I even had one guy who wanted to invest after I did some of my research.

Why I Didn’t Do It

In the end, I passed on the idea for a few reasons. The largest one was the numbers didn’t make sense: starting a company that connects alumni or other institutions to engineers who need student loans is a great idea if you collect the 1-2% spread between private loans and what you could offer. If I had $50m+ I’d do this in a heartbeat. Otherwise, as a middleman, you’re only getting a small piece of the 1-2% differential between the loans you’d facilitate and the rates students could get elsewhere. You have to have a LOT of volume to make this a worthwhile business – even if you facilitated $500m in loans (about 16% of the total market), you’d still only make $5-10m annually.

So, the math didn’t make sense unless you were the one actually giving out the loans (the strategy SoFi seems to be taking). I thought about it, and given my status as a 23 year old recent grad, I didn’t want the potential success of the company hinging on whether or not I could raise $50m+ in capital to lend out to engineering students. When you account for regulatory and legal compliance issues that come with being a lender, and the idea just didn’t make sense for me to pursue at the time.

The last piece of this was a few conversations I had with people in the space. A few people I spoke with saw the opportunity, but didn’t think it could be a major business given the economics of the market. Additionally, SoFi has a mature and well-connected team of executives that I wouldn’t want to compete against in a market that will be rapidly changing over the next 5 years. If the price of college collapses, and the education bubble pops, SoFi is in a tough spot where they have to process more and more loans to reach the same volumes. Even if the cost of college drops 10%, that 10% has a big impact on the loan volume they can process.

In the end, it’s an idea I could have raised money for. I had a few people who said they were willing to invest, and a marketing plan that I’m confident would have worked. However, thanks to intensive market research lasting 2 months, I think I saved myself years working on an idea that likely wouldn’t have paid off.

 

Want access to the competitive research spreadsheet I use to evaluate a startup opportunity? Sign up for my (very) infrequent email list. 

Restaurant Math

5 Mar

Think about the last time you were at a restaurant. Great meal, enjoyable conversation, a few drinks and a fun night out. You’re enjoying the company, the time away from work, the background noise and the conversation.

Then the check comes. Confusion ensues.

Even though we can print organs, fly to space, create self-driving cars and eradicate smallpox, for some reason splitting a check among 3 or more people still remains nearly impossible.

Plenty of times I’ve wondered why this is. Splitting a check should be relatively straightforward – each person takes what they ordered, adds a 20-25% tip and pays that.

The act of splitting a check is so complex because it involves other people. When emotions get involved in otherwise rational decisions, they quickly make a simple situation more complex. They force new decisions on you. Do I want to be a nice guy and pick up the check? Can I get away with having the bill split evenly, even though I ordered the most expensive item on the menu? Can I under-tip and hope nobody notices?

These internal questions add layers of emotional complexity to what is otherwise a basic equation. Your answers to these questions can depend on how you’re feeling at the time, whether or not you recently got paid, how your relationship with your girlfriend is, and so on.

Emotional complexity is everywhere: hiring, firing, working with others… The ability to successfully navigate this complexity can literally make or break your career. Rationally, you hire someone to do a certain job. You set goals, benchmarks and metrics to help judge whether or not someone is meeting expectations and doing a good job. Again, rationally, if they aren’t hitting the goals you’ve established, you should part ways. No hard feelings.

We all know this isn’t how it actually works. I’ve been fired, seen others fired, and recently been the one actually doing the firing. For those that haven’t done it yet: it sucks.

I’ve been laid off once and fired twice. Once because the company was going through some hard times, another time because I took off 18 days in a row (sorry LA Fitness), and another because I underestimated how much work 20 hours a week was when you’re trying to get a company off the ground.

Being fired was not fun, to say the least. As the one being fired, I didn’t think rationally about how I was late on a few projects, or how my last project wasn’t exactly my best work. My immediate thought was that it was personal – they didn’t like me, I had somehow offended the wrong person, I would never be successful in a career, etc. My emotions got involved and made the firing more painful and personal than it should have been. It removed the possibility of treating it as a learning experience, and instead made the event a blow to my self-confidence.

As hard as they can be, such situations can also be an advantage. In the case of getting fired, I was able to get some clarity (once I got over the emotional aspect) about what I wanted to learn and what I wanted to do with my life.

This can apply to other situations, like finding a job. Rationally, a hiring manager *should* go with the most qualified candidate, but will often hire someone they know and like. What this means for the “unqualified” candidate – someone without the perfect resume or the right connections – is that you can get a job by introducing emotion to what would otherwise be a purely rational choice. Take them to coffee, do informational interviews, keep in touch via email, etc. Build a relationship instead of a resume to turn a rational decision into one based largely on emotion.

There’s nothing incredibly insightful here that others far smarter haven’t talked about. I guess my main point is that I’m constantly surprised at how many decisions in the world are driven by emotions and relationships instead of the intelligent, rational adult mind that I thought dictated most things. Envy, greed, fear of missing out, kindness and reciprocity are all very human emotions that have a real impact on how the world works. And I didn’t realize that until I started thinking about how to split a check.

Why Real Businesses Don’t Charge $5/month

12 Feb

As a business that’s trying to make money, you live and die by this evaluation: LTV > CAC.

For those that don’t know what the above means (aka me 6 months ago), it’s a more complex way of saying that in a real business, you make more from your customers than you paid to get them. Their lifetime value (LTV) must be greater than your cost of acquisition (CAC).

Let that sink in for a moment. As someone who (presumably) wants to make more money, there are two clear ways to get you closer to that Ferrari/Thailand trip/guitar studio: lower your CAC, or increase your LTV. Lowering your CAC involves things like pursuing virality, building referral engines and testing new marketing channels (which we cover extensively in Traction Book). I’ll cover that more in future posts.

For now, let’s take a look at how you can increase your LTV. Here’s a thought experiment for a bootstrapper running a SaaS software business. You hate paying for software and figure others do too, soo… you are thinking of pricing your app at $10/month. Let’s say the nearest comparable product sells for around $29/month. Where should you price it?

Let’s take a look at something completely obvious:

Yes, charging (roughly) 3x more per month means you have (roughly) 3x more revenue at the end of the year with one customer. Now before you hit the back button, let’s take a look at how this impacts your CAC.

We’ll assume for the purposes of this thought experiment that you’re somewhat of an Adwords guru and can buy clicks at $0.50. Let’s also assume that of those lucky individuals who click on your ad, 15% of them are blown away by your landing page and the value you’re offering that they sign up for a trial. Of those, 20% are so amazed with your product that they sign up for a paid account. That leaves you with a CAC of $16.67.

Not bad! In this (admittedly optimistic) scenario, you’re looking at about 1.5 months to recoup your investment in acquiring a $10/month customer, and about 2 weeks to recoup with the $29/month plan. Again, pretty intuitive.

What’s not intuitive is just how large an impact this can have on your ability to acquire more customers. Let’s say you are running your SaaS business as a bootstrapper, and don’t have oodles of VC money. In this case, you’re only reinvesting revenues into acquiring more customers. Where would this put you after a year?

Nice! After a year of work, you’re pulling in $1420 a month. Depending on your expenses, this might be enough to quit your day job – just stay away from San Francisco or New York.

Now, let’s compare the above to where you’d be if you charged $29/month and reinvested revenues into user acquisition. You know about things like compounding (you’re smart), so you take a tentative guess that charging 3x would probably result in something like 10x revenues. Let’s see how the two approaches stack up:

Um. What? That’s not a super useful comparison. Let’s try again at 6 months:

3 months?

Finally, a useful graph! Who would have thought that after a year, charging 3x more would have resulted in 819x more monthly revenue than otherwise. That gets you to your financial goals a lot faster. After just 6 months, you’re pulling in nearly $36k per year!

Making real money as a business changes a lot of things. More revenue allows you to build a real business where you have the resources to invest in things like better support and new features. One of my mentors (a guy who’s built 5 successful software companies) told me that when a company would object to his prices being slightly higher, he’d respond along these lines:

“At $5/month I can’t build a real business. If I can build a real company, I can help you to blow up your business. I can provide support, product upgrades, and create more and more value for you. At $5/month, I can’t do anything real to help you build your business.”

Something to think about when pricing your next app.

 

Want access to the spreadsheet I used to calculate the above metrics (CAC, LTV, compounding revenue growth)? Sign up for my free mailing list – no spam, emails 1-2x per month, occasional goodies I don’t post to the blog.

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Thanks to the guys at Lean Analytics for letting me get an early copy of their fantastic book, which inspired a lot of this post, as well as Kevin Espiritu and Nate Speller for edits.

Social Skills as Exercise

4 Feb

I was sitting there at lunch, sweating, staring at the stranger across from me. I had no idea what to say, no interesting topics to bring up. The lone thought racing through my mind, other than wishing this would end, was the disappointment I felt in my inability to make simple conversation for even 10 minutes.

That was the first day of my social workout.

Two years ago, I made a conscious effort to work on improving my social skills. Around the time I started Roommatefit (while still in college), I realized my mediocre interpersonal skills weren’t going to help me succeed. I needed to get a lot of help from others smarter than me, and talking to people via email and Twitter wasn’t going to cut it.

Beginning my junior year, I made it a habit to grab coffee with at least 1 new person each week. The summer I was in San Francisco, I got coffee or lunch with a new person 3x per week, and went to a startup event once a week with the goal to initiate at least 5 conversations. At the beginning it was horrible. I would jump from awkward conversation to awkward conversation, have one good one, and follow it with a painfully strained exchange of sentences that some would characterize as talking. But I practiced, and I improved.

I know since I consciously started working on this I’ve been a lot happier. Today, for example. I went to a lunch with a friend, an acquaintance and a few other people I didn’t know. Two years ago, such a situation would have made me nervous – I would have been unsure of myself, forced conversation and had a horrible time. Now, it’s not a big deal. I had a great time, met some cool people and am grabbing coffee with one of them later this week.

Being a pretty awkward guy has also helped me relate to others who may not have spent as much time practicing their social skills. I understand how others are feeling when meeting someone for the first time, and it’s easier for me to lead conversations to a place where both parties are comfortable. Even a slight improvement in my social skills meant a big leap in my ability to connect with people, which has led to new and better relationships.

Now, although my social fears are (mostly) gone, I’m still working on them. Telling better stories, using more pauses, and adding verbal inflection (I’m a pretty monotone speaker), are all things I need to work on. I’ve learned that your social skills are like a muscle – you can let them wither, or you can work on making them stronger. Improving them followed the same pattern as lifting: you suck, you suck, you see some improvements, you suck more.You don’t have to be that quiet guy forever. After working on this for 2 years I have met more than 300 new people, many who have become friends.

The point of this isn’t that I’m some amazing socialite. I’m not. The point is that I’m better socially than I was, and happier for it. Working on my social skills have had a larger impact on my life than anything else I’ve tried to improve.

 

Thanks to Nate Speller and Dan Shipper for reading drafts of this. And to all my lunch and coffee partners for their patience over the past two years.

Being Mentally Healthy

16 Jan

For two years now I’ve been drawn to starting companies. From my perspective it looks like there are few better ways you can have an impact on the world. Success (seemingly) requires hard work and smarts, less so connections and political savvy (though they help). Media, politics, large corporations all have billions of dollars of entrenched interests to keep the top dogs where they are. Startups less so.

Though there are good reasons to do do them, I’ve come to appreciate just how difficult the mental side of startups is. The experience of starting a company is the hardest thing I’ve done so far. There’s not much that can compare with the ups and downs, the emotional attachment you have to doing something that hasn’t been done before. And I’m not even tackling a problem like sending rockets into space, or changing payments on the web.

After meeting a lot of people in the space, I think that it is almost more important from a career standpoint than anything else. You can’t do well if you’re constantly focusing on negatives, if you have difficulty finding happiness in your day-to-day, and if you’re not in a good place emotionally. This stuff is hard, and being miserable throughout the process is a sure way to get out of startups altogether. I know too many talented, ambitious people who don’t have the mental makeup to stay involved in the game.

Gabe talks about this a bit with his Startup Career Path post, but I hear a lot of people talking about startups as if they are a one-shot deal. As if their current thing doesn’t work, they leave the game. Even if you don’t get out altogether, being miserable while being in startups is hard. It sucks, and it makes people less effective and productive, to posts like this.

The more people who can be happy and start companies, the better. If humanity is going to advance more quickly, we want more smart people starting companies to solve real problems. This means we need more people who can mentally cope with the ups and downs of striking out on their own. This is valuable even for those that fail, as starting a company leads to drastically accelerated learning.

There’s still a lot for me to figure out, but I’m starting to believe that personal development and growth should be a focus before (and during) the process of starting a company. Getting your head right should be as important as anything else. After all, if you succeed at the cost of being a happy, healthy, real human, I’m not sure that’s a positive. This is why I’m working hard to do things like the Daily Practice. To focus on the good things in life and try to take a long-term view of things.

There are so many things I want to improve: my writing, strategic thinking, productivity, health… things most people struggle with. What I don’t want to deal with is a life of work that makes me miserable and unhappy. And too many times I worry that’s where I’m headed.

 

Thanks to Nate Speller for reading drafts of this. I’d love to hear what you think of this type of post vs more marketing-related posts. Thoughts?