I’ve had conversations with many business owners over the past 3 years, and even longer if I go back to my Engine Yard days. Probably literally something like 300-400 conversations – on the phone, in email, over coffee, at conferences, etc.
And there’s a recurring story: in general, businesses that only receive $5/mo from their typical customer are hard on the employees and owners.
There’s just not enough money to pay everyone well and to afford things the business needs. And if you think you’re going to grow your way to prosperity, think again… in most cases, growth just brings more problems. If you’re losing money on 1,000 customers, you’re probably going to lose money on 2,000 customers, but you’ll be losing more money! Sure, there are economies of scale, but they tend to diminish after a certain point. (And if you want to be Jeff Bezos and run on really thin margins, that’s cool, but just remember that Jeff Bezos is very unusual and it took a boatload of money to get there.)
It’s of course different if you have capital to cover losses for a number of years, or if you’re just adding a new product or service to an existing healthy business and you just want a new revenue stream atop many others.
If you don’t have VC or cash flow, pick a different opportunity – one that pays more per customer.
Happiness Seems to Start Somewhere around $20/mo
The happy business employees & owners I speak with are charging at least $20/month, and it just gets better as they hit an average of $30 or $50 or $100 or $200. We even have merchants who charge their customers $500 or $1,000 per month.
(An interesting thing to do, btw, is to compare whatever you’re offering to what people pay for common services like cable TV, cell phone service, and lawn mowing… is your service more useful/valuable than lawn mowing? If you’re helping them do something valuable, it should be a no-brainer.)
Of course these businesses are happy, right? They’re getting $100 or $500 or $1,000 a month. But remember, the fuzzy line between stress and relative happiness seems to be as low as $20/mo. Of course, as the average gets up into the hundreds or thousands of dollars, things seem to get a lot nicer , but I also assume their customers get more demanding at really high prices. I have to assume there’s actually an upper limit to happiness, where customers become so demanding that happiness starts to decrease.
Sell to Professionals or Businesses
At higher prices, you’re probably not selling to consumers, or if you are, it’s not something “light” or optional. I had a business years ago selling ringtones – talk about frivolous! Our average sale was $5. We eventually had a big problem with fraudulent charges and chargebacks, and each chargeback cost $25. That business didn’t make it. Not only have I witnessed many such businesses, but I’ve also been there, done that.
The vast majority of happy business employees & owners I’ve spoken with over the years are selling to professionals or businesses.
They provide a service that helps doctors, lawyers, software developers, restaurant managers, auto dealerships, insurance agents, real estate agents, truck fleet owners, property owners, plumbing contractors, heating & air conditioning companies, etc.
Their customer is someone who doesn’t mind paying a moderate/decent amount for something that adds real value & utility – it helps them get more customers, schedule patients, keep track of legal processes, manage & close more deals, manage rental properties, work better with other team members, manage code, etc.
Find a Good Niche
Now, you might wonder, how do these merchants find their markets? A lot of the time, they’re connected to the market in which they offer a solution… or they know someone who is. For instance, an attorney recognizes a pain point and forms a company with his friend who’s a software developer. We’ve seen this many times.
Some niches are already filled with good competitors, but some are not. Finding one and then analyzing the opportunity is the hard part, because we don’t know what we don’t know. I never knew that a market exists for fleet management software until 2 years ago. So I think the hard part is knowing about the opportunity in the first place. But I’m sure there are people who stumble onto these opportunities, too.
Hard Work for Little Money, Hopefully Not Forever!
That’s okay, and expected, when you start a business. But you don’t want to stay there, right?
Back to the $5/mo business for a second… think of how many customers you’ll need just to pay yourself a moderate salary. And what about paying a software developer or two, and some support people, and people to do marketing & bookkeeping.
If you’re like most entrepreneurs, you’ll do most/all of this yourself for awhile, but there’s a real danger that you’ll work yourself to death and you still won’t have enough customers to “make it”. You’ll want to hire someone else to write software or do marketing, but you won’t have enough revenue to pay them. You’ll feel pressure to shave every penny of costs, to hire the least expensive contractors, etc.
I spoke to a guy last month who has 2,000 customers and revenue of $10K/month. He’s stressed because he’s trying to support 2,000 people but his revenue can barely pay a salary or two in the USA, plus he’s got some servers to pay for, and a little bit of marketing/PPC, etc.
At $5/mo each, you’ll need 10,000 customers to cover a moderate business expense structure in the USA (a handful of employees, health insurance, marketing… all the usual stuff). With a $5 monthly average, you’re almost certainly selling something relatively optional to your customers, so you’ll probably have high churn (this has been echoed by several people who tweeted back to us since we posted this blog post). And the costs to get 10,000 customers will be pretty high. Word of mouth and freemium only go so far. I know some ideas catch fire and go viral, and there are some famous people & companies who are gods of viral/low-cost/free customer acquisition, but that’s the exception, not the rule. Most businesses require investment of time & money to reach customers… at least basic stuff like Google AdWords. Getting to 10,000 paying customers is not easy for most businesses – it will take time & money.
Better Business with Fewer Customers
Now, consider the same story if your average customer pays you $100/mo. Instead of needing 10,000 customers, you only need 500 customers.
It’s much easier to find & communicate with 500 customers, because those 500 are probably much more targeted. Are they in a certain profession? Or maybe they own a specific type of business or asset? You can find them much more easily. And you can listen to them and focus on their needs.
And guess what? Your business with 500 customers will be quieter and calmer, and probably have a lower expense structure. Fewer customers to support, same revenue, and probably better paid employees & owners.
Financing Your Business
Now, I know there are many nuances to this whole discussion. Maybe you want to build Dropbox or Amazon or whatever. Line up some patient capital.
Most people can’t or won’t take that path. Most businesses get off the ground with capital or cash flow provided by the founders and/or friends & family.
For that majority, the advice from those 300 conversations is: offer a product or service worth enough to build a good business with little outside cash. Offer something worth at least $20/mo and preferably more.
(Note that it’s unreasonable to assume you can start a business and get it profitable with no capital or cash flow from somewhere. You will need cash or a day job or something/someone to pay the bills while you get going. But you don’t need a formal angel investor or a venture capitalist to get started. Most people start businesses with money from themselves and friends & family. You might later take money from someone more formal to grow the business – that’s exactly what we did when Maxio took angel investment from Mark Cuban two years after we started.)
As you build up your business, your experience, and hopefully some personal assets, then you can go after larger markets that may take longer to turn a profit. Along the way, you’ll build experience and reputation that will help if you later decide to take outside capital.
Don’t sell something for $5/mo unless you can lose money for a long time in the hopes of dominating a large market.
Do sell something for $20 or $50 or $200/mo that can actually provide a decent living for the people working in the business. If you take money later to grow it, great! A growing business that’s profitable is better in so many ways.
If my last 300 conversations are any guide, you will be happier!