Andrew: Hey everyone, it’s Andrew Warner. I’m the founder of Mixergy.com, home of the Ambitious Upstart. And, if you’ve watched my past interviews, you’d know that I’m obsessed with doing interviews with people who are actually charging their users. I want to learn how, don’t you? How in a world where everyone assumes that everything online is free, how are there some renegade companies who are willing to say, “Our products are so good that people should pay for them? And, in fact, if people do pay for them, we can give them a better experience.”
So charging makes the product better, better than it was already to begin with. How are these people doing it? More importantly, what can you, what can I, what can everyone else who’s building a business online, learn from them? I’ve got one of these renegades, right now on Mixergy today. His name is Mike McDermitt, and he is the co-founder and CEO of a company called...
Edited excerpts: Insights for creating paid web apps
How to have the mindset that will help you charge
It takes conviction. You better be sure you are offering something of value and sometimes it takes time and testing to understand where the value is in what you offer. But if you know you can figure that stuff out, frankly I think subscription revenue business is basically the best business model in the world.
And you know it’s our responsibility to prove our value to our customerbase, through service, through developing the product, through a whole bunch of different things — and every month we’re on the hook for that. But, as you know, as long as we to deliver against that — and we have a long track record of doing that right now — people are will be willing to pay for the value.
How to figure out what to charge
You must find a way to quantify the value of your service and the way to do this is to poll your users. So get a bunch of free users and ask them, “How much are you willing to pay for my service?” And it should be based on which category you’re in:
CRAYON: CRM (Customer Relationship Management software) helps you drives topline, it helps you generate more sales. That’s a crayon. It paints a brighter future.
APRIN: An Aspirin is a pain-killer. I’m in the aspirin business. Every month my customers say, “I have to do billing. It hurts my head. I don’t want to do it. Make this pain go away.”
So, in the CRM version, something that is going to drive top-line for a business. You might want to ask your users, “by using our service for free, how much new revenue have you generated”? Someone might say, “I made a $1000 extra this month because of using your service.”
In the pain business, you might want to ask, “How much time have I saved you?”
We might ask, “How much time do you spend invoicing before FreshBooks and after?” Some people save multiple person-days a month, thanks to our service. Other people save four hours. Right, now four hours is a half-day for somebody who’s busy building their business. You can make phone calls and generate new business in four hours. If I can save you four hours, and you bill out at $200 an hour, my services, to my mind, are worth $800 a month.
Maybe a monthly service costs one hour of your time. All right, so we’re going to save you three, and you can turn that into money.
If it’s a CRM business generation tool, and you can generate $10,000 more a month, I’ll bet you any money you’ll pay $1000/month for that service, if you can generate $10,000.
How to keep yourself going before you’re profitable
I encourage people to set their own metrics, and sometimes those metrics are, “How many happy emails did we get from customers this month?” Because we’re not getting paid we’re not making money, but if we got ten emails this week, or this month, maybe that’s enough to get us by. It tells us we’re on the road. And we’re going to keep doing that.
So, you need to define your own success. And I think that can fundamentally shift the way you look at things.
We started the business in January 2003. The market was not in a good place. I would say we spent more than two and a half years struggling away. Frankly, I’d say it’s closer to four.
It’s all how you define it. It’s all how you look at it. You know you’re kidding yourself. You know sometimes you have real-world obligations. If you have a family, you know you need to support them financially, and you know you’re not able to make ends meet, OK, I understand that. But if you’re not in that scenario, and you love what you do, and you can see some sense of success, however you define it, you know, I’d just say, “Stick with it.” It always takes longer than you think.
Full program includes
– Very detailed discussion about how you can create a paid online service that earns the right to charge users by delivering value you (and your customers) can measure.
– How you can bootstrap a business by starting a consulting company and why you probably want to transition away from consulting.
– How to figure out what business you should launch. (Around minute 4 of the interview Mike talks about where the idea for FreshBooks came from.)
Mike’s book recommendations
At the end of the interview, Mike offered to send us a list of books he recommends. Here it is: