Fail Series: Even The Most Experienced Fail

In 2010, the Grasshopper Group, a company with a proven tracker record of entrepreneurial success, launched a product that failed. Mike Arsenault, the man behind that product agreed to sit down with me and help me learn from his experience.

The product is Spreadable, a word of mouth marketing tool that launched in 2010 and shut down a few months after.

Mike Arsenault

Mike Arsenault

The Grasshopper Group

Mike Arsenault is a product manager at The Grasshopper Group, makers of Grasshopper, a virtual phone system from entrepreneurs and Chargify, which enables SaaS and Web 2.0 companies to setup recurring billing.



Full Interview Transcript

Before we get started, have you seen these? Here’s a box, right there, on Wistia. Here’s another box on inDinero’s website. They’re all over the place. They’re from this company, Olark. Here’s another one. The reason these companies have the box up on their website is so their customers can have chats with them in real-time. Now, imagine what a confused customer is going through, and the frustration they’re having with the website. Then, boom, they have the ability to chat with the founder, with someone at the company, who cares, and can help them.

Beyond solving their problem, and giving you a way to help your customers, it’ll also give you insight into what your customers are going through when they’re on your site, in real-time. Olark. I’m making you aware of them so that you’ll add them to your website, and be able to give your customers incredible support, and so you can learn from them. Once you hear about Olark, you’ll see them all over the place.

My second sponsor is Grasshopper. It’s the virtual phone system that entrepreneurs love. It gives us toll-free numbers — my toll-free number is from Grasshopper — unlimited extensions, call forwarding, and so much more.

Final sponsor is Scott Edward Walker of Walker Corporate Law. Imagine having a problem with a contract. Imagine having to get an agreement put together, and walking over to either your family lawyer, who just doesn’t get it, or one of the expensive startup law firms, who is going to want a piece of your business, and then tens of thousands of dollars in billing. Then imagine going over to Scott Edward Walker, who will understand what you have as business, understand your environment, and be able to help you out. Walker Corporate Law.

Here’s the program.

Andrew: Hey, everyone. My name is Andrew Warner. I’m the founder of, home of the ambitious upstart, and the place where I usually do success stories. But I’m doing a series that is very important to me, and I think is very important to the audience. I’m inviting entrepreneurs and product managers to come on here and talk about the failures, talk about businesses that didn’t work out, tell the stories behind them, so that we can understand how products and how businesses fail. We can learn from them, instead of learning from our own failures firsthand.

In 2010, the Grasshopper Group, a company with a proven track record of entrepreneurial success, launched a product that failed. The man behind that product agreed to sit down with me, and help me learn from his experience. The product is Spreadable. Spreadable was a word-of-mouth marketing tool that launched, in 2010, and shut down a few months later. Mike Arsenault was Spreadable’s project manager. He’s here with me today to go over that story. Mike, welcome.

Mike: Thanks.

Andrew: How much money did you guys invest in Spreadable?

Mike: Just over $550,000. When you factor in the development team, as well as, we did spend a little bit of money on marketing, at the end. But that $550,000 largely includes the cost to actually build the product.

Andrew: That means you’re working on the product full-time. Your full-time salary needs to be included in the cost of the product. Okay.

Mike: Yeah.

Andrew: How many paying customers did you have?

Mike: At the end? We started charging, right around Christmas time in 2010. When we shut down the product in March, we had 361 paying customers.

Andrew: Okay. I said in the beginning that Grasshopper Group has a track record of success. The big product is which one? What’s the flagship?

Mike: Of our two products,, which is a virtual phone system, and, which is a recurring billing platform, for anyone doing subscription-based products on the Web, Grasshopper is the bigger of the two. That has, currently, around 40,000 active customers.

Andrew: 40,000 paying customers.

Mike: Paying customers.

Andrew: Okay. I should disclose Grasshopper has been a longtime sponsor and supporter of Mixergy and the work here that I’m doing in interviewing entrepreneurs. All right. I want to find out how the business formed, how it evolved, and what happened. Then later on, we’ll come back and talk about what you learned from the process.

Mike: Sure.

Andrew: Where did the original idea for Spreadable come from?

Mike: Sure. The idea was born out of the fact that referrals have been a huge part of Grasshopper’s business, the phone product. A couple years ago, we had a problem. We said, on any given day, we knew that roughly 40% of our new signups came from word-of-mouth. When people signed up, they filled out a little form on signup that said they heard about us from a friend, a family member, or a colleague. We tried to figure out how can we get these folks to tell more people that they know? How can we measure the impact that referrals are having on our business?

After we tried a bunch of different things, what resulted was a program that we call Refer an Entrepreneur. It allows our customers to share an exclusive deal with people who they think will benefit from Grasshopper. It incentivizes them to sign up. Back then, we also incentivized the entrepreneur themselves. They would get a discount if their friend or family member or colleague signed up. At its core, it was really a very lightweight affiliate program, to try to incentivize our best customers to tell other people about us.

We saw some incredible success with that. We’d see conversion rates on those referrals, on the emails that get sent out, north of 15%. Fifteen percent of the referrals that get sent out, the people actually come, they do sign up. In 2010, the Refer an Entrepreneur represented $100,000 in additional revenue for the phone product. Back then, we thought we were sitting on a pretty good formula for a referral program, and said, “Okay, how can we systemize this? How can we productize it and create a product where people can go in and create their own referral programs?”

Andrew: Okay. I get that. In fact, in preparing for this interview, I went to I looked at the home page, and right there at the very top is the Refer an Entrepreneur button. This thing is doing so well for you that it’s getting prime real estate on the home page.

Mike: Absolutely, yeah. It’s big part of our business, yeah.

Andrew: Even to this day.

Mike: Yeah.

Andrew: When we say 15%, I think it’s important to understand that a Grasshopper virtual phone system isn’t something that people just sign up for. It’s not like buying a stick of gum on your way out of the grocery store. It’s a commitment. You’re getting a brand new phone number. People end up putting it on their business cards, on their websites. Fifteen percent of people who hear about it to take action is huge. I can understand, then, why you’d say everybody needs this kind of referral system. I think they’re all going to benefit.

Mike: Yeah, absolutely.

Andrew: What were you doing at the time, before Spreadable?

Mike: I was working on Chargify, a little bit. My time was split about 50/50 between the Grasshopper product and Chargify, doing a variety of different things. I’m kind of a generalist here. I have my hands in a lot of different areas, from our affiliate program, to business development, design. I do a little bit of everything.

Andrew: Okay. How long were you with Grasshopper before the launch?

Mike: I’ve been at Grasshopper for two years.

Andrew: This is before the launch, two years?

Mike: Two years total. Before the launch of Spreadable, about a year, a little over a year.

Andrew: Okay. All right. When it was time to launch this as a separate product, and in the future, a vision for it to be its own business, why were you the person who was handed the product?

Mike: Well, at first, I wasn’t. It was — and this is actually something that we learned later on — but we actually started with a very large core team of people who were all working on the product at one time. A big problem was that there really wasn’t a true “owner”, a true “founder,” if you will. We had one of our founders, Siamak, who you know, who was involved. We had a development team. We had a couple of folks from marketing. We had, of course, myself. I was involved in a little bit of everything. There really wasn’t one person who was leading the charge. That was a challenge that we definitely faced.

Andrew: I see. When the idea came to you that this should be its own product, before you were the leader, back when it was still forming, what’s the first thing that you guys did? What’s the first step toward making it into a real product?

Mike: We took a step back. We looked at, basically, the components of the Gras, okay, shopper referral program. We really tried to dissect it to see, okay, what makes this successful for us? Will this port over to other types of businesses? At that time, we felt confident that it would. Without talking to too many people, without interacting with too many potential customers, we just said, “Okay, we think we’ve got this great formula. Let’s just go build something.” We started, basically, mocking up the experience, low fidelity, using Balsamiq, or what have you. We jumped right into design and development.

Andrew: What are the essential elements that you said need to go into this product?

Mike: It’s actually pretty simple. The Grasshopper program really has two parts. There is an email delivery component, where a customer of ours can email an offer to any of their friends, family or colleagues. Part of that is, obviously, the vehicle for delivering the email itself, the content of that email. What does it say? How is it tracked? The second part is some pretty lightweight integrations with a bunch of different social tools – Twitter, Facebook, wherever these people felt comfortable sharing this deal with their networks. Actually, there is probably a third part, and it’s the analytics that are tracking all the referrals that are happening for people.

Andrew: If you imagined someone like me might use it, that I have a premium program on here, where people pay a monthly fee, they end up getting access to all kinds of courses taught by entrepreneurs. You are saying, “We’ll give Andrew Spreadable. Any one of his customers who refers another customer to the premium program needs to get some money back, or some kind of benefit from Andrew.” You’d give me the button. I’d put it on my site. I’d let my audience spread the word in any different medium that they wanted, Facebook, email, whatever. I would get a link back, or data back, with the names and email addresses of the people who shared the product with someone who ended up being a customer.

Mike: Exactly.

Andrew: How do you do that without fully tying into my system? How do you know exactly who becomes a customer, and who sent that person?

Mike: It’s a little bit different for an online conversion, versus an offline conversion. But, what we could do was say, “Okay, I want to refer Andrew’s premium program to three of my friends.” Of course, you would be able to see who the three friends are that I referred. Then, basically, we tracked every link uniquely. We could tell what the person did when they received that referral. Did they open the email? Did they click on it? You would put a little tracking pixel on your confirmation page, after somebody signed up for your service. It could then tie that referral back to the original referral that was sent.

Andrew: I see. You know what? I signed up for the program, and I didn’t even see the pixel. I didn’t understand that that was part of it.

Mike: Yep.

Andrew: That was an issue? I wasn’t the only one.

Mike: Yeah. No, definitely not. That end-to-end conversion tracking was really the biggest part of our offering. The fact that we were allowing you to measure something, word-of-mouth and referrals, that’s fairly nebulous. How do you measure the impact that referrals are having on your business? We were actually able to tie that back to an actual number for people.

Andrew: I see, okay. All right. In my system, I probably have to go in and manually give the person, give the referrer the benefit or switch on an extra month or do something. But I get how it works. I get how it’s a quick system. All right, great idea. You decide that you’re going to launch it. How long does it take for that first version to come out?

Mike: Version one, we worked on for about three months, and didn’t really show it to anybody. We spent a lot of time building the app in a vacuum. Three months went by. We got to a place where we weren’t really happy with the look and feel of the brand. We weren’t really happy with the performance of the app. That first version, we ended up just scrapping completely, and starting over.

Andrew: See, I read about that. I wonder why you’d have to scrap it. If you’re not happy with the look and feel, can’t you just redesign the user experience, the user interface?

Mike: Yeah, we ended up doing that. We did reuse parts of the development architecture. We reused a couple of the features that we had built for that first version. But really, we just re-architected it.

Andrew: What didn’t you like? Then, I’ll find out why you didn’t like it.

Mike: It was very basic in terms of what it allowed you to track. The first version only allowed you to track the email address of the person that the referral was sent to. It didn’t have any of the conversion tracking on the back end. It didn’t really have much of the functionality that we learned later that people were actually interested in.

Andrew: I see. If I put it on my site, I would know that Steve sent a referral out to two, or five, people. I’d have their email addresses, but nothing beyond that.

Mike: Yeah, exactly.

Andrew: If he did it via Twitter, I’d know he did it via Twitter, I guess, but now what happened after that.

Mike: Yeah, you’d know that he did it via Twitter. You wouldn’t even know what resulted from that link that was shared on Twitter. Really basic analytics in that first version.

Andrew: Okay. But you created it, and you called that the first version because you thought this would be enough. Why wasn’t it enough? How did you know that it wasn’t enough, or that it wasn’t right?

Mike: That’s a really good question. Looking back on it, it was probably a mistake to scrap that first version, because, to be honest with you, what happened after that three months is that we spent another three re-architecting the product, before we even showed it to anyone. I think a big takeaway for us was hey, maybe we’re not really happy with how this came out. But we would have really benefited from showing it to some people, and learning from actual customers, before we go and start over again, and spend another three months.

Andrew: You would have taken that first version, and said, “Wait, let’s take this out to people like Andrew and say, ‘Do you like this?’ Who knows? Maybe he’ll say he likes it.” Why would you have wanted to take it to Andrew? You guys have internal people who know this product really well, who know customers like me really well. What would you have gained by showing it to someone like me?

Mike: Well, what we learned really quickly is that we had this referral program for ourselves, that we wanted to port over to other businesses. Most of the people who came to us didn’t have businesses like ours, which is why it’s so important to show it to other people, outside of your organization, getting out of the building and really investigating what kind of business this would really be helpful for.

Andrew: Okay. When you scrapped version one, was that an internal decision, where you showed it to someone in the company, and he said, “Hey, guys, this is not really right?” It was one or two people who made that decision?

Mike: Yeah. Entirely an internal decision.

Andrew: Is that something you guys could say publicly, who said, “No, let’s scrap this one?

Mike: Yeah, actually, it was a couple folks on our marketing team. Myself, I was certainly involved in the decision. We took a look at the app and said, “We think this can be a lot more. We think it can do a lot more.” At the time, it made sense to us to say, “Okay, instead of getting this out there and showing it to people, when we might not be happy with it. Let’s take another look, and see what else we can build to make this a more robust system,” was really the logic behind this.

Andrew: I see. One of the things that I ask entrepreneurs all the time is when you have a reputation like Grasshopper does, do you feel that you can’t show something that’s a piece of garbage to people? You do. Tell me about that.

Mike: Yeah, absolutely. When you have a suite of products, like we do now, it’s a big deal to put the Grasshopper Group label on it, right? I think we felt like we had to do that, because there’s a lot of benefit in putting the Grasshopper Group label on it, too, because it gives us access to this huge group of customers that we have for our other products. But also, just the brand recognition of the Grasshopper name is a really positive thing. But, at the same time, it adds an additional layer of pressure, that the product has to be really good.

Andrew: I was a Startup Riot, and I’ve known David Hauser, your co-founder, for a long time. I heard someone talk about him with such reverence, this young entrepreneur. I said, “I can introduce you to David Hauser.” I saw his eyes light up. He studied David Hauser. He saw him, maybe, give the speech about public relations, and so on. I made the introduction. The guy, later on, thanked me for making the introduction.

There’s a big respect, and a big admiration, for your company. What would have happened if you had taken version one out to show it to customers, and said, “Guys, you studied all our stuff. You love us. You trust us with your phone number, which is one of the biggest doorways into your business. Here’s a piece of garbage that we put together. What do you think of version number one?” What would have happened?

Mike: You know what? If people had said they hated it, and it wasn’t useful at all, it would have been much more useful that what we did in not showing it to anyone, and then going off and building something else for three months. I think that feedback could have been really instrumental in steering us in a different direction, or the right direction, which actually ended up taking us even longer, because we didn’t do that.

Andrew: I see. Do you think that your reputation would have taken a hit. I mean, we just discussed how, yeah, there is more pressure, there is more expected of you. What would have happened with all the expectations if you would have come up with something that was a little bit shoddy, which a lot of version ones are?

Mike: Yeah. I think there are probably two ways we could have gone about it. We could have even gone out to the world, and said, “Hey, check this out,” and not had the Grasshopper Group label on it so overtly. I think that would have been a good way to do it. But I think when you’re introducing a new product to a small group of people who you believe can benefit from it, I found that, most times, there are visionaries–I guess, is a good word–they get that the first version of new products is generally not very good. I’ve found that they feel empowered to help you build something that is useful to them. They almost feel like it’s a privilege to be part of helping you build your product.

Andrew: I see. Okay. All right, I get that.

Mike: I don’t think that showing it to those types of folks would have impacted our brand negatively.

Andrew: Okay. I’m actually reading a book called “Little Bets”. There’s a story in there about how Procter & Gamble now will take cardboard products and duct-taped first versions and give those to potential customers. Their feeling is that potential customers who see something that looks polished will be hesitant to give it a negative response, because they see that you’ve put so much work into it. It’s almost finished. What am I going to do, come and spoil this whole marketing and product creation process?

Mike: Right.

Andrew: But if you give them something with duct tape, they feel much more comfortable saying, “This just doesn’t work right.” Do you think that would have happened here?

Mike: Absolutely.

Andrew: Okay. Version one, in private built inside, you guys decide we have to scrap it. Version two, private built inside, another three months. You guys build it, it’s ready. What happens then?

Mike: Version two wasn’t entirely private. We got a little bit smarter the second time around. We had a small group of customers, both Grasshopper and Chargify, friendly contacts, who we were engaging for feedback throughout the process. The feedback was generally pretty good about the idea. The feedback was pretty good about the app.

We got to the point where three months pass. The team is fairly large at this point. We’re like four or five people, three developers full-time, myself fulltime, another guy half-time. At that point, we started to feel a certain pressure, internally, that we had to launch this thing. We had to get it out there, and start getting some paying customers.

In traditional Grasshopper form, we all got together and said, “Okay, how are we going to start building some buzz about this product? How are we going to get it out there?” Using the PR tactics that you talked with David about in your last interview, we said, “Okay, how are we going to launch this thing?” We planned a big marketing launch event. Jonathan, our PR whiz, started reaching out to the press. We started to get some coverage in blogs. We got some good news coverage, and decided that we’re going to launch this thing with a big marketing bang. We had a marketing launch party, here in Boston, had about 100 or 150 people come through to that party. We launched publicly.

Andrew: All right, let me pause there, and go back a little bit and fill in the gaps. You said you started talking to some of your customers at both companies, at Chargify and Grasshopper. How did those conversations help shape the product that became version two?

Mike: In a number of different ways. From a technical perspective, we learned a lot about how people wanted to integrate Spreadable into their sites, what components of the referral program they wanted to be able to customize.

Andrew: Do you have two specific examples of ideas that came to you from talking to customers, that you wouldn’t have known about otherwise.

Mike: Sure. I think a big one is around the rewards piece. What Spreadable did was allow you to see what referrals convert into paying customers. But, they want to be able to reward on both sides of the transaction. The person being referred gets an exclusive deal to sign up for their product, but they also wanted to be able to reward on the back end, with a reward that may not necessarily be a unit of their own product or service. That could be a branded T-shirt. That could be a gift card.

Andrew: Oh, that’s a good idea. Right. That means I don’t have to build anything into my own system. I’d just know anyone whose email address is marked off as a referrer, I give them something. Gotcha. Okay.

Mike: That reward piece, and that fulfillment piece, was something we really missed, almost entirely, in the beginning, and only learned from talking to customers that that was a really important piece of the puzzle for them.

Andrew: How do you get into conversations with customers that yield those kinds of feedback?

Mike: Surprisingly, a lot of customers, when we started talking to them, that was what they gravitated to first.

Andrew: You’d have a conversation with one or two people, and instantly that answer would pop up. Then, another two people, and that answer would come up. It’s something that just kept coming up, not a lot of prodding, they just said, “Hey, what if we did it this way?”

Mike: Yeah. They’d say, “Hey, it’s great that we can track what people are driving us new customers, but what about this piece on the back end? We want to be able to reward those people, but we don’t want to have to ask them to sign up for an affiliate program.” That was something we learned, later on, that people actually saw us an alternative to affiliate marketing, which is a dirty word for a lot of people. They felt like it was cheesy to ask their best customers to become an affiliate.

The other key part of it was that they wanted to reward people with something other than cash. Giving somebody a branded token of your business, they felt like that was a lot more powerful than rewarding somebody with cash, or an affiliate program.

Andrew: This is so interesting to hear. I hadn’t thought of that, for some reason. You’re right. You go to, and you see cash. You get $10 every time you sign someone up. I’m now reading that they’ll give even $30 to some customers who refer other customers. That’s kind of a tough thing to do, but if you could reward people in other ways. It’s tough to integrate it into your system. It’s tough to pay out $10, $20, $30 per customer, for some businesses. But if you could find other solutions, then it’s an elegant way to reward your customers, without having to change your whole model around.

Mike: Yeah, absolutely. The big piece was fulfillment, too, right? Because if you have a business with a large number of customers, it’s going to be a very time consuming process to fulfill these rewards, whether it’s cash or something else, or if somebody has to manage this process. What we learned from customers is that there was an opportunity for us to provide that infrastructure of fulfillment, whatever they wanted that reward to be.

Andrew: I see. Okay. You changed the product. Why did you feel that version number two was right for launching? What was it about it that made you say, this is enough for a good launch?

Mike: Sure. Mistakenly, we thought that it was right because it allowed our customers to customize and launch a program exactly like the one we had for Grasshopper. You could customize every visual component, every piece of messaging, from what messages were shared across social, to what the content of the email was. We had a variety of different ways you could implement it on your site, from a button, to a hosted page, to an embedded page. I would say version two was overly-featured. Customers could do too much.

Andrew: What makes you say it’s too much?

Mike: People were confused, in a lot of ways.

Andrew: How did you get to a place where it was too much, and was confusing?

Mike: I think, at the core of a lot of the issues that we faced, was how the team was structured. It was so large that a lot of the decisions we made were a result of groupthink. There were a lot of decision makers who had an opinion about what features Spreadable should have. We didn’t do a good job of really defining, okay, what are the core set of features that we need to have? If version one was too little, version two was way too much.

Andrew: I read, in preparing for this interview–I forget where–there was an article where you said, “Version two, we called a ‘minimum viable product’, but it really wasn’t.” What was it about it that wasn’t a minimum viable product?

Mike: From a UX perspective, customers were presented with way too many things that they could customize.

Andrew: I see. It was too big to be called “minimum”.

Mike: Oh, exactly. Yeah, absolutely. There were too many different ways that they could implement it on their sites. We didn’t do a good job of explaining to customers that these are the three things that you really need to do, in order for this to be successful. Instead, we showed them a bunch of different things that they could potentially implement, but didn’t show them the right things that they needed to be doing.

Andrew: You know what I’m thinking? As I’m doing these interviews, I hear a lot of people say, “We launched a minimum viable product.” I feel like that’s the first smart step to take, that a lot of people believe in. They go back and retrofit their stories, so that they come out having created a minimum viable product.

It seems like maybe you guys knew, we need a minimum viable product first, to get the testing. You say, “This will squeeze into that box, that it’s a minimum viable product.” Like when you go into an airport, and you see someone with a bag that’s a little too big for a carryon, but they’ll shove it into that little basket. We all do that. Do you feel that maybe that’s what was going on, too, internally?

Mike: Absolutely, yeah. “Minimum viable product” is a very popular term these days. I feel like even we were throwing it around without really understanding what that means. Minimum viable product, what the definition to us was at the time was this is going to allow our customers to customize absolutely every component of their referral program, exactly like the Grasshopper program, is what it really meant to us.

Andrew: You said, “We should have slimmed it down to three things.” How would you have known what those three things were?

Mike: By getting it in front of customers sooner. Like what we were talking out earlier, there were really just a couple of core pieces of the application that needed to work well for people to start getting referrals.

Andrew: What would those three things be, today? Actually, you’ve talked to so many customers, right now. You’ve seen the product in action. You’ve seen the negative and positive feedback. What would those three things have been, if you could have focused on them?

Mike: Sure thing. The first, and foremost, would be a rock-solid email delivery platform. We ran into a lot of issues where people’s referrals were getting caught in spam. We had some other issues with email. The referrals have to get to where they are intended to be sent, is the first thing.

We spent a lot of time integrating with social tools that didn’t really matter. We had ten social tools. Really, we could have just integrated with Twitter. We spent a lot of development time there.

The last thing would have been the conversion tracking and rewards piece: making sure you can tell when a referral turns into a paying customer, who sent them to you, and if you choose to, being able to reward that referrer with a token of appreciation.

Andrew: Not change the color of the overlay, not have the ability to both create a page and a popup? I see. Okay. All right. I interrupted you. You were going on with your narrative, where you said, “We had a party. 150 people came.” I wrote down a note here to come back to that. You could continue there.

Mike: Sure. We had this marketing launch party. We’re out there, we’re getting press coverage. People are signing up. At this time, we’re not taking paid signups. For about half that time, we had beta going on. We were just taking people’s email addresses, then letting people into the application in groups of about 40 or 50 at a time. People were coming into the app. We were just letting people in, in a trickle. We didn’t have a ton of resources to handle the support requests that were coming in.

At that time, we started to get feedback from people. Basically, for whatever reason, the kind of customer that was coming to us at that time was not who we had originally anticipated. At the beginning of all of this, we envisioned our ideal customer to be an online business, in the ecommerce or SaaS space, companies that are much like Grasshopper. But, for whatever reason, a lot of offline businesses were finding us, lawyers, accountants, dentists, doctors. These people required a level of support that was much higher than we had originally anticipated. These types of folks were not particularly savvy with HTML and CSS. It was a challenge for a lot of them.

To integrate Spreadable into your site, you needed to implement a small snippet of JavaScript, where you wanted the button to show up. It was a fairly high learning curve for the customers that were coming to us. Much more than we expected, we had to be really hands-on with support, and help these folks actually get Spreadable implemented. Many times, it was myself actually helping them implement the code on their sites. We expected it to be much more self-serve than it ended up being.

Andrew: How do you think you ended up with those customers? It seems like those are not the kind of customers that Chargify would get? Definitely not.

Mike: No, definitely not.

Andrew: How did you end up with them?

Mike: I think part of it was that when we made the decision to start putting some marketing dollars into Spreadable, we started in places where we had a lot of success with the Grasshopper program. Radio is a really effective channel for Grasshopper. We’re like, “All right, let’s throw some money at radio.” for Spreadable. But, we realize now that it was driving the wrong kind of customers for us. The ideal customer for Spreadable is not the ideal customer for Grasshopper, just like the ideal customer for Chargify is not the ideal customer for Grasshopper.

Andrew: I see. You know what I just realized? You said you have 40,000 customers at Grasshopper. David, the founder of Grasshopper, was on here just a few days ago. I think he said that each Grasshopper customer is worth $700, something like that, at least. We’re talking about $20 million in value, in your current customer base.

Mike: Yep.

Andrew: What’s interesting here is that we can’t just throw our hands up and say, “We were . . .” I’ve now done two interviews like this, and both of the previous founders said, “I was stupid to make this mistake.” This isn’t a stupid company. This is a company that’s doing well. It’s the third big product launch, obviously has a lot of value already, a lot of customers. Why do you think, so far, you guys were off base? Before we go, in the end and analyze overall, how did you guys miss the trajectory, at this point?

Mike: That’s a really good question. There are a number of factors that go into it. I think the biggest one being that our goal as a business is to create really highly-scalable applications, and highly-scalable products that really require us to do very little direct selling. For Grasshopper, we don’t have a sales force. We sell entirely through our site. Our vision for future products we develop is that we’ll sell those in a similar way.

What we found with Spreadable was that it was best sold in a much more consultative way. I mentioned earlier that the support requests were much greater than we anticipated. It required us to sell it. Basically, we had to sell Spreadable, again, to these folks. At the end, when we made the decision to stop investing in the product, that was a big reason, this was a product that was really best sold in a way that wasn’t a core strength of ours.

Andrew: Okay, all right. But you know what? Actually, I realized, as you were answering, I said, “Hey, you’re already passing judgment at this stage.” We’re talking about six months. Six months is not a long time to launch and build a product. It’s not a long time to get feedback, and adjust it all. The investment in it isn’t that much. All right, you’re a little off-course, but every entrepreneur, I feel at that point, just about, is off-course at least a little bit, if not a lot. Then, we adjust, and adjust.

You launch, you get these customers who aren’t the ideal customers, the ones that you had in mind. What do you do next?

Mike: We took a step back and said, “Okay, is this a market we really want to be in?” We’re providing a tool for business owners to help them get more referrals. We took a step back and said, “Okay, we have a pretty good idea, in terms of market sizing, how many people are trying to find a virtual phone system, every month. We have a pretty good idea of what that number is.” We said, “Okay, how can we figure out how many people are trying to find a referral marketing tool, every month?”

But the number was much smaller than we expected. Our core metric to figure that out was search volume. How many people are searching for this set of keywords every month? The number ended up being a lot smaller than we anticipated.

Andrew: I’m surprised. You’re saying that more people–well, maybe not more people. I would think that there would be more people looking for this kind of product.

Mike: No. Compared to Chargify and Grasshopper, our other two products have exponentially larger and, in terms of search volume, exponentially larger.

Andrew: Oh, really? There are more people searching for new phone numbers, for new business numbers–however they’re phrasing it–virtual phone numbers, business numbers, virtual voicemail and so on, than they are searching for variations of referral.

Mike: Yeah. That was a red flag, for us, when we did that analysis. It was like, “Okay, maybe this market isn’t what we thought it was.”

Andrew: Ah, interesting. Okay.

Mike: We had, from a competitive standpoint, done a lot of research initially, and saw that there were some big players in the space, who were selling to enterprise, and we didn’t really get why, at first. We couldn’t find a really good self-serve platform that would allow you to create a program like this. We said, “Okay, maybe these enterprise guys are ripe for destruction. But, we learned later that there’s a reason why they sell to enterprise.

Andrew: It takes so much work to get this up and running. I see. You say, “The market looks smaller than we anticipated. But we’re in it. We have to adjust.” What do you adjust?

Mike: Yeah. At this point, after the launch party, we’re still developing new features. We started taking paid accounts at the beginning of 2011, or at the end of 2010. Now, we’re really trying to validate is this something that people are going to pay for? Because at this point, we don’t know that. We have a lot of users who have come to us either through the beta, or through the launch party, or found out about us through various news coverage that we had. Now, we need to figure out can this be a real business?

We launched paid signups. Really, our main goal was to set a baseline for okay, how much is it going to cost us to acquire new customers? How long are paying customers going to stay with us? How much money, in terms of marketing dollars, are we going to have to spend to actually make this product succeed?

Our first offer, in terms of pricing, was pretty straightforward. We had a monthly price plan, and an annual price plan. When we launched paid plans, conversion was really bad. It wasn’t anywhere near where our other two products are. At that point, we began what was a three month barrage of price testing, optimization, redesign of the marketing site, copywriting overhaul. There was all sorts of stuff going on.

Andrew: I see you’re smiling as you’re telling that. Was that fun?

Mike: It was.

Andrew: Tell me about what some of the tests you did were. What did you learn? I always think that’s fun, too.

Mike: Yeah. I think we were experimenting in a couple of different ways. We were experimenting both in terms of visual design of the marketing site, and how the product was positioned. That was one track. We were experimenting on price. We were also experimenting on what core features we were talking about on the marketing site.

Andrew: I’ve read about all this. I’m trying to think of which one is most fun to start out with. Do you have one that you want to start of with, or should I pick one, out of all those that you just mentioned?

Mike: The pricing one.

Andrew: Okay, let’s talk about that.

Mike: I think we went through five or six iterations of our pricing model in that three month span. We launched with just the two price plans, monthly, and annual. Didn’t see much success there. Basically, what we learned when we actually asked some people what they thought of the pricing page was that the annual plan, which we had priced at $489, in very large type on the pricing page, people got to that page and were very scared by that large number there. We had the emphasis in the wrong place. That was insight that we garnered just from qualitative user testing. We just showed it some friendly contacts of ours. They were like, “Whoa, that $489 is a really scary number.”

We redesigned the pricing page. We ended up moving up into a three plan mix, which, at first, we were only offering one of those plans that you could actually sign up for, and the other two alluded to some features that we had that were coming soon. We said, “Okay, let’s see how this page effects conversion.” We saw some more success there, in terms of more people signing up at the lower price point.

Andrew: You go to three tiers. Each tier had a different product mix, but you didn’t have all the features that those other two tiers were offering, right?

Mike: No, we were building those features.

Andrew: You were building them.

Mike: Yes.

Andrew: You said, “Let’s see if people want them.” Now, you’re really getting into minimum viable product territory.

Mike: Yeah.

Andrew: Okay. If somebody did buy one of these products, what were the two tiers that you didn’t have fully built out called?

Mike: We had three plans: Start, Grow, and Max, named after the Grasshopper plans that we have. We had all of the features built that were included in the Start plan. Basically, we throttled the number of referrals you could see across the plans. On the Start plan, you could receive 200 referrals a month on the Grow plan. You could receive 500 on the Max plan. You could receive 1,000. Then, the Grow and the Max plan had some additional features thrown in the mix that the Start plan didn’t have.

Andrew: If I bought the Grow plan, the one that had some analytics that you guys didn’t build out yet, what would you do?

Mike: It was interesting. We went into this test, not feeling so sure that this was the right thing to do, because we were really selling features that we didn’t have. But what we found was really interesting. Anyone that signed up on the Grow or the Max plans, I would reach out to immediately, refund their signup fees. What I would try to do is enlist them as an advocate, to help us build those features, and determine what they actually had to do. What we were really interested to find out from these people is what about those features made you sign up, at the more expensive plans? That was the first thing we were trying to learn.

What came out of that was actually, it wasn’t necessarily always the additional features that made people sign up on the more expensive plans. But what it was, was the fact that we were saying that you could only receive a certain number of referrals on that particular plan actually drove people to the more expensive plans, because they didn’t want to miss out on receiving a referral.

Andrew: It wasn’t the features that you were building, that you were feeling guilty that you couldn’t give them. It was the feature that you already had built, that you could give them, which is number of referrals.

Mike: Exactly. We could have really re-architected the page, to show just features that we had, but just continued to throttle referrals in any want that we wanted to. From when we went from just the one plan offering, to the three plan offering, we’re talking about a pretty significant increase in potential revenue, had that business scaled up. Because, all of a sudden, half the people who were signing up on that one lower-priced plan, at $24, half of those people are signing up on a $49 plan, or even a $200 plan.

Andrew: I see. Oh, that’s fascinating. I can see why you were smiling. That is a fun process. It helps you figure things out. It’s almost like magic. You’re reading your customers’ minds, almost.

Mike: Yeah. What part was really fun, at that point, we were really just trying to validate… We had this vision for the product, and the features that were included in the two more expensive plans were in development, at the time. We said to ourselves, “Okay, let’s see if this is really going to be viable for us. Let’s get the offering out there like we think it’s going to be in two or three months. Let’s see if this can [inaudible] a real business.”

Andrew: All right. I actually even interviewed a founder, and for some reason, I can’t think of his name, who didn’t even have the ability to throttle. Actually, there were two. One refused to let me talk about this publicly, because he still doesn’t have a way to throttle. But what they did was, they said, “Here are three categories. You have different levels of access with all three of them.” But really, all three were the exact same thing. If you even signed up for the Mini, you had the Large, because they couldn’t give you the Mini at the time that they were offering it.

Mike: Yeah.

Andrew: But it’s good for figuring out: Where, exactly, should the line be that stops the Mini, and goes to the Medium? Where should the line between Medium and Max go? This is the way to figure it out.

All right, so that’s the pricing and core features. What about the visual? You said you adjusted the visual a little bit.

Mike: Yeah. I think the biggest part of that was, we thought that people had… We got this feedback from a lot of people that when they got to our site, they get the benefit of referrals, they get the benefit of word-of-mouth, and they know their customers are talking, and then telling other people about their business. Not everyone understood, immediately, when they came to the marketing site. Okay, how does Spreadable encourage this kind of behavior? How are my customers actually going to use it?

The biggest piece of the visual shift, I think it was, we said, “Let’s do a quick overview video of what the product is, what the value is, how it integrates on your site.” We thought that could go a long way to help people very quickly understand what our offering was. We looked into working with a couple of the more well-known studios out there, that do these product videos, which oftentimes drive new customers in themselves, just because the videos are so compelling.

But we ended up deciding to take the video in-house. We were going to write the script, and we were going to design it and produce it ourselves. We spent a lot of time on the script. We basically dissected a bunch of product videos that we really liked, and discovered that there’s actually a pretty good framework, in terms of how all these videos are structured.

Andrew: What’s the framework that you used? What’s the outline?

Mike: I actually have it outlined in a PDF. I’d be happy to…

Andrew: There’s an outline that you used for all your videos, that worked really well? What goes first, what goes second, and so on?

Mike: Yeah.

Andrew: I’d love that.

Mike: We found, if you really try to tap into people’s nostalgia about how things used to be, before your product existed, what problems they had before your product existed. You frame it, of course, using factual information, like how much more likely are people to buy if they hear about your product from a friend or colleague? Weaving that story together, so that you reach an epiphany about 40 seconds into the video, where your product is the answer.

Andrew: I see. Oh, I’ve got to see that. Yeah, I’ve never seen that kind of outline. You’re saying it would be something like there was a time when stores would get referrals from their friends. Well, today, friends are . . . no, I’m not even doing it justice. You know, I’m always amazed by broadcasters who can just whip up examples on the spot, who’ll have a conversation, then say, “Oh, here’s an example,” then just go into storytelling mode like that, and just come up with an example. I can’t do it.

Mike: The big one with us, the other one we saw, was building rapport with the viewer, making them feel like you understand their problems, and their challenges. The Spreadable video started with the line: “As entrepreneurs, we live to grow our businesses.”

Andrew: Oh, I see. Now, we’re all in it together. We’re entrepreneurs. I need that. You know, we did a session here on how to create videos that convert, on Mixergy. It was really impressive. It was very effective. I feel almost like I’ve got evil powers now, because I know the structure of those videos. But I want to know what you’re adding to it, because that’s one that I didn’t ever hear of. “As entrepreneurs, now we’re in it together.” I love it.

You do all this, you put the video up. All right, what happens?

Mike: The very sad part of that story is that conversion actually went down.

Andrew: Why do you think?

Mike: You know what? I honestly don’t know the answer to that question. There’s a variety of different things that could have caused it. I think the biggest red flag for us was that we produced this video that we’re really excited about, and we think does a really good job of explaining what our product does. People still aren’t signing up. That’s a big issue. Conversion didn’t go down significantly. The period of time that we were measuring was pretty short, but the important point is that conversion didn’t go up, like we thought it would. That was another red flag for us, like maybe this market isn’t right for us.

Andrew: Okay. Actually, there was one more thing that you said earlier, positioning. Let’s talk about that. How did you change the positioning? Then I’ll come back.

Mike: We were testing a variety of unique value propositions, just doing A, B, multi-area testing. Increase word of mouth referrals. Reward your happy customers. We were testing all sorts of really different core value propositions, on what the benefit of using Spreadable was. It ended up that “Increase word of mouth referrals” was the thing that resonated the most.

Andrew: Wow. Okay. Actually, how do you know that? I’d like to find out what that magic phrase is for my business.

Mike: We used a tool called Visual Website Optimizer.

Andrew: I use it, too. Okay. That’s what I’m going through right now. You use that, you test different copy at the top of the page, you find that magic phrase. That’s the phrase that you use from then on.

Mike: Yeah, exactly.

Andrew: Of course, you could always continue to test. Okay. I’m seeing you smile as you describe some of these experiments. They are fun. Some of them work. Some of them flop. But if you keep at it, you eventually, I’m assuming, make progress. But you guys launched May 2010, closed March 2011. Why did you decide, at that point, no more tests, no more with this?

Mike: Yeah. There are a few different reasons. The first reason we talked about, that is, we thought the product is best sold in a way that’s not a core competency of ours. That’s reason number one. Reason number two is, we had a budget laid out for the team to continue development on the app. We were working on a variety of new features. We had a chunk of money set away that we were going to invest in Spreadable. I remember the meeting where we decided to discontinue investment in the product.

I think a really big reason in the minds of our management team was that, with the Grasshopper business, and even Chargify, at this point, we get a very predictable return when we invest. Basically, if we’re going to put $300K into the phone product, we have a really good idea what we’re going to get out of that, in terms of new customers. We can make that investment with a fairly high degree of certainty. Whereas, investing another $300K in Spreadable, which now puts us at almost $1 million we’ve invested in this thing, we weren’t confident that it would return the same value.

It’s an interesting situation for a company that has multiple products, because, I feel like, for new products, you really need to be comfortable with that higher degree of risk. Where, you know, we could invest that $300K, and it might not work. At the time, the folks on our management team just weren’t comfortable to continue.

Andrew: I see. You know, I’m wondering why you’re not sad as you’re telling this story. How did you feel about that? Tell me how you felt, about the decision.

Mike: Yeah. It was really hard. This was something that I lived and breathed for over a year. It was me. I was answering support tickets late at night, and on weekends. I was on the frontlines with all of our customers. I think the hardest part about it was, I really believed that this could be an impactful thing for our customers. Not only for the reason that the Grasshopper program was so successful, but we had a high number of customers who were getting really good results. It’s really difficult to let go of something that you have spent so much time on.

I can honestly say that it’s about as close as you could get to building a business from scratch, starting and running your own business. I like to think about it as I was like an entrepreneur in training. Because project management, what’s so appealing about it for me is that you get to experience so many different facets of the business. Yeah, it was really hard. Still, it’s only been a couple months since we shut it down. It’s definitely difficult to let go of something you spent so much time on.

I like to tell the stories.

Andrew: Why? Why do you like to tell the story?

Mike: I think there are a lot of lessons to be taken from the experience that we had. You know, you can read startup advice for hours, and hours, and hours and hours, but until you actually do it, and experience it, it’s really easy to make some of the mistakes we made.

Andrew: I see. Yeah, you know, I’m actually learning a lot from this process, too. I mean, I’m seeing a lot of commonalities. Not talking to customers is an issue that comes up a lot. Doing too many things comes up a lot. Confidence that leads to arrogance comes up a lot.

I’m wondering if we’re doing what we sometimes do with minimum viable product, where we’re putting our experiences into a box that’s familiar. I don’t even know how to get at the question. I’m actually finding myself, here, trying to figure out how to draw this out, how to draw out the feeling at the end of this, how to draw out the lesson from this.

Actually, you’re studying this. You’re trying to really sit and understand the lesson from it. You’re doing what I’m trying to do here, in these interviews. You guys are creating a case study inside, you’ve spent some time thinking about it. Let me ask you why. Why is that so important, to try to get at this answer that I’m trying to here, in these interviews?

Mike: Yeah, for us, I think this will really affect how we develop new products here in the future. What we’re trying to create is a system that’s going to allow us to do other successful products, like Grasshopper. I think what we’re trying to get at is really a formula that works for our business, for how we can successfully validate that a potential business is something that can make money, can be profitable, can empower entrepreneurs, just like the phone system.

I think taking a step back and really analyzing what happened with Spreadable is important for us, just as an exercise to figure out, okay, when we go to do this the next time, how are we going to fix all these things that we did wrong?

Andrew: I see. When you go back, and you analyze Spreadable, and say, “Hey, for three months, we weren’t talking to customers.” Next time, you’ll know: “Hey, we felt that pain before. We know exactly why that first version didn’t work out well. Let’s not make that same mistake again.”

Mike: Yeah, absolutely. I think a big thing we took away, in terms of team structure, I think it was too big, too fast. A small team, maybe one product person and one technical person, could have learned an equal amount about the problem that we were actually trying to solve, and what the app had to do, in the same time frame, with a much smaller investment.

Andrew: All right. What are you guys doing now? What’s next for you, personally, actually?

Mike: The Spreadable team was dispersed back into the Grasshopper product and Chargify. I’m working with Rodrigo Franco, who was the lead developer on Spreadable. The two of us are working on a suite of new mobile apps, to complement the phone system.

Andrew: Mobile apps for Grasshopper?

Mike: Yep.

Andrew: Oh, actually, can I ask you about that? Or is this private?

Mike: Yeah, sure thing.

Andrew: Will there be a Grasshopper app that lets people make phone calls and receive them?

Mike: Yes.

Andrew: Ah, and you guys are going to be building it.

Mike: Yeah.

Andrew: The two of you, on that small team.

Mike: Yep.

Andrew: Oh, awesome. When?

Mike: We’re doing two things, in parallel. We have a mobile site, which you can get to from the browser of any smartphone, that will allow you to call out. We’re going to tackle that first. We’re hoping, late July for that. Then, in parallel, we’re working on a native iPhone App.

Andrew: Oh, cool.

Mike: Both of those will allow you to make calls using your Grasshopper number.

Andrew: I’m looking forward to both of those. I also want to thank you for this. When we put this call out for companies who are willing to share their failure stories, and we saw your response from Grasshopper, Tristan, Mixergy’s producer, and I were thinking, “They must have made a mistake. Let’s go back and explain to them what we’re looking for. We’re looking for an open story of failure. This is Grasshopper.”

You guys came back and said, “No, we’re willing to talk about it.” We said, “Really?” I was surprised. Then I thought, “Tristan, what if they’re just going to spin this? What if it’s like, ‘We’re so great. We made this little mistake,’ then the whole hour is going to be about ‘how great we are, because we learned this thing. Now we’re…'”

No, you’ve been really candid here. David Hauser has been very candid. You guys, as a company, have been extremely open about all this. Final question is this: Why?

Mike: It’s a good question. I’m not sure. I think part of it is that the entrepreneurial culture here is one that, sharing is really important, sharing the lessons that we’re learned with other entrepreneurs. Our core purpose as a business is to empower entrepreneurs to succeed. If we can make a mistake, and then help another entrepreneur avoid it, that’s something we definitely feel comfortable doing.

Andrew: I’m grateful to you for doing it. Believe it or not, even though there are a lot of people who say that “failure’s a part of the process,” and pretend that they’re willing to talk about it, they really do not. I know it because I’ve talked to them before and after interviews. They do not want those failures brought up in the interviews. They feel bad when they accidentally let them slip. You guys have been up front about the whole thing. I appreciate it.

Mike: I’m hoping that you’ll have me back, when I have a success story to tell.

Andrew: I’d love it. Absolutely. This kind of openness, this kind of internal awareness, is what makes for a great interviewee.

I’m going to say this to my audience: I feel like I’m going to have a smaller audience for interviews like this, because everyone wants a success story. But, if you listen to this whole interview–of course, you have, if you’re here at the end of it–you see the value of having these stories come out. I think we do ourselves a disservice by not putting the failure stories up on stage, along with the success stories. I feel we do a disservice by not honoring the entrepreneurs who’ve taken a shot that didn’t actually hit the target, and not giving them the kind of attention. Not sitting down with a notepad with them instead of flinging them into the dead pool, as TechCrunch. I love TechCrunch, but I hate that they do that. So much we learn from this.

I really appreciate that you do it, that you came here to do it. I really appreciate that my audience has stuck with the interview all the way here, because I know the value of it. Thanks a lot.

Mike: Cool. Appreciate it, Andrew.

Andrew: Cool. I was fawning there at the end, wasn’t I, Mike?

Mike: [laughs]

Andrew: I was fawning, but with good reason. This is what I’m living for. This is what I want to put out in the world. Thanks for helping me do it.

Mike: You’ve got it, man. Anytime.

Andrew: Thank you, all. Bye.

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