Software and Making Money (Presentation Slides Included)

(note: this is modified from a talk I gave at Seattle Tech Startups on Wednesday)

The more I think about it, the more I’m impressed with software businesses that are great businesses (not just great software). There’s a class of entrepreneur that is product focused (like the folks at Twitter), there is a class of entrepreneur that is business focused (the white-toothed stereotypical biz guy), and there is a class of entrepreneur who is PR focused (I won’t name names, but we all know of startups that seem to thrive simply because of the attention they draw). I think good things happen when you create an outstanding product that has a clear path to monetization– add on someone who is also an attention magnet (like Steve Jobs, who is all three flavors rolled into one) and amazing stuff happens.

A couple of examples

  • One you might have heard of– Google. Their outstanding product certainly earned them clear leadership in the world of search engines. But it was Adwords and Adsense that got them to the point where they could feed every employee gourmet meals and do their laundry for them.
  • One you haven’t heard ofAutotegrity. This tiny company is finding leads for car dealerships via Google Adwords (among other things). They find people who are looking for very specific things (“blue honda accord”) and offer to get them three competing quotes. They take these leads and sell them to car dealerships (3 times, predictably). It’s a win for both sides and they are staggeringly successful.

One thing I increasingly believe is that the idea of just building something great is a game with much higher risks and rewards. Clearly if you build something that captures attention like Twitter and Facebook, you have the luxury of nearly infinite time to figure out how to monetize what you’ve built. But all of the people trying to build the NEXT Twitter end up in much more dire circumstances. A smallish audience of a few million early adopters a month– an audience which is neither big enough nor unique enough to monetize very effectively. This is no joke– I know lots of services out there that are getting tens of millions of page views and millions of uniques per month that can’t manage to get enough ad revenue to pay a single salary.

So step out of the gates with a strong idea of who’s going to be paying your paycheck and how many of those people you’re going to need to pull it off. If “targeted advertising” is your answer, find an audience that PAYS– that means creating a content site for an audience than some subset of marketeers would chew off their own arm to get in front of. That may mean creating software for weird-but-profitable niches like home remodeling (which commands $20 CPMs last I heard). And it certainly means serving audiences who actually SEE and CLICK on ads (which means that your blog about startups is not going to make you any money, natch).

The key here is that owning a business isn’t about building a product any more than owning a car repair shop is about fixing cars. You’ve got to broaden your vision and bring your passion to bear on stuff like marketing, business models, customer service, guerrilla PR, SEO, and more. It’s hard to name any companies that are admirable who don’t excel at things well beyond product development.

So if you’re supposed to work on everything, what do you work on FIRST?

You should look at your business as a funnel (which, incidentally, is how every salesguy on the planet looks at their sales pipeline). Here’s one that’s in my head all the time:

funnel

What’s at the top of this funnel varies on what type of business you have. Maybe it’s page views from organic SEO and SEM. Maybe it’s warm leads from a bank of cold-calling lead-gen folks. And maybe your conversion event is a software purchase (like ours is). Maybe it’s an ad-click. Maybe it’s an account signup. But trust me, you have a funnel.

So when trying to figure out what the hell to work on as an entrepreneur, go worship at the alter of the funnel. That means:

  • Measure the hell out of everything. If you don’t know many many new visitors are coming to your site, what percentage of them do something, what percentage of THOSE people, click signup, what subset of THOSE people actually successfully signup, and what percentage of THOSE people are paying you a month later, the first thing you should do is work on metrics. Don’t go overboard, but know your funnel.
  • Work your way UP the funnel, not down (if you have the financial luxury to do so). Most entrepreneurs ask “how do I get people to come to my site so it can grow?” The answer most often is down the funnel: the product isn’t providing enough value, communicating clearly enough, engendering enough passion, or causing people to want to tell their friends.
  • Seek the low hanging fruit in the funnel. That means that you should seek out where people are escaping your funnel. If you get tons of visitors but no one clicks on anything (high bounce rate, low time on site), chances are your value prop is confusing or isn’t very compelling. You might need to improve the product, but chances are you just have to improve how you talk about it.
  • Seek leverage. The lower you attack the funnel, the more it helps. If you do something to improve your retention that will help you forever. If you do something that gives you a boost in acquisition (like a SuperBowl ad), the value will be short-lived (unless you have a true viral loop). Two great retention stats (via Andrew Chen):

    “If each month you lose 8% of your existing users (92% retention) from the previous month, the average use will stay for 12 months. If you can hold just 4% more of your users (96% retention), then they will stick around for 2 years. If you can hold only 1.3% more than that (97.3% retention), they will be in for 3 years.”

    And, if you take a cohort of 1000 users from a month an 80% retention rate means that you’ll have 68 of them after 12 months. If you can get that to 90%, you’ll have 282 left. A 300% revenue boost for that single cohort (and every subsequent monthly cohort!).

  • Don’t give up on making your product great. It’s easy to get sucked into data, A/B testing, form fields, etc. But at the end of the day, people don’t just abandon signup forms because they are hard and confusing, the abandon them because they don’t care enough about signing up.

Resources Referenced in the Presentation

Bokardo’s “Designing for Social Traction” Presentation
Josh Kopelman’s Cohort Analysis Spreadsheet


Hat Tip to:

Gladwell’s Blink (has the story about likable doctors getting sued less regardless of how good they are at healing)
The Heath Brother’s Made to Stick (best marketing book on the planet, they talk about the “Curse of Knowledge” and the “Tappers and Listeners” study)

Here’s the full presentation:

  • http://www.rescuetime.com webwright

    Comments are a little wonky right now, but I think they are working again!

  • http://1000markets.com Matthew_Trifiro

    Great post Tony. Well presented.

    Here are a couple of other resources your readers might enjoy:

    Dave McClure's Startup Metrics for Pirates
    http://www.slideshare.net/dmc500hats/startup-me

    Sean Ellis' 12-in-6 Startup Launch Plan
    http://www.slideshare.net/seanellis/startup-lau

    Eric Ries on Agile Startups
    http://www.slideshare.net/startuplessonslearned

  • http://1000markets.com Matthew_Trifiro

    Disqus ate my comment. :-(

  • http://www.rescuetime.com webwright

    Thanks Matt! Two of are definitely on my list of favorites. Hadn't seen
    the Sean Ellis one– am digging into it now. I love startup porn. :-)

  • http://1000markets.com Matthew_Trifiro

    So, I went and posted again and my original post showed up. Sorry for the redundancy…

  • bryanstarbuck

    Absolutely wonderful!

  • http://twitter.com/libtuck libtuck

    Great info, Tony!

  • http://DCincome.com/blog Web 2.0 Chiropractic Marketing

    this was so brilliant, you guys keep on writing ingenious entries.. thanks a lot for sharing this, I really learned a lot!

  • http://www.mandtbank-what.com/ Steven.J

    useful info for me , i will follow you posts.thanks for sharing

  • http://www.buildacaronline.net/ build_car_online

    I’ll back again for sure, thanks for great article :D

  • http://one-shore.com/aaron fijiaaron

    I agree, usability and design/copy aren't the be-all end all. There are two things more important:

    Do people have the problem you claim to solve?
    Can you deliver the promised solution?

    Words, pictures, SEO, buzz, usability, etc. mean nothing here. A little honestly and simplicity can get 90% of people past whatever usability/presentation hump you have.

    Retention (not acquisition) depends on delivery.

    The good news is that if you have correctly identified the problem, and people know it, then solving it is just a matter of work. Solving it in a profitable way though, that's the trick of business.

    I'm not dismissing the importance of marketing, but that just gets you to step 2 of the funnel.

  • max191

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  • max191

    I entered your blog from google search. You really have done a good effort. Thanks for the wonderful blog.
    regards
    charcoal grill

  • http://1centralx.co.cc/adwords-j7hq/category/google-adwords google adwords

    thats one sweet article …,

  • tinsgeorge

    Incollege right now will read this latter

    respect
    smith
    ______________________________________________
    Aion Powerleveling | aion kinah

  • PatrickN

    Very interesting article. Reading your post I have found very interesting and useful information. I really like your list, especially “Seek the low hanging fruit in the funnel.” I will try to follow your recommendations! Thanks a lot for sharing it and I will be waiting for other great ones from you.

    Sincerely,

    Tony Peterson from software development

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