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What we have learnt running a bootstrapped startup (supportbee.com)
50 points by nithyad on Feb 2, 2011 | hide | past | web | favorite | 46 comments

I think it's scary when you first realize you have to charge users. (Or to raise your price on them). But, as long as you talk to them, sometimes it can surprise you how receptive they are.

When I was an SAT tutor I started charging $20/hour. I was inexperienced and a bit younger than most of my clients, so I figured I couldn't charge much. After awhile, I decided I wanted a higher wage if I got new clients. But, how much? I decided to ask for $30 from new clients. No one argued, or showed any displeasure. Wow! But, had I not gone high enough?

The next time I decided I wanted more, I made the decision to jump it to $60/hour just to see if anyone would take it. And... everyone did. Without question.

In order to get paid you have to ask. And, it's sometimes shocking how much people will pay you. Don't be afraid to ask for more.

Yes .. we experimented a bit with our pricing too. Raised it from USD 25.95 to USD 49.95 with virtually no impact on conversions. Thanks to Eric Ries for suggesting this on a call where we discussed Muziboo with him. He asked us if we had ever raised our prices and when we said no, he recommended that we double them and see the results :)

I'm learning this the hard way. It's a great introduction to sales when you stop giving something away and actually charging money. You instinctively begin justifying costs based on features/benefits, value/ROI, etc. Then you start reading books on sales, only to realize you are already doing most of things they talk about :).

It also changes the way you plan and prioritize your development objectives -- you begin approaching your project as a real business instead of just a website. When you are ready to begin your next project, you now have a wealth of business experience to bring to the table along with any development/domain knowledge.

The ideas we're talking about here are discussed thoroughly in the surprisingly fascinating book "Winning through Intimidation." My ex-girlfriend was a touchy-feely people person, a trainer by trade. She often cited that book as being straight from the devil, the antithesis of everything she believed in with regard to motivating people. So I bought the book as a joke, to annoy her with its presence on my bookshelf.

Then I started reading it one day, and it actually has a ton of really fantastic business and sales ideas that are not evil at all. The thesis of the book is that for your business to succeed, you need to project an image of success and confidence. The book goes through dozens of specific ways to do this, and asking for more money is one of those. Others include specific ideas on how to present and package the company.

The author discusses the issue of pricing and payment extensively. I highly recommend this book for anyone contemplating issues of pricing their products and interacting with customers. It's honestly not as evil as it sounds. And even if the very idea sounds terrible, consider the book anyway. As Aristotle said, "It is the mark of an educated mind to be able to entertain a thought without accepting it."

FWIW, you don't have to charge users. Ad supported/affiliate marketing is a pretty viable business model and will often fit better than trying to charge end users.

Rather than downvote you, I'll disagree in a reply.

Ads are an extremely unreliable business model. If you want to be an entrepreneur, run a business. If you want to run a business, sell stuff. Don't fall into the trap of "oh, I'll just tack some ads on later and we'll be fine."

> "Ads are an extremely unreliable business model."

How much money do you make from advertising revenue that allows you to quantify specifically how reliable it is? I'd question if you have enough data at your disposal to make a statistically valid assessment.

You can't disagree with data, and it's only unreliable if you don't know what you're doing.

I have data from my own experiences, and while I won't release it, I will say that in our case subscription revenue is an order of magnitude higher than ad revenue.

I can possibly see my business becoming a full-time job from subscription revenue. I wouldn't even cover hosting costs from ads.

I guess in summary then, both are viable.

I've been making a living mainly from advertising income for just over 10 years now.

I've also tried getting users to pay for things, and it's orders of magnitude harder (for me).

I know there are some viable models that depend on ad revenue. It sounds like you've found some of them. That's very commendable.

In my experience, I wasn't very good at balancing my desire to serve the user's needs while also increasing ad revenue. The two goals seemed to be at odds. Either litter the page with ads and annoy the users, or make no money. Not to say it's not possible, just that I didn't like worrying about it or working on it.

I found that the subscription route was much easier. It aligned me perfectly with the users. All I had to do was please them and they would continue paying. No need to test optimal placement, worry about ad fatigue, ad blockers, etc, etc.

Not to say there aren't problems. Finding the right freemium feature balance, dealing with churn, and the horrible beast that is credit card processing are all pain points. But by and large, I have found it much easier to run a business based on subscriptions than ads.

That's cool, there's definitely pros and cons with both.

I've tried both, and even the time I spend with the charge backs and "I changed my mind and want a refund" aren't worth my time dealing with. It's just boring hassle.

I definitely agree, there's a balance between making easy ad money, and satisfying users. That's the hard bit - making the advertising useful enough, unobtrusive enough, but effective.

A lot of it perhaps depends on what sort of person you are. Making money from advertising is basically a numbers game, which you can just optimize iteratively. Selling subscriptions involves feelings, random users, and all those fuzzy things that I personally find a lot harder. I'm not a salesman and never have been. I don't like trying to charge people for something I'd never pay for.

OTOH, I would, and have paid for advertising, I have used websites that carry advertising obviously, so I'm just a lot more comfortable with that whole ecosystem. I can put myself in the position of all parties.

How about the fact that most successful businesses that have ever existed have charged for their products? Why is this data that can safely be ignored? It's the most proven business model out there.

Furthermore, it takes time to get good at anything. As you implied, making money from advertising is a skill, so how long does it take for you to get good enough at it to support yourself? Charging for things is simply more conservative. It's for people who don't want to risk going under while learning how to advertise.

There's pretty substantial industries that are built on advertising revenue - free papers, television, and the internet. Over the last 15 years countless websites have proven you can make substantial amounts of money from advertising income. It's a proven business model.

Getting paid subscribers isn't trivial either. You need to learn as you go with either approach.

"There's pretty substantial industries that are built on advertising revenue - free papers, television, and the internet."

In the beginning, it was easier to get advertising dollars for a website. Things have changed in the last couple of years. Advertisers want numbers. How much traffic are you getting and is it targeted? Sure, you could use adsense or some or service, but it will take thousands of unique, targeted visitors to make enough money for a business to survive. This takes lots of time and energy. If you aren't pulling in any other revenue, you will most likely go under.

Charging for a service or product doesn't require those numbers. You can have 100 people a day coming to your site and make 10X more in revenue.

I've been there.

Advertising was, for the most part, invented for traditional media (papers, radio, television). In many ways traditional media and the marketing industry are the same thing, so bringing that up as an example of a proven business model doesn't really say much.

As far as the Internet, how many publicly traded Internet companies actually make their profits primarily from advertising? Okay, all the search engines obviously, but who else?

I just don't think you can say that ad-revenue-based models are as proven of a business model as just selling things.

You seem to have something fundamentally against advertising, which is ok, it's a commonly held view on HN.

I just like to point out it's stupid to rule it out as a possible revenue stream every so often.

Sorry, I didn't mean to sound partizan. I have nothing against advertising, I was just trying to counter a point you had made. And you're correct - it's stupid to rule out any source of money.

Stormpulse has around 5 million uniques per year and the ad model still isn't viable without destroying the user experience.

In other words, you need more traffic than most people can fathom.

It's not the amount of traffic, it's the fit between your users and the advertising, how targeted they are, intent, etc etc.

Also it totally depends on the service/product. For stormpulse I don't think advertising supported is probably the right idea unless it's made more mainstream.

For example I'd start a "enter your email to get local weather reports free". Build up a massive email list, then start including promotional adverts at the top/bottom of each mailing. You'd be sending out a large amount of mails, to a large amount of people... I think it could generate a good revenue.

It's not as simple as slapping up some ads and going home. This is the mistake I think most people make.

Let's boil it down to eCPM. What is your eCPM going to be? Multiple that by impressions and tell me how you're going to support N employees on that revenue.

For what? What website?

One of my websites generates $20 eCPM. Another generates $0.10 eCPM :/

What's your service going to cost? Multiply that by paying users and tell me how you're going to support N employees...

I don't think arguing over this is useful - making money out of advertising isn't rocket science, but it does require learning and experience.

It's important for bootstrappers to understand the mass traffic that's needed for advertising to fuel growth.

$20 eCPM means to have just a $200k/yr. business you need 10 million impressions per year. $0.10 eCPM means you need 2 billion.

The same could be said for 'paid subscribers'.

If you have a product you're selling for $10/mo you'll need 1,667 subscribers to make $200k/yr not taking into account churn, customer support overhead, etc

The question is whether you think getting millions/billions of impressions is easier than getting thousands of paid subscribers or not.

Also, FWIW, 10m impressions a year is nothing - it's 1 impression every 20 minutes on average. 2b impressions a year is more like 60 impressions a second, but still not ridiculously unattainable.

"The same could be said for 'paid subscribers'. If you have a product you're selling for $10/mo you'll need 1,667 subscribers to make $200k/yr not taking into account churn, customer support overhead, etc"

1667 customers isn't that difficult if you have a good product that works well. Free services still have all the same customer support costs (not to mention the order of magnitude amount of traffic you will have to support).

"The question is whether you think getting millions/billions of impressions is easier than getting thousands of paid subscribers or not."

In almost all cases, paid subscribers are easier. Most sites that are ad-supported (unless it's a blog) eventually move to a paid plan (or have both paid and free accounts).

It really depends on the targeting and matching the right ads to the right users. For example, weather.com gets well over $10 CPM from performance advertisers, and they still make money on the traffic. If you have similar demographics, you should be getting similar CPMs.

The OP was making $60 per hour per user. Is there any advertiser in the world who'd pay $60 to "sponsor an hour" with them for access to a single member of the OP's userbase?

Making $60 per hour per user isn't scalable. You can only service one user at a time. So it's apples + oranges comparison there.

The metaphor I use with my startup students is this:

PPC (even banner) advertising is like scrounging for scraps at the table of someone successful.

AND, of course, if the ads work -- if the advertisers get their money worth -- then of course the ads are leading your users away from your app, which means of course a lower rate of returns.

Ad-supported biz models are difficult to achieve, fickle, counter-productive and, frankly, more work than charging people.

That's a ridiculous metaphor which completely misunderstands advertising.

Your metaphor would be more correct if you said it's like scrounging for scraps at the table of millions of successful people all at the same time.

But you're not "scrounging for scraps". You're selling exposure, mindshare and traffic to advertisers willing to pay for it.

You obviously haven't been successful with ad-supported.

Nope, you're mistaken. I've made tens of thousands on ads... and hundreds of thousands on products. Products that cost money. It's easier to control, more rewarding intellectually (because your interests & customer interess are in sync), and much more profitable -- without counting on a stroke of luck.

If people pay you a percentage of their cash flow, that's a mere scrap. Sell your own product and you get the lion's share.

Well, take your numbers, and reverse them for me /shrug/

That doesn't invalidate my metaphor.

If an advertiser is willing to pay you $x then you can be guaranteed they're earning $x * 2 -- or more. If you had the product instead, and were the advertiser, you could be the one making a lot more money.

Advertising expenditure is always a sliver of total expected revenue, except in two rare cases: when a company bets the farm on an ad campaign, and when the advertiser is a startup running on VC.

Therefore, the amount of money the ad generates will almost always be more than it costs. That is indisputable.

Ergo, making products is a better way to capture more money.

You can realistically make a handful of products. You can advertise millions.

Would you rather sell 1 product, or advertise a million different products?

Your logic seems to miss that crucial point.

Look at it this way. Paid subscription = Manufacturing. Advertising income = Retailing.

Would you say there's also no money in retailing? (Which is really just a form of advertising supported).

My argument is that there's plenty of money in both if you know what you're doing. Which you chose is likely a matter of personal preference, and how much risk you like taking.

Refreshing, honest, well said.

This part caught my eye, though: "we were honest with them. We let them know that implementing that would mean addition cost for us , but would still do it if they were ready to pay a subscription fee".

That's a common early feeling, and one that I've had as well. But you need to completely and forever abandon cost-based pricing if you're going to thrive (find your best customers) as a subscription web app. The task of figuring out what your web app is really WORTH to your customers rather than what it costs you to operate is the key to high profitability and happy customers co-existing.

The worth/value of your app is a percentage of the surplus of success it creates for its users, where success is defined by the user.

Agree 100%. It's really none of your customers' business how much it costs you to run or do things. If people are complaining to you that you're charging for things that are cheap (ie. "that's only a record in a database" or "google does it for free") then those aren't the customers you want.

Sometimes it's right to charge for something that took you 1 minute to write, and sometimes it's right to give away a feature that took weeks of development. It all comes down to what makes the most sense for your business.

Only on the web can 'charge money for a good or service' be considered a clever contrarian insight.

"As corny as it may sound, we were particularly impressed with Guy Kawasaki’s ‘Create value and money will follow’ advice when we started up...Had we known then that he was going to create AllTop in future, we would have probably introspected a little more before buying his line of advice."

I don't understand this statement, specifically the reference to AllTop. Can someone offer me some insight?

Guy, bless his heart, often preaches voodoo. His quote essentially means that you don't need to worry about where the revenue will come from -- just create something cool and the money will get to you somehow.

They're saying: BS. Start a business. Think about a business model. Charge users.

(AllTop is an RSS aggregator for a variety of interest areas like Museums, Cigars, and BBQ. There is absolutely no revenue model except for publishing advertisements. Guy, being Net-famous, was able to sell it after about a year's work. Your mileage will definitely vary from that.)

Thanks. Okay, maybe I just slightly disagree with them. I mostly agree with the "create value, money will come" philosophy. However I would say create value and if the value is very substantial, the money will come. However depending on how substantial the value is, you may have to work to make the money come along.

I am not saying they are wrong, I would just put a little more confidence behind Guy's statement.

I feel that almost all "...and money will come" statements are missing some words.

"Create value, CHARGE FOR IT, and money will come" or "Do what you love, AND A LOT OF CRAPPY BUSINESS STUFF, and money will come"

It's very uncommon for revenue to come to you without some work and thought on your part. It's like the lottery. Sure, some people win, but you won't!

Yeah -- something along the lines of "create something of value, and then never stop working on ways to make money from it until you hit on something that works well."

Not just "create value and the money will come."

Value is the difference between cost and gain. If your users are getting a gain, and their cost is 0, then there's value being created.

The trick is to determine what gain is, and how close you can raise cost before value becomes too low.

I think you could write a whole other blog post about the last paragraph. To me, the most interesting part about getting started on a new side project is what I end up learning as a result.

New methods and skills always come out of trying to solve new problems. And hopefully that will lead you to pursue something even harder/more interesting.

Edit: typo.

Has anyone been forced to downgrade or reduce feature sets for free users when introducing paid plans? Is the generally accepted approach to grandfather in all existing free users?

We have experimented with partitioning features and always grand fathered the existing users. It has generally worked well. For most B2C services at any scale, you have a lot of new users signing up everyday so you don't have to worry about over optimizing on existing users. Its better to just keep them happy

I don't think they were reading the right blogs/books. Lots of places to learn about pricing, target demographics, revenue models. Maybe not ones that music guys read?

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