Show Me the Money - TAKING IT TO THE STREETS - The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future - Chris Guillebeau

The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future - Chris Guillebeau (2012)

Part II. TAKING IT TO THE STREETS

Chapter 10. Show Me the Money

UNCONVENTIONAL FUNDRAISING FROM
KICKSTARTER TO UNLIKELY CAR LOANS.

“Money is better than poverty,
if only for financial reasons.”

—WOODY ALLEN

Naomi Dunford was a teenage mother and a high-school dropout. By the time she was pregnant with her second child, she was living in a homeless shelter. After making it out of the shelter by working odd jobs, Naomi was determined to improve her circumstances however she could. Despite the obvious disadvantages—being a mom at age seventeen, leaving high school—she also had a few things going for her. Her dad had built several businesses from scratch, imparting knowledge and experience along the way. Her mom was a marketer. And back in the day, her grandfather was in advertising. In other words, marketing was in Naomi’s blood, so it wasn’t a huge stretch for her to imagine herself in a different life.

Without sharing her background with potential customers at first, Naomi opened a consulting company called IttyBiz. Tag line: “Marketing for businesses without marketing departments.” Later she would add products, courses, and referrals to other professionals, but Naomi started with a single consulting service: the service of brainstorming. Over the course of an hour and for an initial fee of $250, she would evaluate marketing ideas and provide feedback on ways to improve them. Nothing more, nothing less.

You might wonder how many people pay for this service (answer: a lot), and whether it’s worth it (answer: keep reading). Naomi is originally from London, Ontario, but I met her in London, England, where she was living near her mother. While riding the tube around the city and wandering through an outdoor clothing market, I asked for her advice on a situation in my business. She listened for two minutes and asked a few clarifying questions. Then, without much of a pause, she said, “Here’s what you should do,” and gave me a list of specific actions and ideas while I frantically wrote them down. I took her advice and spent a few hours applying it in my next project. As a result, I made at least $15,000 more over the next year because of her action list. (I didn’t pay Naomi’s fee of $250, but I hope she appreciates this extended testimonial.)

As she sharpened her message and connected with more people, the business grew. At the end of her first full year, Naomi published a short video explaining how she had earned almost $200,000 so far. This came as a big surprise to the online world, because Naomi wasn’t known very well—she wasn’t an Internet celebrity, she didn’t have a million followers—and in fact, a lot of people who stumbled upon her website were immediately turned off by the coarse language and her distinct “call it like I see it” style. Article titles included “What to Do When You’re Scared Shitless” and “Moral of the Story: Topless Edition (with Photos).” But Naomi’s audience wasn’t put off at all.

One of the things Naomi does well is continuously remind her clients about the need for actually making money. This may sound simple, but busy entrepreneurs can easily become overwhelmed with all kinds of projects and tasks that have nothing to do with making money. Putting the focus on income and cash flow—measuring everything else against those standards—ensures that a business remains healthy. Here’s how Naomi explains it:

Remember that the goal of business is profit. It’s not being liked, or having a huge social media presence, or having amazing products that nobody buys. It is not having a beautiful website, or perfectly crafted email newsletters, or an incredibly popular blog. In larger businesses, this is called accountability to shareholders. Business is not a popularity contest. The CEO doesn’t get away with saying, “But look at all these people who like us on Facebook!” Shareholders will not accept that. You are the majority shareholder in your business, and you have to protect your investment. You have to make sure that your recurring activities are as directly tied to making money as possible. There’s nothing wrong with having a hobby, but if you want to call it a business, you have to make money.

Naomi is right: On any given day, there are all kinds of things you can do that have nothing to do with making money—but you should be careful about those distractions, because without the money, there is no business. Many aspiring business owners make two common, related mistakes: thinking too much about where to get money to start their project and thinking too little about where the business income will come from. Fixing these problems (or avoiding them in the first place) requires a simple solution: Spend as little money as possible and make as much money as you can.

Part I: Hang On to Your Wallet

Inspired by her second child, Heather Allard invented two wearable baby blankets that became a worldwide sensation. The blankets were featured on Access Hollywood and sold in more than 200 stores, and it was all she could do to keep up. After the birth of her third child in 2006, Heather sold the products to a larger company in order to spend more time with the family. Success! She wasn’t done with entrepreneurship, though; the next step was to help other women, especially mothers, learn to do what she had accomplished. She started her next business, The Mogul Mom, with the goal of mentoring busy women who wanted to create more independence through a small business. The baby blanket business was highly successful, but it also became a high-spending operation as the product took off. On reflection, Heather realized that she would need to run her second act differently:

I had gotten into a ton of start-up debt with my product company and spent thousands on things that I absolutely did not need (big advertising campaigns, a custom e-commerce website, a publicist, etc.), and I definitely did not want to do that with The Mogul Mom. Therefore, when I spend money on The Mogul Mom, it’s for things that will continue to build my brand and boost my sales while allowing me ample time with my family—things like Web design, payments to a small group of contributors, or a new computer.

The distinction Heather points out at the end is important: She’s not reluctant to spend money on things that will (1) build her brand and (2) boost her sales. This kind of spending can grow a business. If you can spend $100 and create $200 in value from it, why wouldn’t you? It’s the other kind of spending—the unproven ad campaigns and unneeded custom websites—that Heather learned to stay away from. Lesson: Spend only on things that have a direct relationship to sales.

The stories from Naomi and Heather illustrate two important principles, both related to money. The first principle is that a business should always focus on profit. (Always remember, no money, no business.) The second principle is that borrowing money or investing a lot of money to start a business is completely optional.

This doesn’t mean that there are no examples of businesses that have done well through traditional methods; it just means that borrowing is no longer essential. Don’t think of it as a necessary evil; think of it as an undesirable option to be pursued only if you have a way to limit risk or are sure you know what you’re doing.

If you don’t know what you’re doing when you’re starting out, that’s OK, you’re in good company. Almost every entrepreneur pursues projects with a much-trial-and-much-error system. But since it’s easy to try things without losing your shirt, why seek investment and go into debt for something that may or may not work?

It’s completely possible to start on a very low budget without hindering the odds of success. Consider the reports of many in our study group:

✵ Chelly Vitry started a business as a tour guide for Denver food lovers, connecting them to restaurants and food producers. Startup costs: $28. Recent annual income: $60,000.

✵ Michael Trainer started a media production company for $2,500, the cost of a nice camera, which he later sold to recoup the cost in full. He then went on to work with two Nobel Prize winners: the Acumen fund and the Carter Center.

✵ Tara Gentile started her small publishing business for $80, hoping to earn enough money to be able to stay home with her daughter. One year later, she earned enough money ($75,000) that her husband could stay home as well.

✵ Chris Dunphy and Cherie Ve Ard started Technomadia, a software consultancy for health-care providers, for $125. The business now produces net income of more than $75,000 as Chris and Cherie travel the world.

✵ A former store designer for Starbucks, Charlie Pabst needed a $3,500 computer for his Seattle design business. But after he had the powerful machine and a $100 business license, he was good to go. Annual income: just under $100,000.

These stories are not outliers. When I began the research for this book, I received more than 1,500 nominations, with similar stories from all over the world. You can see the range of startup costs from our study group in the graph below. The average cost of the initial investment was $610.60.*

You might expect that certain types of businesses are easier to start with limited funds, and that is correct. It’s also the whole point: Since it’s so much easier to start a microbusiness, why do something different unless or until you know what you’re doing? Small is beautiful, and all things considered, small is often better.

Unconventional Fundraising from Kickstarter to Car Loans

What if you’ve thought it through and you do need to raise money somehow? Whenever possible, the best option is your own savings. You’ll be highly invested in the success of the project, and you won’t be in debt to anyone else. But if this isn’t possible, you can also consider “crowdraising” funds for your project through a service such as Kickstarter.com. Shannon Okey did this with a project to boost her craft publishing business. She asked for $5,000 and received $12,480 in twenty days thanks to a nice video and well-written copy.

Before going to the masses, Shannon went to her bank for a small loan. Her business was profitable and promising, with several new publications coming out over the next year. This wasn’t just any bank. It was a community bank in Ohio where she had an excellent personal and business relationship. Shannon was a meticulous bookkeeper with a conservative attitude toward finances; she brought along detailed sales figures and a clear plan to repay the money. Unfortunately, when she mentioned “craft publishing,” she was dead in the water. “They looked at me like I was a silly, silly woman who couldn’t possibly know anything about running a business,” she said.

The rejection turned into an opportunity. Taking the project on Kickstarter generated both funds and widespread interest in the project. Nearly three hundred backers came through with donations ranging from $10 to $500, leaving the project fully funded with capital to spare. Oh, and Shannon was not one for going quietly. After she reached the $10,000 level in her Kickstarter campaign, she printed out the front page of the site, wrapped the page around a lollipop, and sent it off to the bank’s underwriters. “I think they got the message,” she says.

As I collected stories for the book, I was mostly interested in people who avoided debt completely. But I did hear two fun stories about borrowing money that I thought were worth sharing. On a flight from Hong Kong to London, Emma Reynolds and her future business partner Bruce Morton had an idea for a consultancy that would work with big companies to improve their staffing and resourcing. They calculated that they would need at least $17,000 to start the new firm. There was just one problem … or actually, two: Emma was twenty-three and unlikely to get a business loan, and Bruce was going through a divorce and would also be a poor candidate for a business loan. Somewhere during the twelve-hour flight, one of them realized that although they couldn’t get a business loan, they could probably get a car loan.

Bruce proceeded to do just that, borrowing $17,000 for a car and then investing the funds in the business with Emma instead. They paid back the car loan within ten months, and the bank never found out that there was no actual car. Now the firm employs twenty people, is highly profitable, and has multiple offices in four countries.

Finally, here’s a fun story from Kristin McNamara, who started a California gym specializing in climbing:

To fund the latest incarnation of the gym, we called upon the community to “invest” in us, much like a three-year CD. We offered 3 percent above prime, which is more than you could get then or now, and people I’ve never even seen at the facility came up with the cash to get it started. My partner and I, the founders, are the only paid full-time staff, and we just hired someone to manage the volunteers for us for a small stipend. Our community fundraising project brought in $80,000.

As these lessons in improvisation show, if you need to raise money, there’s more than one way to do it.

Part II: Make More Money
(Three Key Principles to Focus on Profit)

As we’ve seen, it’s usually much more important to focus your efforts on making money as soon as possible than on borrowing startup capital. In different ways, many of our case studies focused on three key principles that helped them become profitable (either profitable in the first place or more profitable as the business grew). I’ve noticed that the same thing holds true in my businesses. The more I focus on these things, the better off I am. In short, they are as follows:

1. Price your product or service in relation to the benefit it provides, not the cost of producing it.

2. Offer customers a limited range of prices.

3. Get paid more than once for the same thing.

We’ll look at each of them below.

Principle 1: Base Prices on Benefits, Not Costs

In Chapter 2, we looked at benefits versus features. Remember that a feature is descriptive (“These clothes fit well and look nice”) and a benefit is the value someone receives from the item in question (“These clothes make you feel healthy and attractive”). We tend to default to talking about features, but since most purchases are emotional decisions, it’s much more persuasive to talk about benefits.

Just as you should usually place more emphasis on the benefits of your offering than on the features, you should think about basing the price of your offer on the benefit—not the actual cost or the amount of time it takes to create, manufacture, or fulfill what you are selling. In fact, the wrong way to decide on pricing is to think about how much time it took to make it or how much your time is “worth.” How much your time is worth is a completely subjective matter. Bill Clinton makes as much as $200,000 for a single one-hour speech. You might not want to pay Clinton (or any president) $200,000 to speak at your next family pizza night, but for whatever reason, some companies are willing to invest that much.

When you base your pricing on the benefits you provide, be prepared to stand your ground, because some people will always complain about the price being too high no matter what it is. Almost none of the people I met with talked about thriving in their new businesses because they always offered the lowest price. What works for Walmart probably won’t work for you or me. Very few businesses will succeed on the basis of such a cutthroat strategy; that’s why competing on value is so much better.

Gary Leff, the frequent flyer guy who helps busy people book their vacations, charges a flat rate for the service ($250 at press time). Sometimes it takes him a fair amount of work to research and book the trip, but other times he gets lucky and it can take as little as two minutes of research and a ten-minute phone call. Gary knows that the people he’s booking the trip for don’t care whether it takes ten minutes or two hours; they are paying for his expertise in getting the flights they want.

Time cost: variable, but averages thirty minutes per booking

Benefit: first-class and business-class tickets for worldwide vacations

Cost: $250 (key point: does not vary based on time)

Tsilli Pines, who makes contemporary Judaic stationery, created a Haggadah (a booklet used at the Passover meal) that most frequently is sold in bulk. Single copies are available, but far more people choose a bundle of five or ten.

Materials cost: $3 each

Benefit: nicely designed memento for families to use when observing Passover

Cost to buyers: $14 each (key point: not directly related to the materials cost)

We could trace this theme throughout almost every story in the book. Some examples are even more extreme, especially in information publishing. Every day, people purchase $1,000+ courses that cost virtually nothing to distribute; all the costs are in development and initial marketing. When you think about the price of a new project, ask yourself: “How will this idea improve my customers’ lives, and what is that improvement worth to them?” Then set your price accordingly, while still being clear that the offer is a great value.

Principle 2: Offer a (Limited) Range of Prices

Choosing an initial price for your service that is based on the benefit provided to customers is the most important principle to ensure profitability. But to create optimum profitability or at least to build more cushion into your business model, you’ll next want to present more than one price for your offer. This practice typically makes a huge difference to the bottom line, because it allows you to increase income without increasing your customer base.

Look at Apple, which famously produces very few products and doesn’t bother to compete on price. Even though there are few products, there is always a range of prices and options. You can buy the latest iGadget or computer at the entry level (which, knowing Apple, isn’t cheap), one or more midlevels, or one “superuser” high-end level. The leadership team at Apple—and anyone using a similar model—knows that this kind of pricing allows the company to earn much more money than it otherwise would. This is the case partly because some people will always choose the biggest and best, even if the biggest and best is much more expensive than the regular version. These kinds of sales will increase the overall selling price.

Also, having a high-end version creates an “anchor price.” When we see a superhigh price, we tend to consider the lower price as much more reasonable … thus creating a fair bargain in our minds. The internal thinking goes like this: “Wow, $2 million for the latest MacBook is a lot, but hey, the $240,000 model is almost as good.”

Let’s look at an example of two pricing options: one offered at a set price and one on a tiered structure. Keep in mind that you can substitute any prices here to apply this to another business.

Option 1: The World’s Greatest Widget
Price: $87

Option 1 is simple and presents the choice as follows: Do you want to buy this widget or not?

Here’s an alternative that is almost always better:

Option 2: The World’s Greatest Widget
Choose Your Preferred Widget Option Below
1. Greatest Widget Ever, Budget Version. Price: $87
2. Greatest Widget Ever, Even Better Version. Price: $129
3. Greatest Widget Ever, Exclusive Premium Version. Price: $199

Option 2 presents the choice as follows: Which widget package would you like to buy?

Chances are, some consumers will choose the Exclusive Premium Version, others will choose the Budget Version, but most will opt for the Even Better Version. You don’t want to go too crazy, but you can experiment with this model to add yet another tier in the form of a “really premium version” at the top or a “freemium” version at the bottom that lets customers try part of the service without paying anything.

Now let’s look at how the money works out for both of these options.

Option 1:

Option 2:

20 sales @ $87

20 sales @ variable prices
(14 choose middle,
3 choose budget,
3 choose premium)

Total income: $1,740

Total income: $2,664

Income per sale: $87

Income per sale: $133

Difference: $924 total, or $46 per sale

The key to this strategy is to offer a limited range of prices: not so many as to create confusion but enough to provide buyers with a legitimate choice. Notice the important distinction that naturally happens when you offer a choice: Instead of asking them whether they’d like to buy your widget, you’re asking which widget they would like to buy.

Options for creating a price range include: Super-Amazing Version (Gold, First Class, Premium), Product + Setup Help (the same thing sold with special help), and any kind of exclusivity or limited-quantity selection.

You can literally sell the same product at different prices with no other change. As long as you don’t imply that there are added features in the higher-price version, it’s not unethical. Big companies do it all the time; it’s how cell phone carriers, hotels, and airlines make money. To reduce confusion, though, it’s better if you can add something with real value to each higher-level version of the offer.

Principle 3: Get Paid More Than Once

The final strategy for making sure your business gets off to a good start is to ensure that your payday doesn’t come along only once—you’d much rather have repeated paydays, from the same customers, over and over on a reliable basis. You may have heard of the terms continuity program, membership site, and subscriptions. They all mean roughly the same thing: getting paid over and over by the same customers, usually for ongoing access to a service or regular delivery of a product.

Back when people read newspapers (actual paper ones), they would subscribe to have them delivered to their doorstep or office. These days, iTunes and Netflix offer subscriptions to your favorite TV show or a regular series of movies. The utility company has a recurring billing program; every month you pay it for the ability to turn the lights on and heat your water. For decades, the Book of the Month Club (in various forms) has delivered new books to its members on a recurring basis.

Almost any business can create a continuity program. Speaking of book clubs, there is also a Pickle of the Month Club, an Olive Oil of the Month Club, and a Dog Treat of the Month Club. In Portland, my friend Jessie operates a Cupcake of the Month club. If you like bonsai plants but aren’t able to keep them alive very long, the Bonsai of the Month Club is for you, but you’ll have to choose among four competing companies that offer different versions.§

Why is getting paid over and over such a big deal? First, because it can bring in a lot of money, and second, because it’s reliable income that isn’t dependent on external factors. Let’s run some quick numbers, assuming you offer a subscription service for $20 a month:

100 subscribers at $20 = monthly revenue of $2,000 or
yearly revenue of $24,000

1,000 subscribers at $20 = monthly revenue of $20,000 or
yearly revenue of $240,000

You can tweak either the number of subscribers or the price of the recurring service to see dramatic improvements. For example, adding 50 more subscribers generates $1,000 more per month, or $12,000 more per year. Raising the price to $25 a month with a subscriber base of 1,000 generates $5,000 more per month, or $60,000 more per year. Adjusting both options—attracting more subscribers and raising the price—generates an even greater increase.

(Note: Don’t get too hung up on the exact numbers here. The point is that in almost every case, a recurring billing model will produce much more income over time than will a single-sale model.)

Even better, after you attract customers to a recurring model (and ensure that you keep them very happy), they are much more likely to purchase other things from you. Brian Clark is an expert at continuity programs, having created a true empire from the art of moving customers from one-time purchases into recurring subscriptions. Here’s what he has to say about this process:

Our general model is to offer a varied line of complementary products and services. Some are one-time purchases that begin the customer’s relationship with us, and others are software and hosting services that involve recurring monthly or quarterly billing. While we strive to build all our product lines, the general strategy is to move as many one-time purchase customers as possible to a more lucrative recurring service.

For example, our StudioPress division sells WordPress themes (designs) to online publishers and has over 50,000 customers. These are one-time purchases, although many people end up coming back to purchase additional design options. We also provide ongoing support to all of these customers.

Over time, we offer our Scribe SEO service or our new WordPress hosting service to our StudioPress customers, which transfers the nature of the relationship into one that is much more economically beneficial for us. But the secret ingredient to this migration is the trust we’ve developed with those customers from the initial one-time purchase. We treat people well, period. This means before an initial sale is made with our free content, and even better once they become a customer, no matter the size of the purchase.

The key to this model is not market share. It’s share of the customer. And to gain more of each customer’s budget, you first have to zealously treat every customer as a “best” customer, no matter which ones actually end up becoming the proverbial “customer for life.”

The most important thing Brian says here is in the last paragraph: “It’s not market share; it’s share of the customer.” Like many of the people in this book, Brian doesn’t spend much time worrying about what other people are doing—he worries about improving his customers’ lives through helpful services. As a result, he gets paid over and over again.

Getting paid more than once is great, but be aware of a couple of concerns. First, many consumers are wary of subscriptions, because they worry that they’ll keep getting billed for the service after they stop using it or that it will be a big hassle to cancel. (To deal with the second problem, I created a “no pain in the ass” cancellation button for my site.) To encourage broad waves of initial sign-ups, many programs offer free or low-cost trials to get new prospects in the door. This works, but there is often a huge dropout rate after the trial ends. Just be aware of this, and make sure you continue to provide value as long as people are paying.

The $35,000 Experiment

One day I received an intriguing message from one of my customers, who successfully built a new business over the past year and is now making an average of $4,000 to $5,000 a month from his industry. In the email he told me about the results from an interesting experiment. I asked if I could share the results with other customers (and eventually put it in this book), but he was concerned about his competition learning how easy it was to increase profits. He finally said I could share this information as long as I didn’t unmask him. Here’s his follow-up note to me with the details:

As mentioned yesterday, I wanted to check something in my product. I set up an experiment that only tested a single variable: price. On one sales page I had $49, and on another $89. Nothing was different at all—same copywriting, same order process, same fulfillment. To be honest, I thought that $49 was a better price, but I had set that price somewhat arbitrarily. Guess what? Conversion went down … slightly. But overall income actually increased! This is what really surprised me. I discovered that I could sell less but actually make more money due to the higher price.

I then decided to test it at $99. Why not, right? But from $89 to $99 I saw a bit more of a drop-off, and I got worried. I’m now back at $89, and even with the lower conversion factored in, I worked out that I’ve given myself a $24 raise on every product that sells. These days we are selling at least four copies a day. If everything else remains consistent, I’ll make $35,040 more this year … all from one test.

I’ve decided to do some more tests. :)

Isn’t that interesting? Here’s how the numbers break down in this example:

Note that if the conversion rate dropped further, say, to 1 percent instead of 1.5 percent, the price change would not be a good idea. But in some cases, the news is actually better than it is in this example: When you raise the price, you don’t always see a drop in the conversion rate. If you successfully raise prices without lowering the conversion rate, it’s time to order the champagne.

The point is that experimenting with price is one of the easiest ways to create higher profits (and sustainability) in a business. If you’re not sure what price to use for something, try a higher one without changing anything else and see what happens. You might find yourself with an extra $24 per sale—maybe more.

You Have More Than You Think

After I met Naomi Dunford in England, I saw her again a year later in Austin, Texas, where we were both in town for the South by Southwest (SXSW) Interactive Festival. Earlier that day, she had run into a money problem. The problem wasn’t a lack of money; her business was doing extremely well, on the way to breaking the $1 million a year barrier. The problem was access to money. Because Naomi is Canadian but has lived in the United States, the United Kingdom, and elsewhere, she often has issues with her PayPal account being closed as she travels the world, leaving her with plenty of funds in the account but no way to access them. In this case, she needed $900 to register for a conference that had just been announced … and would sell out quickly. What to do?

Naomi realized that although she didn’t have $900 with her, she probably knew someone in Austin willing to loan her the use of a credit card so she could register. Asking around, she found three volunteers in the first two minutes who all said, “Sure, no problem. Here’s my card.”

As we talked about it further, we realized that most of us have access to all kinds of financial and social capital that we don’t usually think about but could call upon easily if necessary. If one guy hadn’t lent her his credit card, someone else would have. The trick was that she had to be willing to think creatively. If she had just said, “Oh, I guess I can’t register now,” she would have missed out. Being able to think of different means to achieve her goal led Naomi out of the homeless shelter a decade ago and to the highly successful IttyBiz. “Right before starting,” she said, “I was taking the bus to work, making 55 percent of a $30,000 income. My phone was cut off from lack of payment. Now I employ six people and help hundreds of others become self-employed.”

We all have more than we think. Let’s put it to good use.

KEY POINTS

There’s nothing wrong with having a hobby, but if you’re operating a business, the primary goal is to make money.

Going into debt to start a business is completely optional. Every day, people open and operate successful ventures without any kind of outside investment or borrowing.

The average business can improve its odds of success greatly by getting paid in more than one way and at more than one time. You can do this with a variety of methods. (We’ll cover this much more in Chapter 11.)

Whether it’s money, access to help, or anything else, you probably have more than you think. How can you get creative about finding what you need?

*The median cost was $125. If we discount the 15 percent of outliers at the upper and lower ranges, the average startup cost was $408 and the median cost remained $125.

Even though it worked out OK for Emma and Bruce, borrowing money for a nonexistent car and using the funds for a business was a bold move. As they say on TV, you might not want to try this at home.

Once in a while someone will complain that something I sell is “too expensive.” I always reply that it may indeed be too expensive for them and I’d never try to convince them otherwise, but only the market will decide if it’s too expensive for other people.

§Yes, these are all real examples. Google them.