Wednesday, November 9, 2011

Getting Your First Paying Customers

The other night one of our founders talked about his revenue goal: a million a year. It could be less, it could be a lot more, but it's a good milestone to focus on.

Getting there is the trick. Let's assume that the monthly target is about $80,000 and that's constant--it's the target monthly revenue.

BREAKING IT DOWN
There are 20 to 22 work days in each month. For my math sanity, let's use 20, and break that monthly number down to a daily number: $80,000/20 = $4000.

So you need $4000/day for 250 days to hit a million/year.

So how do we get there?

It's a subscription model, so you don't have to sell $4,000 every day, but it's kind of like that: you need to get to enough monthly customers so it averages out to that. You'll build to that level, but you'll have to methodically bring on more and more customers over time.

Let's say the average monthly charge is $25 (arbitrarily), so we need to get to 3200 customers. Math check: 3200 customers * 12 months * $25/month =$960,000/year (about a million, just shy because of choosing more convenient numbers).

3200 customers is substantial. So how do we get there?

GETTING TO 1%
Start with 32, or 1%: how do we get 32 customers paying $25/month? This is where the daily grind of work comes in: you have to do the small daily tasks.

Let's assume a generous close rate; when I left Mission Research we were at 30%, which is pretty amazing, and highly dependent on referrals. When you're just starting, you don't have the benefit of great word of mouth and referrals, so "generous" is a lot less.

So 5%.

That's still generous given nobody knows who you are. So your stuff really has to work well, and your startup voice has to be very likable, and if you're smart you'll have a free version that people grow to love.

So 32 is 5% of 640 leads. How are you going to get leads? Again, more work. Don't assume that just because you built it, people will show up and pay for it, or that your online marketing or networks will generate huge word of mouth.

METHODS
Here are some ways, and don't grimace when you see the offline methods--they still work:
  • Google Adwords (expensive)
  • SEO (early on it's unlikely to really help, but you have to do some of it)
  • Referrals (no customers, no referrals, but try to turn every new customer into a source of referrals or into an evangelist for your cause)
  • Articles: PR is a cheap and effective way of developing interest--it's really key and can be very powerful if you're ready for it.
  • Blog posts at relevant sites--can you be a guest blogger?
  • Comments at blogs: the more you contribute useful, authentic comments at relevant blogs and media sites, the more traffic you'll drive.
  • Email marketing: still works, but you have to develop highly relevant lists and really track everything ( try Listrak.com )
  • Cold calling: ouch. It still works, but you have to diligently make the calls and follow up. This is still an important way of communicating with customers. 
  • Direct mail: I've never had success with this. We tried all kinds of tracking, packaging, offers, etc. And I can say we never had a great success that justified all the work
  • Speaking: this seems like a great way to get customers, but it's really not. It really depends on your product, target market, and speaking ability. It can support PR efforts though. 
  • etc, etc (I didn't mention trade shows because it's such a mixed bag). 
So getting those early customers isn't easy--it takes work to find out what the best methods are. Trying all of the methods above feels like a scattershot approach. But when you're looking for growth, it makes sense to test some or all of them on a small scale and see if you can develop a functioning model. 

For me, it's important to get those early customers and keep talking with them, getting their insights and feedback. Getting their regular use of the product is more important than extracting money from them; you'll end up with a better product and loyal early customers who sing your praises and help to sell your product to their own networks.  

FREE
So make the paid version free for the first 100 customers. Don't have a free version initially. Make sure you have a simple email form on every page of the site to capture interest, and then send a personal email to each prospect asking for a time to call them to get their input and learn their needs. Early calls are so key...

Offer the product for free for a year if they take your call and join the "Pioneers" group (or a better name") 

Once you have enough early customers, you can start to get a feel for what they would pay, and use that as a basis for early pricing. 

When you do set your pricing, you'll have your free version, and some basic level. I would wait to add deeper levels of pricing--keep it simple so the choice is free or not free, and make the value distinction clear. 

The more choices you offer, the longer it takes for a customer to commit. Make it a no-brainer (but don't leave money on the table--pricing's a bitch). And early paying customers will help you determine what the next level should be. 

So let's assume that you were lucky enough to get a few articles about you or the product that generated some interest, then emailed your networks about your great new product, spammed your friends, and called a few hundred possible targets looking for leads. 

Now you have 100 customers who got the first year free--great stuff (leap of faith).

Can you turn them into salespeople? We still don't have our 32 paying customers, so you either need to convert the 100, or get them to refer paying customers. 

But the referral rate will not be significant enough to get a 32 new customers.

So I would say keep building up the free user base, let's say to 1,000. You'll close 50 of those, given you almost double your first 1%, or at least get enough referrals that close.

That's not enough to pay the bills but it's a good start and enough to base your future marketing decisions on--you'll have learned a ton and created a base of active users to learn from. 

And I'd be careful to make the first basic level limited enough in features and/or capacity to convert the free 1-year accounts to the next-level account when you release that. Just because those first thousand got it for free doesn't mean they won't become paying customers--you'll convert some. 

If they've built a dependency on you, then you'll convert them. If not, you'll see churn, likely in the 10-20% range. 

You're smart, they love you, but let's assume you convert half over the next 18 months. That puts you at 500 paying customers, or $25 * 500 = $12,500/month. Not bad--if you can last that long to get there. 

Out of your long-term free accounts--not the ones who got Basic for free--you'll convert about 5% to a paying account, or 50. 

So which model is better? 

WHICH FREEMIUM?
It depends on your stage. Early on, customers aren't going to have a ton of confidence in you, your reliability, etc. You have to work hard to please them, hope for their patience and support, and while you'll learn a ton, it's painful and things won't simply take off unless your'e really lucky. 

I'd say it's better to give a paid version for free for 12 months. If you serve them well, you'll convert most of them. I wouldn't give a free option until after you've gotten to sustainable revenue. 

So does that mean you'll have no revenue for 12 months? 

Possibly. But let's say you don't have the running room. How can you develop revenue in this model?
  • Paid support, annual up front
  • Paid service (tougher; it's hard to serve both the product and services for the product without investment, unless the service contracts are long enough and big enough)
  • "Pro" (or whatever)--the upsell. 
  • Capacity--depends on your app, but more storage, more bandwidth, etc
I've touched on a lot here and left out a ton of details. But it should give you an idea of the work ahead in getting critical traction with customers. 

I'd rather have 1,000 happy customers who got great value for free than 100 paying customers. Why? Because I know I can convert some of those happy free customers into happy paying customers. 

And I know that 1,000 happy free customers can amplify our startup voice and recruit the next 100 paying customers, likely faster than just going for 100 paying customers directly. 

And at 12 months, if I have 1,000 active free customers who just ran out of freedom, I'll have at least 800 customers converted, plus 100 from referrals. That's just under  1/3 of the 3200 I need to hit a million a year.

Please feel free to point out the flaws (including leaps of faith) in this--there's a lot of missing stuff and a ton of work involved, but this has been my experience establishing a base of customers.

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