Jason is a serial entrepreneur that has already sold one company, and in this episode he teaches us how to create a money machine through predictable acquisition of recurring revenue with annual pre-pay in a good market.
TOPIC JASON COVERS
- He is a serial entrepreneur and the founder of WP Engine
- He managed a WordPress hosting platform that handles deployment, speed, scalability, security, and tech support for WordPress sites
- He found early traction for WP Engine by targeting developers and agencies who build and manage WordPress sites, offering advanced dev tools and deployment capabilities
- WP Engine is a managed WordPress hosting platform
- Traction is defined as people who pay money
- Traction is vital for a business
- He talked about pricing during the customer development phase as it’s a critical part of figuring out if customers are willing to pay for the service
- The goal is to find a small set of things that work, pricing and positioning
- And a whole lot more
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Bronson: Welcome to another episode of Growth Hacker TV. I’m Bronson Taylor and today I have Jason Cohen with us. Jason, thanks for coming on the program.
Jason: Thanks for having me.
Bronson: Yeah, absolutely. You’re a guest we’ve been wanted to have on for a long time. It seems like anytime you write or speak online, it makes light bulbs go off. So you’re one of those kind of guys. Well, Jason, you are the a serial entrepreneur building and selling smart beer and now you’re working on WP Engine. So let’s kind of talk about WP Engine a little bit. Tell us what is WP Engine?
Jason: It’s a managed WordPress hosting platform. So if you if you know what Heroku is like Heroku for WordPress, meaning we handle the deployment side of WordPress hosting like making sure your site is fast and scalable and secure or tech support. People know WordPress. But on the other hand, there’s also dev tools so you can use get to push to WordPress, you can have staging areas you can use, there’s advanced backup systems. So things for developers of WordPress sites as well as actually deploying WordPress sites.
Bronson: Gotcha. Now, early on when you first kind of had the idea and you’re trying to figure out if there was a market for this, how important was traction for the validation of WP Engine and how did you kind of find that traction?
Jason: Well, I define traction as people who pay money, which is different than how some people define traction. And so to me, it’s all important. It’s what a business is. It’s people giving money. Otherwise, it’s a project or a hobby that you hope maybe can become a business. And so if you want to quit your day job and you want to actually have a business that sustains you, then the only kind of traction that people want to give you money is vital. And so at the beginning it started because my blog gets on Hacker News all the time and then it would go down because WordPress doesn’t scale that well under traffic. And so I would ask other bloggers, you know, is there some place I could go to get WordPress hosting where they handle that kind of thing? And I don’t care if it’s 50 bucks a month or something, like I don’t need hosting prices, I just need to work. And they kept saying, I don’t know, but if you find it, tell me, because I need that to. So then it turned into customer development. Hey, if I made this fast and scale and have a staging area, would you give me 50 bucks a month? That kind of thing? Mm hmm. So, yeah, I think the traction is customer validation. I think, you know, along the same lines, some people say in the customer validation phase, you shouldn’t talk about price because you’re just trying to understand their pain, their life, validate your theories about what is true as opposed to trying to figure out pricing or branding or positioning or something like that. And I disagree. I appreciate that perspective. It’s fine, but I disagree because I feel like pricing is a critical part of what you’re trying to figure out in customer development. Will they actually pay in a way to think, do you imagine this is you think about your normal customer development call and at the end you say, and by the way, it’s $1,000 a month. And how will that change their attitude toward, in fact, are they willing to become a customer and so on? It’ll change you quite a bit, and that’s why you have to talk about reminder. Will they say that about 50 bucks a month, will that take them back? Because if so, that’s a problem.
Bronson: Yeah. So can you tell us how many people do you have paying? You are saying they were going to pay you before you actually had a product? What was more, the number of those kind of tipping point in your mind, like, all right, if I get X people ready to do it, then I might build this thing.
Jason: Yeah. I don’t think that’s a good way to do it. By the numbers, the answer is I talked to 40 people, 30 said they pay and 20 did before launch. Okay. Those are really, really good numbers. That’s a sign that something’s going really. Right, because that’s a high hit rate. Yeah, but I don’t think you should do it by the numbers. I’ve seen companies where they just absolutely have a home run. Clearly, after talking to a dozen people, especially if it’s a larger product and you can’t really service more them out at first anyway and and they’re in on and I’ve seen people like there’s a company in town is very successful and it took them about 150 interviews before they finally Lockdown’s called Food on the Table. They finally locked down exactly what this thing was. It just took a lot of meandering. And I suppose if you wanted to use buzzwords, you could say pivoting or changing the the message until they like they found something that was really right. So I don’t think you can set up a number. I think rather you have to look at what’s going on in the conversations. If you’re getting an extremely low hit rate of someone who will do anything like it’s 10% to 15% who even agree that they would pay it all for it, you’re you know, you’re far from done. You need to drastically change what’s going on where you can find another idea and so forth on. And even if they say it’s going to save another idea before the retention, which didn’t pan out after a customer, you know, and what happened was I would talk to I would say what it was and the response that everyone we gave is, this is a terrific idea. You know, what you should do with it. And then the next thing they said would be different for every person. If one person says so, you should charge $1,000 a month and sell through VARs. And the next one says so. Should be freemium because I would use it for freemium and eventually pay. And then someone else would say it needs to be 30 bucks a month because if it was free, I wouldn’t trust it. And I’m. But the first thing that everyone said is that’s a great idea. Mm hmm. In other words, you really have to feel like not only are you getting positive feedback, not only would they say they paid for it, but that it’s converging on a pretty small set of things that you need to do with a small set of pricing, a sort of for a small price range that’s going to work. Yeah. And if any of those things are true, you haven’t found it yet. And it’s frustrating because it is hard to find. On the other hand, if you waste a lot more time, if you proceed anyway, not having found that sweet spot and simply flounder for a while.
Bronson: Yeah. No, we actually just had Steve Blank on the show and one of the things he talked about with customer development was looking for the insights in those interviews, not necessarily just the raw data, because the raw data says, you know, in that one product that everyone liked, hey, 9% of them liked it. But the insight was they all I did for different reasons. It wasn’t converging on to a small set of things you could execute. So I think you’re right along with what he’s saying, it’s really looking for the insights in those interviews. How large is WP Engine today? Because you guys have grown, you know, quite substantially.
Jason: We have. So we have about 70 people now on and we’re probably 90 by the end of the year. We don’t talk about a lot of our private numbers, but, you know, it’s in the tens of millions in revenue. It’s in the tens of thousands of customers.
Bronson: Yeah. So let’s talk about the growth of WP Engine a little bit because you’ve got to watch a couple different companies grow now and you’re just involved in the ecosystem of growth. What are the growth curve look like there at WP Engine? Is it just a linear day by day you add to it? Is there an exponential kind of tipping point? Talk is kind of high level. What does it look like?
Jason: So different companies will have different growth curves naturally and the curve itself and the type of critical change over its life span, depending on what’s going on. I mean, obviously, when you’re still trying to figure things out and get, you know, this first couple hundred customers, it’s going to be scrounging and scraping for each one. And it’s not going to have a curve. It’s like it’s just not an easy enough data to call it a curve. You’re just trying to get it going, right? You don’t really get something that you could call a curve or something predictable is another way to say that until you have systematic ways of growing and there’s lots of things that could be for some companies that means viral. For some companies, it means word of mouth, which isn’t the same thing. For some companies, it’s paid advertising or affiliates or other there’s like a variety of paid staff or it’s events where it’s PR based, in other words, that they pop in with, with, with news. Some of its SEO play, there’s just all kinds of mechanisms. And those mechanisms will cause you to grow in certain ways. And the standard way to think about a fast company growing is exponential. And what I mean is people talk about their growth in percentages. They say we tripled this year. They say, well, we’re growing at 10% month over month. And it was people’s language is the language of exponential growth when they talk about SaaS companies. And actually, in my experience, that’s not right. It’s it’s like a very rare for SAS company, in fact, to be exponentially growing. And it’s true when the growth mechanism is truly proportional to the size of the customer base. And that’s true in a true viral situation where in fact the usage of the product requires bringing in other users of the product that is truly viral and very rare. Actually, it’s more common in consumer companies often when you don’t pay, which again to me doesn’t really count. It’s very it’s hard to find something viral and B2B. It happens, right? There’s things like email contact, you know, contact management. Often it can be sort of viral. LinkedIn is viral in a way. So things can be viral indeed, and then they can grow exponentially. In truth, that’s not usually what happens. Usually in a SAS business. What happens is you you struggle and then unlock some particular growth factor. You figure out AdWords, you figure out Facebook ads, LinkedIn works, Google Plus. You figured out finally you’re on the first page in an easy of searching. Some things happen that you’ve unlocked some channel that has a substantial for your current size, substantial amount of growth, and then that’s adding a certain number of people per month. Right. Which still doesn’t mean it’s exponential. Right. That’s still linear. And then maybe you optimize or get better at that. So that linear amount grows in a small linear way. And a linear thing that’s growing in a small linear way is quadratic, right? It’s a problem. That is typically how the companies grow. Quadratic. We haven’t written about this yet, so this is the first I’ve said this anywhere, but I looked at our own data, given the theory that it’s quadratic and then, by the way, the sort of rest of that story is you’ll saturate the channel. In other words, you’ll ill kind of be buying all the AdWords you can buy or you know, etc., even though you may incrementally improve it with optimization. Also, channels generally tend to be less efficient over time by themselves. In other words, like an average you can imagine competitors also get decent AdWords. They bid more, and in general the bids actually go up and the quality goes down over time. Same thing with magazine. Same thing with trade shows and. So actually, although, yes, you can get some lift by content, by some incremental improvements, there’s also erosion. And so at the end of the day, you kind of call it even. It’s not going to be literally even. But in terms of a broad scope, you think of it as even. And that means you need to find additional channels to continue the growth and layer on those additional channels. And since each of those are sort of parabolic and then level off and hopefully you find another one, the whole thing in a healthy company is in fact still on parabolic, in my opinion. And so what I did is I looked at our own sales data and anonymously. What I mean is I told other people and they ran the data. So I didn’t have to do that. But I asked folks like Dharmesh, HubSpot and other people who are at well-known, quote unquote, fast growth. Well, definitely fast growing, the quote unquote, exponentially growing startups and ask them, hey, take your sales data, put it in Excel and do a parabolic fit. Tell me how it goes. And it’s perfect. It’s not exponential. It’s a parabola. So I want to do a little more, you know, sort of research into like, what does that mean? How much around that? But the point is, that’s the right way to think about growth. You want to say what is the curve look like? Blah, blah, blah. I think parabola is the right way to think about it. Layering on channels is the right way to think about it.
Bronson: Yeah, no, I think there’s so many insights there. Let me ask you this. You talked about unlocking those channels. You kind of stumble upon something, you find something, whatever it may be. How long in your experience does it take to hit upon one of those? Because some people are a couple months in and they haven’t found one yet and they’re discouraged. Should they be should they keep searching? Is it a red flag that they’re they don’t have anything? Is it months? Is a years? When do you unlock things?
Jason: Well, again, to me, there was different phases of it so early on it didn’t take much. Like if you’re only getting, you know, three customers a month and getting up to ten, it doesn’t take much unlocking. Right. Like you can kind of stumble into some stuff or just have a good guest post, right? Yeah. And then the bigger that you are, the more that that has to mean to move the needle. And so it gets harder also. Also, you can try stuff and fail on them and then then later restart it. That’s exactly what we did with our affiliate program earlier program. Originally complete failure. We worked on it for, I don’t know, half a year, maybe more could not make it work. We gave up and a year later we had a reason to retry and it was someone else who’s on board. I know how to do it. Really. Okay, so since something was different this time, we figured we’d give it another try. And it did work the second time. But the time between us initially deciding to do it and then actually succeeding was multiple attempts in something like 18 months to two years. On the other hand, we had early success with AdWords and then that was great for a while. And then recently it’s just been absolutely insane pricing. And so we stopped doing that. But on the other hand, we have great organic search. So in the meantime, so that’s been okay. That’s all just to say, it varies a lot and that’s a terrible it’s a terrible thing to say. It varies a lot because it’s useless to say and it’s also terrible to experiment. Guess some check. That’s what everyone says and that’s not really helpful. The unfortunate thing is with paid advertising, there isn’t a lot more to say. Mm hmm. So. And it changes over time that something that worked suddenly won’t and something that won’t will. And so it’s it’s not only that, but after you unlock it, you’re not finished. So it’s unfortunate that that is sort of the not only the kneejerk advice, but there’s not a whole lot of other stuff behind that unless you you know, you’ve got a real AdWords expert. You can go deep on that. That, of course, is fantastic. But in in the broad scope, unfortunately it is that.
Bronson: Yeah, you know, it it is helpful because it reinforces what you said earlier about the need for multiple channels that kind of create that, you know, parabolic curve. Because what you’re saying is it’s chaotic. AdWords works, it doesn’t work. Affiliates didn’t work. It didn’t work. If you don’t layer on the channels the way you’ve described, especially for a SAS company, eventually given enough years, everything goes to zero because that’s just the way it’s going to be, right?
Jason: It may go to zero, may not go quite to zero. I don’t think affiliates will go to zero. Now, if you don’t do anything that, you know, maybe you did, but you don’t to be too paranoid about it and expect. Yes, of course, like after you after you sort of again unlock and understand. And, you know, sources are systematically using a channel and that’s under your belt in a sense. Yes. You know, the next thing to do is not just not that you won’t continue to optimize, but but that will pale in comparison to another channel in terms of its impact and usefulness of the company to companies. So, I mean, you should be able to get, you know, at least two acts and possibly as much as ten from an adding another channel rather than incrementally optimizing, which is never going to get you to x like once you’d have you what you’re spending 1020 grand a month on. Edwards It’s unlikely that optimization is going to get you ten X out of that. There’s just not enough left over in that channel to go scrape. But another mistake would be to go and try to do three or four channels at once and decide, I’m going do all of these just important have multiple channels like you need to get the company off the ground, you need to get the growth engine going. You need have a systematic way where every day you wake up and you know, you have one even one sign up, but every day. Right. Or ten and you know, it’s so you don’t want to dilute your efforts in a bunch of things. That’s why I say once you get a channel under your belt, you’re like, I understand this. It’s working. I’m, you know, I’m able to reinvest in it. I think I’ve hit more or less the limit of what I can do. An incremental benefit is valuable, but only incrementally. Now it’s time to go find it, you know, get another channel. Otherwise you’re diluting your attention. Yeah, maybe if you’ve raised money and you can afford a big team to go blow money through so they really can in parallel do that without hurting the other efforts, then fine. But that’s that’s almost no one. And so, you know, focus. And we did too like I, I definitely did that on smart beer I did that WP engine and before smart bear and another company I.T watchdogs also groups for four years and sold it also made more than $1,000,000,000 in revenue per year on that with that company the hardware companies so and we we advertising magazines if you can believe that I’m still still all the same stuff that I’m saying so I really do believe as a macro thing even over more than a decade of time and different media formats that is that that is a good way to look at it.
Bronson: Yeah. So just kind of sum it up, you know, long term you’re going to want to have multiple channels, but in the short term you need to master one and then move on when the changes become incremental or you’ll dilute yourself and you won’t ever actually find the channels at work. It kind of reminds me, I believe, if I’m not mistaken, you retweeted the last couple days something about shareholder value. Was that you? Yeah. Yeah. And about how Apple grew because they add a new product line. And, you know, other companies, they really return value because of adding entire new categories, not incremental changes in existing categories. That’s right. And it’s kind of the same thing with growth itself, is that adding a new channel will be far more beneficial than incremental changes at some point, but you have to master the channel to even get to that point.
Jason: That’s right.
Bronson: Yeah. Now, let me ask this today, just because it’s interesting to kind of know how different companies work. It may be applicable to others or not. Where does most of your acquisition come from now? What’s the the main or maybe even the mix of channels that you’ve kind of stumbled upon?
Jason: Well, fortunately, there isn’t one main one. In fact, that’s a sign of weakness. Once you’re in there, really once you’re at scale, if you’re dependent on only one channel for most of the stuff, most of your growth, that’s a problem. Because if something goes wrong there, it drastically affects the company. Fortunately, the number one thing is word of mouth, and that is something where you hope you can continue as long as you continue to have, you know, to maintain the level of service and quality that that earned you that word of mouth in the first place. And of course, it is difficult while you scale to do so. So hopefully we can, in fact keep that up. But it’s a variety of things. You know, as I say, we have all these different advertising, paid advertising channels and digital, everything from text to banner stuff. There’s affiliates. We go to lots of events, and that’s very, very useful for us. Not for all companies, certainly, but for us it is. And there’s is at this point, there’s a wide variety of things that we do, and we’re constantly testing new things. And for example, we just tried Facebook ads again for the I don’t know how many time and failed again, but we’ll probably try again later. That’s that’s great. Yeah. Now, earlier.
Bronson: You mentioned word of mouth and you mentioned it next of reality and you made the side remark. They’re not the same thing. So my guess is you have some feelings on that. And you just mentioned that word of mouth is really good for you guys. So what’s the difference? What is word of mouth? What is virality and how do they get confused?
Jason: Well, we’re a great example of no virality and great word of mouth. People help each other about us because they genuinely like the service. It is, in fact a good service, whether we’re talking about the product itself, the end of the hosting service, or we’re talking about the humans that they talk to on the phone, and it is, in fact, good. And so when anyone else says, Hey, I need to go somewhere, they recommend us. That’s word of mouth. Gotcha. Viral. Is that the nature of the product itself causes other users to come into being? We don’t. If somebody has a food blog and hosts with us, that in itself does not create new net new hosting customers for us. Don’t talk about hosting on a food blog. Right? Like that doesn’t even make sense. It would be weird to advertise us on the food blog. So the nature of the usage of the product itself does not produce other users. So that’s why it’s not viral. Yeah, but it is word of mouth. And so like to me, any company that’s not literally just trying to do something that’s a scam or like arbitrage or something, any company should be striving to have a huge word of mouth component. Not only because that’s the cheapest and highest fidelity marketing channel that you could have, but because it’s indicative that you are in fact, doing something valuable and good. Right. Of course, that’s customer development. Right? Better is if it’s viral. Yeah. So it is it is unfortunate that this particular business isn’t viral. And it’s an actually good question. Could it be made at least a little viral in some way? Could we have a customer referral program? And that’s still not really quite viral, but maybe it’s in between. Well, it’s a good question, but but our business model doesn’t lend itself to being viral, which is, of course, okay. It’s just something to know. And that just means we have to be that much more good at other kinds of, you know, methods of growth. If you can produce a company that has a viral component for real, as everyone says they have for a few people actually have it. But if you really do have a fantastic. And but that is, in fact, you know, wonderful. And one other caveat I put on that is viral stuff only works once you’re at scale. It doesn’t matter if you have a great viral component and for customers. Right. You know, the customer base grows by itself 5% per month. Right. So it was five and then it’s still five. Right. It doesn’t matter. So it is terrific to have that component, but it doesn’t absolve you of the need to to get the growth kickstarted, sort of like a starter motor. Right. You still have to do stuff. Now, if you have a viral component, you’re more free about what that could be. So for example, PR guest posting, you know, social media, things like that, which are ephemeral and therefore not. It’s actually a terrific way to for sustained growth. But they are a terrific way to maybe get a pop, to get some user base to then let the viral component take over. That could be so. That’s what I mean by you’re more free to do more kinds of things because it’s okay if it’s temporary. When you have a viral component, your back, but typically you don’t know that it’s going to work. Figure out skills is a bit of a chicken and egg like. Yes, try to build that. And that is. It’s a better business model, but you’re kind of, in my opinion, don’t want to depend on that anyway and certainly you can’t at some at the start.
Bronson: Yeah. Now, that’s a great insight. Now, let me ask you this. You know, looking back at smart beer and now WP Engine, how does the growth look similar and how is it different? How do you see the two as you kind of look back with some perspective on them?
Jason: A completely different and. Why not? They’re completely different kinds of businesses. Smart beer was all enterprise software focused where we, you know, Adobe Pension. We do have big enterprise customers, but the bulk of our customers by volume are small do pensions as a recurring revenue business. Smart Bear wasn’t. And just you can just get a bit the markets are different. The audience is different. The way they buy is different. I mean, you just go down the line. All kinds of things about it are different. Everything they have in common is they’re both selling software, but that’s that’s actually not a lot in common. And so not surprising, the models are very different.
Bronson: So is it a learning curve going on engine? And that that’s kind of what I’m getting at is because you knew a lot about growth before WP Engine. You knew a lot about how to scale something, how to sell something. But then you come to WP Engine and so many things are different. Is it still kind of a steep learning curve like, all right, let me refigure out this. Maybe some principles apply, but I still have to figure out this.
Jason: I think regardless of how old you are and how many companies you started, if you don’t go into a new company with eyes open, mind clear, ready to learn and figure things out. So this market at this time with this technology, with this team and so on and so forth, right, including all the technologies and techniques and stuff around growth, but also everything else. Then you are, you’re hobbling yourself, you’re adding risk to the company and you’re kind of an arrogant prick on top of that, right? So, yeah, totally. Eyes wide open now. Sure. There’s going to be things here and there that, you know, I don’t screw up or, you know, the first time we had our first enterprise customer at WP Engine was new for the team. But for me it was like I did that for seven years. No, but like, I know here’s what’s going to come, here’s how it’s going to work, right? So, yes, of course, there’s like certain things you pluck out and go. I see. There’s all kinds of things we didn’t mess up doing this, doing that. And the other thing, especially when you get into things that are generic for any kind of business, the way an enterprise shell works is very similar for most businesses, the way finance needs to work. What you know, that the the stuff that comes with finance, there’s a lot of sort of mechanical things in a business that isn’t that different. And so, yeah, that’s terrific to get a head start or the fact that then I had a terrific network of, of advisors and investors and stuff and, and it was trivial for us to raise money 18 months. And when we decided to go that way and start bootstrapping, yeah, that’s all that stuff is a huge benefit. So it’s not that it wasn’t, you know, different carry some wisdom forward or carry some things through the accreted value forward. But man, you have to go in with beginner’s mind, as they say, or else I think you’re you’re you’re just putting blinders on and you’re lucky if even with blinders, you still found the path.
Bronson: That’s great. Now, you’ve been somewhat outspoken about data, and if people read your blog, you deal with data a lot. I mean, the math you put on there, it goes deeper than most people are comfortable with. I think you have to really want to learn this stuff. But let’s talk about data for a second, because you’ve talked about the times when startups shouldn’t focus on data. So talk me through some of those. When do startups just kind of miss the boat? They’re so worried about data and they should be focused on X, Y and Z.
Jason: Well, I love that lean startup has caused us to be experimental and look at data and try to be objective. And certainly the pendulum was too far one way on that, or people were just going one phase or whatever. But I also feel like the pendulum maybe swung too far the other way. And now people are just maniacally looking at data and not stop thinking about what am I trying to do with this business? What is this? Why, why? Why am I doing this? Why now? Why are these customers really buying? And not just because of data that show that they click or don’t click, but because of some principle that I have or some theory that I’m letting the data prove or disprove rather than just following the data blindly. Also, you need a lot of data for the data to mean something. You know, I did a I did a target business. The software that takes data takes an hour or two to really beat you over the head to death. It it takes a lot of data and not just low data but certain kinds of data. You can have an AB test with 40,000 data points over two weeks. That’s absolutely not true. That Google Analytics and everything else will tell you is a real test. And I have an example of that. I have a startup in town. They did exactly that without much data, but it wasn’t an AB test, it wasn’t a test. It was a test of the page against itself. And after 40,000 data points to test in Google saying it had an 85% chance that one beat the other by a whole point of conversion. It’s the same page, it’s still not valid and you know, awesome. So as you say, I do have some formulas and things around that too to actually get at the root of that. But the point is it actually takes quite a lot to have data that’s real. So what that means is not that you don’t look at data, but that you recognize that especially early on you don’t have enough data at story. So rather than obsessing over the little data, which is actually not telling you what you might think it does, again to look more holistically what’s going on. Another thing I’ll say is early on you can only the only kind of data that you can you can in which you can see changes with with with confidence is massive changes. You can’t tell a 10% change conversion rate when you’re converting 1% a day. It’s literally not possible to measure that with statistical accuracy. So you’re just measuring noise. Yeah, so but you could. But if it goes from one a day to three a day and stays that way, that’s real. I don’t care who you are. Right. So that’s what I mean. Early on, you’re looking for huge changes, not small incremental changes, big massive changes, because that’s the only thing that you and by the way, there’s only thing that matters to your business. Anyway, again, one a day and you change a 10%. You won’t. What now you get to quit your day job? No. Right. So, I mean, only massive changes are valuable to the business anyway at that point. So it’s all it’s just as well. But it’s useful to say that also because you can back into well then what does that mean I should be doing? Should I be doing therefore incremental changes to the pages themselves and just playing with headlines? Or should I be changing with big changes to the page that might have? Big outcomes as opposed to little easy changes, which probably actually will just have little outcomes. I can’t measure anything, you see. So having that notion of big outcome backs into big, big, big variation changes in order to get to somewhere different than where you are now.
Bronson: Yeah. No, that’s great. And let me ask you this. You know, when it comes to a test that you mention, I mean, that’s just like so insightful to think about that. And there’s kind of a dilemma that I see here, which is if you’re a big company, you have the data points and you can make some decisions. But then when you ask people for specifics, like, well, how should I do this? Or How should I do that? They say, Well, it’s only relative to your company, so you just need to go test. But a small company doesn’t have the data to even test. So kind of like they’re not allowed to use your data, but they don’t have any data. So what does a small company do? Do they just focus on the obvious big things, like you said, and just leave the data for another day? Is that the answer in some sense?
Jason: Yeah. I mean, it’s not that you don’t collect the data. You don’t look at it because again, you’re looking for big changes in things like conversion rate or the time you spend on the page or how much it’s costing to acquire a customer. Like you’re totally measuring all that stuff. It’s just do not fool yourself around. I have a 10% lift. Yeah, when? When you couldn’t possibly know. So it’s not that you can’t have the data from bigger companies. I could tell you things about what we’re doing, but for us, a 10% change is absolutely measurable and it’s impactful. Yeah. In fact, not only is it material to the top line, but it means we’re suddenly behind on hiring and support. And we might need to hire five more people next month than we thought, which is sort of an insane thing if you think about like the mechanisms that. Right. So it’s not a bit it’s not that you can’t have our data, it’s that it’s a whole different sort of thing that you’re trying to do anyway and implication on the other side and so forth. So it’s not relevant to, you know, that’s why. So, yes, measure the data, but looking for big swings. And the other thing is fun mailing stuff. So I had a recent post, I don’t mean to plug a blog, but I did about how much should I pay per click when I don’t have enough data to know what I should pay? Mm hmm. Because I don’t know the conversion rate and I don’t know my lifetime value, the customer, because my business is only four months old. So I don’t know how long they’ll stay, you know, like, so I had. So what I did is I, I found nailed it by saying, look, this is really good kind of rules of thumb of what should be a ratio to what. And there’s a survey of 100 small startups, and I did sort of an informal survey around the co-working space that the retention is in at the moment, although we were about to move in in less than a month. And so I found certain things, I’ll tell you that right now, too. So, for example, a 1% conversion rate is pretty standard out of 100 startups. Almost all of them were within 0.2% of 1% conversion rate. So that’s good. So if you’re not sure where your conversion rate will end up, that’s actually a pretty good rule of thumb. And so you can back out things like that to the end of the story of this particular calculation. You can look at the positive. I see a derivation is you take the mirrors. So the recurring revenue you’re going to get each month, monthly recurring revenue and divide by 25. And again, the post it goes it goes into the detail of why it’s not a magic number. Right? Yeah. And that’s how much you can pay per click. So if it’s a $50 a month product, you could pay $2 a click it sort of rationally even before you have all the data to really know. And of course, as you can accumulate data, of course you’d want to address that to the truth. And in fact, you could use that mechanism. And whichever of those assumptions you then collect data around, you can, of course, fix them and get a more accurate thing for you. But that’s what I mean by it’s not that you can’t do anything, it just you need to thumbnail stuff and know what’s a thumbnail and.
Bronson: Yeah, no, that’s great. You know, in the intro I said that, you know, whenever you speak or whenever you do these interviews, people generally just love them. I mean, that’s just that’s the response, you know, that I’ve seen online. But there was one talk you gave that I think just keeps popping up. It’s like every time it’s on somebody’s radar, they just feel the need to tell you about it. It’s what you said in MicroConf 2013. There must be five or ten blog articles just written about your presentation and then like giving your notes from it, what you said and why you said it. It had a big impact on people. So I want to dove into it a little bit because it’s really based around one particular sentence and everything, you know, comes from that. And you wanted to help people how to create a money machine. And maybe that’s why they loved it, because they like that idea. I don’t know about clear.
Jason: And to be clear, it’s a money machine where you quit your day job and you start a business. But if the goal is not to make necessarily, it could be. But the immediate goal is I want to quit my day job and make something between a hundred thousand a year and a million a year. Yeah. I’m not trying to, like, be Twitter or any of these kind of things. Right. It’s very practical. I want to make I want to quit my day job and run my own business, period. And I don’t need to maybe if it takes off, great. If it doesn’t, great. That kind of thing.
Bronson: Yeah. And that’s why I was at MicroConf and that’s a perfect audience for that. But what you said was you can tell me if I got it right here because I’m getting this second hand of all the people that heard you, but is that you create a money machine through predictable out. Position of recurring revenue with annual pre-pay in a good market. And so unpack that for us, because each phrase of that has a lot of meaning that I think this audience can take away from.
Jason: Yeah, I mean, it sounds like a contrived sentence, and it is, which is why it was the last slide. In other words, I went through the whole everything about it. And then I said, and here’s like your sort of take away thing that summarizes because otherwise it’s just a weird, meaningless sentence of buzz, right? Yeah. Yeah. So I’m happy we can go the other way and unpack it the other way.
Bronson: Well, I had to start from there because we can’t give the presentation here.
Jason: That’s right. So what’s the first one?
Bronson: The recurring predictable acquisition, I believe.
Jason: So the first thing about being able to have a sustainable business where you quit your day job is that next month it will have at least as much revenue as this month and certainly not like a grant. And suddenly you’re screwed. Right. So that’s where the predictable acquisition of customers. That’s why. That’s why. And the word predictable is very interesting because it immediately discredits a whole bunch of ways to get customers. And SEO is not predictable. Right. Even at even like a huge, incredible, incredibly organized, intelligent force of a company like Mahalo can have the revenue cut 90% because Google does all that. It’s not predictable. You can’t base it on that. Does that mean CEOs value list? No, of course not. But it’s not predictable. Mm hmm. So if you want to make a money machine, something that where it’s going to make more money next month than the month before and so on and so forth, then it has to be predictable. So what’s predictable? It’s hard because customer acquisition is like the least thing. It’s in your control. What’s in your control the most is adding a feature because you just do it right. What’s in your control, at least, is having someone find you and come and be convinced to sign up. That’s the hardest, in a way. And so it’s it’s the thing to tackle and understand the best. And so what predictable means generally is paid advertising. It doesn’t have to be. But when you can pay, you know, you spend a dollar this month and you make $4 over the year or whatever. Right? That’s predictable. And so just like we were talking about before, you know, picking up channels and and making new ones and so forth, that kind of a thing. But with the mindset of I need to find things where nothing’s predictable in business, right? But like your mindset is I’m trying to find things as predictable as I can. And SEO is not is definitely not and AdWords is better. And we know AdWords isn’t the end of the story and so on, so forth. That’s okay if we get it, if we get a clicking on that and then we find a second one, that’s totally fine, right? So that’s the predictable part. So for that, you need a good engine of it’s not too expensive to acquire a customer that way versus how much revenue I have and which this is actually I mean, that sounds trite, but the really important point in here that almost all small businesses are fail to do this. And that’s why I’m harping on this point. If it costs too much to acquire a customer versus how much money you get, it doesn’t work. So you have to charge a lot for your product. If you charge a dollar a month for the product or, you know, $10 a year, then can you spend a $200 to acquire a customer? No, that’s not a profitable business. If you can’t well, if you can’t spend $20 to acquire a customer, all kinds of advertising and customer acquisition channels are not available to you. You don’t have to build a particular order, like cost a dollar or $5 to acquire a customer. And those are very few. It turns out almost nothing is actually that cheap. And so you’re screwed actually. And if one of those few things, you can’t make work, you don’t have a business. Yeah, that sucks. Yeah, we don’t make that. Not the cases did not charge a dollar a month, but instead to charge $50 a month, $100 a month, or have a couple of tiers that average out to 80 $120 a month into total demographic. Right. So you have to charge more for your product, charge more free of charge more for your product, charge more for your product. Okay. Because among among other things, like you get more revenue and get there faster because you charge you 50 bucks a month, you can scrounge up 50 or 100 customers just by, you know, elbow grease, even if it’s not mechanical yet. And you kind of got a business going. Mm hmm.
Bronson: Yeah, it’s predictable.
Jason: Like. Like, just everything gets solved by charging more money. And you say, well, who would pay for that? And you know that much for this thing. And like sponsors, you need to make something that’s worth that. Mm hmm. Yeah. And it doesn’t have to be because it has so many features or because you answer the phone in the first ring. Those are not the only reasons why people pay. It’s how much value they’re getting it. It’s what’s changing for them and the kind of customer you go after in the first place. A lot of times, for example, businesses, people can charge $50 a month in the credit card or not ask if they could buy something that’s not their own money and they’re not to ask. It’s very easy. They could care less if it’s 50 or 40 or 30. Exactly. So, I mean, there’s a lot of reasons why that can get me a lot of money besides how many features you have or something like that. End Point is. So it’s good for all kinds of reasons. And, and just to put the final nail in it on, on the cost of customer acquisition and if you charge $50 a month for a product. $200 to acquire customers now. Rational? Mm hmm. Right. So that’s what. And if you could. If you could pay that much. Oh, my God. You could do all kinds of things. Mm hmm. All avenues are open to you, and. And that’s exactly the point you need to maximize the avenues open to you. Exactly. Because I can’t tell you which channels work and so forth. So you need to maximize how many options you have, some of which do more money maximize. So that’s just a very long way of unpacking just the part of predictable revenue, but that you sort of have to have high a high priced or what you might think of as a high priority as my mother. But what you might think the higher price in order to really make that functional and you know, a healthy business to lots of options to it.
Bronson: Yeah. And then the second part is recurring revenue. I think this is obvious why that’s important because it goes back to predictable. I mean, it has to be referring or you start at zero every first of the month.
Jason: That’s right. Yeah.
Bronson: Anything more to say?
Jason: There’s no I think that means that once per year.
Bronson: And then annual pre-pay. Now this is the one that got a lot of people excited. Yeah. Because they never really thought about it. It’s somewhat obvious when you say it, but until you hear it, it’s like, oh, that’s why prepay annually matters. So unpack offers a little bit.
Jason: Yeah. I mean it’s, it’s again like you say, it seems like maybe it’s obvious, but people don’t do it. But there’s non-obvious things to that’s really important because it literally can transform the business. So I’ll talk about those. So the obvious thing is the cash flow. If you get a lot more cash upfront, that’s better because you can put that cash right back in the business and or quit your day job because now it’s cash flow better. Mm hmm. So, for example, you might say three months free if you sign up for an annual plan. So now you get nine months of revenue down. Yeah. Now, sure, over the next 12 months, you only get nine months of revenue. You do make less money on that customer. You’re paying you’re essentially paying them to get the cash flow today. You’re getting the cash flow today is incredibly valuable. And that’s, by the way, true. Whether you’re a massive company or whether you’re any company, it’s always better to get the cash flow today to reinvest that in the company and so forth on whether that’s more marketing or just being able to quit your job or whatever. So that’s the obvious part. The non obvious parts are stuff like this. When someone taps into an annual plan, you’re kind of raising their hand and saying, I want to be here for the long haul. Mm hmm. That is actually a much more valuable customer. Interestingly, they’re usually more likely to renew on an annual basis than monthlies are really in its place, self-selected as opposed to anything else. Right. Nevertheless, to know that about the customer and to know how many customers are in that category is actually incredibly valuable. Mm hmm. Does that change the way you communicate with them? Does that change what you do for them? Does that change how you handle text for it? You know, it’s an interesting it’s an interesting phenomenon. Yeah. It’s like and it’s not obvious, but true. Another thing to be careful with your cancelation rate, your cancelation rate needs to be a number of people who could cancel this month. Mm hmm. You know, divide it by the number or on the bottom of the fraction. There are people who do because annuals don’t. So it can if you don’t do that and just say number who canceled overall customers, you’re artificially seeing a lower cancelation. So be careful about that. Yeah.
Bronson: And you have a great blog post. I think it’s the top one right now on your blog if you want to read about the cost of cancelation, which was awesome.
Jason: Yeah. So just be a little careful about that. You’re not fooling yourself. Nevertheless, the other thing, another thing that’s that’s not obvious is you can use this to raise your prices. So typically when I say raise your prices, as they say, as people say, well, I’m scared. I don’t know that there’s some people who can’t pay that. All these kind of excuses which generally aren’t true. Generally, when you raise your prices, if they’re already pretty low, nine bucks a month, 19 bucks a month and so forth, usually are for branding companies, you know, usually the same rate doesn’t change at all. And you just make more money. That’s that’s almost always what I see. In any case, if you’re scared, what you can do is you can raise your monthly rate, but then have an annual plan that essentially brings it back down to the current rate because of the annual discount. Yeah. So now you’re giving the customer a choice. Either pay me a lot more money than you pay me today because my monthly went up by 2x3x and that’s fine. Hey, great free money, right? Or by giving me even more money in cash and in the same business model that you you had previously decided was okay, but more money up front. Now the customer satisfied because they have that same deal. But you have the cash in front and you win both ways. Yeah. Another thing. So that’s another subtle point. That’s not obvious. But you can use annuals to in fact raise rates because you’ve got a built in way to discount for people who are sensitive, but in a way that’s still valuable to you. Yeah. You’re not getting a discount for nothing. You’re getting the discount for giving you some cash flow. That’s different. Yeah, etc.. Another thing is it sort of changes the perspective of the customer. And I’m just going on and I.
Bronson: Think this is great. I mean, this is great insight.
Jason: Okay, good. So it changes the perspective of the customer in terms of the pricing. So in other words, I’ll give you example, there was a company here at Discover in this capital factory and. Britney Spears here where they were charging, I forget what their rate was, is something like 300 bucks. And there was more for enterprise customers. And I said, Wow, that’s great. You got them to pay three bucks a month. I say, No, it’s three bucks a year. I said, okay, hold up this for me for one week. Change it to $300 a month and just see you’re like, Oh, I don’t know. I said, Look, the worst cases, you know, you don’t get any situps at all for a week. And so that’s why you lost three ups, you know, and you tried. But actually you only need like one of those new sign ups to cover a whole lot of loss in signups anyway. So just give it a try. And of course, you gave it a try and there was no change in sign ups whatsoever. Right. So that’s a 12 bucks. And I said, and by the way, and I said, So what are you going to do next? He goes, Oh my God, now I’m going to buy these AdWords and do all the stuff I said. No. You’re going to raise your price again. But you just you just change your price by an order of magnitude. And nothing happened. Yeah.
Bronson: There’s no way off. You weren’t even close.
Jason: Yeah, right. So maybe not another order of magnitude? Yeah.
Bronson: You don’t take the 500. Who knows?
Jason: You’re like, okay, so. All right, so you get that. You get the point. And anyway, for annuals, annuals can be a play a part in that support. So and there’s just a lot of reasons to Daniels that maybe aren’t I guess that’s why I say and that’s why I defend my statement that it could be transformative for a business like the difference of quitting your day job or not. And raising prices are not that big a deal.
Bronson: Yeah, that’s huge. And then the last kind of piece to the puzzle is it has to be in a good market. How do you find good market and maybe even talk about B2B and B2C in there a little bit? If that’s a part of it?
Jason: It is a part of it. This was this is, I don’t know, maybe a third of that talk. So I can go on and on about it. I will say I’ll give you two things out of that. One is because you asked me, is obviously so small business wants to make money and not just have active users, whatever that means to me. Got to go. B2B, I say. Got it. Look, of course, you can always point to customers. I mean, companies that do B2C and they’re small and it works. Of course it can work. Like that’s not nothing’s absolute, of course. But if we’re talking about in general what’s easier like running these companies are so hard there’s so much it doesn’t go right. There’s so much to figure out. Like it’s just is so many things running against you. B2C is just a lot another thing against you. So don’t do that. Like businesses have money to spend and $50 a month doesn’t matter. And if it if it has any value at all, it doesn’t matter. Okay. That’s not true of a customer. $50 a month to a consumer that’s like, oh, my God. Like, I can’t like trying to think, what do I even do? Like huge high bandwidth connectivity at home. And even then I kind of complain like it’s hard to even point to things that I that a normal consumer spends that money like. It’s ridiculous. Yeah. Okay. And so what you’re driven into is, is free because everything’s free now for in consumers and very, very low cost. And again, that I think is death for small company. So this is why I think B2C for a small company, it just doesn’t match the other things that you want to have. And so it really you’re like stacking the deck against you, so don’t do that. The other thing I’ll say about the market is I’m in sort of Silicon Valley of DC land. They talk about, Oh, I want a huge growing market with lots of that it and so okay that makes sense. I mean if you want to if you want to make a company with $1,000,000,000 a year in revenue, which for example, we’re trying to do, then kind of by definition, there needs to be a massive market of people saying like, I mean, how could it what else could be right. So so that’s that’s fine. And and sort of bootstrap or small business folks, which, again, I count myself as well because that’s my that’s my heritage. And I also had started, by the way, and then we change course, but we tend to do the opposite. We say no, see, that doesn’t matter to us because we don’t care about big markets. We only do small market and be really focused and niche and win. I actually don’t agree that that feels like a nice little thing. I don’t agree. I actually want a big market also, even for a tiny company. And the reason is not because you need $1,000,000,000 of revenue, but rather huge markets means tons of niches, tons of kinds of customers to go sell to, tons of ways of going and finding those customers on tons of different kinds of products. They’ll want tons of different ways you can differentiate or for that matter, a lot of times you can be not differentiated in a big market and still make plenty of money. That’s correct. How many how many unzip tools are there? Yeah. How are they differentiated between the hell knows. So yeah.
Bronson: Term of free is some cost money, you know?
Jason: You know. Right. Yeah. Nevertheless, Nico Maxx made $1,000,000 a year with WinZip. Yeah. So I think a free to look at things like productivity tools or email things or even things like for consultants to track their time. Right. I’m trying to offer like project management. There’s all these things where it’s a huge market and you can totally make between, again, 100,000 a year, $1,000,000 a year. Just having another project management software is an execution, even if it’s not really differentiated. That’s my point, though. Good. Again, everything’s too hard. Yeah. So I want a space where if even for a tiny company where if something doesn’t work out, there’s is another niche right next to in fact, there’s five niches right next to me. I could go try. And if this marketing channel doesn’t work, that’s okay, because there’s, like, 50 of them to go try. Mm hmm. Right. So that’s why I like a big market, because there’s lots of options. And to me, optionality is how you de-risk any kind of company. And so even for a small company, like a huge market. So there’s lots of other things I think about, about what does it mean to have a market that’s quote unquote good. And again, like, none of these things are absolute, but they’re just like, okay, but you’re going have to overcome something. If you don’t, you know, you know, and maybe and that’s fine, because you can be perfect on every dimension and overcome some stuff that’s cool. But like, you know.
Bronson: It’ll make it harder than it need to.
Jason: Yeah. So big, big marker, just like the book say, but for different reasons. Yeah. B Those are two parts of what I think a good market is for any company.
Bronson: That’s great because I mean, it flips the paradigm on its head the way a bootstrap or a self-funded person thinks. They think, I’m not going after big market because I’m not VC money when it’s like, No, no, big markets are good markets, whatever company you are just for different reasons maybe. Yeah.
Jason: Thanks for great advice. The focus is true, like pick picking a niche you can focus on and really that’s still true.
Bronson: But then you have a niche right next to it. If that one doesn’t work.
Jason: In big market, there’s a hundred of those or a thousand of those. Yeah. So if it doesn’t work, you have another one. Or if it does work, you still have another one exactly like it. Right. So it’s just that even though you want to focus like this is the playground you want to be in.
Bronson: Absolutely. Because if there’s only one niche period, it either works or it doesn’t.
Jason: That’s it is doesn’t it’s over. Right.
Bronson: So zero sum game. That’s awesome. So let me read the sentence again now that we’ve kind of worked through it just to kind of sum it up in everybody’s mind, you want predictable acquisition of recurring revenue with annual pre-pay in a good market. Yeah, that’s awesome. All right. So Jason, this has been incredible interview. I mean, I’m going to re listen to this myself, even though I’m here right now because I need to learn the stuff. I need to hear it again, though. May I ask you one last question? As we close out here, what’s the best advice you have for any startup that’s trying to grow? And I know it has to be high level. You don’t have the specifics. You don’t know what kind of company they are. But the vague fortune cookie advice, what would you tell a startup is trying to grow on?
Jason: Well, there’s a couple of like kind of common patterns or anti patterns that I and so I mean, obviously, all these kind of things like you want to know about the company, want to know about the founding founders, what they want out of it, too, to give good advice. But there’s certain patterns I see a lot that are often the right advice. I’ll just shoot those out and everyone have to decide if that’s correct advice for them. One thing is actually about taking advice. You ask for advice for them. Someone gives them an answer. If that’s true, that means they haven’t really listened and sought to understand what you need from your company. And then they’re doing a knee jerk regurgitated thing like go experiment or go get data or go like that. That means it’s a non-answer. So take advice from people to actually dig in and ask about your goals, your things, your state, your markets, and then give you some answers. That’s real advice. That’s one to raise your prices we are talk about that’s common. So I can say three know what it is that you want out of the company and this is going to sound kind of new and sort of stupid. But I’m an engineer and so if I’m saying it.
Bronson: Then it must be true.
Jason: Yeah, some people just, you know, they kind of go in saying and look, I did exactly the same thing by I think people like me, okay? And everyone else too. We go and like it, just excited that we’re going to be masters of our own destiny. We have a product, we’re going to say, fuck you to our boss. We’re going to we’re going to build a product the way we want, we’re going to, etc.. Right. And that’s all true. We’re going make money. That’s all true. But we don’t kind of consider what is it that we want to get out of this business anyway? What is the end result? And it’s like not having a job. It’s like, okay, you don’t have a job now, but what if you hate what you’re doing? Or what if you’re building a product that doesn’t matter to the world and that may be okay. You might say, Look, I want to make a ton of money. I could care less. And you go, Great, you should either build a company that way or go work on Wall Street. Yeah, you know, that’s fine. That’s fine. Just now you know what you’re ready for. But a lot of times people don’t know what they are. And then when they achieve success with the business, they’re unhappy. They’re unhappy, they resent it. They want to sell it, get rid of it, or they just hate life. And a lot of times it goes back to their spouse, their family, their employees. And it’s extremely common, especially if the business if if, for example, one of the things that makes you fulfilled is actually writing code or actually doing marketing things. And then suppose you build a business in which you have 100 employees and you’re the CEO, you’re never going to do that. And you can be very unhappy and even incompetent potentially in that role. So again, it’s not about right or wrong. There isn’t a right or wrong per se, but not knowing about yourself. What is it that you want out of this? What what would be your ideal situation? And then starting from there and backing into and therefore, how will I build a company around that? Otherwise the company just sort of gets built in whatever form or fashion. And again, it’s only up to luck whether that ends up in a place that you actually want in. After all, isn’t the promise of entrepreneurship to get to build the thing that you actually want to do? And that could mean selling it to, by the way, building things and selling be what you want to do. And that’s what I did with my previous companies. I don’t want to run a company for 30 years. That’s what I want. That’s again, like it’s not right or wrong, but knowing what it is that you want out of it and then building it around that, that’s how you would actually achieve fulfillment in life through this, which is the point that we don’t think about or don’t talk about. So I feel like nobody thinks about that. Including me. Mm hmm. So it has to be told you think about and take it in, and. And then you start getting comfortable around. Yeah. I want to build a little company. It’s just me. And I don’t want a place that sucks. Mm hmm. And then. Great. Now I can ignore everything that comes out of Silicon Valley, and I can cover all the people that ask me about funding. I give you like I’m free where you do. Right. That’s amazing. Or on the other hand, you want to build next Twitter. Fantastic. Then don’t listen to hack to most of what I said in the interview, because it’s a whole different path if you want to be Twitter. Right. So that’s cool. Just you got to decide so that you’re building the kind of life that you want and you’re taking the right kind of advice and not straddling, you know, the path, you’re picking your path and then trying to build down that path and not some optimizing by sort of you’re hedging or not not deciding. Right. That’s suboptimal. So that’s a common pattern.
Bronson: Now, that’s great advice, Jason, and it’s great advice to end on. Thank you again so much for coming on Growth Hacker TV.
Jason: You bet. Thanks for having me.