Scott Brinker is the Co-founder and CTO of Ion Interactive as well as Founder and Editor of Chiefmartec.com, the most widely read blog on the web focused exclusively on the intersection of marketing and technology. Today Scott is considered one of the preeminent thought leaders in the world when it comes to marketing technology. We caught up with Scott to get his take on what we’re building at Outseta and to learn how he thinks about the technology related challenges that start-ups often face.
Geoff Roberts (GR): Scott, for the sake of our readers tell us a little bit about who you are, what you do, and how marketing technology became such an important part of your professional life.
Scott Brinker (SB): Sure thing, Geoff. I’ve been in this industry for 20+ years now, but I became really fascinated by marketing technology as I saw two business functions that previously were very siloed start to collide - IT and marketing. As these functions started to intersect more and more, it became clear to me that there was very little knowledge shared or best practices around how these functions could support each other’s needs effectively. There’s no doubt that marketing teams today need to be staffed with technical resources, much more so than they did previously - I refer to these people as marketing technologists. So the merging of these two functions was really what gave birth to my blog, Chiefmartec.com.
GR: You are perhaps most well known for the infographics of the Martech landscape that you put together each year - over 5000 Martech vendors in 2017! How does this make you feel? Do you perceive this to be a problem? I’m curious, generally, how you think about this.
SB: That’s a good question. At the end of the day, there are both pros and cons to this. On one hand, there are simply so many options out there - the more than 5,000 marketing technology vendors that you mentioned - it’s overwhelming. There are simply so many options for any one category of marketing technology, that there’s a problem with over-saturation and it can be difficult to identify the technologies that your business actually needs. On the the other hand, marketers have access to more technology and tools than ever before. For pretty much any marketing touch point or need, it’s pretty likely that there’s a software tool out there that can fulfill your need. So the pro would simply be the accessibility of tools and the wide range of functionality that the marketing technology landscape now provides.
GR: Former SAP exec and new Marketo CEO Steve Lucas recently made the following comments…
“What’s crushing the marketer right now is that every time there’s a new consumer touch point, there’s a new point solution for it,” Lucas said. “It’s overwhelming the marketer.” The problem with that, he said, is that “you lose any context on who the customer is.”
What is your take on Steve’s comments, and what do you think will emerge as the solution to this problem over time?
SB: I agree with Steve’s comments, but I do think that there’s more than one path forward. We’ll see a couple of different types of solutions continue to emerge as we consider the challenge that comes from an ever growing number of consumer touch points.
The first is going to be the all encompassing platform play, much like what you’re working on at Outseta. There are other companies working on this sort of approach as well. The idea here is to build a single system that’s wide enough to cover all of the major touch points, or at least the most important ones. This has the advantage of companies only needing to pay one bill, only needing to work with one company for support.
The other route is continuing to integrate any number of point solutions that are more specialized and do one thing really, really well. There’s a growing number of companies that are either data warehouses, or pre-built system integrators, that allow you to effectively make use of data coming from disparate systems in a meaningful way.
GR: How do you think about the differences between solving these issues at an enterprise versus a start-up level? My own take - while the costs and number of point solutions that need to be integrated are all larger demands within an enterprise, the importance of solving these issues within a start-up may actually yield a bigger return. Start-ups don’t have dedicated resources to devote to this work, so it comes with an opportunity cost of technical co-founder time. They are also more cost sensitive than their enterprise counterparts, and the benefits of having a clearer understanding of their customers and business may be that much more beneficial in helping them find initial traction and scale their business successfully. What are your thoughts?
SB: I agree with you 100% with regards to their being a significant opportunity cost for start-ups. I don’t think the real issue for start-ups is the integration work associated with integrating a stack of point solutions. Most of that integration work isn’t terribly difficult, but it is work that needs to be thought through carefully. Which systems actually need to be integrated so that the data can be put to use in a meaningful way? How do you actually intend to use the data? What real world business process, or use case, or workflow are you trying to support? I think it’s most important that the real world use case is carefully considered so that you’re actually getting business value out of integrated and accessible data. At the end of the day start-ups are all about prioritization - there’s not enough time in the day to do everything. Start-ups are also going to be more resource constrained in terms of dollars, in terms of people, and in terms of time. If you can provide a single platform that saves start-ups time, then that’s very valuable.
It’s worth noting too though that start-ups have a huge advantage - they are starting from a blank slate. They have the opportunity to consider their needs and deliver a tech stack that they build to address those needs from the ground up. That’s huge. In almost any other business there are going to be legacy systems in place and an existing way of doing things. Not just from a technical perspective but also from a cultural or change management perspective that can be very, very challenging.
GR: So the concept for Outseta is to provide basic functionality across CRM, customer support and knowledge base, email marketing, subscription billing, and reporting - the basic functionality that SaaS start-ups need and nothing more. It’s a platform play, and we’re going wide rather than deep in any one area. This definitely flies in the face of “conventional” start-up wisdom, which often suggests that you do one thing very well, very deep. I’ve certainly heard this from many smart people whose opinions I trust - what’s your take?
SB: Everybody has heard the “do one thing and do it really well” mantra. You’re either choosing a high level of specialization, or less specialization with a broader reach of functionality. I don’t see either option as being correct, or more right, than the other - I think it’s simply a matter of approach and the strategy you are using to deliver value to whoever your customers might be. If your customers only need basic functionality across A,B,C,D, and E and you can deliver that to them in one platform that’s built well with these components integrated from the ground up, I’m all for it.
GR: Is reducing your technological footprint, within any company, an import thing to be thinking about in and of itself? Why or why not?
SB: It’s definitely worth considering, but I think it’s most important to focus on what technology you need to help you achieve your business goals, whatever they may be. If you’re too worried about your technological footprint, you could end up with fewer tools, or not the right tools, that you really need to support your business objectives. The converse is true too - you can go way overboard and have all sorts of software that’s simply overkill for your needs. But again, if you can pay fewer bills and work with fewer vendors while still supporting your business needs appropriately more often than not that’s a good thing.
GR: How important is or isn’t delivering on a single, 360 degree view of your customer? It can certainly take companies a lot of time, effort, and money to get there - is it worth it, or is this an aspiration that’s not as important as it may seem?
SB: I think it’s very important if it’s delivering a view of your customer that’s actually useful in a real world setting. For example, it used to be that there was one marketing message that businesses pushed out to just about everybody. One of the things that marketing technology has really delivered is the ability to better segment and personalize your marketing messages to buyers with different characteristics, personas, etc. Say you want to use marketing automation to send different messages to different customer segments - you’re probably going to need your automation tool to be integrated with your CRM and have context on those different customer segments. There’s real value in having that context; that better, more complete understanding of the customer.
The flip side here is it’s easy to go overboard. There can be prospect or customer records with crazy amounts of detail, tracking every touch point imaginable, but if you’re not using that detail in any specific way then it’s just a longer, more detailed record than it needs to be. I would start by making a list of the data from different types of point solutions that most often has to be integrated to help support a business goal within a SaaS business.
GR: One thing we learned during our idea validation interviews is that start-ups solve for their immediate need - if they need to send an email campaign, they buy Mailchimp. If they need to start billing customers, they buy Recurly. They are not thinking at an early stage about buying a platform to solve multiple needs that they’ll have at some point in the future. From a go-to-market perspective, how would you solve for this?
SB: I don’t think there’s any one trick here, I would simply lay it out for them. You’ve worked in a number of SaaS start-ups before, and you’ve identified 5-6 needs that are common to most of these businesses. So the pitch becomes, “You only need functionality A today, but we know that you’re going to need B, C, D, and E in the near future. By working with us you’ll get functionality A today, but the rest of the functionality you need will be there for you whenever you’re ready behind the same login credentials.” This is a simpler solution and if it saves start-ups that ever valuable time, I think they’ll get it.
GR: Knowing what you now do about Outseta, tell me why you think our idea sucks. Or if you insist on being nice to us, what’s the biggest challenge you think we’ll face?
SB: I think the biggest challenge for you is simply going back to the size of the marketing technology landscape - these are so many good options out there across each of these categories. There’s some irony here in the sense that you’re offering a system that out-of-the-box should help more SaaS companies launch successfully. If they have a good business idea, the promise is your company can increase their odds of being successful and some portion of them will undoubtedly be in the marketing technology space!
GR: Now let’s flip it - what do you like about our idea? What concept excited you or do you think at least shows promise?
SB: All of the things we’ve talked about - I think it’s a simpler solution and if it can meet a start-ups basic needs, it will give them more time back to focus on other aspects of their business.
GR: I am personally of the belief that most companies understand the impact that well integrated and effectively used marketing technology can have on their business. They get it. But I do think that most companies tend to underestimate the resources, time, and costs associated with evaluating, buying, integrating, and maintaining their tech stack over time. How do you educate companies on what it will take to deliver on their vision, and what are the common traits you see in the companies that are most effectively leveraging and supporting their marketing technology?
SB: I think there’s really two things of note here. The first is the work associated with figuring out what business processes and campaigns you actually need your technology stack to support. There’s real strategic thinking that needs to be done here, and it tends to not be a one-off project - you’ll need your tech stack to support an ever changing set of business needs. I agree that most companies tend to underestimate their needs in this regard. The second is simply about the structure of modern marketing teams today. I’ve written a lot about the “Marketing Technologist” role, but I don’t think the structure of modern marketing teams has necessarily kept up the requirements of the marketing function in many businesses.
GR: What’s most exciting trend/characteristic/movement to you that’s happening in the Martech space right now? What gets you giddy thinking about what 2018 holds?
SB: There’s so much it’s hard to pinpoint any one thing. There are totally new types of customer touch points being created every day, like virtual reality experiences, just to give one example. Another huge one is just machine learning and data science tools making data not only accessible, but also highly useful to marketers with so much less effort than was required before. If you look across the various categories in my marketing landscape infographics, there’s exciting innovations happening just about everywhere.
GR: We’ve gotten pretty technical in this conversation - what’s something about Scott Brinker the person that those that know you only by professional reputation wouldn’t know or expect?
SB: I was a music major, which most people probably wouldn’t guess given how technical my job is today. But I think there’s an interesting parallel between orchestras and how businesses used to be run, versus how they are increasingly run today. In an orchestra there’s one person up front, coordinating the efforts of many musicians to deliver the final product. I see that increasingly as the old way of doing business. Today, I see a growing number of companies operating without that conductor, instead leveraging a number of small teams that are all focused on their own objectives. Think of this more a a jazz band, where everyone is doing their own thing but there’s enough structure there for it all to come together beautifully. I’ve always enjoyed that parallel and I think it’s true. I play keyboards and a bit of guitar today.
GR: Thanks, Scott!
We’ve talked quite a bit on this blog about our desire to build a self managed organization. Self management depends heavily on transparency - everyone in the organization is enabled to make decisions, including spending company money, because everyone is operating with all of the information available. With that in mind we thought it would be both fun and appropriate to take a closer look at our expenses now that we’re six months into building Outseta. This exercise was a valuable checkpoint for our existing team, and let’s face it - we’d like to work with some of the people reading this post in the future - so we figured we’d start giving you access to all of the information available now.
The graph and breakdown of our spending shown above is from Mint.com. We’ve spent $4,702.85 to date. That includes $1,541.18 on “Food and Dining” - this is mostly Dave & Dimitris getting lunch together when they work from Dave’s house. The $178.88 spent on “Entertainment” was primarily a round of golf that the three of us played together when I was in Boston last.
Where this is most interesting (and hopefully valuable) to other SaaS start-ups is looking at what we’ve spent in the broad category of “Business Services.” It’s interesting to look at both the timing of these expenses, and the breakdown. Some highlights are below - they are listed in the order in which we first incurred an expense with each vendor.
My initial reaction to this table? It’s fairly remarkable how little overhead is needed to start a SaaS company. It’s worth noting that we’ve chosen to bootstrap the company, and have made a pretty concerted effort to keep expenses low to date. For example, we are all using computers we had purchased on our own and we are not yet paying ourselves at this stage (we are working for sweat equity).
Oh, and Dave and Dimitris really like Pure Cold Press in Brookline - they’ve eaten lunch there more than anywhere else (6 times!). They even brought me once the last time I was in Boston - good place.
We’ll circle back at the end of the year and publish a similar update focused on our total expenses in our first year of building Outseta.
By Dimitris Georgakopoulos
With this post I want to share some highlights from my recent trip to the Giffre Valley of the French alps in a small village called Samoens. The week was organized by The Happy Startup School whose mission is to build a community of purpose-driven entrepreneurs and changemakers. Alptitude is the group's flagship event and brings together 25 purpose-driven entrepreneurs and changemakers from around the world for a unique, meaningful experience in stunning natural surroundings. Their next event is in Mt. Hood, Oregon in October.
The event was nothing like I’ve ever experienced. With a loose agenda the organizers left space for the group that attended to explore the areas that they were most interested in. People were asked to let the group know what they need help with and what they could offer the group. Part of the time was spent on topics that the group brainstormed and wanted to talk about; part of the time was spent 1-on-1 with other attendees getting to know each other; and the most significant portion of the time was spent on outdoor activities that exposed us to the beauty of the valley.
The day typically started with a mindful activity like yoga, meditation or pilates followed by breakfast. Then we spent 2-3 hours on topics that attendees had experience with and wanted to share with the group. Some were more scripted presentations and others were facilitated discussions. After lunch we would head out to experience the area by hiking, biking or a nature walk. The outdoor activities gave a lot of space for folks to get to know each other well. My favorite activity was hiking up to a refuge at 1,763 meters and spending the night there. The refuge is taken care off by a family and provides food and shelter to hikers. There are hundreds of these refuges in the Alps and one can plan hiking trips and visit a number of them in a trip.
I signed up to attend this event without a specific goal in mind. I was attracted to the unstructured agenda and the opportunity to meet other like-minded entrepreneurs. The setting and the outdoor activities was the icing on the cake. The event delivered everything promised and then some. The conversations and discussions validated and reinforced what I’ve come to appreciate about life in the last few years. The best way to live, in my opinion, is by focusing on the process instead of the outcome. The journey not the destination. Optimizing for the long term over the short term. Couple that with leading a creative life, focusing on intrinsic motivation, and spending time using your talents to build something that gives you joy and pleasure at each moment. Finally, do all the above in the presence of friends that share your values and you have the best opportunity to live a truly fulfilling life. I left the week reinvigorated and with a number of new friends.
Below is a collection of resources organized by topic that sparked my interest during the week.
Gini is a German company whose purpose is to free mankind from paperwork. The company has enjoyed success by partnering with a number of banks and building a solution that enables customers of a bank to pay any invoice that they receive electronically. The company has primarily had success in one market segment and has grown its team to close to 30 people. They recently began to consider other market segments and also began questioning how they should organize the company to best be able to fulfill its vision and build the best possible working environment. The company decided to organize around a structure that is as flat as possible and decentralizes decision making. The Gini handbook is an inspirational resource that covers how the company organizes and conducts day to day business.
Maptio is a startup that is focusing on helping self managed organizations visualize their organization. It’s for leaders who want to find ways to work and organize without traditional management hierarchy or the overbearing rules of Holacracy. The product lets you see who has taken responsibility for what; who's helping who; and how the big vision breaks down into its component parts. The company is in private beta and is looking for prospects.
Agile manifesto is widely known but I wanted to include it in this blog post as a reminder. It came up in a number of discussions and I had forgotten how inspiring the main 4 principles are:
- Individuals and interactions over processes and tools
- Working software over comprehensive documentation
- Customer collaboration over contract negotiation
- Responding to change over following a plan
While items on the right are valuable it’s the items on the left that should be focused on more.
The Entrepreneurial Operating System (EOS) is a complete set of simple concepts and practical tools that helps entrepreneurs get what they want from their businesses. The system helps get everyone in an organization on the same page, instills focus and accountability throughout the company, and helps create a cohesive, functional, healthy leadership team.
The entrepreneurial lifecycle
Jeroen Meens was kind enough to share his thoughts on the entrepreneurial journey. He discussed what to expect from each stage and what you should be doing.
StrengthsFinder is a tool that helps you find and develop your talents into strengths. It's based on decades of research and documented success in multiple case studies. Talent is your natural way of thinking, feeling or behaving. When talent is combined and developed with knowledge and skills, it becomes a strength. Strength is performing with near-perfect results on a consistent basis. To take the assessment allocate about 30 minutes of uninterrupted time. For better results work with an experienced coach like Jo Self. I am particularly intrigued to use this tool for parenting and to help raise my kids to discover and strengthen their talents.
I had the chance to experience a short version of the workshop that Tom Nixon runs on the topic of money. The workshop was very insightful and reinforced my beliefs about money. I came out with new tools that help me identify and keep at bay undesirable ways of thinking and projecting myself when it comes to money.
Once Upon a Doug
I had the pleasure to meet the founder behind this non-profit project. At the moment this project provides regular monthly income for 15 women. The goal is to grow that to 200 by 2020 and he needs your help. Check out the inspiring story via the link above.
Since 1979, Jadav Payeng has been planting hundreds of trees on an Indian island threatened by erosion. In this film, photographer Jitu Kalita traverses Payeng’s home—the largest river island in the world—and reveals the touching story of how this modern-day Johnny Appleseed turned an eroding desert into a wondrous oasis. A truly inspiring story about the impact one person can have.
The Incredible Edible project is an urban gardening project which was started in 2008 by Pamela Warhurst, Mary Clear and a group of like-minded people in Todmorden, West Yorkshire, England. The project aims to bring people together through actions around local food, helping to change behavior towards the environment and to build a kinder and more resilient world. In some cases, it also envisions to have the groups become self-sufficient in (local) food production.
Cycling Without Age
Cycling Without Age is a movement started in 2012 by Ole Kassow. Ole wanted to help the elderly get back on their bicycles, but he had to find a solution to their limited mobility. The answer was a tri-shaw and he started offering free bike rides to local nursing home residents. He then got in touch with a civil society consultant from the City of Copenhagen, Dorthe Pedersen (now Cycling Without Age), who was intrigued by the idea and together they bought the first 5 tri-shaws and launched Cycling Without Age. The company has now spread to all corners of Denmark, and since 2015 to another 28 countries around the world.
Your one stop shop for adventure planning in the Giffre Valley - this week would not have been successful without the help of Alp Adventures. Most of the outdoor activities consisted of exploring the trails of the Grand Massif either hiking or on bikes, and were organized by our guide Arno de Jong.
I had the pleasure to meet the founder of this company that has transformed her home into a place that folks can use to experience the wonder of the area. Sally-Anne organizes customized retreats to serve your needs. Check out her cool site for more info.
Dan lives in the area and came over and gave us a slideshow and a funny narrative from his experiences travelling the globe to capture awesome moments (he’s a photographer). He represents the epitome of living a full creative life. I encourage you to check out his adventures.
Other fun activities included….
Yogic laughter - A fun group activity
Coupe des Alpes - An automotive event
Naturally seven - The art of becoming an instrument using the human voice
While it may sound a bit (and I admit, it felt a bit this way) like I just spent a week gallivanting around the French Alps, the more I reflect on my experience the more I realize how valuable it was. I have spent my career in an industry obsessed with “innovation,” yet when I reflect on the industry conferences and meet-ups I’ve attended over the years I see anything but innovation.
What is there to the “standard” conference format of cheap hotel rooms, quickly erected corporate booths, and regimented presentations that is so effective? The inspiration that I derived from a week spent in nature with a small group of 25 reinvigorated me in a way no other event has. The relationships and friendships that I formed, both from a personal and business perspective, will benefit me for months and years into the future. When was the last time you could say that about any event that you attended?
As I continue to build Outseta I plan to look for opportunities to borrow heavily from Alptitude’s format. Whether it’s putting on customer events or organizing a company retreat, I believe that this format can be both more enjoyable and more productive than what’s today so often considered “the norm.” My hat is off to the team at The Happy Start-up School for so fully embracing their purpose driven mission with this event. It was my pleasure to attend!
This month’s company update is focused entirely on pricing. Our goal is to share the process we used to come up with our pricing, to publicly share Outseta’s pricing for the first time, and to share our thinking and values around how we’d like to price our product well into the future.
Let’s start with our process.
When thinking about pricing, there are three useful barometers that we considered:
- Pricing based on persona
- Pricing based on the market or competitor pricing
- Pricing based on value delivered to the customer
Let’s tackle each of these one at a time.
Pricing based on persona
Considering our pricing based on the persona of our potential buyer was relatively easy - we are going to be selling to early stage, SaaS start-ups. We want our pricing to be accessible to bootstrapped companies (like ourselves). The companies we’ll be selling to may even be pre-revenue, so we know that they are going to be highly price sensitive.
On top of that, there are a slew of point solutions out there already targeting this buyer persona and it’s the norm for these products to be free or very inexpensive. Hubspot CRM, for example, is free. Mailchimp’s email marketing software is also free for up to 2,000 subscribers, with a cap on the number of emails that can be sent. You get the idea. This led us to...
Decision #1 - We wanted the eliminate the barrier to entry and allow companies to start using our product for free.
We think this is important in allowing us to effectively compete against the other point solutions in the market. Perhaps more importantly, we know that we’ll be competing against more established and better funded competitors - as a result, we’re designing our go-to-market strategy to keep customer acquisition costs as low as possible from the get-go. Rather than relying on a time-constrained free trial model with an inside sales team following up on those leads, we’re going to focus on building a product qualified leads (PQL) model where users can access the software for free and essentially qualify themselves based on their engagement level with our product.
Pricing based on the market or competitor pricing
Pricing Outseta against the market or our competitors was a bit trickier, as we had to look at the overall cost of a handful of point solutions against the cost of our platform. There were countless permutations, but here’s a pretty representative view.
*This table does not include subscription billing pricing
Let’s start by acknowledging the above table is imperfect - these companies all price their products based on different value metrics and have different thresholds for users, contacts, customers, etc. Beyond that we’re not talking about complete parity of features or functionality.
All we’re trying to do here is illustrate that there are countless different permutations, options, and prices… and I think the table speaks for itself in showing that it’s very easy for a start-up to lose sight of what they’re actually paying at any given point in time for the combination of point solutions they select. Which led to...
Decision #2 - We wanted our pricing to represent a great value against even the least expensive combination of these point solutions. This is important because we won’t offer true feature parity; just the basic, core functionality that a start-up actually needs (we don’t and will never support emoticons, sorry). And we wanted our pricing to be easy to understand so you’re never surprised when you look at your bill.
Pricing based on value delivered to the customer
More than anything, we wanted our pricing to be based on value delivered to the customer. We think this is simply good business and if our customers are truly getting significant value out of our product they will have no problem paying us for it. The difficulty here was deciding on how we can measure value delivered to the customer - what was our value metric going to be? With such a broad range of functionality within our product it could be anything from number of users, contacts, customers, revenue, support tickets answered, or emails sent.
We initially came to the conclusion that users was the value metric that made the most sense. As a start-up begins to grow, they inevitably need to give more salespeople access to their CRM, more customer service people access to their support ticketing system. What our customers pay us should scale up in parallel with the growth of their business, and users felt like a more real-world indication of growth than simply growing the number of “contacts” in your database.
That said, we are a new email marketing provider and need to be cognizant of building a strong “sender reputation.” Basically what this means is we need to safeguard ourselves from bringing on companies that will try to use our platform to send email broadcasts to large lists of people who did not give them permission to email them. When this happens the emails inevitably have high bounce and complaint rates, which in turn hurts our sender reputation and lowers the deliverability rates of our email marketing tools. This risk led us to...
Decision #3 - Our value metric is going to be a blended model of both users and contacts, because both the number of users and the number of contacts should naturally grow as a start-up gains traction, begins to hire more people, and begins to market to more folks. Our plan is to give our users more than enough contacts for the stage that they are at, but to provide some sort of cap in the vein of building a strong sender reputation and ensuring our email marketing tools aren’t abused.
Outseta’s Pricing - Where did we end up?
Reviewing the above decisions, we know that we wanted to…
- Offer a free plan so there’s no barrier to entry to get started with Outseta.
- Offer a fantastic value, even in comparison to the least expensive combination of point solutions. And have an easy to understand pricing structure so you always know what you’re being charged.
- Use a blended model of users and contacts as our value metric to effectively mirror the traction and growth of a start-up.
Without further adieu, here’s a link to our first pricing page.
Let’s unpack this a little bit - everybody who wants to use Outseta will start on our “Founder’s Plan” which is free forever for 1 user and up to 500 contacts. This is not a time constrained free trial, or a limited functionality offering - you’ll get access to all of our features until you outgrow this plan. As a small, bootstrapped start-up ourselves we’ve been working on Outseta for six months now and would still be on this plan - we wouldn’t have paid a penny, and we think that makes sense given our stage.
Eventually as we start bringing on more salespeople, more support users, whatever it may be we’ll need to scale up. Or maybe we’ll simply have grown our database beyond the 500 contact limit. Whatever the trigger is, the price is the same - you’ll pay $30/mo (billed annually) for an additional user which includes 2,000 additional contacts. Free to start, easy to understand, and it scales with growth.
Now, let’s look at how our pricing scales as a start-up grows versus that least expensive combination of point solutions (Hubspot CRM, Groove, MailChimp, Profitwell).
Total Price Per Month - Outseta vs. Point Solutions
We think any way you cut it, Outseta is a great deal.
What we think we got right and what we’re not sure about
Any time you release a new product into the market for the first time you’re taking an educated guess at best in terms of how the market will respond to your pricing. Despite the fact that we’ve given this a lot of thought (enough to devote a 2000+ word blog article to it), that is absolutely true in our case as well. There are three things that we feel really good about that we haven’t discussed yet.
- We’re giving a 25% discount for selecting an annual versus monthly plan. While the dollar amounts here are small, that’s a significant discount. We’re selling to start-ups, which we know is a population that will naturally have a high churn rate. As such, we want to incentivize people to make that larger commitment to our platform which will help us raise our average customer lifetime value (ACLTV).
- Despite the fact that we already win on price for the price sensitive customer, we think our customers will realize enormous value from gaining a single, “360 degree” view of their customers. They’ll be able to better understand their customers and their business, which is imperative to an early stage start-up.
- Our customers will also realize significant savings in terms of time spent evaluating, integrating, and maintaining a handful of point solutions. Over time the cost of these activities becomes, very, very real in terms of employee time. Your VP of Engineering has better things to do.
All of that said, we do have a mild worry which was rightfully raised by Patrick Campbell of Price Intelligently in his article Stop Per User SaaS Pricing You’re Killing Growth. In short the point that Patrick makes is if your pricing is tied to the number of users, then companies will try to limit the number of users to limit their costs. If you think about it, you should want everybody possible to be using your software because that increases the stickiness of your product and makes the customer less likely to churn. We absolutely buy that and it’s something we’ll monitor closely going forward, but our thinking is that with our blended model companies that are growing will either need to genuinely add more users or increase their number of contacts.
All things considered, we’d betcha we didn’t get our pricing perfectly “right” this first time around. Almost nobody does. FrontApp published an article we found useful on derisking your pricing strategy that gives an interesting perspective on the path they took to optimize their pricing. It’s worth the read and started an internal discussion amongst our team around the commitments we’d like to make to our customers when it come to pricing.
We know that we don’t want to be the company that nickle and dimes you, raising prices every time a new feature is delivered. We also don’t want to be the bait and switch company, whose prices start out low and then increase almost every year in an effort to keep up with investor’s revenue expectations. But we do want to reserve the right to experiment with our pricing consistently; it’s too important not to. Our thinking is simply that as we run future pricing experiments, we’ll do so only for new customers and will honor the pricing that our customers originally signed up for. Across the board pricing changes will be very few and far between.
So now to put the ball in your court… what do you think? If you are someone who has purchased the point solutions we’ve reference in this article or just someone who has thought quite a bit about pricing SaaS products, we’d love to get your take. Please share you thoughts with us via a comment below.
BJ Lackland is the CEO of Lighter Capital, a Seattle based company that provides revenue based financing to tech start-ups. Lighter Capital typically invests $50,000 to $2mm of growth capital into businesses without taking an equity stake in the company or a board seat.
Geoff Roberts (GR): Thanks for taking the time to chat with us BJ. The funding model that Lighter Capital uses is really interesting and might be a great alternative for our audience of early stage SaaS companies. Why don’t you start by walking us through how revenue based financing works?
BJ Lackland (BJ): Revenue based funding is an alternative to the typical model of angel or venture capital funding that’s so common in tech. This funding model allows companies to raise growth capital without giving up equity or a board seat, so entrepreneurs maintain control of their businesses. Companies agree to pay a percentage of their revenue on a monthly basis until they repay their loan, and the amount that they repay is capped. What this means in practice is if your company has a good month, you repay a little bit more. If your company has a bad month, the payment is less. Typically monthly payments are 2%-8% of monthly recurring revenue, and repayments are capped at 1.35x-2x of the amount invested in the business. Repayment typically occurs over a 3-5 year period.
GR: When I first heard of revenue based financing, an analogy was made to how funding is raised in Hollywood when it comes to making movies. How did the idea come about to leverage this model in the tech sector?
BJ: There a huge need in the tech sector for alternative funding sources. Traditionally, the only growth capital available is equity investments from angels and VCs. But raising VC money is incredibly time-consuming and it’s like strapping a rocket to your back - you’ll either shoot to the moon trying to make investors a 10x return or you’ll blow up halfway.
The vast majority blow up.
That just doesn’t fit a lot of companies and entrepreneurs. Lots are great business people who want to build companies to last. Or they want to put off an equity round until later. Or they don’t have 6 months to spend raising VC money. Either way, there’s a huge opportunity to provide capital that is non-dilutive and yet still aligned with the entrepreneur toward growth.
GR: What problems does this model solve when you consider the typical model of VC/Angel investment that’s been so prevalent in the tech sector?
BJ: This model solves several important problems. To start, the non-dilutive nature of the model means entrepreneurs don’t need to give up an equity stake in their business, or a board seat. The second is we allow companies to spend substantially less time on the fundraising process - this can become a huge distraction to early stage start-ups whose time is better spent building their business. I heard a statistic that it typically take a start-up something like 60 meetings and 40 pitches to raise $500,000 from angels or VC firms. We offer companies seeking funding an easy online application, and the funding process typically takes 3-4 weeks. Last but not least, with this model entrepreneurs don’t need to hit a “home run” or have some sort of liquidity event in order for the investment to be seen as a success. This model works much better for entrepreneurs who are looking to build a sustainable business.
GR: What do you look for in potential investments? What’s the profile of your typical investment?
BJ: There’s really three criteria that we look for in potential investments. The first is a monthly recurring revenue stream of at least $15,000 per month. We’re typically investing in businesses that have anywhere from $200,000 to $10mm in annual revenue. The second is high gross margins - at least above 50%, but more often than not above 80% which is fairly normal in SaaS businesses. Last but not least, we’re looking for an indication of stickiness - products that are providing sustainable value which is evident through low customer churn rates.
GR: My understanding is your decision to invest in any particular company is based more on an algorithm and the financial performance/unit economics of the business than qualitative factors like strength of team, market opportunity, etc. Can you speak to the process you use in deciding whether or not to fund a business?
BJ: You’re completely correct. We’re really looking more at the financial performance of the company, the unit economics, and you know - is the company offering a basic, durable offering for the market? And certainly the management team is a piece - we want to be working with good people and good people are what drive good returns no matter what business you’re in. It’s not nearly as important to have an MBA from Stanford or Harvard; you don’t have to be fraternity brothers with a VC to get funding at all. We do background checks, we want to make sure the entrepreneurs understand their business well, that they can speak articulately about their business, that they have a good financial understanding of what’s going on when operating their business. What’s least important is are they going to go on to be the next Uber? I mean, we just don’t really care. We’re really focused on funding businesses that are solid, that are durable and are going to be around. And they’re able to scale up - one of the reasons we want to see high gross margins is we want to see that if they land a bunch of new customers they can scale this thing up from $2mm to $10mm in the next 4-5 years. If they do, this model makes a lot of sense for the entrepreneur.
GR: What have been some of Lighter’s most successful investments?
BJ: It’s interesting because when you think of successful investments for a VC fund it’s all about what was the multiple and what was the exit and was it a brand name? And we have a couple of those but by our very nature our upside is capped. For us as investors, sometimes the companies that do best with us aren’t exactly household names. The biggest brand name company that we’ve funded is probably Steelbrick. We funded them when it was 5 people, a virtual organization, and they were totally bootstrapped. The original entrepreneur brought in a new and highly experienced CEO, they raised a ton of money, and they ended up selling to Salesforce for $360mm. An incredibly great outcome for them. That’s probably the biggest name we’ve funded because of the big exit. MapAnything is another - they do geolocation on Salesforce and ServiceNow’s platforms and are growing like a weed. They also went on and raised a lot of VC money. But most of the companies we fund are small businesses that are well known in their niche industries.
GR: What involvement does Lighter Capital have with their portfolio companies post investment?
BJ: It really depends on the entrepreneur and what they want. The only thing they need to do is provide us with financial data and handle the payment. We try to make that light as possible, so we have software that attaches to their accounting software package so they can login to our portal and hit a button and do all the reporting. A lot of the businesses have a bookkeeper or a controller do that work. Aside from the reporting, where we are most helpful is planning out their financing, frankly. As opposed to a VC we don’t necessarily need to know the best VP of Sales candidate in healthcare tech in South Carolina. What we know is if you’re doing X million in revenue and have this kind of burn rate and this kind of growth rate, what kind of capital is available to you from which different sources? Whether it’s angels, VCs, banks, and probably how to introduce you to any of those sources. So we can help with strategy, mostly on the capital side. We’re also coming out with some BI tools for entrepreneurs - we’re learning more and more and more about what drives growth. For example, we can say what an acceptable churn rate is for a company with an ASP of $1,000 per year and we can share that information back with the companies so they can benchmark themselves and learn how to grow their businesses.
GR: This all sounds great, and I love the non-dilutive aspect of this model. But what are the disadvantages or downsides of this funding model? What happens with your investments that don’t do well? Who does this model not work well for?
BJ: We’re a creditor, we’re not equity so we get paid first. We’ll take a second position behind a bank, but we’re not equity so we get paid first if the business goes down and is not successful. That’s the legal side but we try to work with the entrepreneurs. The businesses we’re funding don’t have any hard assets so it never makes sense for us to go and try to force a liquidity event - there’s nothing to liquidate. Their real core assets are the fact that they have sticky, high margin revenue streams. And if things don’t go well hopefully they can cut their expenses and survive with a sticky high margin revenue stream and have enough money to keep the business alive and pay us back our principal. If we don’t get the full amount that we’re owed, we have to work with the companies to figure that out and we’re not always going to win. That’s the reason we have a large and diversified portfolio. We fund something like 10-12 business per month and funded 101 businesses last year. Our goal is instead of having what a VC might have - 10-20 highly concentrated positions - we’ve funded 160 businesses and accept the fact that with some portion of those we’re not going to get repaid.
GR: You spend much of your time with founders of early stage SaaS businesses… what technology related challenges do you see most frequently within these organizations?
BJ: I think the number one thing is finding good developers. That’s a key, and it’s hard in this market and you need to have the capital to do that. One thing that’s cool that you’re doing at Outseta is you’re simplifying a lot of the software offerings that SaaS start-ups need, and that’s going to save them a lot of money. Another thing is getting their product offering good enough to sustain customers. I’m sure you’re familiar with the lean start-up and the notion of minimum viable products, but the majority of our customers are B2B and they just need to get their products to a good enough place where they can not only attract but sustain customers without under serving their needs and having them go elsewhere.
BJ Lackland can be found on Linkedin, or on Twitter @bjlackland.
We’re back! Here’s what our team has been working on since our last monthly update.
We built our customer support and knowledge base tools
While we focused primarily on building our email marketing tools (email broadcasts and drip email campaigns) in Q1, we shifted our attention to building our customer support and knowledge base tools moving into Q2. The knowledge base tool is a searchable and easily organized home for product documentation and “how-to” content. It will be home to our own product documentation content shortly - we’re focusing on building out the “must-have” content that we’ll need to support the launch of our product. This will mostly focus around things like how to register for an Outseta account, how to reset your password, and documentation around how things like People, Accounts, Segments, and Custom Properties work in Outseta.
On the customer support side, we built a customer support ticketing system. Dave, Dimitris, and myself got together in Boston and spent a couple of days tearing apart customer support tools including Zendesk, Intercom, and Groove to inspire our own design. Here’s how our own ticketing system works.
- Any customer of ours can email support(at)outseta.com with any sort of customer service inquiry or question. They don’t have to navigate to any particular URL, screen, or form to submit a customer service request; they can simply send us an email from their email client.
- We receive the request in the “Support” section of Outseta. The email’s subject line displays as the topic of the ticket, and the body of the email shows up as the content of the ticket. We can then easily assign the ticket to anyone on our team and respond to the inquiry.
- Our response shows up as a personal, 1-on-1 email in the customer’s email inbox from whoever responded to the ticket.
While the support ticketing system is our first customer service oriented tool, it’s also worth noting that we’ve already taken into consideration how we are going to layer in support interactions from other channels in the future; for example chat requests and social media interactions.
We’re working towards a September launch date
One of the challenges that we face as we’re building our minimum viable product is that we can’t truly deliver on our stated value proposition until we’ve built basic tools across all the different functions of our product; CRM, email marketing, customer support and knowledge base, subscription billing, and reporting. While that remains true, we’re eager to get some real world user feedback. On top of that, we feel like what we’ve built so far - our CRM, email marketing, and customer support and knowledge base tools - would provide real value to an early stage SaaS business.
With that in mind we’re planning to launch the first paid version of our product including those components in September. There are a few reasons that we made this decision.
- We think there’s value in what we’ve built. We’ll be able to start getting real world user feedback and testing our initial customer acquisition strategies sooner by taking this route.
- While this functionality is already built, this gives us some time to work out details around things like account registration, product documentation, pricing, and billing.
- By publicizing our intention to launch this first wave of functionality in September, you will all help hold us accountable to that date!
The plan thereafter is to focus on our subscription billing and reporting functionality. By the end of 2017 we should have our minimum viable product complete, we should be delivering on our stated value proposition, and we should be ready to make waves.
We need your help! We’re looking for referrals to a handful of beta users.
With our September launch date officially out there on the horizon, we are starting to look for a handful of companies that would like to be “beta users” of our product. I put “beta users” in quotations because I think it really undersells what we’re after... “congrats, here’s your opportunity to be our test dummy!” Here’s what we are able to offer to any company that is referred to us.
- A basic, functional tool encompassing CRM, email marketing, support, and knowledge base tools.
- No cost - your Outseta account will be free for life.
- An advisor to your business. Dave, Dimitris, and I will make ourselves available to help you with your business in any way that we can. Just as you are helping us work out the kinks with our technology, we’ll lend your business our collective experience in everything from engineering to go-to-market strategy.
Here’s the ideal profile of the initial users we’re after.
- Ideally an early stage, SaaS business. If you’re at day one, that’s great. If you’re a little further along and are already using some point solutions but are willing to make the switch to Outseta, that’s great too - we’ll work with you to make that transition as painless as possible (we recently went through this process ourselves).
- If not a SaaS business, other subscription businesses could also be a great fit. Subscription “box” businesses (think BirchBox or Blue Apron) or subscription content businesses, for example, would likely be a good fit.
- If not a subscription business of some sort, any early stage business with a need for basic CRM, email marketing, and customer support tools could also be valuable to us.
So to put the ball in your court… do you know anybody that we should be talking to? You can email us or send introductions directly to either geoff, dave, or dimitris @outseta.com. If we start working with someone that you refer to us we’ll be A) forever indebted to you, and B) will pay it forward in some awesome way when Outseta takes off!
Further validation of what we’re building
While we’re eager to bring on some beta users and start running some customer acquisition programs to further validate our idea, it always feels good when external sources provide validation that we’re on to something. That happened a couple of times recently. The first was an unsolicited email from the Head of Growth at a Boston based start-up. Perhaps most importantly, this email came from someone that neither Dimitris, Dave, or I knew.
That one felt good! Another came from Zak Pines, VP of Marketing at Bedrock Data. Bedrock Data is solving a similar problem to Outseta, but with a different approach and generally a focus on later stage companies. I recently interviewed Zak on our blog (check it out!), but the excerpt from the conversation below stood out.
That’s our progress report for May - if you are willing and able, please remember to hit us with any referrals of beta users that you think could benefit from our product. Thank you in advance.
-Dimitris, Dave, & Geoff
Zak Pines is the Vice President of Marketing at Bedrock Data, a Boston based software company that connects, cleans, and synchronizes SaaS systems. I caught up with Zak to discuss systems integrations, closed loop reporting, and the importance of “a single view of the customer.”
Geoff Roberts (GR): Zak, why don’t you start by giving us a brief introduction to Bedrock Data.
Zak Pines (ZP): At Bedrock Data we help sales, marketing and operations teams connect disparate sales and marketing systems, without code or complexity. Marketing and sales systems are exploding, and as you add more and more systems, to get the most out of those systems they need to be connected and have aligned data.
It typically starts by ensuring you have a strong, multi-directional integration between your marketing automation and CRM system, and then layering on additional sales and marketing systems.
Some of the typical systems we connect are HubSpot, Marketo, Pardot, and Eloqua (on the marketing automation side) and then Microsoft Dynamics, NetSuite, ConnectWise, SugarCRM, Zoho, Insightly, Base CRM and Salesforce (on the CRM side), to name some.
GR: What’s the profile of your typical client?
ZP: Our clients tend to be small to mid-sized companies that are looking to grow and are reliant on sales and marketing to do that. They are looking to get technical projects done quickly without time consuming IT projects. Our customers come from all industries; many of them are SaaS, B2B companies themselves.
GR: Zak, you’ve been at Bedrock Data for about a year now. What led you to join the company?
ZP: Bedrock Data is solving a problem that I had first hand experience with. What’s unique about how we are solving this problem is we are looking to allow business users to connect and integrate systems in a turn key fashion, avoiding development, avoiding IT projects, avoiding long time lags. These were challenges I faced in the past and there’s huge value to businesses to operating in an agile manner. It was a compelling problem I had experience with and I was very motivated to help broaden the adoption of Bedrock Data.
GR: I had similar reasons for deciding to start building Outseta. I had spent a lot of time with early stage SaaS companies, both in operational and consulting roles. In both circumstances a common occurrence was the company’s VP of Engineering was spending a good chunk of their time integrating or maintaining the software integrations the business relied upon. These were highly skilled, expensive employees who had other competing priorities. For a start-up with limited runway, there is a very real opportunity cost associated with this work.
ZP: Geoff, to build on that I have a customer at Bedrock Data, a very progressive, bright President of a company who said something very similar about integration. He needed to connect Marketo and Zoho as his marketing automation and CRM systems and he said “I have a room full of developers, I have a CTO, I could have thrown this project to them but why would I do that? They have other priorities they are working on. The last thing I want to do is pull them off of those essential priorities to deal with system integrations when we could instead leverage a best-in-class pre-built connector."
GR: You’re a marketer Zak - what is the value proposition that Bedrock works to deliver to your clients?
ZP: We get your systems integrated faster, so that it’s not an IT project but something that can get done for sales, marketing, and operations teams. We get it done quickly and done well, leveraging best practices and expertise. Then on an ongoing basis, as needs evolve, you’re able to adjust your systems so they connect at the speed of the business. The value is therefore teams being well aligned, increased velocity around sales and marketing processes, and a better experience for customers.
GR: You just mentioned how systems integrations impact the customer experience. Can you talk me through that?
ZP: Integrated data has a direct impact on customer experience. I’ll give you several examples. As a customer, more and more companies are trying to leverage customer data to communicate effectively with their customers. It could be personalizing an offer to them when they visit your website. It could be personalizing an offer to them through email communications. If I have the wrong data about you, if you’re a customer but I think you’re a prospect because I’ve got duplicate data for you that’s not aligned, it’s actually going to result in a negative customer experience.
Another example is say a customer wants to change their email preferences - they want to communicate with you on certain topics but not others. If you have duplicate data that doesn’t get properly updated to that customer’s email address, that’s another negative customer experience. As a customer engaging with sales or support people, if those folks have the right visibility into my interests, how I’ve engaged with the website, past customer support tickets, that’s going to allow for a more relevant customer experience. It’s both automated, digital processes as well as more personal 1-on-1 interactions where this can personify itself.
GR: When do your customers typically come to you in search of your services - is there a particular stage in their lifecycle or a frequent trigger event that results in customers coming your way?
ZP: Yes, getting ready to add a key system like a HubSpot, Marketo, Pardot or Eloqua is one trigger. Alternatively companies come to us when they have been using those systems for a little while and begin to realize how important it is for those systems to connect across all their systems.
GR: Bedrock’s website speaks to “deep systems integrations without code or complexity.” How does your team deliver on that?
ZP: It all starts with a product that automates integrations. We index data, map fields, de-duplicate data, and control business rules for when data syncs. All of this is managed through a web interface.
It’s more than product though - it’s product plus process. We employ a rapid onboarding process, to help customers make key decisions around setting up the best possible integration. Bedrock Data integrates these systems, meaning data is passing between these systems. By that I mean it’s not an i-frame, and the reason that’s important is data needs to transfer between these systems in order to enable workflows in those systems, in order to show up on field records in those systems, in order to show up in reporting in those systems.
For example, when we’re passing marketing data into a CRM, when salespeople are using that CRM they want to see that information right there on the lead or contact or account record that they’re working with every single day. In order to do that, some work needs to be done in those systems to prepare for an integration. If I want to connect my marketing automation and CRM systems I need to have the right fields set up in those systems, and those fields need to be the same type, so I’m mapping a number to a number or a picklist to a picklist, and those picklists will need to match too. This is work that during rapid onboarding we can knock out in the course of an hour web meeting. We can help customers get all of this pre-work done, which might take them weeks or months to figure out without that expertise.
The rapid onboarding allows the systems to be connected much more quickly than a system integration project would have taken in the past. Our customers tell us they’re really getting two things from Bedrock Data - they’re getting the integration platform and they’re getting the expertise around how you connect these systems and get them working together most effectively.
GR: Across sales, marketing, and support how many point solutions are your customers typically using?
ZP: Many. 3-12 different systems is the norm.
GR: How do you see businesses quantify the cost of evaluating, integrating, and supporting so many SaaS systems?
ZP: When it comes to evaluating software, I think that’s a challenge in marketing technology today. There’s just such a crowded set of products with over 4,000 different marketing technology vendors. There are so many different options and it’s typically hard to understand the differences between them. I think evaluating software is a challenge for many companies, therefore they tend to rely on their network, rely on referrals, rely on input from people. That’s the evaluation piece.
As for integration - the traditional paradigm for integration is it’s a professional services or consulting engagement, so in terms of cost, that’s typically how people think about that. “What would someone charge me to do this integration? What would this cost me in terms of my own resources to hire a developer or hire consultants?” Bedrock Data is disrupting that by saying you don’t need to pay for the integration, we can help you get that done quickly, but you’ll pay more so for the ongoing management of those integrations. And the cost you pay ongoing will be less than what it would cost in terms of internal or external resources to manage your integration, and you’ll get the flexibility to make changes yourself, immediately.
Supporting integrations is an area most people overlook and it’s an area where Bedrock Data provides some education. Things like troubleshooting an API, having error reporting, or having the ability to easily add a new field or adjust a business rule, these are things that companies don’t typically appreciate heading into a project, that there will be resources required whether they are internal or external to maintain those integrations.
GR: Interesting. From my own experience - again with mostly early stage start-ups - I’d say most companies don’t associate much in the way of cost or pain when it comes to the evaluation stage. They tend to go with what they know, so it’s “I’ve used Mailchimp before,” or “I’ve used Hubspot CRM before.” I think the other factor at play is people, whether they are marketers or not, simply like to buy stuff. They don’t perceive software evaluation as painful as a result.
From there I tend to see start-ups underestimate the work required at the integration stage. There’s often this mindset of “I’m throwing my VP of Engineering at this, it should be a piece of cake.” It’s not so much that the work is terribly difficult, but the devil’s in the details and with poor documentation this often takes longer than expected. Or the company chooses to use a pre-built integration that simply doesn’t work as well as expected. But it’s really the maintenance of these integrations where I think the primary pain lies - these are simply not one-off projects.
ZP: Yep, totally agree with that.
GR: Switching gears a little bit now… I’ve come across many business leaders who speak to the value of well integrated technology that provides a unified view of the customer and enables data driven customer acquisition and success programs. That said, one of my own observations is most businesses underestimate what it’s actually going to take to deliver on this promise - whether it’s working with a company like Bedrock or just making the case for a full-time sales or marketing ops professional. Why do you think that is?
ZP: I don’t know that I have that opinion as strongly as you do, saying there are folks out there with that vision but not executing on it. What I’d say is it’s one thing to have a vision for closed-loop reporting, but to execute on that takes a lot of ongoing work. The devil’s in the details. It’s one thing to have a vision but you need to have methodologies for tagging data, for reporting on that data, so there’s a lot of work involved and that’s where the disconnect can occur between vision and implementation.
Also on this topic, something I’ve been advocating for is moving away from the structure of siloed marketing ops or sales ops, and instead having a unified role if you’re a relatively small business. I’ll be talking to James Carbary about this at the Aligned Virtual Summit. Really what I'm advocating for is having one operations person who’s capable in your marketing, sales, and customer success systems. Don’t think of it as a siloed or specialized role, think of it as a person who is going to support closed-loop operations across your entire business.
GR: What would you call that person in title?
ZP: Business Operations. Biz Ops. Or longer form could be something like Sales, Marketing, and Customer Support Operations.
GR: What is your advice for sales and marketing leaders who are trying to make a compelling case for further investments in this area? How can they best speak to the ROI that well integrated SaaS systems deliver?
ZP: First of all, Bedrock Data has relatively low price point so we’re typically not getting into ROI conversations; it’s more use case conversations to reinforce “what could this do for you?” The first thing is often speed of execution within your sales and marketing teams. One of the stats I like to go back to is an old study from insidesales.com, which is the great drop off that occurs in conversion rates as time passes when engaging with a prospect once they’ve reached out to you. So speed of execution, moving data from a marketing system to a sales system to a customer support system, this has real impact in terms of success rates for those various aspects of your business. Enabling sales and customer support people to have the most effective conversations impacts conversion and success rates. Enabling your marketing team to segment your database in a real-time fashion and communicate in real-time has an impact on conversion rates for customer marketing programs, and marketing programs in general.
Another key to this is closed-loop marketing. What’s emerging as a best practice is you integrate your systems so that you can directly connect your marketing investments and your dollars to the sales results and make data driven decisions on what’s working, what’s not working, and how you’re going to grow your business. The case for integration should center around driving growth.
GR: Cheers to that! Last but not least the question we’ve gotten dozens of different perspectives on… How important is or isn’t a “single view of the customer?” What’s your take?
ZP: I think there’s massive value in it for all of the reasons and use cases we’ve talked about in this conversation. What’s interesting to me about Outseta is you’re going to be marketing to smaller companies, start-up companies that don’t already have these systems in place, and that’s the right time to address the issue. As you layer on more and more systems, it becomes more and more challenging. If you can start your business with that integrated view, you’re going to be in a much stronger position to deliver on closed-loop reporting, ensure a really great customer experience, and keep your teams aligned from the start.
This is not the first blog on the web highlighting admirable or inspiring companies. That said, we’ve spent quite a bit of time lately thinking about and discussing how we’d like to build Outseta. Many of the companies that have come up in our discussions are included on our list below. Some of them we simply appreciate because of the decisions they’ve made while growing their businesses. Others have inspired us to the extent that we’re planning to directly steal their ideas and concepts as core elements of our own operational strategy. The common theme running through this list is that the majority of these businesses are challenging assumptions of how people should work together while creating organizations that bring out the best in people. These companies work hard to foster environments where people feel fulfilled, trusted, and empowered to take initiative every day. If that tickles your fancy, read on!
Semco is a Brazilian company that’s known for its controversial business management practices and corporate reengineering. CEO Ricardo Semler grew the organization from $4mm in revenue in 1982 to $212mm in 2003, all the while pioneering principles and operating procedures based on trusting your employees and not having a lot of rules within the organization. The company has been described as “insanity that works” and their CEO has been described as a “corporate rebel.” What we like most about this company is that they’ve shown that self management principles can work at scale - the company has more than 3,000 employees today, and has experienced less than 1% churn in their workforce over the last six years. Unlimited vacation time policies that are so prevalent today (particularly in tech) originated at Semco. This is a really interesting podcast with their CEO - one of my favorite stories is Semco was having problems with their employees stealing some of their products, which were kept under lock and key because they were very expensive. Unsure of what to do, Ricardo decided to no longer lock up their inventory - a statement that said loudly and clearly, “we trust you” to the people in the organization. Amazingly, once he made this change the issues with product theft all but disappeared.
Tower Paddle Boards
Tower Paddle Boards is a San Diego based company that sells manufacturer direct stand up paddle boards, in addition to the Southern California beach lifestyle. The company recently embraced a 5 hour work day in order to support their employees’ desire to live that SoCal lifestyle, and it hasn’t slowed them down one bit - Mark Cuban famously invested in this business via Shark Tank and the company has landed on the INC 5000 list of America’s fastest growing companies each of the last two years. Also of interest - they emphasize hiring great people over hiring for specific roles, and ask all job applicants to send them a 2-minute video application.
Wistia is a Boston based SaaS business offering “your friendly neighborhood video hosting platform.” Dimitris and Geoff were early customers of the company at Buildium, with both companies sort of growing up together. There’s a lot that we admire about this company…
- They’ve resisted the temptations and trends to grow at all costs; they took a small angel investment early on and have been very deliberate throughout their growth.
- They’ve almost never raised prices.
- One of the biggest early investments they made was in office space, because they cared deeply about creating a great working environment.
- They’ve always been willing to lend an ear or a hand (thanks Chris and Brendan)!
- The product is awesome. Nuff said.
ConvertKit is an email marketing platform for professional bloggers. One of the company’s values is “Teach everything you know,” so they’ve always made their revenue performance public and written about their path to (currently) $600,000+ in monthly recurring revenue (MRR). They are a completely distributed team of 25 and have always made a concerted effort to stay small. The company is currently operating with a 25%-30% profit margin and participates in profit sharing with their employees. Metrics like revenue per employee and customers per employee have been tracked since early on; something we’ll look to replicate at Outseta.
Patagonia is a California based outdoor apparel company that constantly lands on lists just like this one. The company has always celebrated the outdoor lifestyle its products are built to support, and has used environmentally friendly materials long before it was en vogue to do so. Flexible hours, on-site childcare, and 16 weeks of paid maternity leave as well as 12 weeks of paid paternity leave are examples of the company’s focus on their employees' experience.
FogCreek is a software company that started in New York - they are well known for founding Trello (which we use at Outseta), which they later spun off into its own company and sold to Atlassian. They’ve taken an interesting approach to compensation, as they’ve long wanted to foster a workplace where software developers don’t feel pressured into personnel management if they want to be promoted. They have a compensation ladder with all employees at the same level making equal pay, and a limited number of job titles. Again, financial rewards are gained via profit sharing. Six weeks of paid vacation is the norm, as is three weeks each year dedicated to training. New employees receive a 10% signing bonus that must be paid back if you leave the company within 12 months.
Zappos is another company that lands on lists like this one all the time. The Zappos Culture Book has long been a staple in Buildium’s offices. Most of what we like about Zappos is directly attributable to their CEO, Tony Hsieh. He’s completely sold on the concepts of self management and employee empowerment, and despite the fact that Zappos did not start out as a non-hierarchical organization, he didn’t shy away from making that change (7% of Zappos’ Managers left the company after the change). Tony uses a metaphor when talking about his company - Zappos is a village, and he’s the mayor - meaning he’s just there to serve the people of the village. The company also takes an interesting approach with new hires - they pay new hires to quit within their first 90 days, taking a proactive approach to exiting new employees who don’t feel that they’ve found a good fit for themselves at Zappos.
Basecamp is probably the company that’s been our most consistent source of inspiration. They spent a lot of time and effort thinking about how to structure their organization so that they can keep it at a size that’s easy to manage, and have focused on creating a place that you’d want to work - even if that means sacrificing some growth. They don’t have a sales team and have done very little in the way of paid advertising to acquire customers - they’ve instead focused on content marketing and “building a tribe” of passionate users. They spend a lot of time and effort sharing details of how they work and operate - while these philosophies may not directly correlate to new business or users of their product, they believe enough in their approach that they take the time to share it with the world. To date they’ve written a few books about how they operate, and they also host live sessions at their headquarters walking people through how they work. The company’s Signal V. Noise blog is a favorite of ours.
Toms shoes has quickly become synonymous with social entrepreneurship - for each pair of shoes that they sell they donate a pair to someone in need. They offer a good product, and their customers are OK with paying a higher price point because they are a mission driven company. What we like most about Toms is that their CEO and early employees actually took the trek to the underprivileged communities they were donating shoes to, and distributed the shoes themselves, in person. It would have been easy and less expensive to simply ship the shoes overseas, but that was never the point and the power of those experiences created an extremely loyal workforce.
HolacracyOne is a consulting company that has gone the furthest with experimenting with self management principles. They’ve consistently published content on emerging best practices within self-managed organizations, and are very much at the forefront of thought leadership in this area.
Valve is a Seattle based gaming company founded by a team from Microsoft. They were among the first companies out there to embrace self management in the late 90’s and early 2000’s, although they’ve never talked a lot about it. When you show up on your first day you’re given their employee handbook, which is inspiring and outlines their unique approach to performance and compensation management. When you start at Valve you aren’t hired to a specific team or department, but instead you simply start working on a few different projects and gravitate towards those that interest you most. The company focuses on hiring experts in different fields - artists, developers, etc. - but they don’t plan out how things are going to happen and instead let work happen as organically as possible.
Mailchimp is another company that’s constantly landing on lists like this one. They have stayed private, and have crushed companies that were much better funded than they were. We admire the brand that they’ve built, and are big fans of their content style guide.
Squarespace is a website building platform, and a company who knows who they are - they are not trying to be all things to all people. Their product is reasonably priced, and they’ve emphasized ease of use and user experience over all else. We chose to build the first version of our website using Squarespace, and their help content is second to none. Whenever we’ve had any sort of question we’ve been able to find appropriate documentation and resolve our question or issue ourselves - very few tech companies truly deliver on this level of self service. It would be amazing to know how much their knowledge base saves them in customer support costs.
Groove is another small, distributed team that builds help desk software. We like just about everything they say on their “About Us” page - they advocate for a sane work schedule, they’re in it for the long haul, and they emphasize that the journey of building the company is more important than the destination. The result? The company has only been in business for about 3 years and supports 6,000+ customers with just 12 employees. Last but not least, the blog they’ve written detailing their start-up journey is second to none. Cheers to you, Alex and team!
InvisionApp is growing like a weed - it seems like in just a few years InvisonApp came from nowhere to being used by seemingly every product design team in the SaaS industry. And all of that growth has been accomplished with a 100% remote workforce - there is not a single corporate office. They feel the benefits of opening up your hiring pool to the world far outweigh the benefits of being co-located - we tend to agree.
Baremetrics combines the majority of the characteristics that we’ve called out throughout this list - they are mission driven, have passed on growth at all costs, support a remote workforce, and have shared fantastic content throughout the course of their start-up journey.
It may seem strange to see a venture capital firm on this list, given how much we’ve spoken about focusing on profitability and not chasing growth at all costs. Well, the team at IndieVC says it better than we can in the introductory paragraph on their website. “Real businesses make products and sell them for a profit. They focus on customers, revenue and profitability not investors, valuations and the next fundable milestone. Real businesses prioritize their customer’s needs over their customer’s eyeballs. They have a functioning business model, not a believable financial model. Real businesses want to stay in business, not run for the exit. They create their own source of funding and don’t have to ask anyone for permission to exist. We believe real businesses make really great investments.”
Dimitris can’t say it, given that he co-founded Buildium and that could be construed as self-serving… but I can (Geoff here). I was insanely fortunate to start my career at Buildium and work with a team that always put ethics, the employee experience, and my interests as an individual above all else. The company’s mission to “help small businesses succeed, while setting the highest standard for how business should be done” is very real. The number of remarkable and admirable things that I witnessed at this company, behind closed doors when no one was watching, is something that will always stay with me. My experience at Buildium will forever shape my professional priorities and philosophies on work.
Not a bad list, eh? It’s companies like the ones above that keep us motivated, hungry, and inspired as we work to build Outseta into the company we know it can be. We are convinced that there’s a better way to build a sustainable organization, rejecting leaders that employ a rigid form of command and use fear, status, power, or money as carrots to bring out the best in people.
Without question we feel that there’s a strengthening tide of businesses that truly care about the journey over the outcome, about the potential of self management practices, and about the well-being of employees both inside and outside of work. That’s what will keep us going, and we could not be more excited put these principles first to help further that strengthening tide. We want to lead by example in changing how work is done and perceived, as it has the potential to benefit us all.
As I’ve been speaking to more and more people about Outseta, I’ve found that the conversation tends to linger much longer on how we want to build the company as opposed to focusing on what the software we’re building actually does. That’s OK by me; the “how” and the “why” are what I’m most interested in. I very quickly find myself talking about creating the best possible employee experience and how we’re planning to embrace self management principles.
“Self management, huh…” I can almost hear it, judging from the half-perplexed look on the face of the person I’m talking to.
“Self management” sounds accessible enough; most people get that it concerns some aspect of self responsibility, rather than relying on an outside person or force for “management.” But what does that actually mean; how does self management manifest itself within a self managing organization? This post serves to give specific examples of self management processes in action - our goal here is to make self management come alive and be that much more real for you. These are also processes that we’d like to use or borrow from at Outseta.
So what does self management actually mean?
We wrote on our About Us page long ago that we’re planning to embrace the principles shared in Frederic Laloux’s Reinventing Organizations as we build Outseta. Self management is one of three principles that Laloux’s book emphasizes; our definition of self management is derived from his book.
In short, self management simply means “no bosses.” That’s it.
What Laloux argues is that you can run an organization without the need for hierarchy. There’s absolutely no real reason or need for a boss; but in order to operate without hierarchy, there must be well defined structures or processes to help with the things that bosses usually do.
It’s around this time that I usually get one of two responses. The first is “that’s a recipe for chaos.” The second is, “what type of socialist/communist company are you trying to run?” To be honest, I very much understand both reactions (I felt both). Before I even reply to these quips, the person I’ve been chatting with has already turned these thoughts over in their head a few times and has a new take.
“I like the idea conceptually in some ways, I do. But it’s too aspirational. How would that ever work in the real world?”
Why we care about self management
Let me start by saying my reaction to the “too aspirational” comment is “that’s exactly the point!” If you’re going to spend 40 hours per week doing something…. Heck if you’re going to spend your life doing something, shouldn’t it be something aspirational? If it wasn’t aspirational, could you possibly be doing your very best work?
Think about that for a minute…
When you chase something aspirational and find the practical means of making it happen, I’d argue that’s when great things happen. That’s when people effectively bring their full passion, energy, and abilities to the workplace. And that’s just starting to scratch the surface of why we (and a growing number of other organizations) care about self management.
So what is the promise of self management? Why would you try it when building a business is already difficult enough? It starts with a belief that top down control within an organization can never produce the best possible outcomes. As additional layers of hierarchy are added to a business, the more disconnected the limited number of people making the key decisions become from how to best deploy the resources at their disposal. Self management puts the onus on everyone to understand the needs of the organization, and how their own unique skill sets and passions can best be leveraged to meet the organization’s needs. People more often find themselves on projects and in roles that they think are the best fit them, and as such are more likely to feel fulfilled and empowered.
While Laloux’s book provides evidence that self management can produce superior business outcomes to a traditional, top down management approach it’s also worth noting that that’s not the primary driver for us embracing self management at Outseta. We have a strong instinctual, intuitive sense that this is how work should be done. It’s certainly how we’d prefer to work if we were joining a new company.
Necessary assumptions and prerequisites for self management
While that may sound all well and rosy, there are some conditions that need to exist, some assumptions that need to be fully believed and adopted within an organization for self management to be successfully practiced.
- The company has figured out the principles which will guide it. In different contexts this is often referred to as a mission, a set of core values, the why, or the brand promise. Regardless of what you call it, the company must have a clearly defined sense of it’s reason for being and the values on which it won’t compromise.
- A belief in trust over control. The organization intrinsically believes that employees are reasonable people who can be trusted to do the right thing, and as such are able to relinquish control that’s typically provided by some form of hierarchy in a traditional organization.
- A belief in personal ownership and responsibility. Without a boss to “manage” people, people are expected to bring their unique skill sets to the table, as well as a sense of personal ownership and responsibility for their work. A lack of hierarchy is not intended to make everybody “equal” - it’s fully expected that everyone has different skills, and different levels of skill, which they bring and contribute to the organization’s work.
- A belief in earned authority over positional authority. People actively seek the advice of others because of their experience and expertise - not because of their position or title - with a full understanding that doing so is in their best interest.
- A long term view. If you’re interested “flipping” a business or looking to build a company for a few years, self management is probably not for you. Self managed companies believe the best decisions tend to be made when acting in the best interests of the company over the long haul.
- The company shares all information, including financial information, with full transparency.
How self managed organizations handle specific operational decisions
With the aforementioned conditions met, almost any business regardless of size or industry can practice self management successfully. Here are real world examples from Laloux’s book highlighting how self managed businesses tackle operational decisions that traditional organizations typically rely on hierarchy or bosses to handle.
Self managing companies typically consist of self organized and self governing teams. Each team is responsible for figuring out things like how large it needs to be, which geographies or territories it will cover, which customers it will serve. Tasks typically assigned to bosses like performance evaluations, planning, and even finding office space are distributed amongst and owned within each specific team. Teams collectively are responsible for their own performance, operating procedures, and contributions to the company at large.
Rather than having predefined times and agendas for meetings, self managed organizations emphasize calling ad hoc meetings as needs arise. Every meeting is assigned a facilitator, whose sole job is to solicit feedback on items that the group would like to discuss in that present moment. From there items are prioritized and discussed in the context of the group.
Meetings are typically broken down into either tactical or governance meetings. Tactical meetings focus on the “what” - what’s our strategy? What’s our timeline? What progress are we making against our objectives? Governance meeting instead focus the “how” and the “why” - why does this team exist? How will we work together? How will we staff and operate this team effectively?
Say for example a particular team felt that their objective and team structure was no longer appropriate and was interested in disbanding the team into two separate teams with newly defined objectives. With no boss in the room this proposal could be discussed, refined, and put to a group decision (more on decision making shortly). In a traditional organization such a decision could often takes months to make happen.
Budgeting & Forecasting
Self managed organizations also advocate for keeping budgeting and forecasting activities to a minimum. Sure, budgets are a reality and must be operated within - but with everyone in the organization operating with a full understanding of the company’s financial standing, self managed organizations appreciate the agility that they have to operate within those financial constraints without adhering to or spending a lot of time putting together rigid budgets.
Likewise, forecasting and even to some extent goal setting aren’t stressed and are seen to an extent as an attempt to control the future. For example, a company that’s short of its quarterly revenue target might feel compelled to do something that’s not in its best long term interest in the vain of hitting that artificially set target - maybe it’s selling to a customer that’s not yet truly ready for your product, or maybe it’s making a short term investment in lieu of a long term one. Self managed organizations emphasize that if you always act in the best long term interest of the company, you’re ultimately putting yourself in the best position to hit your performance goals.
If you were managing yourself, how much vacation time would you give yourself? Unlimited vacation, of course! Take-what-you-need vacation policies have become popular in recent years, particularly in tech companies - this is simply one of the first self management principles that’s become mainstream or at least popularized in recent years.
The basic concept here is simple - people need time off. To recharge the batteries. Because of illness. Because of accidents. Whatever it may be. Who are you to say each person needs the same 10 days of vacation schedule per year? Every person’s needs are different, and every person’s needs may vary from year to year. As an employer it’s in your best interest to support your employees’ needs, which will in turn result in them doing a better job in their professional life. Employees are expected to act like adults and take what they need, but also get their jobs done and done well in cooperation with their co-workers.
While these policies are great, it's a frustration of ours that these policies are often either A) adopted for the wrong reasons, or B) are the only aspect of self management that an organization adopts. It's perhaps the least important item on this list; self management has so much more to offer than unlimited PTO.
OK, OK… vacation time is pretty easy to figure out. But without a boss, how do you figure out who gets paid what? There are few topics more sensitive or difficult to get right than compensation.
There is not one “right” way to handle compensation in a self managed organization, but there are a bunch of different approaches that have been practiced successfully. One that seems to be among the most promising is, unsurprisingly “Everyone sets their own compensation rate.” Here’s a recommended process for rolling out this sort of policy.
Once per year, every employee writes a letter to all of the other employees in the company highlighting the contributions they’ve made to the business over the course of the last year. They also specifically reference how much they think they should be paid the upcoming year based on their contributions relative to those of others. Prior to doing so, they receive anonymous performance reviews from at least 5 other people that they work with so that they have that feedback in hand when they set their compensation rate. All of the compensation letters and the anonymous reviews are made public.
From there, there is a “compensation committee” whose members rotate every year. The committee is supposed to provide a recommendation, some advice on how appropriate your salary ask was. “Hey, you did some great things last year - you should ask for a slightly larger raise” is just as appropriate as “Hey, you asked for a 25% raise when the rest of the company asked for closer to 10%. You should probably dial it back a bit.”
Every employee then has the ability to change their salary as they see fit - they can choose to follow or ignore the advice of compensation committee. Want a raise? Take it. Organizations who have adopted this approach speak to it being liberating; office politics, posturing, and raises going to the loudest voices are trends that tend to melt away when you’re granted the ability to set your own compensation rate.
Of course, to make this actually work in practice there needs to be some structure. It’s particularly important here that all information, financial and otherwise, is shared with full transparency. As a result, every employee goes into the process of setting their salary with full information. They know how much the company can afford to spend on employee compensation and how their ask will impact the business.
Second of all, because all of the employee salary letters and performance reviews are public there’s no place to hide for employees who consistently ask for more than their peers, yet under-deliver compared to others and ignore the advice of the compensation committee. These people are consistently abusing the process and are clearly not acting in the best interests of the business; there are formalized ways for exiting employees that abuse the liberties these policies provide.
Last but not least, self managed organizations emphasize profit sharing programs as a way to deliver financial rewards to employees. Profit sharing programs provide enormous benefits in terms of alignment, as employees can expect that working together in the best interest of the business will ultimately deliver the best financial return for all parties.
“90% of business is making decisions” - someone must has said that at some point. But in an organization with no bosses, no hierarchy, how do decisions get made? What are we going to spend money on? What strategy will we employee? Who are we going to hire?
The key pillars of decision making in a self managed organizations are that you do not rely on hierarchy to make decisions, nor do you need consensus (everyone in agreement) on which decision to make. Both processes have very familiar flaws - when hierarchy is tasked with making decisions, people often feel like they have little ability to impact or influence the decision - it’s outside of their control. When you strive for consensus, it’s all too common that opposing sides talk the issue to death, with both sides ultimately feeling frustrated and exasperated to the extent that they simply care that a decision, any decision, is made. Instead, Laloux advocates for the use of what he calls the “Advice Process” to make decisions in a self managed organization.
Simply put, advice process means that any employee can make any decision (including spending company money) as long as two conditions are met.
- They seek the advice of experts
- They seek the advice of the people that will be most directly impacted by their decision
That’s pretty much it - do your diligence, be informed, act with empathy, and good things will happen. Generally speaking the bigger the impact of the decision, the larger the group that should be consulted prior to making the decision. Again, those who serially abuse or disregard the advice process have nowhere to hide so people take the advice process seriously. And when everyone’s interests are aligned, and everyone is operating with all of the relevant info, this becomes much more practical and not just aspirational to put into practice.
Within every organization regardless of management styles or structures, conflict will happen. Decisions need to be made, and we’ve all experienced scenarios in the workplace where opposing sides just can’t agree on the path forward. Self managed organizations take a very deliberate approach to conflict resolution. To start, all employees are trained on both group decision making processes and conflict resolution - this is done proactively, rather than waiting until there’s a specific problem at hand.
With decision making conflicts, nobody is allowed to veto a decision simply because they prefer a different path or decision. As long as nobody has a principled objection - an objection on the basis that the suggested decision flies in the face of the company’s mission, values, or leading principles - then a team can make a decision collectively and move forward with it without the need for consensus.
Whether the conflict at hand is a technical decision, an interpersonal problem, or a breach of company values a recommended process for conflict resolution goes like this…
- Employees are first asked to bring the conflict to light and sort it out privately, striving to reach an agreement that’s acceptable to both parties.
- If the conflict can’t be resolved in private, a colleague that both parties trusts will be asked to step in as a mediator. Again, this colleague can’t impose a resolution but helps both sides work towards an accepted agreement.
- If both sides are still stuck, a panel of relevant people is assembled to help the parties shape an agreement.
When group decision making and conflict resolution training is proactively done and this process is followed, it typically is able to resolve the vast majority of conflicts. All parties involved in the conflict are expected to respect confidentiality before, during, and after the conflict to discourage water cooler talk and either side making any attempt to bring others onto their side of the conflict.
Hopefully sharing some specifics on the processes self managed organizations use to handle operational decisions helped make self management a little bit more tangible. I know that the above examples probably left you with just as many questions as answers, and there are many more processes that need to be employed to make self management work in any organization.
Being part of a self managed organization is probably not for everyone - and there will be plenty challenges associated with running a self managed organization just in the sense that so few people have ever worked in one. From a business perspective there’s a growing mountain of evidence that embracing self management can drive better business outcomes, as measured by metrics from employee churn to revenue. From a personal perspective, there’s a spark that comes from following your intuition and embracing a way of doing things that just feels right.
Did you like this post? If so, we'd appreciate it if you'd up-vote our answer to "What is self management?" on Quora!
One of the single best pieces of start-up or SaaS related content that I stumbled across in 2016 was David Cancel and Dave Gerhardt’s Seeking Wisdom podcast when they welcomed Hubspot CRO Mark Roberge to the show. Prior to Outseta I was lucky enough to work at a company where Mark was a board member, so I decided on a whim to tune in. The entire 52 minutes was insightful - I suggest you check it out for yourself - but it was one of the first things out of Mark’s mouth that gave me pause for thought.
Mark described his framework for advising SaaS start-ups as…
- Customer success
- Then unit economics
- Then growth
The basic concept he introduces is thinking of each of these as distinct stages in a start-up’s life cycle. Before you do anything else, you need to figure out how to make customers successful with your product. Only then should you turn your attention to the viability of the business model. And only when the business model is healthy should you be concerned with your start-up’s growth rate. You get the idea.
To be honest, this didn’t strike me as a surprising concept or even really a new idea - but it stuck with me because of how simply and concisely it conveyed a framework that made so much sense. There's a heck of a lot of logical thinking and important start-up concepts inherently baked into a framework that's articulated in just seven words. This post serves to unpack and explore the simple beauty of this framework.
It makes good, logical sense that before your start-up is ready to grow you need to figure out how to make customers successful with your product. I think that few people would argue that, but surprisingly few companies actually practice it. Customers are like crack - you get a little taste, and you immediately want more. Lots more. And with most start-ups having limited runway, it makes sense that many founders decide to forge ahead with the intention of figuring out how to make customers successful on the fly as they bring them on. The problem is that rarely happens, especially if customer acquisition begins to take off.
Sam Altman, President of start-up accelerator Y-combinator, shares a similar sentiment in his Start-up Playbook, “Your goal as a startup is to make something users love. If you do that, then you have to figure out how to get a lot more users. But this first part is critical—think about the really successful companies of today. They all started with a product that their early users loved so much they told other people about it. If you fail to do this, you will fail. If you deceive yourself and think your users love your product when they don’t, you will still fail. The startup graveyard is littered with people who thought they could skip this step.”
The value of looking at “customer success” as a stage of growth is really two-fold for me. First, there’s a lot written in marketing circles about “vanity metrics.” I would argue that most companies that are focused on growth before they’ve figured out their recipe for customer success are only achieving “vanity growth.” Inevitably customer churn will become a show stopper.
Additionally, the emphasis on customer success inherently implies “do things that don’t scale” to me. This is a tried and true start-up mantra. Do whatever you need to do to figure out how to make your early customers successful, even if it’s not scalable or profitable. This is perhaps the single biggest competitive advantage that start-ups have over established competitors, and I love that this framework emphasizes it.
As Mark mentions, it’s important that you find some sort of leading indicator of customer success that you truly believe in before you’re ready to leave this stage and focus on unit economics. I think one useful and easy measure of customer success can be simply asking your customers the question, “how disruptive would it be to your business if I took our product away?” No doubt about it, finding the recipe for customer success is the most challenging of the three stages. The best founders are the ones who take a deliberate approach to finding customer success and fight the urge to chase growth prematurely.
Now that you’ve figured out how to make your customers successful with your product, you must turn your attention to the fact that you’re running a business. If it’s costing you $1,000 to acquire a customer with a lifetime value of $1,000, it’s going to be tough to make a living. If you’ve gotten to this stage at all, kudos to you - you’ve found a recipe for making your customers successful; now you just have to figure out how to do it cost effectively.
Challenges at this stage can look very different. Maybe you’ve handheld each and every one of your early customers, with your team spending hours upon hours onboarding each new account. Employee time costs money, and it’s entirely possible that you’ve spent so much time with each early customer that your relationship with them isn’t even close to being a profitable one. Or maybe it’s the efficiency of your lead generation programs that’s to blame - you’re generating some leads that are turning into paying customers, but your average cost per lead is prohibitively high to support any sort of true growth potential.
In an industry obsessed with automation, this is likely the time for automation. This is the time to bring people onto the team with a “growth hacking” mindset. This is the time to be endlessly analytical and obsessed with all of the metrics related to your customer acquisition programs.
Whatever you decide is the indicator that you’ve gotten your unit economics in order; from a particular payback period to a target LTV:CAC ratio, once it’s achieved (and there’s reason to believe it can be sustained)... now you’re really on to something. Now you’re dangerous.
David Skok’s SaaS Metrics 2.0 - A Guide To Measuring And Improving What Matters is a great resource at this stage, including insights from the metrics that fueled the growth of companies like Netsuite, Hubspot, and Constant Contact.
At this point, you’ve found a recipe for making customers successful and your churn rate is healthy. On top of that, your unit economics prove that you’ve found a viable business model - one where you invest money into one end of your customer acquisition machine and a healthy return is spit out at the other end. You have made a real, viable, compelling case for investing in growth.
By the time you reach this stage you should have plenty of options, and doors opening for you left and right. With healthy unit economics, you may choose to reinvest some of your business’ profits back into the company to grow as fast as you can organically. Or maybe this is the point where you want to stake your claim as the leader in your market, and you want to raise that big series A to support that goal. Either way, by following Mark’s framework you’ve put yourself in a position to chase down growth via whichever path suites you best.
The question you now must answer logically becomes “how fast should we try to grow? What growth rate should we be shooting for?” Much has been written on this topic - I had always been told that as a SaaS business starts to scale, showing an annual growth rate of 50%+ for 2-3 years was the path towards an exit with a company valuation of 5x-6x your company’s annual revenue. Brad Feld, Managing Director at Foundry Group, introduced The Rule of 40% for a Healthy SaaS Company. This rule is more for SaaS companies at scale (greater than $50mm in revenue) but it states that a company’s growth rate + profit should add up to 40%. Tom Tunguz of Redpoint Ventures explored the rule of 40% further, finding that for early stage SaaS businesses this metric if often well over 100%. “But for early stage companies, whose metric may exceed 100% or more, founders should focus more on the unit economics (average revenue per customer, cost of customer acquisition, churn rates, contribution margin), which drive the business’s top line and bottom line. Everything else will take care of itself.”
In an early stage SaaS business, if your unit economics are healthy you have an opportunity to step on the gas - but more important than any specific target growth rate is that you choose to grow at a rate that is responsible and that won’t derail your business. David Heinemeier Hansson, CTO and Founder of Basecamp, writes of the many ways that chasing exponential growth can devour and corrupt your company. If you’re lucky enough to work at a business that’s found a recipe for customer success and has healthy unit economics, then of course you should be investing in growth. We all want to grow - but how fast and aggressively you pursue growth is at the end of the day a personal decision that needs to fit you and your business rather than Silicon Valley’s expectations.
More than anything, I think this framework surprised me so much because of how infrequently it’s truly followed. But stop for a moment and think about the alternative. In my head I envision a ship heading slowly towards a whirlpool in the ocean, much like Titanic heading towards an iceberg. Someone is yelling, “turn on the second engine, let’s speed up to 20 knots!” while the whirlpool (churn) looms ahead. If you’re steering the ship, do you really want to accelerate and hope that you make it through the swirling pool of water ahead? Or would you do everything in your power to keep a steady speed, or even slow down if you need to, until the seas ahead are calm?