Vinay’s note – 50% of all businesses fail within the first five years. So how does one find themselves in the other half of businesses that succeeds? In this first of a two part series (read part 2 here), we learn from Nathan Barry founder of ConvertKit who grew his business from zero to $125,000+ in monthly recurring revenue.
On January 1st, 2013, Nathan Barry announced the Web App Challenge with the aim of building a SaaS app and reach $5000 in monthly recurring revenue in 6 months.
3 years later, ConvertKit is a serious player in the email marketing space and is used by some of the biggest blogs in the world. Monthly recurring revenue? $125,000+
The Web App Challenge
In 2012, his first year of being self-employed, Nathan had done very well for himself by selling ebooks.
- In September, he released his first book, The App Design Handbook, which made $12,000 on launch day.
- In December , he released his second book, Designing Web Applications, which made $26,000 on launch day.
- Altogether, his books made him more than $85,000 that year (in only 4 months!). “To say my eBooks have been a success would be the understatement of the year,” said Nathan in his 2012 review post.
However, he came to realize that while selling info products could be extremely lucrative, there was a problem with that business model – these were all 1-time sales. Sure, he made a lot of money that way, but it also meant that his income varied wildly from month to month, and that each month, he had to go out and make more sales to keep the money coming in. That didn’t seem sustainable in the long run.
Nathan decided that in 2013 he wanted to focus on recurring revenue. The SaaS model seemed like the best bet for that… so on December 31st, 2012 he announced The Web App Challenge:
“Within 6 months, build a web application to $5,000 in recurring revenue each month. A friend just referred to that timeline as “aggressive,” so let’s add some more restrictions to make it more difficult:
- I am starting without an idea. So I don’t know what the application will be, what it will do or who it is targeted towards.
- I can only spend $5,000 of my own money in this entire process. Meaning all other funds necessary have to come from paying customers. Since I will be hiring out the development, getting paying customers right away is mandatory.
- I cannot spend more than 20 hours a week on this project. If allowed, I waste tons of time on projects. This limit is partially because there are other things that need my time (contract projects, writing, etc) and to help keep me focused.
The deadline is July 1st, 2013 to have $5,000 a month worth of paying customers”
Yes, you read that right, Nathan publicly committed to building a $5000/month SaaS business in 6 months, while only investing $5000 of his own money and only working 20 hours/week. Sound crazy?
Here’s what Nathan wrote in his announcement post as an answer to the “What if you fail?” question:
“I don’t think it is likely that I will fail completely. A more likely failure is that I reach only a couple thousand in revenue, but that’s still a partial success. If it does completely fail, then it will be public. At least I, and everyone reading my posts, will have learned something to apply to future projects”
And he did fail. On July 1st, 2013, ConvertKit monthly recurring revenue (MRR) was $2480/month, which meant that Nathan accomplished only 50% of what he had set out to do. However, it’s important to see the big picture here. Sure, he set out to build a $5000/month business in 6 months, and he failed to do that, but he did manage to build a $2480/month business, didn’t he?
“So in technical terms, The Web App Challenge was a failure—I didn’t meet the goal. But to me, it’s a massive success. $2,480 in monthly recurring revenue is a fantastic start to what will be a great business,” said Nathan in the post that concluded The Web App Challenge.
- 1-off sales are great but… 1-off sales are a great way to make money and learn valuable lessons. In fact, if you have no previous business experience, then jumping right into the SaaS world probably isn’t such a great idea. That being said, if most of your income comes from 1-off sales, then your financial situation is probably not as stable as you’d like it to be due to the month-to-month variation in revenue. That’s why at some point you should probably consider investing your resources (time, energy, money) into something that generates recurring revenue.
- Don’t allow yourself to waste time. Parkinson’s law says that work expands so as to fill the time available for its completion. That means that the more time you give yourself, the more time you’ll end up wasting on non-essential tasks. So keep your deadlines tight. You will be surprised how much you can accomplish that way.
- Consider publicly committing to your goal. How many times have you set a goal, then got distracted by something else and gave up on your initial goal? Publicly committing to your goal can help keep you accountable and on track. And what if you fail? Well, just like Nathan said, you are unlikely to fail completely as long as you are putting in the work, and some progress is better than no progress, right?
How Nathan found his winning business idea
When Nathan announced his Web App Challenge, he didn’t have a specific idea for a SaaS product, so his next step was to figure out what exactly he should build. Those who want to start a software business tend to spend a lot of time sitting around trying to come up with their big idea (“This is going to be the next Facebook!”)… But Nathan knew better than that.
“Customers don’t pay for ideas; they pay for their problems to be solved. So rather than looking for an idea for what to build, you should be looking for a painful problem that you can solve. People will pay to make pain go away. The more painful and frustrating the problem is, the more they will pay.”
So how did he go about finding those painful and frustrating problems? He used a method called Idea Extraction, which he had learned from Dane Maxwell:
“Idea Extraction is really pretty simple. Talk to potential customers to find their pain. Once you come across a painful problem, validate it with other companies in the same industry. Then find out how much these companies are willing to pay for this problem to be solved. This is the most accurate way to determine how painful the problem really is.”
Nathan’s first step was to pick a market. He went through his Facebook, LinkedIn and address book contacts, looking for anyone that met certain criteria (which boiled down to working in or owning a $100,000+/year business that is already paying for software in an industry with more than 5,000 businesses). That’s how he came up with a list of 3 lawyers, 2 insurance agents, 2 commercial real estate agents, 2 web design agencies, a landscaper, a dentist and a home care business owner.
In order to get these people on the phone, Nathan sent them all a quick email (fill in the blank with industry, say lawyers, landscapers, etc.)
Once he got their attention, he asked them to talk on the phone. “A few people responded to the email with software ideas, but they weren’t very good at all. You can’t do idea extraction over email; it needs to be over the phone or in person.”
Here are 3 questions (also learned from Dane Maxwell) that he used to get the conversation started:
- What is the most important activity in your business?
- Is there any pain associated with that activity?
- What do you spend most of your time doing?
That would get people talking, but discovering their exact pain points wasn’t easy. “I found that people would gloss over potentially painful problems to tell you about an idea they had. The ideas were never worth very much (though I was still very grateful for them talking to me). You will really need to dive deep in order to find the pain. Otherwise, you will leave the conversation thinking nothing frustrates them”
Soon after publishing a post about the whole idea extraction thing Nathan received a tweet from his friend and mentor Amy Hoy. She said she liked what he was doing…but she also thought that he was making a critical mistake.
Amy and Nathan then had a long Skype chat in which Amy’s core message was this:
“Building and marketing software is hard. Don’t throw away all your competitive advantages to make it even harder.”
This made Nathan reconsider his approach. He realized that the best marketing method he knew was teaching…but what could he possibly teach landscapers, dentists and lawyers? He knew nothing about these industries.
So he decided to scratch his own itch. Nathan was well aware that the existing software for building one’s email list, drip-feeding them your content and launching your products was often frustrating to use. Why not build something better?'Customers don’t pay for ideas; they pay for their problems to be solved'Click To Tweet
- Don’t look for ideas, look for problems to solve. You are probably not going to build the next Facebook, so don’t waste your time trying to come up with an idea for a “killer app.” Instead, talk to people, find out what kind of problems they are dealing with, and whether or not they’d be willing to pay for solutions to those problems. You’ll have a much better chance at building a sustainable business that way.
- Make sure that you pick the right market. Nathan’s decision to go after $100,000+/year companies that were are already paying for software wasn’t random. Businesses like that have money to spend, motivation to pay someone to solve their problems, and already appreciate the value decent software can offer, which means that it’s relatively easy to sell it to them. Meanwhile, those who try to sell their products to people who are unable or unwilling to pay are doomed from Day 1. Sounds obvious, but a lot of people go after the wrong market (say, try to sell software to cash-strapped charities), then wonder why they aren’t making any money.
- Capitalize on your strengths. As Amy Hoy pointed out, building and marketing software is hard, so throwing away one’s competitive advantages doesn’t make any sense. What do you already know? What are you already good at? Where do you already have connections? It took you years to gain these competitive advantages, so try to leverage them as much as you can.
Why it doesn’t count as validation until they have paid you money
Nathan sent out some direct messages on Twitter telling people that he had a product idea that he wanted to run by them and asking them if they had 15 minutes for a call that same day. Most people agreed to get on a phone, liked the idea, and 8 out of 10 said “Yes!” when asked “Is this something you’d buy?” That meant that the idea was validated, right? Well…
Nathan knew that Dan had a point. People often say that they’d buy something during market research interviews, but they rarely follow through when the time to make the purchase comes. With info products, this problem is usually solved by offering people an option to pre-order. But would pre-orders work for a SaaS product? Nathan was skeptical, but decided to give it a shot.
He wrote and launched a ConvertKit sales page with 3 price tiers:
- Beginner $112 (3 months at $37/month)
- Intermediate $281 (3 months at $93/month)
- Expert $562 (3 months at $167/month)
Then he tweeted the link to the sales page and sent out an email about it to his subscribers. Not too long after that, pre-orders started coming in, and eventually Nathan ended up with 19 of them (an additional $2916 to the project budget and $972/month worth of customers). Now the idea was validated.
By the way, none of the pre-orders came from the people that Nathan had interviewed who said that they’d pre-order. “Ultimately Dan and a few other skeptics were right: it doesn’t count as validation until they have paid you money.”'It doesn’t count as validation until they have paid you money' Click To Tweet
- Cash in your pocket is the only true validation. Don’t get too excited when someone says, “Oh, yeah, that sounds cool, I’d totally pay for it.” Likes, tweets, email opt-ins…all that doesn’t mean anything until money changes hands.
- Use pre-orders to validate your SaaS idea. Work out the details, create a sales page and start pitching. Get people to pay you now. You can’t? Then drop that idea. Don’t waste your time on something that people aren’t willing to pay for upfront.
ConvertKit Academy: Can you sell a SaaS app like an info product?
Once ConvertKit was up and running, Nathan realized how hard it was to get a SaaS business to the point where it generates a decent amount of revenue. “The journey has had a lot of ups and downs, but overall has been a lot of work without too much growth,” shared Nathan 18 months after the launch of The Web App Challenge.
There was a big difference between selling info products and SaaS software. With info products, you could build up anticipation, then launch, and make a ton of money in a single day. Meanwhile, with a SaaS app, the customers could subscribe at any time, which made it harder to sell, and each sale would only add a small amount of money to the monthly revenue. Plus, there was also churn to think about.
Compare the revenue stats for Nathan’s book, Photoshop for Web Design, with the revenue stats for ConvertKit:
So in January 2014, Nathan decided to try selling ConvertKit as an info product and launched ConvertKit Academy:
- He’d launch ConvertKit Academy every month and only accept 10 people who’d pay $300 each (they’d get a 6 month membership, a course on email marketing, and templates for things like landing pages, book covers, etc.)
- He’d then teach those 10 people how to use email marketing (and ConvertKit!) to grow their businesses.
- He’d also offer them hands-on help with things like setting up their accounts, embedding opt-in forms and crafting marketing strategies.
This allowed Nathan to get the best of both worlds – he could build up anticipation, launch and make a decent chunk of money in 1 day, while also increasing the MRR at the same time.
Take a look at this graph that shows both MRR growth and ConvertKit Academy spikes:
However, while ConvertKit Academy helped to reduce churn and solve cash problems, it also attracted the wrong type of customers.
“Unfortunately the focus on education—particularly building a list from scratch—attracted an audience that didn’t make the best customers. What we found is that these beginners complained the most about price, lacked the discipline to produce content consistently and were very likely to cancel when their project failed.”
And that wasn’t all. People who’d make the best customers, those who already had legitimate online businesses and big email lists, had doubts about ConvertKit due to all the focus on beginners. “We were actually driving away our best customers and focusing on those least likely to succeed.”
In June 2014, Nathan stopped promoting ConvertKit Academy. Growth stalled. Soon the monthly revenue started declining.“Recurring revenue is great, but it can take a really long time to turn into meaningful numbers” Click To Tweet
- Building a SaaS business is hard. At the moment, the SaaS model is often seen as the Holy Grail of online entrepreneurship, and there’s a reason for that. Nothing beats recurring revenue, right? However, as Nathan noted, “Recurring revenue is great, but it can take a really long time to turn into meaningful numbers.” Every business model has its advantages and disadvantages, and with the SaaS model, “the potential upside is huge, but it is really, really hard to make it work.” All aspiring SaaS entrepreneurs should keep that in mind.
- Don’t be afraid to think outside the box. Nathan had a problem, he came up with an unorthodox solution, and then tested that solution. Sure, ConvertKit Academy didn’t work out, but he still made quite a bit of money and learned a valuable lesson about his target market. And what if it would have worked out? These kind of experiments often have a limited downside and a high upside, so if you have an interesting idea, just try it out. Who knows, maybe you’ll score a big win.
- What kind of customers are you attracting? There’s often a discrepancy between what kind of customers people want to attract and the kind of customers they are actually attracting. Presumably, if you’d have asked Nathan who his best customers were, he’d have said, “those who already have serious online businesses,” yet he was going after the complete opposite of those best customers. When you look at it with hindsight goggles, it doesn’t make any sense, but when you are in the trenches, it’s easy to fall into this common trap. So pause, take a close look at what you are doing, and ask yourself, “What kind of customers am I attracting?”
Revenue drops to $1207/month, and…
By October 2014, ConvertKit revenue had dropped down to $1207/month, and Nathan realized that something had to change.
“Treating ConvertKit as a side project just wasn’t working. The rest of my business (book and course sales) were doing great, but ConvertKit was sliding further towards zero revenue. And it still cost a decent amount to run each month.”
So how did Nathan manage to turn ConvertKit around and go from $1207/month to $125,000/month in only 15 months?
That’s what the part 2 of this case study is all about. Don’t miss it!