10-minute read

Jason Cohen’s 2013 Microconf talk, Designing the Ideal Bootstrapped Business with Jason Cohen, is one of the most valuable resources I’ve found for bootstrapped founders. I watched it for the first time in 2020, and I’ve revisited it repeatedly since then.

If you’re new to the world of bootstrapped software business, or you’re struggling to gain traction with your business, I highly recommend this talk.

Below, I’ve included my notes.

Most businesses don’t work 🔗︎

  • Most businesses fail.
    • Most fail because they build a product that customers don’t actually want.
    • Some fail because they’re building a product customers want but with a business structure that’s incompatible with bootstrapping.

Jason’s background 🔗︎

  • Jason is founder of WPEngine, one of the most popular WordPress hosting vendors.
  • Jason founded four companies.
    • All made over $1M/yr.
    • All of them were profitable.
    • Jason sold two of them.
    • All were bootstrapped, although WPEngine later raised venture capital.

A “cash machine” 🔗︎

  • The ideal self-funded business is a “cash machine.”
    • The business has a predictable way to make profit every month.
  • 20% of people in the conference audience would make $10k the following month if they invested zero work into their business.
  • Goal of self-funded business: earn at least $10k/month in revenue per founder.
    • [Ed: He says “revenue” but I suspect he means “profit”]

Revenue model 🔗︎

One-offs never get easier 🔗︎

  • One-off sales never get easier.
    • Every month, you start over with $0 in revenue.
  • One-off sales are the opposite of a cash machine.
  • Even when Jason Cohen’s previous company (Smart Bear, one-off sales) reached millions in revenue per month, he still worried he’d fail to meet payroll every month.
    • The stress never went away.

Recurring revenue: the only way 🔗︎

  • The myth of “1,000 true fans”
    • Kevin Kelly introduced the idea of 1,000 true fans
    • Musicians could gain indepedence from music labels if they could convince 1,000 passionate fans to buy $100-200 in merch and concerts or other purchases that go directly to the artist.
    • Seth Godin popularized the idea by sharing the blog post with a larger audience.
    • Kevin Kelly got feedback from musicians that his idea wasn’t practical and walked back the idea.
      • It’s difficult to get that many fans to give you recurring revenue.
      • For musicians, $100-200k/yr is not enough to cover the costs of touring.
    • Godin never acknowledged the retraction, so the myth persists.
  • Better target: 150 customers
    • You should have 20-30 customers waiting to pay you monthly before you even start building.
      • If you can’t find 20-30 in the first few months, it’s going to be hard to reach a sustainable customer base ever.
    • First 50: Scratching and clawing your first customers
    • Next 25: Guest postings, social media
    • Next 75: Basic marketing

WPEngine’s first customers 🔗︎

  • Jason found 40 WordPress consultants on LinkedIn.
  • He said he had a new product designed to serve them.
  • Key: He offered to pay them to talk to him.
    • The pay was “whatever [they] thought was fair,” even if it’s higher than their normal hourly rate because it’s a one-off job.
  • 100% agreed to speak with him on the phone.
    • 38 actually scheduled calls.
    • 0 asked for any money.
  • Takeaway: Showing that you value their time yields positive results.

Pricing 🔗︎

  • If the revenue goal is $10k/mo and the customer base is 150 customers, you need to charge each customer $66/mo, on average.
    • $10k / 150 customers = $66/customer/mo.
  • Most founders charge a lower rate because their service is crappy starting out.
    • Everything is barebones, support is slow because it’s just the founder.
    • Founder decides to charge $19/mo because they assume their product isn’t worth a higher rate.
    • Lower price means you have to find more customers, difficult to do.
  • Strategies
    • Price tiers
      • WPEngine had three tiers segmented by customer type: $49 / $99 / $249
      • Average revenue per customer was over $100/mo.
    • High prices, but lots of coupon opportunities
      • Example: Standard rate is $99/mo, but give bloggers a 30% off coupon for their readers.
        • Ends up being the $66/mo target.

Boutique business 🔗︎

  • What do you think when you hear the word “boutique?”
    • Small
    • Not open very much because it has a small staff, usually just owners
    • Expensive
    • Customers receive lots of personal attention
    • Work is special and unique
    • Customers feel good supporting the business
  • Present yourself to customers as “boutique.”
    • Customers will tolerate higher prices if they think of it as supporting an independent boutique vendor.

Cash flow 🔗︎

  • Cash is king.
  • The “annual pre-pay trick”
    • “You have to do it.” -Jason Cohen
    • Example marketing scenario
      • Spending $300 on Google Ads gets you $50/mo in recurring revenue.
      • Therefore, spending $60k gets you $10k/mo in recurring revenue.
        • [Ed: I disagree with this point, as Google Ads don’t scale linearly like this. Scaling your spending from $300 to $60k means you have to bid higher for each click to capture a greater share of the results. I think a more realistic scenario is that if you scale your Google Ad spend by 20x, you’d see 10-15x the conversions.]
      • You could reach your target monthly revenue right now if you had $60k in cash to spend.
      • Tell customers they get two months free with an annual plan.
      • You’d get $100k in cash immediately as opposed to $120k over the course of a year.
      • After the $60k on Google Ads, you’d have $40k left over to spend immediately on marketing, design improvements, etc. rather than waiting to collect the recurring revenue over a year.
  • WPEngine’s numbers
    • 1/4 of signups pre-pay for a year.
      • 75% pay 1x month
      • 25% pay 10x month
      • 0.75 x 1 + 0.25 x 10 = 3.25
      • Translation: WPEngine gets 3.25x the cash flow as they would without annual pre-pay option.
      • WPEngine’s cost of customer acquisition is lower than their monthly cash flow, so they effectively have an infinite marketing budget
  • You can combine annual pre-pay with coupons to make them more enticing.
    • Example: Coupon gives you three months free on annual plan.
      • They would have gotten two without the coupon, but three sounds more exciting.
  • You can adjust pricing to make pre-payment more appealing.
    • Increase monthly price, and make annual discount steeper.

Free trials 🔗︎

  • Most people who sign up with a credit card will stay.
  • If they do the trial and never convert, you lose money.
  • Instead, offer a 60-day money back guarantee.
    • Charge customers up front, but let them cancel easily.
    • When WPEngine made this change, signups increased.
      • Customers liked the change. They said it gave them more time to evaluate the product.

No picking up pennies 🔗︎

  • Example: Kickstarter
    • Lots of money flowing through.
    • Kickstarter “picks up pennies” by taking a small percentage.
    • Kickstarter raised $100M in funds, only $6M of the revenue went to Kickstarter.
    • They finished the year at a loss and had to raise more money.
    • Kickstarter is one of the most successful examples of this, and they have trouble turning a profit.
  • Cohen recommends against this model for bootstrapped businesses.
    • “Go get customers, and charge them lots of money.”

Market model 🔗︎

  • What markets are conducive to a cash machine company?

Only build B2B companies 🔗︎

  • Never sell to consumers.
    • Cohen quoted an app store review that complained that a $1.99 app should have been priced at $0.99.
      • Consumers are too price-sensitive and demanding.
  • Every Microconf speaker that year had a B2B business.
    • Exception: patio11 with BingoCardCreator, but he recommends against B2C as well.

Bad Market: Point-in-time / temporary pain 🔗︎

  • Examples
    • Weddings
    • Events
    • Code profilers
  • You have to catch customers at the exact right time.
  • For things like weddings, you’re competing with tons of companies trying to market to brides/grooms in the months leading up to a wedding.

Good Market: Naturally recurring market 🔗︎

  • Ongoing actual costs
    • Example: Server hosting
      • People know that servers are an ongoing cost, so they expect to pay for hosting on a recurring basis.
  • Financial cycles
    • Example: taxes, invoicing, compliance
      • People have to do these things regularly.
  • Pain naturally changes over time
    • Example: digital marketing, SEO
      • The underlying market changes, so the tools have to adapt.
  • Offering support
    • Example: $100/mo for a premium support queue.
      • “Free money” because you want to resolve all tickets anyway, but this just changes the order that you process tickets.

Bad Market: Viralityness 🔗︎

  • Viral products almost never work.
  • If your viral coefficient is 1% per month (pretty good), and you have 100 users, that means you only get 0 or 1 new users per month.
  • Viral products only work when you have a large customer base.
    • It’s expensive to build to that critical mass.

Good Market: Not real-time 🔗︎

  • A non-real time business is one where it’s not a disaster if your product is down for a few hours.
  • WPEngine (hosting) is a bad example, as any outage is a disaster.
    • “That was a mistake.”
    • WPEngine’s support staff has to wake up in the middle of the night to fix severe issues.
  • Examples
    • Analytics, decision support
    • Finance – Finance employees typically have a buffer around their timelines
    • Project management – If Trello is down for an hour, you’re probably not going to cancel your subscription
    • Content – Can be down for a few hours, but it’s also easy to make always available on a static site

Bad Market: Marketplaces 🔗︎

  • Platform that matches buyers with sellers
  • Examples
    • Etsy, Kickstarter, eBay
  • Difficult to get off the ground
    • You have to attract sellers and offer the functionality they need.
    • You have to attract buyers simultaneously.
    • It’s costly to attract and support both.
  • You’re effectively starting two high-risk companies.
    • Both have to succeed in order for the marketplace to be sustainable.

Good Market: Something that can be “finished” 🔗︎

  • Examples
    • WinZIP, Freshbooks, Basecamp, hosting, time-tracking, bug-tracking, CRM, wiki, task management, email, PDF editor, image editor, web analytics
  • You don’t want to get stuck in a feature war with a competitor.
    • As a bootstrapper, you’ll have fewer resources to build features, so you’re at a disadvantage.

Good Market: Aftermarkets 🔗︎

  • Find an established product with a significant following, and build add-ons or integrations.
  • Examples
    • Smart Bear: Added code review to Perforce and Subversion
    • Balsamiq: Started as add-ons to Basecamp
    • WooThemes: Themes for WooCommerce
    • AlienSkin: Paid plugins for Photoshop
    • QODBC: Makes ODBC interface for QuickBooks, allows customers to make database queries against it
  • Ecosystems
    • Some ecosystems are friendlier than others to aftermarkets
      • Apple App Store
        • Apple is semi-hostile to third-party apps.
        • Apple sometimes introduces first-party apps to compete with third-party vendors on their platform.
      • Salesforce, Heroku
        • They’re committed not to compete with aftermarket vendors.
        • They limit the features they implement themselves in order to foster an ecosystem of third-party tools.
  • Vendors are often interested in supporting aftermarket vendors.
    • Aftermarket vendors make the first party vendor’s product more valuable.

Good Market: Big market 🔗︎

  • In a large market, you have many niches to inhabit.
    • There’s always a risk that your niche is too small, but in a large market, it’s easier to find adjacent niches.
  • Big market gives instant validation that the pain point exists and people are paying to solve it.
  • Big market gives you the option to grow from a lifestyle business to a billion dollar business if you want.

Acquisition model 🔗︎

  • Jason doesn’t like social media as a way of acquiring customers.
  • People underestimate the cost of social media marketing and overestimate its effectiveness.
  • Social media typically doesn’t yield customers who want to pay a recurring price.
  • Jason Cohen’s blog had 40,000 subscribers.
    • Only two signed up when he launched WPEngine.
    • Hiten Shah observed a similar effect.
      • Having a large following didn’t translate to customers.

How much to pay per click? 🔗︎

  • Rule of thumb: Cost per click = Average monthly revenue per customer / 25
    • Example: $50/month in revenue, pay $2 per click ($50 / 25 = $2)
    • The exact cost varies depending on your business.
    • The full derivation is on Jason’s blog.

The squeeze 🔗︎

  • What happens if you successfully build a cash machine?
    • Your business will keep growing.
    • To sustain more customers, you need to hire more people.
    • Your job shifts from marketing and development to coding.
    • Do you still want to run a company like that?
  • Paths forward
    • Sell before it’s too big
      • You can arrange a sale with an earnout if the new owner doesn’t have cash up front.
        • e.g., $20-30k/month for three years
    • Sell to partners
    • Sell to your biggest customer
    • Raise prices
    • Raise venture funding to grow even more
      • If you’re willing to do venture capital, you should start with it rather than a slower start with bootstrapping

How to decide what to do next 🔗︎

  • Thales was Greek businessman-turned-philosopher.
    • When asked what is the hardest thing, he said “to know thyself.”
  • Understand what brings you fulfillment.
    • Understand that it changes over time.
  • Talk to people who have been through this path before.

Summary 🔗︎

Formula for success in a self-funded business:

  • Predictable acquisition
  • Recurring revenue
  • Annual pre-pay
  • Good market

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