Volume Number: 25
Issue Number: 08
Column Tag: Industry

The Business: The Workshop, The Sales, and The Fun

All we know about starting an Apple business, from the idea, to product launch and beyond.

by Michael Göbel and Oliver Pospisil, Inspired By Life

Consultant: "Oliver, what's the price for your app?"

Oliver: "I thought of $19.95."

Consultant: "You buy cheap, you get cheap. Is it what you want to communicate?"

Oliver: "No. $29.95?"

Consultant: "Oliver, get real! You want to sell to guys earning $2,000 per day! Why not $999?"

Oliver: "What would a fair price be for Spring?"

Michael: "$39 for version 1.0."

Oliver: "Isn't that too cheap?"

Michael: "Compare it to iWork which goes for $79. $39 is a strategic price."

Oliver: "You're right. $39 is in line with our future plans."

Your idea passed the terrific idea test and your better half is on board. Great!

Now, let's start coding. Wait a minute. Your overall goal is to make a living out of it: Your application should pay your bills. Thus, before heading into coding, you should predict as accurately as possible how successful your terrific idea will be in terms of money.

We now welcome you to our One-Day-Business-Workshop. The key take-away point and lesson learned will be that you'll know whether you're investing your time and money in the right terrific idea.

Every start-up needs money to take off. We present the alternative ways to get the money you need.

We'll wrap this article up by focusing on certain legal aspects that you should by all means take into account.

The goal of this workshop is to figure out whether your terrific idea has the true potential to pay your bills. We will focus on numbers and take marketing and sales for granted. Be assured that we will get back to marketing and sales in great detail later on in this series of articles.

At the end of this workshop, you will know who your ideal customer is, the price of your product, the sales figures and the cash, all combined in a compact chart giving you an overview of the first twelve months of your business after product launch. We don't strive for total precision, just for sufficient assurance that we're on the right track.

Targeting teenagers is different from targeting senior executives. Choosing your ideal customer affects the price for the product, the sales figures and later how you design the GUI, the website, your communication style and sales channel.

Now just imagine one day in your user's life. Tell a story about how your user gets up, eats breakfast, lunch and dinner. Is the user interested in sports? What's his or her profession? And most importantly: When and how does the user use your software during the day?

Breathe life into your story as much as possible. At the end, you'll have a holistic picture of:

- who he/she is

- how old your user is,

- how much money he/she spends,

- how they buy (e.g. your software), and

- what they are most likely doing with your software.

Isn't it fun to imagine how other people live?

Now you need to figure out how many potential users for your product there are. In other words, the market size. You determine the market size by obtaining information from the bureau of census in your relevant country. We mainly need the market size to cross-check the sales figures.

If you get the feeling that the market you chose is too small: It's not a bug, it's a feature. It is much easier to become the leader in a small, niche market and to then aim to gain a foothold in another, larger market segment.

Once you have calculated the initial costs and sales figures, you will know what your minimum price must be in order to pay your bills. You have made up your mind and are no longer interested in coming up with a value-reflecting price. Or do you think that if $79 is all that you need to be happy that you could easily switch to $799? I sure doubt it.

Figure 1: Sales chart of VoodooPad by Gus Mueller

Finding the right price means thinking on multiple levels. Let's go through them:

Pricing has a lot to do with the customer's perception. As an extreme example think about the iPhone app for $999 stating, "I am rich." You need to put yourself into your buyers' shoes and take a look at your product and its price from their point of view.

In addition, you also need to find out how much they can afford to pay: A student can't afford $3,499 for your photo editing software but a professional earning $2,000 per day can. What does your story of the user's life tell you about his or her financial background?

Take your reputation into account: Do you want to build a Smart or a Ferrari? A high price goes hand-in-hand with high expectations: Starting with a feature-rich application and premium packaging that reflects the high price, a printed manual and an ultra-fast and highly effective multi-language support, zero bugs, one-to-one training, options for customization and so on.

Do you want to sell fewer licenses for a high price or a lot of licenses for a low price? You want to sell as many licenses as possible. Why? You need a large customer base. This is inspired by Eric Sink: "A larger customer base will generate more buzz and more word-of-mouth marketing. A larger customer base has more gravity." More satisfied and happier customers lead to more word-of-mouth, which leads to more new customers and so on.

Pricing your first application might also involve a strategic component. Let's say you want to use your first application to gain footing in the market. The application is a door opener and a type of test-drive for the product development process. It's for establishing and adjusting the business processes, testing a concept, attracting investors and supporters or you might have some more terrific ideas in the pipeline. The price is more strategic because you might consciously decide to set a lower price with regard to your future products than you might set in case you only have one idea and your future builds on the monetary success of that one idea.

Never use price as the primary differentiator. Use product features and perception instead. You might be forced by competition to adjust the price (or reposition the product). But that is a different problem. If you use a low price to differentiate your product from those of your competitors, you position yourself in the low budget section. It is very, very expensive to change that reputation later or charge a much higher price for the same product.

Some thoughts on price models: What about volume discounts and academic pricing? First of all, carefully think about whether or not your product qualifies for these models.

Does an educational institution buy your software in large volumes? If yes, think strategic: Will the students using your product in college or at the university keep it when they switch to their first job? If so, treat them well; they will be the ones to open the doors to companies.

Things look different in the business sector: Corporate buyers always negotiate for a large discount and they become your reference users. Think very carefully: Can they prove that they are the market leader and that when they use a new tool, the rest of the business sector will follow suit? Never agree to a discount when it has to do with a pilot project. You are a start-up and your product has its value. Period. But be prepared to provide a company license.

Keep your price model simple, simple, simple. This means keeping your products simple – not five different versions of one product: single user, standard, professional, business, corporate edition and so on, resulting in a very large comparison chart. – Act like Apple: There is iPhoto and Aperture – Photo management for "the rest of us" and professionals. Not even one single comparison chart is needed.

Compare your price to other software products in the market and your target market sector in particular. To us, Apple's iWork is the epitome of strategic pricing right now.

Definitely make sure that your product has a price-feature ratio, resulting in the perception of a great product with a fair price.

And last but not least: Ask your attorney whether the respective law affects your pricing.

One last thought: Users will agree to pay a higher price for version 2.0 than for 1.0. But think twice before charging version 1.0 users for the update to version 2.0. After all, they are the ones who helped you take off.

Now set your price.

"Our projection is conservative", this is lie #1, taken from Guy Kawasaki (p. 128). I can personally testify to that: We tend to overestimate sales almost naturally, because we aim for success. My first approach to estimate sales figures proves that this holds true. Since I've seen this approach applied far too often, I want to present it here:

Step 1: There are about 30 million Apple users

Step 2: My idea will attract 10% of them: 300,000 users

Step 3: I will win 10% of them over in the first year: 30,000 users

Step 4: Sales price will be $179, leading to revenue of $5,370,000 (Michael and I will retire)

I presented it to professionals. They laughed outright and taught me a lesson by backward calculating my figures:

Step 1: In the best case scenario 4% of those who downloaded the software will buy it. Thus, to get 30,000 buyers you need 750,000 downloads.

Step 2: Only 10% of those who visit your website download the program. Thus, to get 750,000 downloads you need 7,500,000 website visitors. That's 20,548 visitors per day. Ouch!

If you can spend millions of dollars for advertising, you might attract that many visitors. But let's face it: The top-down approach doesn't lead to realistic numbers. Thus, go with Guy Kawasaki's bottom-up approach:

Step 1: How many visitors will come to your website? Let's say 1,000 per month.

Step 2: 10% of the visitors will download your software. That is about 100 per month.

Step 3: 4% of those who downloaded it, will buy it. That comes to 4 sales per month. That's 48 sales per year with a turnover of $8,592 (given a price of $179). (No retirement)

How do sales develop over time? The best thing for you to do is to ask an experienced successful ISV and analyze their sales chart. It was really great of Gus Mueller to share his sales structure with us (above).

Analyze its structure: See how product and marketing activities relate to sales. Over the course of the first year you can expect to reach a first sales peak right after product launch. After that first peak, sales will drop significantly and develop like Gus' chart if you work hard to achieve this.

Our advice: Keep your expectations low. Very low. Shocked? That's all right. If you can prove us wrong, congratulations and please tell us how you did it!

Now, set your sales figures for the first twelve months.

Final cross-check: How does the market size relate to the number of website visitors and sales figures? Do you have more website visitors than market members? Expect to only seize a small fraction of your market in the first year.

Your payoff depends on the sales and your expenses. So what you need to do first is to create a list of your monthly expenses. Make sure to include your quarterly, half yearly and yearly expenses accordingly. To get a detailed view, we will depict this on a monthly basis.

Set a table with the following layout up and enter your revenue and expenses:

This table has been adapted based on Eric Sink's research (see p. 23 of his book in the reference section). The final table should reflect the first twelve months after product launch.

Congratulations! You've worked your way through our workshop. Now it's time to sit back and reflect on the result from a distance. Take two hours to think about the price and sales figures one more time.

First hour: As a start-up, your financial background does not allow you to waste even one single cent. So, seriously reflect on the price: What would happen if you double or triple the price? When do you intuitively know that you can't hike your price up any higher? How about just giving users your software for free and generating money differently? Play around with the price and happily imagine how the revenue develops if you raise the price – dream of retirement!

Take the second hour to reflect on the sales figures: Can you generate enough qualified visitors? How can you drive more visitors to your website?

In this one-day workshop, we did not talk about marketing and sales. We did this intentionally: When you are really ready to unveil a prototype to the people you want to win over as customers, we will delve into the marketing and sales aspects in full detail.

So, hopefully your endeavors are paying off. Next, we need to think about the money one more time: How to finance it?

Don't be surprised if it costs you $30,000 to $100,000 to start your business up. Don't be surprised if it costs you triple the amount that you had originally planned. There are several options to finance your start-up with two extremes: Using your own money or raising external money.

If you follow the micro ISV paradigm you do it completely without external money, that's called bootstrapping. You use your own resources to finance your start-up. This includes personal savings and the credit card debt.

Bootstrapping typically means that your advertising budget isn't even worth mentioning at all. It also forces you to do more or less everything all by yourself since you cannot afford to pay external developers, marketing or sales experts, which results in a stretched time-to-market.

The biggest advantage of bootstrapping: It is all in your hand. On the contrary, venture capitalists start with the exit in mind: They only invest if they believe they can sell your business and subsequently make a big profit. That's the trade-off: Personal freedom or money?

Be careful about doing everything ALL by yourself. For example, in case you are not really addicted to icon design (like I am), you should hire a professional icon designer. The same holds true for website design. On the other hand, in case you are a great GUI designer with limited coding know-how, team up with someone who fills that gap. These kinds of partnerships could well end up in a joint endeavor.

Last year I asked Fog Creek Software how to find a great developer with only a very small budget. Their answer: " Hmm… That's a tough one! Find a friend who isn't as concerned about the money... maybe you could meet people at user groups, or online through meet-ups in your area.  If you have a partner you like, it will make things much easier." At first I was disappointed, yet they are right: There is no silver bullet. Partnering is a sort of bootstrapping: Doing-it-together with a small budget.

That is the story behind Michael and I: Michael has the know-how and I had the idea. Michael developed the idea even further.

You share the good times and you have someone to talk to when times get tough and you also avoid the risk of rushing into a decision you might later regret. One more advantage: Shared time equals money: together you shorten time-to-market.

In addition to bootstrapping, you can ask friends and family to lend you money.

We do not advocate this for one reason: If you fail, and statistics prove that this is likely, you could end up damaging your most important relationships if times get rough.

If you have a friend or family member who is literally bathing in cash like Dagobert Duck and definitely doesn't need all of that money, then you might think about it, but be very careful. Because once again, in case you fail, your friends and family might be all that you will have left.

Here in Germany, you will not find one single bank that is willing to invest in a small software start-up without any financial background. And today, even just asking them is a sheer waste of your quality time.

The only option is to borrow on mortgage. However, before you do this make sure to ask yourself: In case I fail, will I still be able to pay all the money back or will I (and my spouse, my children) lose their home?

There is one chance to convince your bank: That is, if they're on the savings side and will get the money back at any rate. Try to apply for a loan guaranteed by the Small Business Administration. As an alternative, you might be eligible to apply for a Small Business Innovation Research Grant.

Angles and venture capital are geared towards very costly endeavors with very high risks and the promise of a very high return on investment (five to ten times the money invested) within a five to seven year timeframe. Nowadays, however, they prefer to invest in growth, and not in start-ups.

Typically, business angles are interested in supporting a start-up with money (up to $500,000), expertise and contacts.

If you opt for venture capital ($500,000 and much more) you need to be prepared to hand over the managerial reins if the business situation makes this necessary and to sell your company after five to seven years. Venture capitalists start with the exit in mind. It is not a shortcoming, but simply a different perspective on business than you might have.

In these times of turbulence, it is not easy to convince a business angle or venture capitalist because you're competing for money with well established companies that must fulfill signed contracts – which is less risky for the investors.

If you want to try it that way, prepare a presentation (you are a great communicator, aren't you?), a full featured business plan, and you need money for due diligence and attorneys. In addition you need time, they never decide at once: Three to twelve months is the norm.

Especially against the backdrop of today's global economic crisis, business angles and venture capitalists have better alternatives to invest their money than in software start-ups.

If at all possible, fund your start-up with your own money. Friends and family might act as a backup. Michael and I agreed to these financial limitations. The big advantage: It is all ours.

That's my dream: We have one idea that needs a lot of money. Once Spring is up and running we are no longer a start-up, then we are in the growth phase. Then it is time to keep a lookout for an angle with a very, very long term perspective, who shares our dream.

Please note that we are not attorneys-at-law! The advice contained in this article is not legally binding! Therefore, please contact your attorney if you have any questions concerning your specific legal issues!

Paradigm (Inspired by Joel): As a start-up you should make it easy for your customers to buy and to leave. No barriers definitely help drive sales.

Big companies use their power and market clout to restrict one license to one computer. And now for a real-life example: Let's say you own an iMac and a Macbook. How many times did you install iWork? And how many licenses do you have? Oops!

We recommend allowing users to install the software on all computers they own. You won't lose any sales; instead you will earn a great reputation. That's because people will not only talk about the features of your software, but also about the legal freedom, too. This will drive more sales to you than a restrictive license agreement. It is something that you can't control or influence anyway.

You can try a lot of things to make your serial numbers as secure as possible. You can even make use of special hardware dongles to protect your software. I have a strong hunch and an intuition that advocates doing so: Michael and I invest so much time, money and creativity in Spring that I feel we deserve every penny we charge for it from everyone using it.

Never listen to your hunch or intuition with regard to this, because (1) Crackers always find a way, (2) your software isn't on the cracker's radar and (3) you waste quality time. Our advice: Do not make it too easy to use your software without a serial number. A dongle or a complicated registration process destroy sales.

And never ever let the honest users pay the price to compensate for the loss incurred due to the very few that betray you. This would drain your energy and time, gobble up your money and crush your dream!

Not really legalese, but equally important. Register the domains you need as early as possible. If you're not sure whether a domain is the right one, be on the safe side, grab it and decide later. Be prepared to buy one if necessary or be creative: spring.com was impossible to get, springapp.com as well. But thespringapp.com was still available.

Just a few weeks after we registered inspiredbylife.com, someone emailed me and asked me if she could buy the domain. I'd still be shedding tears today if I would have failed to get inspiredbylife.com just because I didn't act fast enough due to my own lack of determination.

In any case, check your local and international trademark agencies to make sure you are not infringing on any trademarks or copyrights. And consider protecting your own intellectual property as soon as possible. You don't want to change your company name just because someone else is faster than you. The United States Patent and Trademark Office provides a special website for small businesses.

Oh, and make sure to put a copyright statement on all of your documents and your webpage. And keep the year up-to-date, too.

Easy in: We recommend giving potential customers sufficient time to try out your application. If it is useful for them, they will buy it. Do not pressure people into a sale. That just does not work. Think carefully about how long someone needs to test your software in a real-life case: 45 days, 60 days or 90 days. Adjust the trial period accordingly.

Easy out: You want satisfied customers who talk about your great software and convince others to buy it as well. Sometimes people buy your software only to get back to you later on to ask for refund. Let them go and make it easy for them. As an example, go to fogbugz.com and click on "Buy it" to read their promise. They walk the talk: Read "7. Greed will get you nowhere" at http://www.joelonsoftware.com/articles/customerservice.html.

Think for a minute: In case you find great software… How many people do you tell about it? Maybe you talk to two, three or five people. In case you have major trouble with a software vendor… How many people do you tell about that? Everyone you meet, you put it on your blog for sure.

This is why you should focus on the honest customers – make them happy and they will tell others how great you are. And never give frauds a reason to bash you, because too many people will believe them.

In this article we went through the steps of a Mini-Business-Workshop. Hopefully all lights are green to move on.

We shared our thoughts on raising enough money to get your venture off the ground. Again, investing only your own money gives you freedom, total control and keeps you focused.

We hope our thoughts on certain legal aspects have been an inspiration for you.

Final recommendation: Consider hiring a start-up consultant for help, especially if you are weak on the business side. Many institutions and universities provide help as well.

In the next article, we will show you the fastest way to figure out when version 1.0 is released by thinking carefully about the must-have features.

We want to share stimulating, innovative ideas with you and we really look forward to your feedback! Is anything missing or do you think something could be fleshed out in further detail? Just let us know and write to oliver.pospisil@inspiredbylife.com.

Kawasaki, Guy. The Art of the Start. London, 2004.

Sink, Eric. Eric Sink on the Business of Software. New York, 2006.

Wiefels, Paul. The Chasm Companion. New York, 2002.

US Census Bureau: http://factfinder.census.gov

USPTO on Small Business: http://www.uspto.gov/smallbusiness/media/

Small Business Administration: http://www.sba.gov

Small Business Innovation Research Grant: http://grants.nih.gov/grants/funding/sbir.htm

Association of Small Business Development Centers: http://asbdc-us.org

P>http://www.fogcreek.com

http://www.47hats.com

http://www.ericsink.com

Michael started MOApp up in 2004 and he has now developed more than ten applications - six of them are Apple staff picks. He does everything from software development, icon design, website development to sales management and public relations.

Oliver has been in the software business for over ten years, specializing in areas ranging from Palm programming to large-scale, in-house Java projects. In 2006, an idea grabbed his attention that both are now working on. He is still working full-time for a German retail company and will be until the new business starts paying off their bills.