The Jewelry Shop Owner and the Performer

Derek kicked off his presentation on profit models with a couple stories.  Derek has a friend who owns a jewelry shop in a tourist area.  The shop had good traffic, but not great sales. Awareness and marketing were evidently not issues, because of the relatively healthy traffic flow into the store.  Yet, the store was faltering.  The owner decided to take some time away to think about next steps for the shop.  When the day before her vacation came, she was packing up and wrapping up loose ends, one of which was to leave directions for her staff to price a box of items at half-price.  She quickly scribbled on the box: “everything here price 1/2″.  Upon returning from her trip she was surprised to find that sales had doubled!  Her employees thought she her strategy to “double the price” was brilliant.  ”What do you mean, doubled the price?”, she wondered, having left instruction to do just the opposite and halve the price.  ”Right here, you wrote ‘everything here price X 2′”.  Upon a misreading of the hastily scribbled direction, her employee had doubled the price of the items to be tagged and shelved.

Why did doubling the price double the number of items sold?  This is contradictory to traditional demand-curve models.  It turns out that tourists used price as an indicator of quality.  Picking up a $12 piece of jewelry to bring home to a friend or family member they might think, “this is nice, but can’t be that good if it’s only $12″.  Yet, when holding a $24 piece of jewelry, customers typically thought of it as higher quality and were thus more likely to purchase.

Similarly, Derek told of a performing friend who doubled his performance price from $1,500 to $3,000.  The result: he lost some recurring customers but more than made up for it with some new customers at the higher rate.  Though he was performing fewer gigs, he was making the same income.  He loved it!  Before the price increase, he soft of performed for the the sake of keeping income coming in.  After the increase, when getting paid $3,000 per performance, he found himself more excited and more into his work!  Eventually his calendar became full at his $3,000/performance rate and he was still excited about his performances. [Ed: Of all the anecdotes of the day, this had the most impact to me as a Ruby on Rails consultant who often gets paid by the hour.  It got me thinking of ways to double my rate in 2010.  Also, the Multiplier Profit Model (notes below) got me thinking of ways to package up my knowledge and experience in different ways.  All-and-all this was a thought-provoking and potentially profitable presentation.]

Business Models

Derek shared his frustration with people that go after the number of users as a metric of success, or love to brag about how their solutions are FREE!  There is no business model there, only a feel-good metric that will not make money.  Only a step up on the business-model ladder are those businesses that blindly follow the profit model of their competitors or peers.  Derek’s talk was meant to get us to think of a larger variety of profit models.

Why?

It’s important to consider and implement a variety of profit models for competitive advantage and for diversification.  If you have all of your profit tied to one model, then when the industry inevitably changes, your entire revenue stream could be destroyed. By diversifying among two or more profit models, you are better protected from industry changes.

Profit Models

Derek next went into an overview of a wide variety of profit models.  Here are notes on three of them. [Ed: These notes lose a lot of impact without Derek's drawings.  Maybe he will post them.]

Customer Solution Profit

This is where you spend a lot of time, effort, and money up front to customize a solution for your customer in order to have long-term, sustainable, stable revenue in the future.  Initially, you lose money as you spend unpaid time getting to know the customer and building and implementing a custom solution for them.  In the long-run though, that up-front effort helps you win customers, keep customers happy all while keeping your support costs low for those customers because your solution is so well implemented.

Derek used the example of Hostbaby.  As soon as someone signed up, they would call them and hand-hold their new customer through getting started.  It was a lot of up-front work, but once the Hostbaby customer was set up and happy, they had little ongoing support work.  Using customer solution profit model helped Hostbaby net ~$2 million / year with no inventory requirement, no warehouse, little physical space requirement, and a small staff.

Takeaway: Consider how can you get to know each of your customers well up front and create a customized experience for them?

Pyramid Profit

This is where you have several levels of products, starting at one that is barely profitable but prevents competitor entry all the way up to a price level that is very high-margin, but low volume.  Examples: Apple’s $59 iPod. American Express’ Green, Blue, Gold, and Platinum cards. Hotel chains.

Takeway:Consider what can you offer to people that think you are too expensive?  On the other end of the spectrum, what upscale, huge profit margin offering can you put out there?

After Sales Profit

We’ve all probably had this experience.  You do heavy research on selection and pricing of a big ticket item like a laptop, appliance, or car.  Yet on the way out the door after purchase, we’ll buy add-ons without any research or price-comparison at all.  For example, we’ll buy a laptop and then choose from a limited selection of laptop bags at non-competitive prices. At the time of checkout of the big-ticket item, we are at a low price-sensitive moment for small-ticket items.  What’s a $200 floor-mat add-on to a $30,000 truck?  What’s a $70 computer bag when you’re already spending two grand on the computer?  Price sensitivity is lowest when your purchase price is high and selection is low.

Takeaway: What tiny but profitable thing can you ad onto someone else’s big ticket purchase?

Multiplier Profit

This is when you have one skill set or product re-packaged in multiple ways.  The up-front development cost of the skill or product is fixed, yet you profit from that skill or product by offering it in different forms. This gives you a broader reach, more diversified customer base, and increased profit.

Takeaway: In what ways can you re-package and re-sell you primary work product?

[Ed: As I eluded to earlier, in my field of software development consulting, this is one of the most intriguing profit models to consider.  For consultants, this is probably one of the most under-utilized yet promising profit models.  When we learn something new in our work, or become an expert at a technical skill, we should package that knowledge up in ways to share beyond hourly consulting.]

——-

Tips:

- Consider doubling your price.  At the least, experiment with your pricing.

- Don’t blindly follow the profit model of your competitors.  Differentiate and diversify instead!

- Consider each of the profit models Derek presented, asking yourself the takeaway questions.

- For more profit models, check out The Art of Profitability by Adrian Slywotzky and Derek’s detailed notes on that book.

Thank you, Derek, for attending LessConf and for your talk.

Rails Rumble and TechStars.

What they mean to how we work.

I participated in last year’s Rails Rumble, creating bidbuildbill.com which finished on the first page of the leaderboard and in close contention for the solo prize (damn that Ben Scofield).  It was a grueling 48 hours.  Yet at the end of it most of the contestants had a working app of which they could be proud.

I have not been a TechStars participant.  I’ve been to the bunker.  I’ve been to Ignite Boulder and Denver Boulder New Tech (BDNT) meetings, both TechStars hangouts.  I’ve seen all the TechStars TV videos.  I’ve read the wrap up posts from TechStars participants.  In other words, I’m a TechStars lurker. I’ve felt just enough of the TechStars vibe to feel I have a very small slice of understanding of the attraction and awesomeness of the program and even more, the people involved in it.

All of that said, here’s some ways in which Rails Rumble and TechStars are similar and what it means to you and I and how we should work.

Planning

Both events get you out of the jump-straight-to-code, eyes-glued-to-screen mode of too many aspiring web-app owners.  While the 48-hours of the build portion of the Rumble encourages an environment of code-like-mad, the time leading up to the Rumble is dedicated to everything except code.  No coding is allowed.  It is planning time.  It is time away from the keyboard to realize that it takes more than just a good code-base to make an app successful. Similarly, TechStars teams spend a large amount of their time working on tasks other than design and development.  A lot of those tasks relate to building relationships with and getting advice from other people.

People

Both events give you the opportunity to meet with, plan with, socialize with, and work with people that are not part of your formal team.  Even as a “solo” competitor in the Rumble, I spent a lot of time chatting with other participants and the very busy and amazingly productive organizers.  Working with people outside of your immediate team is refreshing and productive.  It gives you people from which to get outside, honest feedback.  People to show you some things you may never have thought of, but that turn out to be relevant and useful to your daily work.  And people to help, just for the asking.

Goals and Deadlines

Both events have deadlines and particularly short timeframes combined with goals. The 2 days of the Rumble is about the limit for how short a goal horizon should be. Shorter than that and you’re working a task list – not goals.  The 13 weeks of TechStars is about the limit for how long a goal horizon should be. Any longer presents too many factors out of your control to effectively and efficiently plan around.  Goals alone: no good.  Deadline alone: no good.  Goals + deadline = golden.

Declaration and Expectation

In both RailsRumble and TechStars, you tell other people what you plan to build.  You declare your intentions. Other people have an expectation of you. Talking about your intentions with others is motivation to plow forward and meet your goals. (You can always change your direction.  And when you do, you simply re-declare what you are going to do. More about this in Just Set the Right Goals.)  An environment in which people have expectations of you is powerful and motivating.

Cooperation and Competition

In the 48 hour Rails Rumble, there is no time for self-doubt to get in your way.  And if it does, you need only look at others around you and realize that everyone has hurdles.  But the best part is that those going through this with you are there to help you over the hurdles.  Awkwardly termed ‘coopetition’, this simultaneous sharing-of-support and pushing to one-up the other guys is something I’ve found very productive.  While Rails Rumble is explicitly a competition, it is still with gloves on and not a knock-out, drag-out, winner takes all at any price proposition.

During the course of last years’ competition, most teams had at least one person in the irc channel where we would encourage each other, joke with each other, help each other through little technical bumps, and generally just kept the tone of the competition friendly and productive.  Yet, there were just enough hints dropped about teams’ progress that made me want to keep working harder and faster to keep up.

I imagine it might have been that way at TechStars as well.  While TechStars is expressly not an internal competition, there is still the motivational element of keeping up with the other teams.  There is still that final Investor Day in which all teams are pitching to the same group of VCs and investors.  Each team must have pushed themselves just that little bit harder knowing the ‘other’ teams would set the bar high.

Post-Launch Relationships

By and large though, it all comes back to where we started.  Relationships with our peers and others in our professional community.  If you really want to know who someone is, what they like and dislike, where their expertise lies, and why they’re into this crazy industry – if you really want to know – there are worse ways than to be locked up, physically or virtually, in a room with them. Whether it was for 48 hours or thirteen weeks, you will remember and possibly work with your new roommates long after you’re done bunking up together.

Belief that It Is Possible

Besides carrying their own reward, all of the benefits we’ve covered are also the pillars supporting the most powerful motivator of all: Belief In You. Chris Kilmer covered this so well and thoughtfully in his recent blog post that I couldn’t say any better here.  So I won’t.

Don’t wait until the Rumble comes around or to get accepted into TechStars to work this way. If you don’t have a RailsRumble or TechStar environment, find one or make one.

The Takeaway: Have Yourself a Daily Dose of TechStars and Rails Rumble

So, all of this reflection and feel-good keyboard tap-dance is not just for grits and shins.  Here’s the kicker and the takeaway.  Even if you are a solo developer, working from a lonely home office, you don’t need to wait until the Rumble comes around or to get accepted into TechStars to work like this. You should be doing it every day.  Yes, Rails Rumble and TechStars bring a nicely packaged structure with timeline and expectations and industry-leading people to your project.  But you can also seek it out.

Get involved in groups of local developers or, even better, start your own group of like-minded folks.  Tell them what you plan to do and when you plan to have it done.  If you work as a part of a team, get the team involved in activities with others outside of your small group.  Get together for code-and-coffees, user group meetings, and product demos. Ask for mentorship from experts like those at SCORE, that offer free small business mentoring.

Members of your support community can offer a environment of planning, cooperation, competition, feedback, and expectations like that sought after by Rails Rumble and TechStars participants.  If you do not work in a workplace that offers the environment I’ve described, if you do not have a RailsRumble or TechStars type environment, I urge you to find one or make one. Do it now.

Certainly the Rails Rumble and the TechStars environments can not be duplicated.  They are unique and valuable experiences presented by one-of-a-kind type of people.   So, while your application to TechStars is being considered, while you are waiting for the next Rails Rumble to come around, (or Startup Weekend to come to your town, etc.), make sure to go ahead and build your own community and network in support of your next big idea.

It’s not only the simplicity we crave. It’s the feeling of having nothing to lose. By having nothing to lose, the biggest obstacle to action is removed. He can honestly say: “What’s the worst that can happen?” If we start a new business, or quit our jobs, or travel more, or work more, or work less – what’s the worst that can happen?

The thing is, we call can do that. We can capture the motivating excitement and hurdle-reducing state of having nothing to lose by imagining our worst fears of losing it all. (When done as an exercise, it turns out we do not need much help to do so. We often overestimate risk.)

In The 4-Hour Work Week author Tim Ferriss quotes:

Set aside a certain number of days, during which you shall be content with the scantiest and cheapest fare, with course and rough dress, saying to yourself the while: “Is this the condition that I feared?” — Seneca.

When inventoried, we’ll often see that some of our worst fears are 1) unlikely to happen and 2) recoverable. Often, upon this closer inspection we’ll realize the permanent affects of the risks weigh far less than initially imagined.

……

With our young nephew’s big life change this weekend, I’m glad for the reminder of what it’s like to be just starting out. And for the reminder that no matter where we are in life, we can all start new goals, make big life changes if we want, and have the open-ended excitement of a clean slate. And – if the worst comes to be and we lose all that at one time we thought was important – we will probably realize it wasn’t important and can rebuild and start anew. I look forward to seeing what the future holds for our nephew, wish him well, and am sure he will do great things — with nothing to lose.