The Price of Everything and The Value of Nothing

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You might be interested in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.

People Love Free

On January 7th, 2010, Sparkfun, a Boulder, Colorado based electronics supplier, decided to give away free merchandise. Each customer who placed an order that day received $100 in free goods. No minimum order. No code needed at checkout.

Ten minute before the web store opened, Sparkfun’s servers were already buckling under the load. Their company name was appearing in four of the top ten search terms on Google Trends. It took one hour and 44 minutes for the company to pass their pre-announced limit and give away $100,587.

This extravaganza was originally announced on November 23rd, just ahead of the Thanksgiving holiday weekend. Founder Nate Seidle said in a blog post that he was inspired by Chris Andersen’s book Free and wanted to give back to his customers. I found out about this incredible offer from Chris Andersen himself that morning via his Twitter feed. In response to the offer Andersen said:

“Yikes, what have I done?”

Indeed.

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You might be interested in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.

Happy Birthday, 100 Best!

The 100 Best Business Books of All Time is one year old today.

My friend Ray asked me today if it felt like a whole year had gone by. I said yes. We talked to all sorts of media people, did 20 live events, and answered countless emails from people looking for the right book or idea. It's something that has had my attention the last 365 days.

That is going to change now. I am starting to focus on other projects. Much of the team that made the book happen have moved on to new projects.

The book doesn't really need attention any more. It has found its audience. People are still recommending it to others. And that is awesome.

Happy Birthday, 100 Best!

Fixed to Flexible Interview with Evernote CEO Phil Libin

I published Fixed to Flexible on Tuesday. Everything was going well. People were starting to read it. They were starting to talk about it.

When I check my email Wednesday morning, I had an email from Evernote CEO Phil Libin:

Just read your ebook. It's in my Evernote now. Great job, thanks!

Your Evernote math is a bit off.

Ugh.

I asked Phil if he would help me clean up the math and answer a few questions about the company. He agreed and the results follow:

Todd: So, I seem to have messed up the math a little.

Phil: It was my fault for being confusing. When talking to the BBC I switched back and forth between talking about all users and active users. Active users are people that have used Evernote in the past 30 days. That's important because someone who doesn't use the system in a given month, doesn't cost us anything that month. So that 9 cents per month figure is for active users, but you did the math as if it was 9 cents per month for all users. Only about 30% - 40% of our users are active in a given month, so the mistake makes our margin looks a lot worse than it really is.

I ran the numbers from January 2010. At the end of the month, we had 2,335,676 total users and 41,598 premium users. Total variable expenses (hardware + software + hosting + network + operations staff + support staff) were $68,641. Total revenue from active premium users was approximately $145,000. I say "approximately" because this is recognized revenue, which trails cash, but is more relevant for gross margin calculations. The gross margin comes out to about 53%.

The gross margin increases every month because revenue per user grows (conversion rates go up because long-time users are more likely to convert) while variable expenses per user decline (Moore's law + efficiencies of scale).

There are other sources of revenue (as well as fixed expenses), but they don't move around much, so the gross margin is by far the most important factor. We launched the service into closed beta in February of 2008. Gross margin went positive in January 2009.

T: What other factors need to be taken into account?

P: There are many other factors, enough to fill a book. Maybe we should write one together. The gross margin is the single most important factor, but the other stuff that you have to worry about are fixed costs (which can be huge in a high-tech startup), fundraising, team building, product development, marketing, execution, lunch, etc.

The general recipe I try to follow is:

1. Invest heavily in the product; focusing on things that will make your customers love you and things that will keep your variable costs low when you scale. Make your product free so that you don't have to pay for traditional marketing.
2. Raise a little bit of money and put all of it back into the product.
3. Slowly introduce paid features but always keep the "main" product free. Get to positive gross margins.
4. Raise a lot more money and put it all back into the product.
5. Grow until your gross margin makes you fully profitable.
6. Put all the profit back into the product.

People ask about exit strategies, but my goal has always been to get big enough and profitable enough that the last thing you'll want to do is exit. That's when you'll exit.

T: My original hypothesis was that you would benefit from declining costs in line with Moore's Law/experience curves. Do you continue to see prices falling in processor power, storage, and bandwidth?

P: Moore's law moves mountains on the decade-scale, but it's not quite fast enough for the planning purposes of a tech startup. For a really quickly growing startup that's always doing something new, you have to multiply Moore's Law by Murphy's Law; "The number of things that will go wrong will double every year." Sure servers get cheaper, but you probably bought the wrong ones anyway...

The real medium-term cost savings comes from efficiencies of scale and getting better at what you do. For example, we currently have about 60 servers in the data center and four operations guys to maintain them (both included in the variable costs for gross margin calculations). When we get to 600 servers, we won't need 30 ops guys, probably 10 will be enough.

T: I have always found the two options at Evernote interesting. There is some good research that says three options increases sales. What has been the thinking?

P: You're probably right. We just haven't had time to get into heavy price theory yet, but we might experiment with different price tiers down the road. We decided to go with a single, low price for the premium version to keep the decision for users as simple as possible.

I don't know much about the black-art of pricing, so for my last 13 hour flight to Japan I brought three books on pricing strategy on my Kindle and a copy of the Lord of the Rings trilogy, "just in case". Wound up reading LotR for the sixth time and still don't know anything about pricing. Well, I know one thing: there will always be a free version of Evernote, and it will always be the "main" version.

T: Many entrepreneurs are at home dreaming of their version of Evernote, lured by extremely low cost of bits. Freemium still seems like a tough model. What do start-ups need to think about when rolling out a freemium model?

P: Here are three things I think about:

1. Make a product that a billion people will fall in love with and use for the rest of their lives.
2. Make it easy for a single-digit percentage of them to pay you a few bucks a month once in a while.
3. Make sure your variable costs are low enough that you can make a mountain of profit if you get #1 and #2 right.

If you can't see how you'll do all three things, go with another business model.

T: Thanks writing me to correct my assumptions and taking the time to answer some questions.

P: My pleasure. Thanks for actually writing a book about this!

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You might be interested in the ebook Free to Flexible: Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business. You can download it here.

Let's Get To Work

I spent most of the day following up on the ton of responses on Fixed To Flexible.

So, let me start by saying thank you to all of you who read it and shared it with others.

I have been getting emails ranging from very general to very specific about pricing and margin. So, I want to share some of those queries in the form of blogs posts over the next week.

I also have some ideas that didn't fit perfectly into the ebook and I was afraid it would get too long, so I want to post some of those thoughts as well.

We are going to go through a couple of revisions in short order. I already posted Version 1.01 with small typographic corrections. Thanks to Dylan, Sally, Joshua, and Iain for writing me with those annoying little errors.

Tomorrow, I will be posting Version 1.1. Didn't expect a big revision so soon, but Phil Libin, CEO of Evernote, dropped me a note with some additional information about his business. It changes some of my conclusions in the Margin section. So, I'll run through that in a blog post and then revise the ebook. Phil also agreed to do an interview and we will be posting in the next few days.

So, let's get to work and find a bunch of ways to make these ideas work for you.

Fixed To Flexible - The Ebook

Let me present my first big project.

It's called Fixed to Flexible and it is about cost, price, margin, and the options we have for how to sell.

Hope you will take a look and if it makes sense to you, share it with some folks you think it might help.

The ebook is easy to share. You can download the whole ebook and email it to a friend. The viewer below can be embedded into a blog and shared that way. There are also buttons at the top to share with friends and followers and Facebook and Twitter.

Fixed to Flexible - The Ebook

"The 100 Best Business Books of The American CEO"

Today, I got in the mail two copies of the Japanese translation of The 100 Best Business Books of All Time from my good friends at Portfolio.

The Japanese title is "The 100 Best Business Books of The American CEO" (playing off the authors from business book retailer 800-CEO-READ).

Our Japanese publisher Kodansha has done a great job with the book. There was some concern initially about being able to include all 100 books because of translation costs and book length. And it is understandable, the Japanese version comes in at 516 pages versus the American version at 316 pages. I even went as far as developing a shorter list with a new table of contents. It is wonderful to see they decided to include all the selections.

There are some nice details. Kodansha maintained the "Where to Next?" section with the choose your own adventure feature. They assigned a number to each book to help with organization, providing the number in the table of contents and then in the page header. The best part though is the addition of the cover art from the Japanese versions of these books. They kept the American version at the front of the review and added the local versions at the end.

Authors always talk about how cool it is to see their books printed in other languages. I have to agree. It is WAY cool.

Ideas Need Air

I got out of my basement office yesterday and spent time with people I know in Milwaukee.

I was reminded again that ideas get better when you talk about them. Face to face is better than phone and much better than email.

You can see immediately if they get it. If they are good listeners, they share with you what works and doesn't.

Better yet, new ideas or appear out of thin air.

Don't keep things to yourself. Find someone to talk about your crazy idea with today.

Book Review - Linchpin by Seth Godin

In 2003, I was working with my father in his small sheet metal fabrication shop. We were struggling to keep customers and attract new ones. I read Purple Cow from a milk carton and it changed my life and the trajectory of our company.

Lightning does strike twice.

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I keeping changing my mind as I think what Linchpin is about. Seth Godin is certainly writing about work, how it is changing and the opportunities that will create, but it is also about art and change and gifts.

The first part is available in any number of books. The Spring 2010 business book season is full of them. Dan Pink's Drive, The Heath Brothers' Switch and 37 Signals' Rework are all about doing, what gets us to do things, and how we get ourselves to do things different. That is covered in Linchpin as well.

It's the second part, the 'what' we should do, that deserves attention. Here Seth does what he always does: expands the meaning of words. Art is not a painting hanging on the wall in a museum, but rather "a personal gift that changes the recipient." Art creates change, whether stump speech or chocolate cupcake, stone arch or science fair experiment. Everyone can see themselves as artists.

Artists give gifts, Seth says. On this point, most readers will struggle, but Seth comes back to it multiple times. We think of gifts with wrapping paper and bows, given on special occasions. Seth is not talking about the holiday reciprocity with we have come to expect. He says those expectations cripple art and creates an arms-length quid pro quo. Give without expecting anything in return.

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Linchpin has done the same for me that Purple Cow did. Books are often about timing and hearing what you need to hear at the right point in time. I write this review as I start off on a new path in my life, and Seth told me a bunch of things that I needed to hear or maybe just needed to be reminded of.

(You can also listen my interview with Seth Godin here.)

Idea Arena Podcast - Linchpin Interview with Seth Godin

Seth and I spend 20 minutes talking about the words he choose to use in Linchpin and what those words mean.

Art. Gifts. Emotional Labor. Shipping. Map Making.

Idea Arena Podcast - Linchpin Interview with Seth Godin by toddsattersten

(You can also read my review of Linchpin here.)

Posted onTuesday, Jan 26, 2010 in Books, You | Permalink | | TrackBack (0)