Apr 14 2009

Where do Value and Cost Meet in your Business Model?

Jeffry

This post comes out of a conversation that John and I had a while back.  We thought it would make a good post here; so this is my attempt at ‘summarizing’ the discussion.

We were discussing potential topics and sponsors for our podcast, The Flex Show and that led to a comment on pricing of various conference tickets.  Obviously that is a topic important to John.

Jeffry Said:

I don’t have the magic wand to tell us where the value / cost line should meet.  I do tend to agree that some conferences have crossed a line, where their cost no longer matches its value.

I think I read a blog post that made me think 360|Conferences was struggling with the same cost vs. value issue.

I was reading something about the down turn of the newspaper industry.  A lot of people complaining about the downturn seem to say that the newspaper “business model” was to sell news to people.  But, I read something that said the real business model was selling the access to people (community) to advertisers.  It makes a lot of sense to me.

The [current] business model of The Flex Show is to sell our community to advertisers.

The [current] business model of Flextras is to sell software to the community.  I worry it is not a long term sustainable approach, though.  I believe the real profit benefit to customers is going to be selling access (support) to myself [and other Flextras employees.  Plenty of companies (Redhat, MySQL) have had success with the “premium support” style models.  A lot of my support option ideas don’t apply to a company w/ no proven record and/or only one component, though.  This comes back to my theories on the difference between digital / infinite goods and scarce goods.  Many of these theories were fueled by reading techdirt commentaries.

I think the business model for a conference (such as 360|Flex) is to two fold.  You sell access to the community to advertisers. And to attendees you sell access to the experts.

John responded:

We’re actually in the opposite problem as some other conferences  (IMO). We offer way more, but charge too little. We’re realizing that we’re so bent on two very counter ideas. We’re obsessive about being less than everyone else, and equally obsessive about offering the most value. If we were wal-mart and conferences were made in China, that might not suck, but for Tom and I, it sucks.

We’re not thinking of raising prices, but realize our current pricing model’s biggest flaw is our price/attendee mix. we can’t do enough shows at that level to really be profitable. beyond paying our phone bills, writing a check here and there, but nothing FT Salary level.

Yeah I agree. it’s more about connecting sponsors to community, while providing community a reason to be there. That’s what I’m hoping to help us figure out with The Flex Show. we’ve got a very targeted community, there has to be some one who wants to talk to them.

I dunno, but these topics rock!!

Jeff Responds

I’d always recommend focusing on adding value and less so on cost through the door.  Companies who compete only on price die.  Because there is always someone who can come in and do it cheaper.  When I was doing focus groups for Flextras, no one blinked on pricing [as long as the components would help them get their job done].

I struggle with the difference between providing a discount (generally bad) and adding value (generally good).  I’m pretty sure that providing the pre-conference day free to attendees is adding value.  Most other conferences charge for such things.  Charging extra for that day might cause backlash.  But, I wonder if you offer a lower-priced 3 day pass for those that don’t want to / can’t make the pre-conference day?  I’m not sure.  I’m entering a realm where I don’t have experience to back me up; and I always have a sense of discomfort telling other people how to run their business.

Maybe we should turn this into an OurStartupStory post somehow.

John Responded:

Yup, exactly, wish we had realized it sooner, but yeah. We’ve woken up and realized low price is fine, but better value is better, and we have that in spades.

Shoot, Tom and I ran head first into a realm we had no experience with :) I actually prefer that, since experience leads to more of the same in my opinion, LOL

Jeff Responded

It is often hard to get out of the “more of the same” thinking, that is for sure.  Reminds me a bit of Courtney Love’s now famous article about the music industry.  Around that time she was quoted as saying she would hire non-entertainment lawyers who could offer a fresh view of the “indentured servitude” of musicians and songwriters.  Hard to believe she wrote that 9 years ago.

And for our readers, here is the post.


Feb 9 2009

There are No Absolutes in Business

Jeffry

I saw this post come up across my twitter feed.  “Samuel” wrote about 10 Absolute “Nos!” for freelancers.  These are things he thinks a freelance web developer should ever do for a client.  While, on some level I agree with him on many of those points, I tend to think that there are no absolutes in business.  For every reason not to do something, I can think of many reasons why you would want to do something.  Let’s go through each item in his list.  Samuel’s answer to all the bullet point questions is, of course, no.

1) Can you show me a mock-up to help us choose a designer/developer?

I can respect that no on wants to work free.  And this type of work is often looked on badly by graphic designers.  However, as a freelancer you do want to be able to provide a portfolio of work so that potential clients can get a feel for your skills.  In that portfolio you should include some info about the project goals, and how the end result achieved those goals.  I say this, because, unfortunately, any thing that properly achieved your clients goals is probably going to be complete crap from a high moral good design stand point.  The important thing with any freelancer I hire is that I believe they can help me achieve my business goals.  Not that they can create pretty pictures, or beautiful code.

In programming terms, I do not understand how anyone can define a scope of work without some type of spec, though.  And often up-front would meet with the clients pro-bono to help them put together that spec.  These meetings help build up my relationship with the client and my understanding of their true needs.  Sales is all about the relationship.

2) Can you give us a discount rate?

Samuel recommends opening the conversation w/ the client by stating an hourly rate.  I tend to believe that anyone working on an hourly rate is approaching their business model in a fool-hardy manner. There are only a certain number of hours in a day that you can bill.  The only way to grow a business like that is by adding more people.

If you’re not working on an hourly basis, then you are working with a fixed fee.  A professional should be able to estimate the amount of work based on the client’s requirements.  And a professional should have the appropriate documentation, and people skills to manage the client’s changing requirements.

I personally tend to believe that everything in the contract is negotiable.  I step into negotiations with the intent to make a deal.  I have a default set of terms and a standard proposal.  But, every client wants something different.  I used to ask clients to rate these things in terms of importance to the project:

  • Budget
  • Timeframe
  • Functionality
  • Ease of Use

Often a client will be willing to sacrifice a feature in return for an early deliver date or smaller bill.  I could use that info to tailor my proposal to the clients needs.  In retrospect, I wish I had saved data on how clients ordered that list.  I bet it would have made a fun research study.

3) Will you register and host my site?

Every business model is different; and someone somewhere has to provide web hosting services.  To say you should absolutely not offer hosting services to your clients is just wrong.  There are plenty of pluses and minuses to any service you offer to your clients.  And there are too many factors involved for me (or Samuel) to decide whether or not it is good, or bad, for you.

4) Can you copy this site?

I agree with Samuel on this one.  I would never take on a client [again] who told me to “just re-purposes this other site”.  For one, we parted ways w/o finishing the project.  For the other, I was able to succesfully educate them about creating their own content.

5) Can I pay for my e-commerce site from my website sales?

6) I have a great idea. Do you want to…?

I used to get a lot of questions like 5 and 6.  Some people, especially start-ups, want you to work for a future piece of the pie.  I have found that if you ask those people for a business plan you’ll never hear from them again.  I think that is a much more elegant way to say “no” to them w/o burning bridges.  And who knows maybe they’ll come back to you with the best business plan you’ve ever seen and decide you really want a piece of it now.

7) Do you have an IM account?

[insert sarcasm] Why would I give you my IM account?  Do you think I want to talk to you or be accessible?  Of course, I don’t!   [end sarcasm]

You should give clients as much ways to get in touch with you as possible. IM accounts are free.  So are Twitter, Skype, Facebook, and and at plenty of other social networking systems.  With IM just create a “BusinessName” type of account and give that to clients.  When you’re off the clock don’t sign into that account.  You can still have a personal IM account so your GF / Wife / Mom can tell you to bring home milk.

8) Can I just pay the whole amount when it’s done?

Everything is negotiable; including payment terms.  I rarely sign contracts that make me wait until “it’s done” –or even worse “It is live” — for payment.  Often projects are split into milestones, so I’ll often ask for half of Milestone 1 up front.  Upon completion of MileStone 1, I’ll ask for the rest of Milestone 1 and half of Milestone 2.  And I Force the client to approve things at each step of the way.

9) Is there any way you could get this done tonight or this weekend?

Of course there is a way.  But, you’ll have to sign off on the rush charges…

10) Can I be sure you won’t use this work in anything else?

This one is always tricky.  IP concerns are very serious.  I believe I am the one consultant in the world who was never able to negotiate ownership / re-use rights of the code.  Every client wants to own everything that is built for them.  Almost all projects I’ve built have been from the ground up.  Which is kind of sad because a lot of stuff, such as user account management, could be easily “Shareable” between multiple projects.  Before I Started getting out of the consulting biz I spent some time to building my own DotComIt Modules that I could use / re-license on projects like this.  I never got far enough to have any projects.

Overall, everything I do is about keeping communication lines open w/ potential clients /contacts and I find that blatently saying “no” is a good way to cut yourself off.


Dec 26 2008

What should a startup focus on: profits or expansion?

admin

This post is in response to a recent article on Businessweek, entitled “A Wrench in Silicon Valley’s Wealth Machine“.  It’s our first panel style post where we ask our startup contributors to give their views on a certain topic.  Let’s hope it works out. :)

-=-=-

John’s Thoughts:

VC’s seem to be largely morons and most startups seem to be the perfect match.

Only a startup would exist and not have a plan to make money. Only a VC would give money (large, large sums of money) to a startup that would “Make money in the future”, if everything goes according to plan.

That’s not to say startups have to be profitable or even bringing in money when they start, but Digg is what? 2? 3 years old? And not making money still.

From Businessweek

Jay Adelson, Digg’s chief executive, says it’s clear the environment has changed for all startups. With venture money harder to come by, entrepreneurs have to concentrate on building their businesses. He says Digg is dialing back some expansion plans and trying to reach profitability as soon as possible. “All I care about is making sure the business foundation is solid,” Adelson says.

Really? Now the focus is on profitability? Now that they’re being seen for what they are? Just another over hyped startup with no clue how to make a dime, hoping that profitability will find them on its own.

What really amazes me is that all the Digg fanboys and gamers of the system singing Digg’s praise etc. are simply filling Digg’s DB with data that they [Digg] intends to sell. Sell for a retardedly over valuated price of 300m! Holy crap! Smooth move guys, give your meta data and attention to Digg so they can hope to sell it. NICE!

One reason may be that Digg’s public profile is much larger than its financial might. Last year the company lost $2.8 million on $4.8 million in revenue, according to Digg financial statements reviewed by BusinessWeek. In the first three quarters of 2008, Digg lost $4 million on $6.4 million in revenue. Adelson declined to comment on the figures.

Those better be some damn good Christmas parties, and some 70 and 80’s style whoring and coke snorting, I’m talking Studio 54 here. Lost 4 million? On what? It’s a site that people give content too, they don’t pay for it! Oh wait, Diggnation probably isn’t cheap to produce, that explains it.

As some one who runs a business completely in boot strap mode, it’s insane to imagine how some of these businesses can exist. Tom and I started ’08 owing 15k on our line of credit and were contemplating closing up shop rather than continue moving into debt. Startups seem to have mastered the art of spending money that isn’t theirs in exchange for retarded amounts of their company and probably a sizable chunk of soul.

Is it worth it guys? You couldn’t have done with out millions of someone else’s money?

-=-=-

Tom’s Thoughts:

I wouldn’t say all VCs are morons, just the dumb ones.  :)  Perhaps that should read the greedy ones.  I understand VCs provide more than just capital.  Take a look at eBay.  It was successful, but Pierre realized that he didn’t have the knowledge needed to take the company to the next level.  VC investment helped him get Meg.  Then there are visionairies that have expensive visions but the visions have profits in mind ala Bezos.  Amazon took what, 4 years to reach profitability?  But Bezos had the system worked out in his head to reach profitability.  Heck, at least it was a goal for those 4 years.

Article Snippet 1: With venture money harder to come by, entrepreneurs have to concentrate on building their businesses.

Now, that could just be poor writing on the author vs something dumb Jay Adelson said, but that line just blows me away.  What the heck kind of statement is that?  What entrepreneur doesn’t concentrate on building a business?  And what kind of people give that entrepreneur millions of dollars?

I’ll be honest.  I thought about approaching investors to help us grow 360|Conferences in the early days.  However, I realized we had no street cred. We had never ran a conference before, much less a conference business.  Even now, John and I are contemplating approaching angel investors, but I still tell John, “We’re profitable, but I don’t think anyone will care.  We’re not trying to take on the world and we’re definitely not sexy.”  John and I have spent a lot of time making our business what it is.  Sure it’s been tough, but we went from no money investment on either of our parts to making some money in less than 2 years, part-time.  People think we put on the best conference they’ve ever been to and are shocked to find out it’s just John and I doing the biz, part time.

The reason I think we make money and why people love our events is because from day one, we’ve always concentrated on building our business.  John asked during year 1 of our biz,  “Why didn’t you quit this idea like you did many others in the past?”  My answer came swift and still rings true to this day, “Someone trusted me with their hard earned money and it is my duty to live up to that trust by providing them the very best service.”  The only way you can provide a great service is by building your business.

Article Snippet 2: [Adelson] says Digg is dialing back some expansion plans and trying to reach profitability as soon as possible. “All I care about is making sure the business foundation is solid.”

Here’s where millions of someone else’s dollars makes you delusional.  Whereas Digg is now gonna focus on profitability vs expansion, John and I have been focused on profitabilty and are now looking at expansion.  I didn’t go to business school, so maybe that’s why I’m lost.  But don’t you usually test an idea out first to make sure it makes money?  Then once you’re profitable, you move on to expansion?  Like I’ve always told John, “Our profit model depends on x number of attendees per show.  If we don’t get those numbers, that means people don’t like our show.  We either need to change to get those numbers or leave the biz as our ideas obviously are all wrong.”  Now x is not in the millions or billions, we’re talkin roughly a few hundred.  But if there is no profit in sight, then you may have a good idea, but you surely don’t have a good business.

Article Snippet 3: In the first three quarters of 2008, Digg lost $4 million on $6.4 million in revenue.

Now, I won’t make accusations about what Digg did with that money.   John could be right, but I’m sure there’s some costs we’re just not seeing.  Some people accused us of throwing an “orgy” when we spent $90K on food, but after you realize a 6 oz soda costs $4.  You can see how fast things add up.  One thing companies should do is be more transparent.

I’m not saying throw your quickbooks file on the net. (Yes, I know they don’t use Quickboooks, just work with me will ya.)  But lay out what gets spent where.  Show people what you’re doing with the money.  If nothing else, your customers will tell you what your spending too much on.  Though I’m not sure that would work for Digg.  They have users and not customers, i.e. no one pays them to do a service.  Maybe that’s the problem then.

Can you be defined as a business if you don’t have customers?  Or more importantly can you be called a business if you don’t focus on profits?

-=-=-

Andrew’s Thoughts:

My preference in starting a new business would be the conservative approach.  Save up money from a standard W2 job until you have a nice emergency fund before going for it.  Focus on those projects that get you to profitability the quickest.  Anytime you take money that you haven’t earned whether from a bank or from a VC, you’re giving up some control of how your business runs.  Unless the idea is truly revolutionary and needs to explode quickly, I’d stay away from taking VC or bank funds and doing it the old-fashioned way.  Having excess VC funds around is just plain distracting and a false sense of security.  It doesn’t make sense to have all those parties if you haven’t earned a dime.  Having a tight budget early on also forces you to find unique and cheaper ways of doing things.  One example would be a VC-funded startup throwing servers at a scalability problem whereas a self-funded startup would be forced to re-factor and optimize their code for maximum scalability.

-=-=-

Jeffry’s Thoughts:

Are VCs Morons?  I don’t think so, but I do get the impression they only expect 1 in 10 of their ventures to be succesful; kind of like the traditional record company model.  That 1 success makes up for the 9 failures many times over.  With that in mind, I may consider factors other than the business plan when investing in companies such as enthusiasm and adaptability of the owners.

Cash flow is king, especially in a down economy.  Generating profit should always be a much higher focus than expansion.  Build your profit model right into the business from the start.  Think it through before you start coding or building the service.  Controlled growth is the best way to build.

-=-=-

Ben’s Thoughts:

I have to say, I think this is a trick question. Let’s look at it this way, “What should a baby focus on: feeding itself or growing up?”. I guess the answer would be “yes”. Startups, like babies, require further growth by definition; otherwise you’re just running a business. So if a startup focuses solely on profit, it may never take the risks that are required to grow. By the same token if a startup focuses only on expansion fueled by VC money, it may not have legs to stand on when it needs to back up those extravagant claims it made (a la Digg). I’m not saying that VC is invalid or that projects with big ambitions (like mine) are dead, but I do think that inflated egos, hot-air pitches, and over-valued stocks are being market-corrected in short order. Hopefully that’s a good thing.


Dec 20 2008

How do you Provide Value?

Jeffry

I was flipping through my news aggregator and came across this post on SlashDot. Some guy is wondering if part time IT jobs exist.  While the post doesn’t relate to the purpose of this blog, one of the first comments in there struck a nerve in me.  The quote worthy of note is:

It takes more than one person to provide something of value.

This is the absolute most ridiculous thing I ever heard.  During the course of my life, I have met plenty of people who have provided value as an indvidual.  I remember working as a “Sales Associate” at Waldenbooks.  As you might expect, such a retail job had tons of turn over in employees. During my 8 year “tenure” there, I worked under many different managers.  Most of them were easily forgotten.  Except one!  Kristen was the last manager I worked under.  She lasted the longest.  She was also the most organized person I’ve ever known.  She got the store “in shape” for the company, while using less than her company allotted man hours.  That alone is worth something to a company.  However, she went above and beyond just that.  Her organization guided us associates employees to work more efficiently and make better use of our time.  Instead of the haphazard meanderings of the “next step”, we knew where we were at and what had to be done.  There was a lot less frustration about the job and the store.  Although I don’t know numbers, I bet that led to better customer service, which led to more sales.

The vast majority of businesses start as single person ventures.  I find it hard to believe that such ventures would grow if that venture provided no value.  So, when you sit down to think about your business, be sure to consider what the value proposition is.  Be sure to communicate the value succinctly.  Be as direct as possible.  Research your competitors.  What do they offer?  What is their value proposition?   How will you be different?  Don’t assume that your prospects will know; tell them all about it.

When I accidently started DotComIt, I never thought about any of this stuff.  Survival was just dumb luck.  It wasn’t until recently I started to look at this stuff seriously.  The Flex Show podcast is a DotComIt brand.  What is the value proposition?  We help developers learn Flex on their own time!  How do we do it?  By releasing mp3s of developer interviews and screencasts of code tutorials.  They can download–through iTunes or elsewhere–and listen or watch on their own time.

What is the value proposition of Flextras?  We save Flex developers time.  It will be a lot cheaper to buy our interface components than to try to build and test a similar component.  How do they know our component will work for their app?  They will be able to download our developer edition at no cost and test it out.  The Developer edition will help prove to them, to their boss, to their client that the app works in the context of their application.

Traditionally DotComIt has only done consulting development for small businesses.  What was the value proposition there?  We delivered on time and within budget.  Sadly, I never knew this was the value proposition until I recently took a long hard look a the business.  But, consistentcy and reliability is one thing that kept bringing people back.

When you are planning out your idea; be sure to ask yourself.  What is the value I’m going to bring to my customers?  How is that value different from my competitors?


Dec 19 2008

Jeffry Houser – The Perpetual Entrepreneur

Jeffry

Hi, everyone.  I’m Jeffry Houser and I’m a technical entrepreneur.  In high school, I mowed lawns for a neighbor.  At the time, I had no idea that could be construed as an Entrepreneurship beginning.

In college, I started selling live import CDs (AKA Bootlegs) on the Internet.  This was before the web was the e-commerce haven it is today.  At the time, selling stuff on the Internet meant posting to Usenet and having people snail mail us a check.   I didn’t think this was a business either; I was just looking for a way to make some extra cash.  Myself and a friend pooled our money together and placed a bulk order with a supplier in Germany then we sold stuff over the Internet.  My friend was the financier and I was the labor.  We split profits 50/50.  It was nice to have some extra spending cash for a poor college student and I still have some of the unsold merchandise in my collection today.

Then I graduated from college with a computer science degree and got a “real” job for a few years.  I worked as the “IT Guy” in a business to business consulting firm.  My boss would sell clients on these incredibly insane things and it was my job to figure out how to implement them.  I was in heaven.  I wasn’t even old enough to drink, yet I had already accomplished more than I ever dreamed I could.  This is more depressing than it sounds.  Then the hours started to grate on me and I drifted towards burn out. After a particularly good pizza one afternoon, I gave my two weeks notice.

This led to the founding of DotComIt, the IT consulting firm which has been my bread and butter for more than 9 years.  If I have one piece of advice, it is do not ever start a business this way.  I had no plan, nominal savings, and no idea what I wanted to do with my life.  I just got lucky.  The company I left hired me a week later.  I went to a local User Group meeting and got a client.  A different user group got me a different client.  Then I got another client, and another.

All of a sudden, I was writing books paper weights for Osborne McGraw-Hill.  Then I was speaking at User Groups and Conferences all over the US.  Without doing anything business-like on my part; word of mouth kept me busy.  It wasn’t all fun and games though.  I had one client go out of business owing me a big chunk of change.  I had many issues collecting payments; and a lot of clients would renegotiate invoices when it came time to pay.  It seemed with every project, I would modify my contract terms and/or internal procedures.  These days I am known for being especially meticulous on doing “due diligence’ as a business owner.

Along the way I was in 2 serious bands; a band is a business too.  I also started a company named “Web Pages for Bands” (guess what that company did?).  I had this crazy idea to create a way for independent musicians to easily sell mp3s on their web site.  The idea was fantastic (see iTunes, Amazon MP3, CDBaby, and plenty of others), but the business crashed and burned.  I was making too much money consulting and didn’t devote enough time to getting it off the ground.  If I was smarter about building that business, I’d be writing this from my own private island right now.  Clearly I had the right idea at the right time.  But it doesn’t matter how good your fudge is if you keep making cookies.

A couple of years ago I stopped being in bands and decided to devote my full attention to DotComIt.  At some point I decided I absolutely hate consulting.  It wasn’t always so, but I have been doing it for a real long time.  I needed to decide what I really wanted to do with my life.  I loved writing and helping other developers.  Can someone create a business based solely on that?  I think so!

I started The Flex Show, a podcast for Flex Developers.  When you do have a moniker like “Producer of The Flex Show” next to your name, no one questions your ability to work with the technology, so it was a bit easier to bring on consulting jobs.  But, I didn’t want to bring on consulting jobs; I wanted to convince people to pay me to produce these episodes that I’m already producing for free.  Where else can you go to get a message in front of 2700 (and counting) Flex Developers?  Adobe Max, probably, but  I am pretty sure a sponsorship of the podcast would be cheaper and give you more direct exposure.

I was always intrigued by the challenges of product development and it seems like a nice change from consulting.   I’ve started working on Flextras, a line of Easy to Use Interface Design Components for Flex Developers.  This is in the uber start up stage and my launch is currently about four months late.  I’m juggling graphic designers, lawyers, a web developer, and a business coach consultant trying to pull everything together.  Building a product was the easy part.

So, at the moment I have two ‘brands’ in start up mode; and a mature consulting business that I want to shoot and bury.  I know John and Tom love business transparency.  I want to bring The Flex Show revenues up to 150K a year.  Consistent sponsorships would do that easy if we could succesfully bring sponsors on.  We’re still figuring out what works best in our format.  With Flextras, I want to generate 600K a year and have a staff of five employees.  To do that, we need to sell 160 components a month.  To keep that pace up, we’ll have to keep a steady stream of new products coming out–ideally 1 a month.

I hear having a vision is the first step in actually achieving one.