Choosing Your Business Model Wisely

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I see countless entrepreneurs struggle with the same things I did and likely every startup founder faces, even with great mentors. From time to time I receive messages from friends asking for advice on their next big idea. As a process freak myself, and likely some Kaizen DNA somewhere in my genome, I’m always trying to improve processes and help others do the same.

This past year my team and I developed a simple blueprint for vetting new business opportunities and I thought I’d share in hopes it could help others. We have several amazing things we’ll be introducing to the world very soon, but one example I can share is the deconstruction of an existing well-known service my company offers called Goomzee Connect.

Goomzee Connect is a marketing solution for real estate professionals, allowing them to capture potential buyer leads typically right in front of their properties for sale. The service assigns them one or more keywords (or promo codes) they print on signs and flyers, allowing consumers to send a text message (SMS) and receive an automatic reply with home price, information, and link to photos and more. At the same time the service delivers lead alerts with contact for follow-up to the agent, our customer. They are able to manage their codes, campaigns, and leads via our website after they log in.

Opportunity Evaluation/Product Planning Process

Our process is based on some simple fundamentals listed below, and I’ll explain the thinking behind them thereafter.

  • Revenue model aligned with¬†success of your customers
  • Single KPI that represents value delivered to customers
  • Narrow focus and comms to no more than 4 buyer personas

The process involves several weeks of effort, primarily because the team all have their “day jobs” so we came up with a simple roadmap:

  • Lean model canvas/business model canvas (begin to organize¬†thoughts)
  • SWOT analysis (further evaluate market opportunity and risks)
  • Create detailed buyer personas (no more than 4)
  • Create survey per persona and identify candidates to validate assumptions
  • Update canvas and hone messaging
  • Decide on minimum viable product, project timelines, budget
  • Refine go-to-market strategy in parallel to MVP buildout
  • Automate everything, and build the KPI reporting in from day 1
  • Pre-release, private beta, launch and refine as you go

History

When we began, we were unsure how many messages would be sent and since we paid for every message on the carrier network, we just took a guess and figured we’d adjust later if needed. As a new service, and category, there were only a few other companies in the U.S. doing it so no benchmarks to figure out how to price it. We decided a price per code per month (subscription model) of $13/code/mo assuming we charge enough that if 100 messages at $0.03/each, we’d still not lose the farm, literally being from Montana. It was great and agents around the U.S. who typically average 2-3 listings would buy a 5-code plan for $65/mo, at least before the economy tanked later 2007, months after we began.

Over the years and as competitors popped up around the nation, plus shifting to a channel sales strategy via Realtor Associations and Multiple Listing Services (MLSs), price pressures for volume purchases drove the price down to around $39.95/mo for up to 20 codes (or $2/each, down from $13). We began closely watching our customer aquisition costs (CAC) and of 300-400 cold calls/day/rep, they would sign up 22-24 new accounts per month each. We figured around $145/agent CAC, and industry with ~30% churn for SaaS solutions (many part-timers and seasonality) so LTV was $185 at $20/mo discounted plan.

Do the math and you know there is not much left for R&D, G&A, S&M let alone COGS (hosting + tech support) and this is the same trap so many startups fall into. Recognizing this, and growing up in a family business, I decided to diversify and introduce a second product into the same channel and this stabilized and funded ops and secured profitability. That said, I was still not content and determined to find the best formula for evaluating services in the future which leads me to our discovery/recommendations.

Subscription Model Lessons Learned

The allure of the subscription model, especially for an early-stage startup, is that you can easily forecast sales and show that linear or exponential growth curve. Furthermore, instead of the “if I just get X% of this $gazillion TAM” adage, you can thwart the naysayers with your bottom-up sales projections. We all do it.

In reality, however, what we learned is that there are two sneaky villains that hide in the shadows, often until it’s too late, that you never account for. These villains as I’ve eluded to earlier, are churn and customer acquisition cost (CAC). To build a profitable company the formula is simple: Revenue – Expenses = Profit. To build a sustainable SaaS company, you need to retain your recurring customers long enough to see a lifetime value (LTV) greater than your customer acquisition cost, plus to reach those hockey stick scaling projections you need to maintain an annual churn typically under 5% so revenues compound.

In real estate we learned that more than half of the million+ real estate professionals could be considered “part time” agents. Many in recent years have had only 1-2 transactions (commission events) in a single year. This means the actual pool of customers out of the advertised 1.2 million + agents is really in the hundreds of thousands. My agent in my hometown closed 100+ transactions last year, and the entire market just just over 1100, so one agent team out of 600+ represented a large % of this market as example. Even his business is cyclical (especially as a Northern state with all 4 seasons), so he prepares for slow times.

Imagine that more than half the professionals close only a couple transactions per year, they have other jobs or work as a builder/agent team (many are husband and wife), they don’t have the luxury of spreading out the earnings to prepare for slow periods typically. As such, when things slow, they begin to cut any unnecessary expenses. If they don’t have listings, why pay a monthly fee for a listing promotion solution, right? This is how we discovered the 30% annual churn for particular product segments. Some products are immune like website, drip marketing, CRM, and of course the MLS, but others and even advertising are susceptible.

LeadsByCell Example

I included the logo of our soon-to-be-released service, LeadsByCell, which by the way was the original name for the product before we decided to use our existing Goomzee brand. The thinking back then in SMS infancy was that the word “lead” might be negative association and limit consumer adoption; that ship has sailed and text messaging is now ubiquitous and it just makes sense based on our new model.

When we launch the new service instead of a monthly subscription, charging customers whether they use the product or not (#1 cancellation reason was ‘I didn’t use it’), we decided to adapt our model to the success of our customers. Instead, they can reserve their keywords each year for a modest fee (like domain names), and then only pay for the leads delivered to them when they actually use our service. We have some even cooler innovations based on cool ways we saw people using our product we’ll introduce soon as well.

Our single KPI that we will track in real time likely on a huge screen in our office is “Leads Delivered”. Everything else folds under that single metric and indicates the health of the company, and the value we deliver to our customers. I liken it to the point in the movie, “The Social Network”, when the team is rallying around a monitor as the user count tips over 1 million; we can set goals and rally and cheer together and the single KPI approach aligns everyone – just make sure you take time to pick the right one.

I’ll share more as the new product launch, or re-launch, nears but the moral of the story is don’t always take the easy road to determine your business model; be sure to remember churn, CAC, LTV if using a subscription model, and wherever possible try to align your model to success of your customers. You will find this scales even faster, has more longevity and lower churn, and how truly great companies of today and tomorrow are run.

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