The mental switch – From Service Business to Product Business in 1 Year

This blogpost is part of the series: “My Challenge: From Service Business to Product Business in 1 Year“. You can read the full series here, or you can read this as a stand alone post.

After I published last weeks blogpost about my challenge to be break even on products in 1 year, many people asked me: “So, what is your great idea?“. Well, I have to disappoint you guys and gals. A startup is not about a great idea. Nobody will pay for your idea. People pay you for a solution for their problem. We will come to that in a future blogpost about idea extraction. There I will reveal my idea, explain how I got to that idea, and show you how you can find a problem for which people are willing to pay money if you take away their pain. In this blogpost, I want to focus on something more important than the actual idea: the right mindset. This might be an eye opener for some of you.

In order to succeed in a product business, you will have to spend a lot of time upfront. On short term, this time will have no return. In other words: you are putting time into something without being paid for it. You will NOT be paid for building your product, for the time you spend in the idea extraction or for calling potential customers asking for feedback on your first version. Even worse: you will loose money! Since every minute spent on your product is a minute that you can not spend on billable projects or on your job, it is a complete upfront investment of your time. But you will have to go through this investment if you want to get at the other side. There is no other way. All the successes you see in the world are a result of an upfront time investment. If you are serious on launching your product business, you have to give up some things now in order to be better off later. And you have to act on it. Now.

Trading time for money is like smoking: it’s an addiction. And the longer you smoke, the more difficult it is to stop. Or in other words: the sooner you stop smoking, the more easy it is to succeed. So it is ALWAYS BETTER TO STOP TODAY THAN TO STOP TOMORROW. By postponing, you make it more difficult for yourself. And between you and me, how silly is it to take the most difficult path? I’m a lazy person, so I take the path of the least resistance. The same way, as your service business is growing, as you earn more in your service business, you get more and more used to it, you get used to the salary, to the way of working, to your certainty, you hire more employees and you rent bigger offices. Day after day, it is becoming more difficult to take the switch. Therefore: act now, not tomorrow.

As soon as you realize that (1) you have to go through it in order to succeed and (2) you better act now than tomorrow, your eyes are opening.

So let’s take action! Make things concrete, tangible. Best is to set a (relatively) short term and realistic goal.

NOT: I want to be the next Facebook in 10 years from now.
BUT: I want to get $1.000 in recurring revenue from my product in 4 months from now.

If you can get to $1.000 monthly recurring in 4 months, you can as well get to $5.000 in 12 months, no? And to $20K in 2 years, no? Set clear financial, short term and tangible goals. In our Ruby on Rails and mobile agency Zorros, this translates to the following:

  • We decided we want $10K automated recurring revenue from our products by September 2013. This is maybe not enough to be break even, but as said above: if we can get 10K, we can as well get 20K, 30K or 50K. It’s a matter of time.
  • In order to achieve this goal, we decided to spend between 25% and 50% of our time on products, not on service business.
  • Why a minimum of 25%? Since less than that is just procrastination of the switch. Why a maximum of 50%? Since we are still working on exciting projects that we want to finish decently. We are not stopping service business overnight, we want to keep on delivering good quality and we will even accept new nice projects.
  • We treat our products as other projects: we plan them in, we use the same tools, the same quality, the same way of working. Except: nobody is paying us for that.
  • That is an immediate cut in revenue of 25% – 50%.
  • So I made a calculation of our survival time. What if the product would bring in 0$ and we would spend 50% of our time on products? How long would we survive without going bankrupt? What is our deadline?
  • The combination of the cash we had at the bank, and the most pessimistic scenario of 50% cut in revenue gave the answer. Let’s work out a fictive example:
  • Let’s say that normally, we make $25K of revenue per month for trading time for money. Let’s say also that our monthly costs are $20K (mainly wages, in a software service business, employees are the highest cost). That means that we have a $5K of profit per month if we spend 100% of our time on service business.
  • Let’s assume we have $100K of savings  / cash in our bank.
  • Now, we are going to have a serious cut in revenue: 50% of our time is spent in non billable things like building the product, research for the right product/market fit, calling clients, cold calling, emailing, … So, our monthly service revenue goes from $25K to $12.5K, while our costs stay at $20K. That means: in stead of a $5K profit per month, we make a $7.5K loss per month from now on.
  • With $100K on our bank account, and with the assumption that our product brings in $0 (so, our product would be a complete disaster, worst case), it means that we have survival period of 100/7.5 or 13,3 months. For easy calculation, let’s make this 12 months.
  • This means: we have 12 months where we can spend 50% of our time in building a product. In the worst case, the product brings in $0 by then, and we have to stop everything and we need to start spending 100% of our time again on service business or we are bankrupt. In the best case, the product by then brings in $10K of revenue, enough to become break even.

Such a concrete target makes everything very tangible and real. It forces us to get real, to take action, to forget about business cards, shiny logo’s, and going viral, but to focus on the most important:

Between today and september 2013, we have to find a pain that we can solve, and for which 200 people in this whole d@mn world are willing to pay $50 a month. We will spend 25% – 50% of our time on that.

200 people in this world that will pay $50 per month…if you look at it that way, it’s quite a feasible challenge, isn’t it? Yay!

What is next?

  • In the next blogposts I will go through the idea extraction process (how to find a pain for which people are willing to pay to get rid of it)
  • I will talk about landing pages and pre-subscriptions in order to get customers even before your product is launched
  • I will talk about the importance of mailing lists
  • I will reveal the product we are working on – wow
  • I will give financial details on our monthly recurring revenue
  • …and much more

Stay tuned!

Hey, by the way…it takes me quite some time to write all this. It would take you a minute to tweet or share or like this blogpost. I owe you some karma if you do so, thanks!

Author: Pieter Eerlings

http://www.linkedin.com/in/pietere http://www.last.fm/user/pietereerlings

2 thoughts on “The mental switch – From Service Business to Product Business in 1 Year”

  1. Hey I am intrigued to keep seeing your progress, as I have had a service business for over 10 years. Sold the business, no fancy exit, and am now interested in learning about building software apps for a recurring model.

    Best of Luck,
    G

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