The absolute number 1 goal of every product bootstrapper should be to become break-even purely on recurring revenue.
This means: what automatically comes in every month covers all your monthly costs (servers, support, software, your wage, phone bills, …).
MRR (monthly recurring revenue) = MRC (monthly recurring costs)
Why is this so important?
Since it’s a milestone. It’s a turning point. It’s the moment where your time and income are 100% decoupled. So you can put all your time and effort into growing and scaling your product business. As from that moment, can say “no” to any consulting / service work. Remember, time is the #1 asset for everyone in this world. Without time & when you have to work 20h a day, even millions on your bank account won’t make you happy. Everyone has just 24h a day, and you can’t buy yourself more time. That is why time is worth so much more than money. You can work your ass off to earn more money, but you’ll never have > 24h a day. So just imagine how rich you are when all your time is yours.
Note that you don’t make any profit yet when MRR = MRC. But making profit is not the primary goal. Running on auto pilot and decoupling time and income is the primary goal. When you run break even purely on product revenue without any consulting work, you have all the time in the world to invest into your product, marketing, and support, so you can scale further and profits are near.
As long as MRR < MRC, you have to accept consulting or service work in order to not make loss (or you need to raise capital to fill the gap). In other words:
MRR + MAR (monthly active revenue) = MRC
MAR or active income is the opposite of passive income. It is income that requires direct action from you in order to get paid, and it is directly related to your time spent.
The proportion between MRR and MAR is important here.
If you own a pure service business running break even, then…
MRR (0%) + MAR (100%) = MRC (100%)
…or you are trading all of your hours for money. The quickest and most obvious way to make profit is by putting more hours into your business. For each extra hour you work, MAR grows a little over MRC, and it’s extra profit. Hooray! Except that it does not scale and you’ll have to do this month after month.
The less obvious (but long term more rewarding) solution is to start growing some MRR. Building MRR is something that takes time. A LOT of upfront time investment to grow a little MRR. But the good thing is: it’s recurring. Once you have built up some MRR, it requires almost nothing to have the same MRR next month. While it requires all your time, sweat and tears to keep your level of MAR the same each month. In order words: the value of MRR is way higher than the value of MAR, because of the astonishing high value value of time.
We (zorros.be – RoR service business) decided about one year ago to focus on building up some MRR, to decouple our hours spent from our income stream.
Our equation (I’m ignoring profits here) is now something like
MRR (50%) + MAR (50%) = MRC (100%)
That means that 50% of our monthly revenue is streaming in passively! All the efforts have been done upfront. For the other 50% of our revenue, we are still trading our time for money for software projects we like.
Here is the nice thing: the more % of MRR you have in your equation, the more time you have to build up even more MRR. We can now spend up to 50% of our time building up more MRR, without loosing a single dollar. Building up your first 1% of MRR is the hardest: it requires a lot of upfront time, but is not paying off yet. But from there on, it can start scaling slowly. Once you have your first 10% of MRR, your monthly trading-time-for-money can be lowered to 90%, so you have 10% or 2 days per month you can spend on your product without any cut in revenue, which will grow your MRR. This is a snowball effect. The more MRR you have built, the more time you have in building up even more MRR.
The day you are running a pure product business in break even mode:
MRR (100%) + MAR (0%) = MRC (100%)
This means you are not trading hours for money anymore. Theoretically spoken, you could take months of holiday and travel the world without loosing any single dollar on your bank account. Yay :-)
This does not mean you HAVE to stop any service or consulting work (MAR). It just means that you could refuse any consulting work if you would like to. But you could very well accept interesting consulting and service work, which will be pure gold since all your costs are covered already with MRR. How great is that! For now, we are not planning to give up our RoR custom development business zorros.be, but we do want to become break even asap on MRR (mainly our product ArchiSnapper is contributing to this goal), so we can actually choose in what we spend our time.
The idea of freedom to dedicate your time to anything you would like to without any income loss is just awesome. The #1 goal of any product bootstrapper should be to become break even on MRR.