The art of bootstrap and build a business model that works!
In my years of experience as a business developer I’ve learn that you don’t make complicated business models. Your job is to streamline and to simplify the business processes, down to the point that it could be stupid simple (KISS). “KISS your business and Profit!”
The KISS method for a successful business start up has three major steps; First is the “Ideation Stage”, second is the “Validation” phase, and third is the “Propagation & Promulgation” of your business.
Here is a fantastic case study by Noah Kagan from AppSumo. This is a guy that I’ve been paying attention to for the last few years or so, and in all honesty someone that I respect a lot and I’ve learn a lot from, even with all my years of experience, specially about his approach to starting a businesses.
First time I’ve heard about Noah was a post on Tim Ferris blog the 4-Hour Workweek blog – The blog post is titled “How to Create a Million-Dollar Business This Weekend”.
Noah has quite the start-up resume. He was employee #30 at Facebook, #4 at Mint, had previously worked for Intel (where he frequently took naps under his desk), and turned down a six-figure offer from Yahoo. Noah’s helped create Gambit, an online gaming payment platform that grew into millions and AppSumo.He also helped pour fire on both the 4-Hour Workweek and 4-Hour Body launches.
In the article Noah stated, “For some reason, people love to make excuses about why they haven’t created their dream business or even gotten started. This is the “wantrepreneur” epidemic, where people prevent themselves from ever actually doing the side-project they always talk about over beers.”
“The truth of the matter is that you don’t have to spend a lot of time building the foundation for a successful business. In most cases, it shouldn’t take you more than a couple days. We made the original product for Gambit in a weekend. ‘WTF?!’ Yes, a weekend. In just 48 hours, some friends and I created a simple product that grew to a $1,000,000+ business within a year. Same deal for AppSumo.”
“We were able to build the core product in one weekend, using an outsourced team in Pakistan, for a grand total of $60. Don’t get me wrong–I’m not opposed to you trying to build a world-changing product that requires months of fine-tuning. All I’m going to suggest is that you start with a much simpler essence of your product over the course of a weekend, rather than wasting time building something for weeks… only to discover no one wants it.”
What I’ve learned is that you only need a simple process to create your business model. It is not about whether it is a million-dollar-potential or not! I personally found fascinating how simple the process is, I tried it in numerous occasions myself and it does really work well.
Actually something else that I want to point out from this process, and that is that while you are putting the process to work, you will find out whether you want to create that business or not? In many occasions I found that a great idea was just that an idea! That original Idea may take a lot more work and effort that you want.
This particular article is an awesome case study to show proof of the KISS your business method. So, here we go.
Step 1: Find your golden idea.
You simply are looking for something that people are willing to spend money on. So, write down a list of ideas that you think might be profitable. If you’re having trouble coming up with ideas, try using the methods below to speed the research process along (as it appears in the original article):
Review top sellers on Amazon. Find products that already have guaranteed customers, then build something complementary. A good example of this is Dodo making a gorgeous $60 case to buy for your iPad (which costs over $500, and over 5 million sold).
Think of all the things you do on a daily basis. Anything done more than once has potential for a product or service to improve the process. For Noah, one of those products was a shower mirror that you can hang in the shower.
Be cognizant of products you use and frequently complain about. Before Gambit, the problem they have was getting certain features from their payment tool partners, yet their requests were always rejected. That was the impetus for the group to create Gambit for their own games.
Check completed listings on eBay. This allows you to see how well certain products are selling. It’s also an easy way to measure sale prices of items and gage the overall percentage of the market that’s receiving bids (i.e. in demand).
Look for frequent requests on Craigslist gigs. These listings are from people actively searching for someone to give their money to in exchange for particular services. Try searching for certain keywords (e.g. marketing, computers, health) and keep track of the total number of results displayed. Evaluate the most popular keywords and see if you can create a product or service around those requests.”
Sub Step A – Find the big money – Do you think you can build a $1,000,000 worth of customers.
Now that you’ve found an idea, it’s time to assess whether there’s a big enough pool of prospective buyers. In this step, you’ll also want to ensure your market isn’t shrinking, and that it fares well compared to similar markets.
Also look for other big companies that may piggy back on.
Paypal did this with eBay, AirBnb is doing it with Craigslist home listings, and AppSumo looks to the 100 million LinkedIn users. If you can find a comparable site with a large number of potential customers, you’ll be in good shape.
Noah also stated, “What helped me with finding $1,000,000 worth of customers for AppSumo was studying my successful competitors; specifically, Macheist. Their site did a Mac-only deal that generated more than $800,000. Macheist shares their sales revenue publicly, but you can use your own business acumen on the CrunchBase list to see which business you want to replicate. For instance, you might research Airbnb.com, discover that they have a profitable and growing marketplace, then decide to create a similar service for alternative verticals.”
Sub Step B – Assess your customer’s value.
Once you’ve found your idea and a big pool of potential customers, you’ll need to calculate the value of those customers.
Noah gives the example of the Chihuahua market. He state further “This will help us determine the likelihood of them actually buying our product, and will also help with pricing. Here’s how we do that:
- Find out how much it costs, on average, to buy a Chihuahua (about $650). This is the base cost.
- See how much it costs to maintain a Chihuahua each year (i.e. recurring costs). Looks like it’s between $500-3,000. For this example, we’ll call it $1,000.
- Look up their life expectancy, which is roughly 15 years. This is the number of times they’ll have to pay those recurring costs.”
Therefore, a Chihuahua’s average total cost of ownership is: [$650 + ($1,000*15)] = $15,650
Now we need to utilize the TAM formula (a.k.a. Total Available Market formula), which will help us see our product’s potential to generate a million dollars.
Here’s the TAM formula for estimating your idea’s potential:
(Number of available customers) x (Value of each customer) = TAM, If TAM > $1,000,000, then you can start your business.
Let’s plug in some basic numbers to see the TAM for our Chihuahua information product:
(84,260 available customers) x ($50 information product) = $4,213,000
Looks like we have a winner!
Observation, you are not going to reach 100% market, but;
- This is only through Facebook traffic.
- This does not include the 5,000,000 monthly searches for “Chihuahua” on Google:
- This is only for one breed of dog. If you find success with Chihuahuas, you can easily repeat the process many times with other dog breeds.
- This is only for one product. It’s far easier to sell to an existing customer than it is to acquire new ones, so once we’ve built up a decent customer base, we can make even more products to sell to them.
By all measures, it appears that we have a million dollar idea on our hands. Now we can move on to the final step!
Note; Keep in mind that these two sub steps (A & B) will help you asses your marketplace. For this example Noah is using a One Million-dollar-potential. You may want to use a different numbers, or yo may not want to reach one million a year business, but the point is that the exercise to find your market potential is the same.
Step 2: Validate your idea.
This step is critical. A lot of your ideas will seem great in theory, but you’ll never know if they’re going to work until you actually test your target market’s willingness to pay.
In the article Noah states “I believed AppSumo’s model would work just on gut-feeling alone, but I wasn’t 100% convinced people wanted to buy digital goods on a time-limited basis. I mean, how often do people find themselves needing a productivity tool (compared with, for instance, how often they need to eat)?
I decided to validate AppSumo’s model by finding a guaranteed product I could sell, one with its own traffic source (i.e. customers). Because I’m a frequent Redditor and I knew they had an affordable advertising system (in addition to 3 million+ monthly users), I wanted to find a digital good that I could advertise on their site. I noticed Imgur.com was the most popular tool on Reddit for sharing images, and they offered a paid pro account option ($25/year). It was the perfect fit for my test run.
I cold-emailed the founder of Imgur, Alan Schaaf, and said that I wanted to bring him paying customers and would pay Imgur for each one. Alan is a great guy, and the idea of getting paid to receive more customers was not a tough sell. The stage was set!
Before we started the ad campaign, I set a personal validation goal for 100 sales, which would encourage me to keep going or figure out what was wrong with our model. I decided on “100″ after looking at my time value of money. If I could arrange a deal in two hours (find, secure, and launch), I wanted to have a return of at least $300 for those two hours of work. 100 sales ($3 commission per sale) was that amount.
By the end of the campaign, we had sold more than 200 Imgur pro accounts. AppSumo.com was born.
I share this story because it illustrates an important point: You need to make small calculated bets on your ideas in order to validate them. Validation is absolutely essential for saving time and money, which will ultimately allow you to test as many of your ideas as possible.”
Here are a few other methods for rapidly validating whether people will buy your product or not:
- Drive traffic to a basic sales page. This is the method Tim advocates in The 4-Hour Workweek. All you need to do is set up a sales page using Unbounce or WordPress, create a few ads to run on Google and/or Facebook, then evaluate your conversion rate for ad-clicks and collecting email addresses. This is how Noah and his group launched Mint.com. You are not looking for people to buy; you are simply gaging interest and gathering data.
Note: With Facebook advertising, $100 can get you roughly 100,000 people viewing your ad, and about 80 people visiting your site and potentially giving you their email addresses.
- Email 10 people you know who would want your pseudo-product, then ask them to send payment via Paypal. This might sound a bit crazy, but you’re doing it to see what the overall response is like. If a few of them send payment, great! You now have validation and can build the product (or you can refund your friends and buy them all tacos for playing along). If they don’t bite, figure out why they don’t want your product. Again, the goal is to get validation for your product, not to rip off your friends.
Again You can read Noahs’ article by clicking here.
Step 3: Propagation & Promulgation of your business.
Propagation basically is to multiply and increase your business, and Promulgation is to announce it to the public at large, to get the word out. You can’t run until you learn how to walk. This is one of the biggest reasons why small businesses fail. The business owners are announcing to the world while expending a lot of money without knowing whether people are interested in their product or not.
I also found a rare but awesome interview of Noah Kagan by Tim Ferris in the Creative Life Youtube Chanel where he talks for about an hour or so about the process and his insights as well as some case studies live, really awesome!
Not to long ago Noah challenge himself to get the process done in 24 hours. He started the 24-Hour Business Challenge to show people that there’s no reason you can’t start your business today! So he challenged himself to make $1,000 in less than 24 hours, and let his readers pick which business he was going to do.
He start by showing proof that he made it with a picture of his paypal account for this particular project.
So here is how he put it all together!
First he ask his follower what they thought should be the 3 most interesting businesses, and the answers were: lemonade, salsa of the month, and beef jerky.
In the article Noah stated, “The BEST way I’ve found to start a business is to solve your own problem.
I already spend about $100 – $200 a month on jerky and would love to try new and delicious jerky. Boom, let’s do this.”
First start doing a quick keyword research to find a suitable domain name. A common pitfall is people over-thinking their name when they’ve made no profit. People just want the solution and could care less what you’re called.
Then spent few minutes in putting together a simple site:
After he got this done, he try to sell his own co-workers and friends to see if they will hand over their money. Noah tried to sell to his co-workers at AppSumo. They didn’t hand over their money 🙁
“It is important to understand that your friends, family and co-workers are the hardest to sell to, so don’t get discourage.”
A few key questions Noah used in helping figure out what it would take to get them to give me money:
- How often do you eat jerky?
- Where and how do you decide to buy your jerky?
- What would make you pay for jerky right now?
- What’s your hesitation in not buying right now?
These questions helped Noah see that they preferred not to think about the jerky they buy. They like it because it’s a healthy snack and are open to trying a variety of snacks.
Noah’s Tip: When selling, a key thing is to get to the root of the rejection and see if you can solve that. One potential customer specifically said the value in this business would be: “that I get to try new ones without even thinking.”
After getting a general idea of what I was going to sell (healthy special jerky of the month).
Then he went on to work on the idea. So here’s what he did:
- Made a basic budget so you could work backwards to see what amount of sales you would need to do to hit $1,000 in profits. One of the most insightful things from this was the margins are small so Noah decided to aim for selling 3-month plans vs. just 1 month of jerky.
- Make a customer avatar to help you sort through who to contact. If you know WHO your customer is, then finding WHERE they are is much easier. Noah decided to go for:
- Offices for healthy snacks
- Young professionals who already eat healthy
- Then Noah did quant-based marketing (mapping out sales/marketing numerically) to plan out how how to hit the # of sales needed to reach $1,000 in profit. The idea here is if you can plan on who you’re going to reach out, it makes your day MUCH easier.
Download Noahs’ quant-based spreadsheet by “Clicking Here.”
Noah’s tip: updated the sheet during the day so you can see what’s working and what’s not, then adjust in real-time which sales activities to focus on. Then start reaching out to some of the people you think are the ideal customers.
Here’s the script Noah sent to the first person:
Then posted on Facebook and Twitter to your friends.
At first Noah said that sales were slowly trickling in. He felt a bit better but SO much further to go.
Then he realized something that a lot of salespeople and entrepreneurs forget, and that is to ask for referrals. A key thing is to make referrals EASY for the other person to do.
So here’s the email Noah provided for people to forward to friends:
“Hope you’re all doing insanely well.
A good buddy of mine is starting a neat service to send 1 amazing bag of beef jerky every month.
I signed up for $20 / month for 3 months (which is enough jerky for every day). It’s only $0.67 a day for some good snacking…
He’s only taking a certain amount of people for this first run. Thought I’d hook y’all up.
Who else is in?
Keep it real.
PS. Any of you work in offices or know of offices who buy snacks? This is perfect for that.”
Here’s also what he provided for people to post on Facebook:
Attention Beef Jerky Fans! My buddy Noah is launching a beef subscription jerky service. He is crazy and so are you for loving beef jerky. Check it out: http://sumojerky.com/
Then he searched his Facebook for people who like paleo, health or jerky. He also already had a few friends and messaged them.
Once sales started happening, Noah began asking people who they think he should talk to. “Start engaging people.”
Noah’s Tip: “One of my FAVORITE email subject lines to use: Referred by (person they trust)”
***9 hours later after 4 large amounts of caffeine and working harder than he ever had in a long time … here’s where he was:
- $3,030 in total revenue
- $1,135 in profit (BOOYAH BABY!)
- Dang, I am surprisingly tired. Whiskey and taco time for me 🙂
- Future ways I can grow this business:
- Look up office managers on LinkedIn and spend time seeing who knew them.
- Give away samples to offices for them to have a great experience and then sign them up. A great way to get in the door and meet people.
- Get jerky companies to give away jerky in exchange for all the promotion they are getting to the buyers.
Really fascinating take-always during this process:
- Real-time communication (skype, google talk, texting, phone-calls) wins. This was the most effective way in selling vs more passive forms (emails, Facebook/Twitter posts).
- Ask for referrals. If someone isn’t interested, ask who is. If someone is interested, just ask for 1 person who else they think will like it. Incentivize people with an extra month of jerky with any successful referral.
- Down sells work. If someone didn’t want 3 months which helped with the goal, asked if they were okay with just 1 month of jerky.
- You can’t sell everyone. With limited time, anyone who did not eat jerky or didn’t care about high-quality specialty jerky wasn’t worth selling to.
- Focus on what already works. Quickly, I noticed offices already order snacks AND have larger budgets to expense things (perfect).
- Ask people what they want. If people liked a certain type of jerky already, he noted that and will just get them the kinds they like. Why guess? Work backwards from what people already want.
- Social media is noisy. he posted twice on both Facebook/Twitter to make sure anybody who knows him has a better chance of finding Sumo jerky. He assume one tweet should reach everyone, it doesn’t.
- You don’t need to spend a lot of money to start a business. With only 24 hours and $7.99, Noah got this biz going. You don’t need to spend tons of money and time to validate a business.
- The secret to sauce … is work. That’s it. It’s hard and tiring but if you want it, you can do anything.
- Focused on people who think the jerky would genuinely be good for them and for you. It is a bit uncomfortable but you will noticed that’s generally the case when you aren’t promoting something you believe in.
- Build (or maintain) your network. If you complain you don’t have enough people to sell to, build it now! If you haven’t reach out to many friends in awhile, you need to do so. You have to tend to your “garden” or it will decay.
As you can see, this is not rocket science, it only takes “Ganas” to do it. Very simple steps, Find the Idea and the market, validate it, and expand it, make it a real business.
What did you like or learn from this article, please comment below.
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