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Tag: books

Founders, Pay Yourselves First

by Santosh

Santosh Dawara.

I occasionally get a cry for help in my inbox that goes something like this – “Hey there, I’m not sure if I’m going to last the next few months. I’ve got only 50k left over in the bank. I can’t build my venture out!”. It happens to the best** and there’s nothing wrong with desperation. And yet we know that it’s pitifully far from where we really should be going.

The answer may lie in a maxim I read recently, “Pay yourself first”*. The reason it sounds so out-of-place is that we’ve been encouraged to believe that somehow business people are greedy. On the other hand, the way a founder thinks will often determine how his startup will fail.

If you believe in capital first, fixed payouts, followed by payments to vendors, followed by pay the government, then pay yourself last – if your venture takes a tad longer to get off the ground then trust me, you could be writing an email just like this one.

If on the other hand, you believe that you will have to pay yourself first, there’s a chance that you will build a very different company, one where responsibility lies squarely where it should. Perhaps one that is both grounded as well as one that exceeds the wildest expectations of yourself, your investors, customers, employees and everyone else.

If you believe that founders that think this way don’t make it big – that’s simply not true. The most oft-cited examples are of Google.com, eBay.com. Each of them were making a couple of million annually before their second year of operation. What also needs to be mentioned is that one of them found a hugely successful business model a little later in its lifetime and promptly switched over to it. The Indian business climate blessed both RedBus.in and Flipkart.com, both having made cash-flow milestones within the first years of operation. For sure, revenue-first never stunted the future size of your venture.

If you’re uncertain about ‘how’ or ‘if’ your venture will make revenue, that’s really a good thing because it’ll compel you to think about the outcome, about your position in the value chain. It will also help your prospective customers to be decisive. It reinforces the boundaries of your experiment so that you can distinguish between true success and failure.

If you’re certain that your venture isn’t destined for early revenue – also read as ‘we’re a media company’, that realization is important and a certain outcome of revenue-first thinking. You can then be sure to have to look for another source of cash-flow, or divi-up your resources for offering consulting, or services and integrate it into your venture.

The kind of thinking I’d like this post to shape is that of a founder being creative with both what he is personally capable of and what’s necessary but beyond him. If you must, think of it as a game where you rack up points. Markets have traditionally measured ventures by their ability to efficiently generate cash and it won’t be the same game if we gave up on that fundamental.

I recall a founder, close friend who gave in and licensed his technology out after much consideration. His buyer simply had access to the market while he didn’t. He shared that it had been an ’empowering’ choice. It had compelled him to acknowledge that his runway was limited and that he had to build out his own capacity to self-sustain. It certainly delays his dream but it was better than having to write that final email.

After having gotten to cash-flow, you’ll find that even though you’re not perfect (what of profit? what of margin?), your confidence is greater at being able to maneuver your venture towards those same ideals. I hope that email will read – ‘we’ve gotten this far and are trying to figure out how we can go from here …’. In essence, it’ll bless you with better compatibility with the unknown that all ventures face.

* “Rich Dad, Poor Dad” – Robert Kiyosaki (get it on your kindle, or with flipkart).
** Also see, “Ecomom, And a Grave Financial Error“.

The Price of an Electronic Book

by Santosh

The cost of delivering an electronic book to a device is significantly lower than that of a physical book. That’s clear. Then why is it that publishers insist on pricing eBooks the same as their physical counterparts, especially at launch? That’s probably the question behind the ongoing anti-trust case* against Apple’s use of the agency model. Apple decided to price eBooks at 30% + (the publishers price). In contrast, Amazon priced eBooks at $9.99 where ever it had control of the price.

The funny thing is, Apple used the Amazon approach to pricing for iTunes where it was first in the market.

This same question is at the heart of so many other existing business models?

Why is it not cheaper to reserve a ticket online with an aggregator versus purchasing it directly from the airline, online and offline?
Why is it not cheaper to buy a ticket with a movie tickets aggregator – why is a convenience fee necessary? What is convenience but a choice?
Why can’t it be more cost-effective to buy certain products online than in retail?

In maturing markets, costs don’t determine price. Profit does. Incumbents believe that consumers won’t mind paying for convenience, or for an exclusive, or perhaps for choosing to reserve a ticket on an aggregator where they can compare prices. Perhaps these are profit-making avenues that the incumbents fear losing control of. Perhaps it also helps dampen the popularity of these avenues and keep them in check.

On the other hand, the pioneer of a market – the one who’s trying to change existing consumer behavior, they believe that pricing attractively will convince consumers to change their existing habits. Within four years Amazon were able to achieve parity in sales of eBooks to their physical counterparts**.

Amazon exec says Apple’s agency model was designed to hinder Kindle, AppleInsider.com.
** E-Books Outsell Print Books at Amazon NYTimes.com.

Excerpt from “Steve Jobs”, Walter Isaacson.

Books were an obvious target, since Amazon’s Kindle had shown there was an appetite for electronic books. Apple created an iBooks Store, which sold electronic books the way the iTunes Store sold songs. There was, however, a slight difference in the business model. For the iTunes Store, Jobs had insisted that all songs be sold at one inexpensive price, initially 99 cents. Amazon’s Jeff Bezos had tried to take a similar approach with ebooks, insisting on selling them for at most $9.99. Jobs came in and offered publishers what he had refused to offer record companies: They could set any price they wanted for their wares in the iBooks Store, and Apple would take 30%. Initially that meant prices were higher than on Amazon. Why would people pay Apple more? “That won’t be the case,” Jobs answered, when Walt Mossberg asked him that question at the iPad launch event. “The price will be the same.” He was right.

The day after the iPad launch, Jobs described to me his thinking on books: Amazon screwed it up. It paid the wholesale price for some books, but started selling them below cost at $9.99. The publishers hated that—they thought it would trash their ability to sell hardcover books at $28. So before Apple even got on the scene, some booksellers were starting to withhold books from Amazon. So we told the publishers, “We’ll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that’s what you want anyway.” But we also asked for a guarantee that if anybody else is selling the books cheaper than we are, then we can sell them at the lower price too. So they went to Amazon and said, “You’re going to sign an agency contract or we’re not going to give you the books.” Jobs acknowledged that he was trying to have it both ways when it came to music and books. He had refused to offer the music companies the agency model and allow them to set their own prices. Why? Because he didn’t have to. But with books he did. “We were not the first people in the books business,” he said.

“Given the situation that existed, what was best for us was to do this akido move and end up with the agency model. And we pulled it off.”

How Sticky Growth Models Work

by Santosh

What really matters is not the raw numbers or vanity metrics but the direction and degree of progress. – Eric Ries, ‘The Lean Startup’.

Most online services can be cast as having a sticky engine of growth. At it’s heart is the question – “Is the experience rewarding enough for new users to return?”. A model built around this question can help you determine the direction and degree of progress for eCommerce services, creative communities, Saa’Services and many more business models.

Three measures come together in this model – Retention Rate, New Customer Rate and Growth Rate. Each measure has it’s own story to tell. If you’ve read ‘The Lean Startup’, you’ll also learn that the model can reveal if your venture has figured out how to leap forward consistently.

With this honest a metric at hand, you won’t lose your way. I’ve found the model handy in most of the projects that I’ve worked on. Below is an interpretation of the model and how the three measures are derived.

Sticky Growth Model (Image)

With the model above,

1. Retention rate: “Customers Retained in Current Period” by “Total Customers”.

2. New Customer Rate: “New Customers” by “Total Customers”.

3. Churn Rate: “Customers you failed to retain” by “Total Customers”.

4. Growth: is the difference “New Customer Rate” – “Churn Rate”.

5. Total Customers: coming into a period are the Customers Retained in the previous period and New Customers you will engage in the current period.

Key scenarios shown in the test sheet (Google Docs Worksheet) that will help you grasp how the model works,

* When Retention Rate is 100%, Churn Rate is zero.

* When New Customers Added = Customers Retained in the same period, Growth is 100%.

* When Retention Rate is zero, Growth is negative for that period.

* When New Customers Added is zero, Growth is less than or equal to zero depending on the Churn Rate.

Thanks to Mitesh Bohra, CEO at Savetime.com for lending his time to whet iterations of the model. Do leave your feedback in the comments, especially if you have a different interpretation to share.