How do you actually make money off of web-based software?
September 6, 2010 12:47 PM   Subscribe

I'm a web developer with enough proven abilities to develop good stuff that end users like. I'm employed, but want to start a business with a couple of friends with complementary skill sets in the technical side of things. We'd like to create one or more web-based products used by small-to-mid-size businesses and/or individual consumers, paid for on a monthly basis using a "software as a service" model. We've got more than enough combined development and graphical/UX design abilities, but we have no solid product ideas that we feel confident enough about to start doing the enormous amount of work involved in any of them. The main problem with any idea we get is this question: how on Earth do you convince anybody to pay you money for the product?

We've read our Reworks and other 37signals gospel. We've bought into the idea of not just throwing some random shiny Web 2.0 garbage out there with VC or angel money and hoping it'll one day magically transform into a business with actual profits, but instead creating a product that you can charge people for from day one. We're willing to work during our free time, building a product while holding a day job, only quitting if/when the business is steady enough to support us. We could basically do this with no other investment than a lot of time and effort. A good, well-grounded basis for starting, if I say so myself.

In a previous life, I was a tech support guy. In that line of work, I encountered a mindboggling amount of extremely bad web and desktop software that these people (barely) run their businesses on—that, or Excel spreadsheets, the Swiss army knife of business software for non-technical people everywhere. There is an enormous theoretical market for Things Done Better. Why theoretical? I'll explain.

So I've seen how bad the stuff people use is. Why not just pick some specific bit of software and start from there? Well, I've also seen how deeply people have integrated those crap tools into their daily workflows. The software might be awful, but it works just enough for them to have gotten accustomed to the way they work, glitches and idiosyncracies and all. Small businesses, the customers we'd most likely target, are very conservative with their money and very skeptical of sales pitches (both for a good reason). Switching, even to a vastly better, more efficient and more reliable system, would mean overcoming the basic human fear of change, multiplied by the reality of risking their business on a new, untested bit of software. Not good.

In short: we can think of things to do better, but we don't trust any of the products ideas enough to start devoting enormous amounts of time to working on them. We don't want to spend months slaving away on something just to have it completely fail on the marketplace. To put it another way, we'd like to be reasonably certain that the work we do won't be wasted, before we start. I don't know if "reasonable certainty" is possible when starting any web business, though.

To make things worse, three crucial things we don't have: any domain expertise in any real-life area of human endeavor (except web development), any contacts who would have any of that, and any sales expertise whatsoever. We sad, non-networked introverts. To compensate for that last deficiency, we could probably do the usual online marketing thing, relying on free trials, word of mouth gained from a quality user experience, perhaps even positive press. That might work. But the lack of domain expertise is a killer: due to that, we don't even know what kind things people might want enough to pay for. Having no contacts, we don't know who to rely on for continued advice when building a product that needs domain expertise. Our own itches are basically scratched already, so we can't really jumpstart from that, either.*

It's been done. 37signals has done it several times, as have others. We don't know how. We just don't see what more is needed besides having the better product. We just don't see how anybody would want to pay us for anything. We just don't see what that "anything" would even be.

What would you do in our situation? And, basically, how the hell is it even possible for some people to make money off of web-based software?

* OK, issue tracking is one thing that hasn't been done very well, not done to death anyway, and that could be worth a shot, especially for smaller, specific niche markets (if only we knew what they are). It's just that doing to issue tracking what Basecamp did to project management is not easy: in our experience, issue tracking is really heavily dependent on the specific workflows of a company, be it for developer bug tracking or customer care. It's really hard to make an issue tracking product serve enough needs and not suck UX-wise.
posted by lifeless to Work & Money (13 answers total) 14 users marked this as a favorite
I used to work for a company that was at the very top of its field. It employed some of the most brilliant people in our industry. Some of those people left to form their own companies, taking their good ideas to market. Most of those companies failed, but some didn't. The one pattern I saw was that companies that were founded and operated from the start by the techies failed FAST. The ones who recognized early on that simply having awesome technology wasn't enough, and brought in someone as their partner/CEO with the kind of sales and marketing background that was needed to get people to pay money for awesome technology - they were the ones that succeeded.

In short: you need to bring in a suit. Nerd-driven companies don't make it. You need someone who has a sales and marketing background to help you push this idea. The good news is, if you've ever worked for a technology company, you probably know at least one - someone who, at the very least would be willing to talk to you about your idea and provide you with some advice. Start with a phone call. You've got to know someone - perhaps a product manager, or a marketing manager, or a sales guy. Take 'em out to lunch, tell 'em at a high level what you're doing. Most people in that kind of role LOVE to talk - you shouldn't have any problem plugging them for some free advice. Based on those conversations (and you should have more than a few), figure out your next step.
posted by deadmessenger at 1:03 PM on September 6, 2010

Your profile says you're in Finland and I don't know if this is common there, but you may want to look around for a business incubator or something like that. They're GREAT for this kind of thing - helping people with strong functional backgrounds become businesspeople.
posted by deadmessenger at 1:10 PM on September 6, 2010

Of course, yes, you need to bring in a suit - but you should also hit the ground yourself - go to some sales conventions/meetings, perhaps in a narrow field or two (pet shop owners, dentists, etc.) and try to glean what is missing from their systems (warning: asking outright "what's missing?" is not always reliable.)

My point is that not every "suit" knows what they are talking about it and you can not do harm by having some of your data, even if it's anecdotal to bring to the table.
posted by victors at 1:27 PM on September 6, 2010

You need to read this:

10 Reasons Customers Won't Switch To Your Product

This is what you need.
You need someone who can come up with a profile of your ideal customer. Then, you need to research and FIND that ideal customer. I don't just mean do a bunch of Google-fu to find a list of companies, but go out there and dig and find the companies that have people who you want using your product who are out there - Twitter, LinkedIn, blogs - and start a conversation with them. Don't try to sell them. If you flatter them by saying "We have this thing and we think you'd be our ideal USER and we'd love to talk to you about this and OH we will give you a $50 Amazon GC for your time" people *will* talk to you. You're flattering their egos AND you're recognizing their time is valuable.

Then you have to LISTEN. And i emphasize LISTEN because what you get back from these people may not be what you want to hear. You may talk to them and find out that The Thing you think you are going to build is not The Thing that people want you to build.

At the end of it, you build The THing and you GIVE IT to the people you talked to and ask them to use it. For free. Then you get testimonials and case studies out of it.

Then you sell it with all of the stuff you have above.

What you need? You need smart people who are good marketers. You need a hungry young sales person who isnt stupid and GETS what you're trying to do. They could also be a hungry old salesperson who doesnt want to get pushed out of the industry but everyone sees their grey hair and thinks they can't possibly be relevant. You need a product manager, too, someone who can talk tech AND talk marketing, and has the 30,000 foot view.

Don't waste time on sales conventions or meetings. Go find the people you want to talk to. The people you want to talk to may not have time to go to a sales convention or a meeting.
posted by micawber at 1:39 PM on September 6, 2010

But the lack of domain expertise is a killer: due to that, we don't even know what kind things people might want enough to pay for.

I haven't ever done what you are planning to do, but have worked for later stage software start-ups and sold consulting services to software start-ups across the lifecycle. I still aspire to do an early stage start-up and be a founder. A really strong reoccurring pattern is that at least one founder has a lot of domain knowledge in whatever vertical the software is targeting and exactly understands whatever it is the customers do to make a living. The problem with being a hardcore software developer is that the vertical you understand best is software development tools, which as you know is a small and crowded market. Since you are stuck on "go" with what to build, I would suggest that you need to somehow find that other founder who is going to bring the business knowledge and the idea for the problem you'll solve. This may or may not be the "suit" the other posters are referring to.

I have no idea how it works in Finland, but in the metro area where I live in the states, there are a number of meet-ups and networking events related to venture capital and angel investing. I've met lots of business school types at those functions who are brimming over with ideas, have perhaps had one successful exit already, have domain knowledge in something or at least contacts into a domain, and would love to work on a prototype with some technical types. I've been approached a number of times about working on prototype products; only a few matched up with my technology expertise ("hey, do you know anything about RFID? What about set-top boxes?"), fewer had the right vibe to actually start investing hours in a project, and (so far) none of them have taken off. I wish I could tell you "this worked perfectly for me", but I can say I've had a lot of opportunities and got to hear a bazillion pitches for different ideas.

Everything else you are planning sounds spot on. My experience is that investors are most interested in the companies that have the least need for capital. A business model that you can bootstrap in your spare time and is profitable early on fits that bill exactly. Good luck with finding your killer app!
posted by kovacs at 3:35 PM on September 6, 2010

lifeless: "What would you do in our situation? And, basically, how the hell is it even possible for some people to make money off of web-based software?"

The best way to avoid spending "months slaving away on something just to have it completely fail on the marketplace" is to find a problem you want solved. You say your itches are scratched, so it may involve a bit of self-examination first. Brainstorm what you do daily, and what other people do that you'd try if it were less work than it currently is.

Then solve it as fastly and crappily as possible. It may in fact mean designing an Excel spreadsheet. I ran into a company via AskMefi that started out as a budget spreadsheet that people still recommend in budgeting threads. As a solution, it gets people 20 percent of the way to perfect, but it's still an improvement and you get instant brand name recognition. They now advertise their web service in their old spreadsheet approach. Plus, all the people linking to their website helps the pagerank.

I can't remember where I saw this, but another option is to get signed statements of intent. "If we can deliver software that does X, Mega Corp agrees to buy it for Y dollars." I think it might have been a compiler, as in "If we can deliver a compiler that produces code 10 percent faster than icc by 9/6/2010, Intel agrees to buy a site license for 100k." Granted, finding these customers can be hard, and maybe Finland doesn't have many Intels with definitive benchmarks you can beat. In order to do this, you really need to be prepared to be a domain expert, and prepared to face objective comparisons of your output.

lifeless: "But the lack of domain expertise is a killer: due to that, we don't even know what kind things people might want enough to pay for."

It's a strange fact of the internet that people will tell you what you should be doing, if you know where and how to listen. It's one reason productive small companies have public forums; customer A posts an idea, and if it gets a lot of replies or a lot of clicks, you know there's something there to look into.
posted by pwnguin at 5:29 PM on September 6, 2010 [1 favorite]

I don't have time at the moment to write more here, but a few links, names, etc. you should read up on.

ABSOLUTELY read up on Customer Development and the Lean Startup Movement. Key people there are Steve Blank and Eric Ries. A few other names to add to that mix: Dharmesh Shah, Hiten Shah (not related), David Cancel, Ash Maurya, Sean Ellis, and Cindy Alvarez. I also like Joshua Porter a lot, although his work is more on psychology and UX, rather than customer development. Don't buy the book "Four Steps to the Epiphany", but read all the blog posts you can find that reference it. (Or buy it. But I found it to be too dry, and online articles explain the same topics in more accessible ways.) There's actually a new book that covers some of the same ground, The Entrepreneur's Guide to Customer Development. I haven't read it, but it seems to be getting some good reviews.

Oh. Hey. Actually, here's Eric Ries, giving a talk at Stanford. Watch this. ASAP.

In a nutshell, Customer Development says that no startup ever folded because it failed technologically. Every single failed startup failed because it didn't have a market. So you should focus on developing your customer base as much as — or even more than — you develop your product.

You might also find the Hacker News message boards useful, although they could be a distraction, and they're more targeting young startup founders who are looking for VC investing and big exits.

In terms of what you should build ... there are two schools of thought here. One is to really try and suss out what would have a huge market opportunity. The other (the more 37signals way) is to think through what you would pay for. The idea there is that you probably aren't that many standard deviations away from "normal", and there are probably enough people like you that you could sell software to them. (On preview. Oops, you covered that, and pwnguin notes it. Your itches are scratched. Really? All of them? There's nothing in your life that you think "this sucks, and we could do it better"?) In my case, I'd pay for attention management software that helps me focus on my work. So that's what I'm building.

If you're looking for ideas, I think software that could help small businesses (specifically, online startups like you and me) stay on top of their churn rate, help them run cohort analyses, and could otherwise make business analytics (like these or these or these) easier to understand, measure, and increase would be worth a lot of money. Think about it: If you can help me make an extra $100 a month, and you're saving me lots of time, I should be willing to pay you $100 a month. People aren't totally rational, but if you're helping businesses make more money, then they'll be willing to pay you.

I'd be more than happy to chat via MeFi mail or e-mail ( if you want to talk more. Or post stuff in the thread here and I'll write more later on.

On preview, pwnguin's talking about my other startup, PearBudget. :) (Thanks, pwnguin!) He's right, on all counts. Launch a proof-of-concept quickly, cheaply, and dirtyly (?), and iterate it based on customer feedback. Now. I need to listen to my own advice, and get our app pushed out there as soon as we can. Let me know if I can help!
posted by Alt F4 at 5:47 PM on September 6, 2010 [3 favorites]

But the lack of domain expertise is a killer: due to that, we don't even know what kind things people might want enough to pay for.

I know this is going to sound flip, but I mean it with all honesty: take a walk outside. There's so much bad it's almost impossible to go a day without running into someone, somewhere, that hates their "system."

Just for starters:
  • Point-of-sales devices
    • …for restaurants
    • …for gas stations
    • …for boutique stores that could use an online presence
    • …etc.
  • Your dentist's office (appointments, notes, pictures, payments, etc.)
  • Moving companies
  • Equipment rental companies
  • etc.
Pretty-much open the yellow pages to any page and you'll see a business category that could really use some updated business processes & software to facilitate those processes.

It's been done. 37signals has done it several times, as have others.

Meh. 37signals hasn't really done much. They went for extreme horizontal instead of extreme vertical. Their software is very generic, but that's their model: target the fundamental problems most businesses have. The problem with this model is that it's just a matter of time before someone bigger, better, with more money, and who's name rhymes with *frugal* develops something similar and steals your client base overnight.

What would you do in our situation?

I would look for a class of business that has similar problems cross-company. For example: real estate rentals. Everybody that works in property rentals does the exact same thing. Or plumbing, or roofing, or any other number of jobs that are all handled in a similar manner no matter what the company is. Then look at the software they're using. Can it be improved, or is it a giant bubbling cauldron of suck? Do the businesses in that industry typically have money? When was the last time they had a software update?

And, basically, how the hell is it even possible for some people to make money off of web-based software?

Make it run rings around the existing DOS-based crap. Make it easier to use than the old shit software, make it more useful.

* OK, issue tracking is one thing that hasn't been done very well, not done to death anyway

True. But unless your issue tracking software is The *Bomb* on the first try, you'll be struggling the whole time just to get name recognition. There are a **lot** of lecture packages available.
posted by Civil_Disobedient at 6:53 PM on September 6, 2010 [1 favorite]

Truly useful and accessible text analytics has not been done well yet. Find a way to enable people to search their vast stores of documents based on what they mean and not just what they say. There are a number of toolkits out there, but they have not been deployed in any way that make them truly accessible and flexible enough for the non-developer.

There's a solution that would be valuable to just about everybody.

You did say you guys were good, right? :)
posted by cross_impact at 7:37 PM on September 6, 2010

Its funny...I'm actually an online marketing guy who can market the crap out of anything and has tons of brilliant ideas, but doesn't have the development knowledge or connections to get them made. I'm not going to pitch ideas to you (although feel free to MeFiMail me if interested), but I will share one of the most important things I've learned in online marketing of web services...


The biggest hurdle is just getting something out there. As a developer I hope you are familiar with the Agile Development methodology. Apply it to your work.

Start with any idea, and whip up a service that does something for it. Maybe add a couple components, but focus on doing that one thing really well and just GET IT OUT THERE. Make it a free service initially and start spreading the word in your circles to judge demand and get feedback. Now, based on that info, take the next step, perhaps rolling out a paid Pro version or something else.

The point is, don't get hung up on having the final vision of your product and all associated details hammered out before you write your first line of code. Just get something out there.

The quicker you crank stuff out and get it to market, the quicker you can see where the potential is, and the less risk will be involved because you will have minimized the time spent on each effort.

If you have any questions about marketing SaaS in particular, message me. I built a lead-gen program from the ground up for a b2b SaaS solution, manage multi-million dollar paid search budgets for my day job, and do affiliate marketing on the side. Needless to say, I've seen a lot of what is out there, and would be happy to answer questions regarding the various marketing channels available to you.
posted by Elminster24 at 8:35 PM on September 6, 2010 [1 favorite]

Response by poster: Excellent answers, everybody. I'd mark just about all of them as "best answers", but that would just make the page look messy. Don't be offended that I didn't mark any, yet :-)

I wrote the question late at night and just woke up (time difference...), but will come back to this thread after work today.
posted by lifeless at 10:24 PM on September 6, 2010

Response by poster: All right. First of all, reading your replies has given me much-needed focus. Due to some personal issues, I've been complicating the matter way too much, mixing the dreams of running a business with mental cruft it has no reason to be mixed with. This helped, thank you.

Finding business- and marketing-oriented people is recurring advice. I guess it has to be done, somehow. The problem is, our little team is willing to work for free for a loooong time in the hope of an eventual payoff. We're all friends and we trust each other implicitly. Finding an outsider who would share the vision and be willing to work for free and then bringing him into the mix is easier said than done.

I'm not completely hopeless when it comes to managing the products and daily operations, fortunately, as well as having the 30,000 foot view. I'm an ideas man, I just don't follow through :-). Sales I can't do, so we need a salesman.

But I did some thinking today regarding the domain expertise bit, based on your replies. Using Scrum terminology, each product needs a product owner, who is a domain expert. I realized that this person need not be a part of the core team, just be available with his expertise, especially during the design and requirements gathering phase. A trusted outsider who will stand to benefit from the product's success through some profit-sharing agreement should do nicely, and this circumvents the issue of not being comfortable with having an outsider as one of the founders.

(We almost actually had a product with an owner like this once. Unfortunately, the project fell through during early planning stages, because we heard that a government body was just finising building a free service that did what we intended to charge for. I haven't found another product idea that I could fully stand behind since.)

Some specific notes:

deadmessenger: Yeah, we have business incubators in Finland :-). Turns out there's a starter info coming up next week in one that's near me, I'll attend.

micawber: Good advice, although I have no clue which industry of the thousands available we should target and go listen to for product ideas. It would be easier if we knew some people in some of them, otherwise it feels almost like cold calling. (I've exhausted my contacts in the past to no avail, but the other guys may not have, yet.) Also, where do you actually find competent, non-douchy sales guys willing to work for no money until there is income? No offense to any sales guys who fit the criteria, I just haven't met you yet. Just a lot of your opposites. The sales mindset is not inherently compatible with the techie mindset.

Alt F4: I've previously looked at some of Ries's stuff, but mostly superficially. Gotta take a deeper look. As for itches, well, we're quite happy with the tools that we use daily. We haven't found project management and issue tracking systems we'd love to use yet, but we haven't extensively looked at the available alternatives either. Thanks for your chat offer, I might take you up on it.

Civil_Disobedient: Yup, I've identified quite a lot of bad stuff out there mysqlf, but the emphasis is on "want enough to pay for". Add to that: "want enough to do the switch despite the fear and risks". This may just be a matter of efficient sales and marketing, though. I'm just fundamentally skeptical that anyone would want to pay for anything that we can build, but that may be due to my deep unwillingness to convince strangers to do it, i.e. do some actual selling.

Elminster24: I agree about releasing early and often, but first we need a product, but first we need an idea we are confident enough about :-). I'll probably contact you later on as well, thanks for the offer.

To make some of my thinking more understandable, I'll mention this about networking: I hate it. To be specific, I hate actively trying to build contact networks. (I'm not on Facebook or LinkedIn, for example, and shudder at the thought of attending networking-oriented meetups etc.) I'm too antisocial for it. When networking happens as a side effect of some other activity, though, without forcing it, it's all good.

Anyway. This thread will probably die quickly as AskMeFi threads tend to, but thanks to all of you once more. I've got a lot of thinking to do.
posted by lifeless at 10:18 AM on September 7, 2010

Response by poster: (Man, I already regret that sales jab in the previous post. Sorry all. Didn't mean to imply that a sales guy not willing to work for free would be a douche, for one thing. I've just had almost exclusively bad experiences with salesmen, including one sociopath I used to work for.)
posted by lifeless at 10:34 AM on September 7, 2010

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