This is part of an ongoing startup advice series where I answer (anonymized!) questions from readers, like a written version of Smart Bear Live. To get your question answered, email me at asmartbear -at- shortmail -dot- com.
Burgeoning Startup Founder writes:
After a year of work, my startup is now doing about $6,000/mo in revenue and $3,000/mo in profit. I just quit my day job to work on it full-time, and I have a few thousand more dollars I can put into it.
What should I do next? I’ve heard automation is important for scaling a business and I think I could save something like $1000 if I worked on that, so should I do that?
You should not be focussed on automation, nor on cost-cutting. Cutting costs at this stage cannot lead to a significant change in the business.
To see this, consider what would happen if you really were able to save $1000/mo. What would you do with it? You can’t hire someone with it. It’s not enough to get a website redesign.
You could try to “plow it back into marketing.” But because you’ve already been at this a year and even now are only at $6k/mo, I can surmise that you don’t have a consistent way of spending $X in marketing to automatically drive $4X in revenue. If you did, you’d already have done that, you’d know what to do with all your extra money, and the company would be larger.
So, spending your time (your most valuable asset) on saving an extra $1000 cannot — today — significantly improve the business. You should be spending that time on something else. But what?
It has to be on getting more revenue. Both short-term bursts and, more interestingly, building systematic ways of growing revenue month over month. Such as:
- Get AdWords 2x more efficient on campaigns with plenty of inventory headroom so that you get 2x more signups for the same spend.
- Create different pricing tiers so that people willing to pay $99/mo instead of $9/mo can do so, doubling your average monthly ticket and therefore more than doubling profit.
- Hustle up a few hits of press to inject some new customers this month.
- Find a consistent reseller channel, like an agency who needs your service fifty times a month.
- Find a lucrative consulting gig to inject cash (so long as it’s enough money to be worth the distraction rather than turning into a consulting company).
- Get new leads to sign up for a newsletter so you can convert them over time.
- Set up an affiliate program and sell bloggers and consultants on how much money they can make.
- Offer an annual plan for a discount to increase immediate cash-flow. Since you’re bootstrapping, “cash now” is far more valuable than “cash later.” Rand over at SEOMoz just wrote up what he thought about how we did this at WP Engine.
- Install a web-chat system so you can close 2x more of the people who arrive at your website, whether by directly selling or learning about their experience with your website and product.
A breakthrough in any one of these areas means a significantly more stable business. With under $10k/mo per founder in revenue — no matter what the other expenses are — you don’t have something sustainable. You can’t afford to hire anyone else, you can’t cut enough costs to be worthwhile, you don’t have enough money left over to invest in future things (marketing, features, anything), and you still don’t have enough knowledge about what specifically you’d invest in anyway.
Once you get past that point, say with $15/mo with just you or $40k/mo revenue and three people, you probably have enough cash-flow to weather some ups and downs in order rate, seasonal slowdown, etc., and still invest back into the company.
In fact, at that point you might indeed find a way to save $1k/mo or even $5k/mo through automation or changing server vendors or whatever. And since you have the time for that, and since that $5k/mo can go back into growth — which now you probably can affect with that money — that makes sense.
Of course don’t be wasteful with money either — that’s just silly. But spend the next few months trying to 2x revenue, not trying to shave a little off the expense column.
Add your advice to the discussion section!