This graph doesn’t look like 700% growth does it?  But it is.

I’ve been playing around with the excellent HighCharts today and I decided to chart our online income for the last four years.  It has been a fair old struggle to get where we are and at this rate there will be a good few more years ahead of us before we get to where we’d like to be.  I guess there is only so much you can do about that sometimes.  It just takes time – no matter how badly you need the money right now.

• at least a €500,000 turnover
• 3 or more employees (with preferably 1 managing the other two and so on)
• an operating margin somewhere between 50% and 10%
• a Christmas party
• HR contracts
• titles
• Hours of work

I admire these businesses.  They provide employment, structure and meaning to people and help the world go around.  The only problem is, I don’t want to run one.

I’m more interested in spending less than I earn while not selling any time.  With that in mind I’m dumping term building a business in favour of developing cash-flows.  As for a title, I tend to stick with programmer but privately I try to think along the lines of an investor.

People think Google is a software company. It’s not. It’s a services company. Advertisers are the customers; you are the product.

It got me thinking about how its easy it is to misconceive and how those misconceptions can be disastrous when it comes to nurturing your cash-flow.  Pricing is one thing that I’ve misconceived for years.

Supermarkets, shops, airlines and pretty much every consumer business sets the price for its products.  It might be easy to assume that they are in control of the price.  In reality  – they are not – we are.

In middle-class society, we are brought up never having to set a price on anything.  All our services are defined in price for us.  Setting a price is a completely underdeveloped muscle and you only have to observe a muzungu squirm as he struggles to haggle with local traders in an African market.

So if we are so bad ad setting prices, how come we still set the price as consumers?  The answer is that we set the price, but not individually, but in aggregate.  On average we either buy or don’t buy in a binary fashion without negotiation.  We are as a rule uncomfortable negotiating so the crowd decides for us.
So how does the crowd decide?  Easy, it decides based on the average income.  In any society, the salary bands are actually pretty narrowly defined.  An average of around €38k seems about right to me.  Out of collage most do well in increases for the first couple of year before the Peter principle kicks in …

“In a Hierarchy Every Employee Tends to Rise to His Level of Incompetence.”

… and no matter how good you are it becomes hard to justify a wage above a certain point (lets say about €130,000).   In my opinion that is a pretty small swing considering all the money there is in the world.

Actually, the salary isn’t really a good measure.  Disposable income is.  As you acquire more stuff (mortgages, cars, kids, schools, colleges, tax etc) your actual available income for spending doesn’t increase as much as your salary may imply.  This narrows what is physchologically acceptable in terms of paying for anything.

Of course if that were true, the a car would cost the same as a pound of butter – which it clearly does not.  But I’m not selling cars or butter.  For the most part, I’m selling subscription services.

So here comes the punch line.

Subscription service prices are set by consumers, not service providers and those prices are fairly predictable

A quick survey of 17 subscription services spread over entertainment, software, telecomes and productivity markets demostrates a common theme.

• 100% had a starting price point under 25
• 20% have a price point between 9 and 16 per month
• 35% have a price point between 19 and 31 per month
• 15% have a price point 40 and 50 per month

“9 and 16 what?” I hear  you call (like anyone is still reading at this point).  Well, 13 of the services were in dollars and the rest in euro, but I think that kind of misses the point.  The price is set in a combination between what we are used to paying for other subscriptions and some value dependent on disposable income (which I have no idea about).  The number is important – not the currency.  These 17 services delivery radically different value.  I’d argue that a mobile phone has a lot more value that 4 hours of DVD entertainment per month, but they are priced equivalently.

The Good News.

Subscriptions services are not priced on value.  Neither are they priced on the cost.  A phone network is a lot more expensive to build than an online invoicing system and yet they are priced equivalently.

Pricing for subscription services is already set.  The question for someone seeking to build a cashflow is

Can I find x hundred/thousand people to pay for a subscription service I can build?

You don’t really have to worry about the pricing.  It is already well established (for consumers and business consumers).  The only question becomes what does it cost to provision a service + acquire a customer?

* for subscription services aimed at consumers / business consumers.

1. The customer has be able to see exactly what they are going to get before they buy.  Think about it.  You only pay for things up front when you are certain that the product is going to deliver what it promises.  A Sacha Barron Cohen film guarantees to gross you out.  A grocery store cookie guarantees to give you a sugar rush.  This is the biggest reason why you just can’t get away with charging up front for consultancy work.  It is hard to predict an accurate outcome.
2. Guarantee:  If the cookies don’t give you a sugar rush or moreover are out of date – you can get them exchanged or refunded.  I’m not sure if the same is true for a Sacha Baron Cohen film, but you get the idea.  There must be some kind of guarantee.  In effect this is why customers don’t pay up front.  Not paying before delivery is their own inbuilt form of guarantee.  If the service is that out of whack with whatever they expected, they can just withhold payment.
3. Payment terms:  You gotta provide some flexible payment terms.  Some people will want to pay by cheque, some by credit card etc.  If you do persuade someone that upfront payment is what is required, don’t fall at the last hurdle by failing to facilitate that payment.  Having said that – we are loathed to accept cheques – they are so 1990’s.
4. Offer financing.  The good folk over at Microsoft will even help you with this if you are selling their product.  There are a range of financing companies out there that will let you sell their finance package.  I haven’t seen it done for software development services but I’ve no doubt that it does.  This somewhat reminds me of webstrong’s business model – but in reverse.
5. Build in a discount for gov.ie:  I’ve never done this myself, but I’ve heard that if you offer a discount for up front payment, then Irish government bodies are required to do so.
6. Pay your suppliers up front:  This might sound crazy – but in my experience- bad payers tend to clump together.  So do good payers.  If you pay your suppliers up front, it might be easier to persuade your customers to do the same.  I was once asked by a customer when asked for upfront payment “do you expect me to fund your busienss?”.  It was great to be able to explain that i had to pay my suppliers up front and I didn’t see why he should do any different.

Credit is effectively a basic form of financial engineering.  You should handle with care.  Before you know it you could end up with months of payments in arrears from debtors.  I have just decided to make it non-negotiable.  It is certainly harder to get paid up front and indeed, on Piehole we offer monthly plans to spread the pain, but when push comes to shove it really isn’t the blocker that some people think it is.  Ask for money up front, stick to your guns and see what happens.  You’ll miss out on some deals but could save you a lot of hassle in the long run.