We did a lot of the hard things you’d expect a bootstrapped start-up to do when we were building Backblaze. We forwent a salary for over a year. We worked long hours. We crammed into a founder’s living room instead of renting an office. We developed our own dramatically cheaper cloud storage infrastructure.
And yet, one unexpected--and very simple--thing made it all possible.
Money Comes From Customers
When you’re bootstrapping, the question is never, “Will we be able to raise our next round?” Your money comes from selling products and services to customers, not from investors. So the question is always, “How do we get our customers to give us more cash?”
In the early stages, start-ups don’t die because they lack a business model, they die because they run out of cash. Early on, we were fast approaching this fate.
We considered various options:
- Raise prices on new customers? That would make us potentially non-competitive.
- Raise prices on existing customers? Great way to piss-off early evangelists.
- Offer new products? They take a long time to develop and could make us less focused-;not to mention cause customer confusion.
One Simple Trick
In the end, the solution was dead simple: We switched one radio button in the sign-up process on the website.
Backblaze offered online backup service for $5 per month or $50 per year, with a radio button to choose your plan. The default was monthly. The result? 60 percent of customers left monthly default; 40 percent switched it to yearly.
For every 100 new customers, Backblaze collected:
- 100 new customers x 60% x $5 = $300
- 100 new customers x 40% x $50 = $2,000
So then we tried simply changing the radio button default to yearly. The ratios flipped: 40 percent signed up monthly; 60 percent stayed with the new yearly default.
For every 100 new customers under this new model, Backblaze collected:
- 100 new customers x 40% x $5 = $200
- 100 new customers x 60% x $50 = $3,000
Switching the radio button increased our cash flow by 40 percent!
We did this without raising prices, doing any engineering work, adding new products, or introducing a new pricing plan. All it took was a five-minute change.
While this simple change increased cash flow, it did not make Backblaze more profitable. (Arguably it made the company less profitable since we discount yearly plans.) Collecting more cash up-front commits you to providing a service for which you will not receive cash in the near future.
In our case that meant we needed to buy more hard drives and servers; pay for datacenter space, power, and bandwidth; and pay for the support team for an entire year during which 60 percent of our customers would not pay us any more cash.
This is worthwhile for many start-ups for four reasons:
- Development and other start-up costs are upfront.
- Customer acquisitions costs are typically upfront.
- The actual costs of providing the ongoing service are low.
- Fast customer growth means the amount of lost cash from this month’s delay is dwarfed by next month’s new cash.
Thus, this move provides capital when it is being spent and is needed for survival, and the future commitment is fairly low.
However, when doing this, be honest with yourself. Are you really aligning cash and expenditures? Or are you committing yourself to a form of loan that you will not be able to repay?
If this makes sense for your business, it can be the easiest way to quickly generate the cash required for survival--and enable sustainable self-funded growth.
What strategies have you used or seen to increase cash flow?