The Market Likes Your Product, Now What?

And we’re back for round 3 of our journey into starting a profitable business online. To recap, I’m Doug, CEO here at Earth Class Mail.

So far we’ve talked about Step 1: the biggest mistake you can avoid, and Step 2: how to find profitable customers. Now let’s dig in to the results with Step 3, evaluating your market demand test.

What’s a Demand Test again?

Simply put, a demand test is an experiment you run to see if there is anyone in the market for your product or service.

It can take many shapes, but for our purposes we focused on setting up a simple lead funnel by buying ads on Google AdWords and pointing those users to a landing page with a lead form.

This type of test is great because:

You can simply buy exposure to users likely to be interested in your product, very inexpensively. That means you don’t need to organically build an audience and you don’t need to have a product, just a pitch.

You can use the landing pages to funnel users through the various value points of your product, from a high-level pitch down to pricing. That means you can gain insights into what exactly is drawing people in or turning them away.

Most importantly, it’s really easy to setup. A focus group or even a basic functioning product are way more expensive and time consuming. 

Step 3 – Did Any Customers Show Up?

Congratulations! If you’ve made it this far, you ran some ads to a landing page. Now let’s dig in to the results.

To refresh your memory, we want to answer a few simple questions to better understand if our business idea will be a success:

  • Question: How many potential customers exist looking for a solution to this problem?

Answer: Ad impressions

  • Question: How well does your business solve the problem for potential customers?

Answer: Ad click-through-rate (CTR)

  • Question: How many potential customers can you get to your front door?

Answer: Ad clicks

  • Question: How many potential customers are interested in pricing for your product?

Answer: Landing page CTR

  • Question: How many potential customers indicated they would pay you money?

Answer: Pricing button clicks

  • Question: How many potential customers are ready to buy now?

Answer: Email leads collected

  • Question: Can your business be profitable? How profitable?

Answer: The metrics from your demand test will help build an initial forecast

Let’s dive into our data to see what it tells us.

The very first question is probably the most important, how many potential customers exist looking for an answer to this problem?

In our test this data is easily accessible, and there’s good news for the future of ClaimSender. Google AdWords shows that there are thousands of daily searches related to healthcare claim forms. 

We dig in a bit more and find that our $50/day budget produced 48 clicks/day, with an average CPC of $1.08 (this data is for one day, but it’s representative of the other days in our test).

Our limited keyword test produced a solid number of impressions. A bunch more search volume likely exists for a few reasons:

  • We set our daily budget at $50, and hit that somewhat early in the day. 
  • Adwords budget alerts told us we could double our budget to get double the clicks at the same cost per click. 
  • We can expand our keyword set to include other health care companies and more niche terms. 

This is good news. It means we have plenty of room to grow through paid acquisition.

A quick trip to Google Trends tells us there’s perhaps at least double the volume if we include other healthcare companies besides United and Aetna. 

Adding Cigna alone would produce a lot more volume, and a bevy of others exist – Humana, Centene, HealthNet, WellCare, Molina, Magellan, etc.

So the answer to our question is: “enough to keep learning”. No red flags on this step, let’s keep moving.

How well does your business solve the problem for potential customers?

I’ve seen click through rates from 0.01% up to 8% for AdWords campaigns. Our ads clocked in at a robust ~2.9%, a great result for a first attempt. 

Hitting nearly 3% on our initial go shows that our ads appealed to people searching for a remedy to their health care claim filing pain. 

We struck a nerve!

You can always improve on your first attempt, so the answer here is two strong thumbs up.

How many potential customers can you get to your front door?

Don’t sugarcoat this number. Is it enough to support a business if we convert a reasonable percentage of tire-kickers into customers?

Our ads delivered ~50 clicks per day.

However, our budget and keyword set constrained us. If we cranked our budget up and expanded our keyword set to include other healthcare companies, we could likely make that 50 turn into 150-200 per day. 

Pencil in a conversion rate of 0.5% – 2% (some rule of thumb averages, your mileage may vary) and you have your likely customers per day.

If we get 200 interested people to the site, and convert a handful to paying customers, will that be enough to build a business? Perhaps, but let’s cover that in the spreadsheet section. Stay tuned.

How many potential customers showed interest in seeing how much your service cost?

Here’s what they saw after clicking an ad and landing at http://try.claimsender.com/

26.67% clicked the “Get Started” button, one-in-four is not bad at all.

How many potential customers indicated they would pay you money? 

As the saying goes, “the proof is in the pudding” and it’s pudding time. We’ll measure this by looking at two things:

  • Unique users clicking on one of the sign up buttons
  • The specific sign up button they clicked 

These actions tell us the person showed interest in signing up, but you can’t count your money yet. The best thing to do here is to apply a reasonable conversion percentage to calculate signups. 

More importantly, looking at which pricing plans people clicked on tells you a bit about what they would pay.

Using the data from Unbounce, we can see that 24% of people that hit the pricing page clicked one of our pricing buttons. Nice!

Diving into Google Analytics to look at the events reveals which pricing tiers prospects clicked on. Most clicked on our free plan (some free will convert to paid when they hit usage limits), a few clicked on the $29/mo option, and one clicked on the $9/mo plan.

The clicks on the paid plans are encouraging. The data lacks enough volume to be valid, but even this amount of data is enough to show that we have something worth further investigation.

How many potential customers are ready to buy now?

These prospects display the strongest interest in your product. Three of the nine people who clicked on the pricing buttons left their contact info for us. Not bad at all.

Even better, it gives you a list of prospects to email so you can rack up some easy signups when you launch. 

One thing did surprise me – two of the leads were from 10-25 person healthcare companies. Perhaps there’s a business-to-business product here?

Can your business be profitable? How profitable?

Time to break out the spreadsheets. I’ve created a simplistic one here for you to look at. Our example is a software-as-a-service (SaaS) based business that charges people a recurring fee per month. 

For this type of business, we want to model the following numbers:

  • What we plan to spend on ads
  • How many customers we can acquire for that cost
  • How much each customer pays us per month
  • How many customers leave us each month

The resulting numbers give you the money you’ll be left with to pay for everything else. Those things include every other cost of running the business – per unit costs (if any), all provider costs (hosting, email, rent, software, support tools, etc.), taxes, compensation . . . you get the idea.

By playing with the assumptions in the spreadsheet, we get a sense of how profitable the business can be, and what it takes to make it so. 

If we use monthly ad spend of $1,500, a CPC of $1, 1% conversion, an average of $12 per month per customer, and 3% churn, we break even in month 10 and generate a positive $337 in month 12.

If we use monthly ad spend of $6,000, a CPC of $1, 1.5% conversion, and 2% churn, we break even in month 5 and generate a positive $7,563 in month 12.

Results vary DRAMATICALLY with changes to each of those numbers. It’s impossible to know what they will be at this point, but we can use this template to get a sense of what’s possible, and what it will take to make that happen.

What’s next?

Let’s Drop Everything and Build Our Site! Right Now!

No Larry, hold your horses. It’s not time to build yet. Stay strong, and FIGHT THE URGE TO BUILD, BUILD, BUILD. Let me repeat myself, DO NOT BUILD ANYTHING YET.

Let’s dig into the data to deduce our most intelligent next step

Here’s what we learned:

  • We can buy plenty of clicks at a reasonable cost.
  • A lot more keywords, forms, categories (dental, vision, pharmacy) and providers exist than we tested. 
  • The strong CTR on the homepage and pricing buttons show demand lurks, ready to turn into signups. 

That’s a solid foundation to build on. Let’s make an action item to research how much more search volume exists, and note that optimization can improve our conversion rates significantly over time with testing.

Our financial model gives us a sense of how big this can be. On the low end it appears to deliver a few thousand dollars a month after many months of ramping up. 

A more generous interpretation of AdWords demand and conversion rates gives us a nice solo lifestyle business.

Getting leads from small healthcare companies surprised me. Perhaps these types of companies need a solution? Mark down another research item.

This data told us that a good number of people want this problem solved, and will pay enough to make it worthwhile for us to solve. 

To paraphrase my good friend and investor in Earth Class Mail, Jonathan Siegel, “the best investments have little risk and high return”.

If we channel our inner Jonathan, what questions do we need to ask to reduce the risk and build confidence in a profitable business?

I want to know:

  • Is our core idea technically possible?
  • Is our core idea legally possible?
  • Will people really buy this? For real? For really real?
  • How can I get those questions answered most simply?

That’s it for today, but stay tuned for our next post where we dive into the questions above.

Fund Your SMB or Startup The Right Way

At some point or another, most businesses need funding. Maybe you’re just starting out and living off credit cards. Or, maybe your business is in a slump and you need cash to pay everyone. 

It’s important to both know your options, and understand them enough to choose the best one for your situation.

Some Background

Earth Class Mail has a lot of personal experience with this. If you’ve done some searching, you probably found an article or two on the bankruptcy of a “once highly touted Oregon startup”, that would be us.

The most important lesson we learned, and one you can learn from, is not to take on too much debt even if it’s offered. 

The second most important lesson, is to clearly understand the type of debt you are taking on. You can read a little more about it in our CEO’s letter, and we’ll come back to it again in an upcoming series.

3 Basic Categories of Funding

Cash 

Bootstrapping, the badge of honor so many startup founders aspire to wear, is easier said than done. Few are lucky enough to have the savings to do this, and even fewer reach meaningful revenue before they run out.

The benefits of cash are clear. It’s interest free, it’s liquid (i.e. easily accessible), and you don’t have to give up equity. 

Cash definitely has its drawbacks too. You’re personally investing much more than you would via leveraging. If you don’t get profitable in time, you will run out of it.

Is this a good idea? It really depends on your run rate, how much savings you have, and reasonable expectations for the growth of your business. 

At a minimum though, if you have cash, you should build that into your funding model so that you don’t need to give up as much collateral or equity to other investors.

Debt

Probably the most common form of small business financing. To borrow money from an institution or individual you put forward some sort of collateral, then you agree on terms of repayment such as the interest rate and payback period.  

If you both agree then you get some money, and they get payments to cover the principle and interest every single month.

It doesn’t matter if your business isn’t profitable, or if you’re making money hand over fist. Those terms are locked in.

Debt financing is a complex field, but here are a few shapes it can take:

  • Family and friends 

It is often easiest to ask those close to you for small amounts of money, relatively that is. Make sure to draw up a formal agreement, no need for lawyers with apps like Shake

  • Credit cards

A common option for new entrepreneurs and freelancers because of the ease of access. It’s really only a good option if you have cash flow issues and can repay before the interest charges hit. 

If this fits your needs, many credit cards offer cash back so you can easily reduce overall expenses and get other benefits.

  • Peer to peer

It’s the 21st century after all. There are lots of notable services out there, like LendingClub.com, that will let you secure a personal loan from one or multiple individual lenders. They aren’t investors, you are establishing a lender-debtor relationship. 

  • Line of credit 

This can come either from a bank directly, or from a service like Kabbage.com. It’s a lot like a credit card, but with a much higher limit and generally needs to be paid down to $0 each month. 

The interest rate is likely adjustable, higher than a fixed rate loan, and payback terms are usually shorter than traditional loans.

  • A/R Lines or Factoring 

If you’ve managed to generate revenue, and have some recurring or expected payments coming from clients then you can leverage that to fill any gaps in cash flow. A great example of this is if your business signs up clients for contracts. 

It may take you a year to collect that revenue, but if you need money now you can take that to a lender and say, “give me a little bit less money now and I’ll give you my receivable later”.

  • Small Business Loans 

This is a big category, with lots of sub categories, but we’ll focus primarily here on Small Business Administration (SBA) and Traditional loans. 

There are lots of services out there that can take the hassle out of securing a loan, like Fundivo. The service is actually really unique in that it searches multiple lenders for proposals, then negotiates on behalf of your business for the best rates.

Whether you use a service or go at it alone, there are some important things to understand. Firstly, the SBA is a government organization that insures loans for small businesses, much like the FHA does for home mortgages. 

Because of that insurance, it’s a lot easier to secure an SBA loan. 

They have softer requirements and reduced rates. Traditional loans will be harder to secure, but can have preferential and more creative terms for established businesses. 

Most importantly, these types of loans are going to be collateralized. Meaning, some assets will be needed to guarantee repayment in case of default. Think of things such as cash on hand, equipment, and inventory.

Often times, small business owners will have to personally guarantee the loan. So the lender can come after your personal assets to collect on a debt if you default. 

That’s not meant to scare anyone away, but it’s a fact of how business loans work. It’s no different than your mortgage being secured by the title on your home, or you car loan secured by the title to the car.

Equity

This is the one that makes the headlines you see in your Twitter feed. It’s rare to see something like “new startup secures $100,000 SBA loan”, but you will see stories like “startup raises $50,000 seed round” almost daily.

There are a lot of reasons equity sounds sexier than debt financing, but that doesn’t mean it’s the best idea for every business. It can definitely be a reckless decision to give up equity and control of your company.

Investors do take on all the risk, but in exchange they become business partners. You share your profits, and make big business decisions together.

Equity financing is generally broken down to the stage of business maturity.

  • Seed

This is the earliest stage, often pre-product even. Usually founders at this stage have an idea, a strong business plan for their current stage, and a committed team. 

Investors at this stage are often considered Angels, as they are individuals with independent sources of capital. These rounds tend to raise small amounts of money, usually less than $100,000.

All of the product and team caveats aside, you are giving up a lot of equity here because the Angel is taking on a lot of risk. Angel investors will probably lose money on 90% of investments, but that one winner is worth the risk to them.

It could be a great idea for you, or it could be a big mistake. Giving up a ton of equity just because you don’t want to dip into cash might cost you millions in the end.

  • Series A

A company might skip seed funding entirely, or this could be a post seed round. Usually, this round will attempt to raise up to $5 Million and attract professional investors, both individual and boutique firms.

There are a lot of mistakes you can make here. Stock sales are nuanced, and lawyers are expensive. 

If you are trying to rapidly grow a company and don’t like the risk associated with debt, this could be a good option.

  • Series B, C & Beyond

Once a business has grown more established and needs to scale past a certain threshold, it will hold additional financing rounds. There is less equity at stake here, mainly because there is less risk and much of it has been given up already.

Usually a business has proven itself here and already achieved major milestones. This is also a time when most big Venture Capital firms will get involved, as they are looking to invest large amounts into high growth potential businesses.

Wrapping Up

The most important thing you can learn from this article is that you need to make prudent, clear-headed decisions about your financing options. Most businesses will blend these methods to hedge against the risk of each. 

If your business is just starting, slower growth might be ok. If you want rapid growth, but can’t secure an investor – ask yourself why? Don’t immediately turn to debt because it’s easier or more available.

Financing can help you grow a good business faster, but it can’t help a bad business succeed.

Launch! Why we decided to spin out a FBA logistics & China private label imports company.

We’re thrilled to announce that we’re spinning out a new company from Earth Class Mail, Varehouse.com. No, Varehouse is not a vampire warehouse, although we debated a logo depicting that. Varehouse.com helps online sellers navigate the waters of Amazon FBA logistics and private label import from China.

FBA logistics? Huh? What’s FBA? China private label import? What’s that?

FBA stands for Fulfillment By Amazon, or, “sell your stuff on Amazon” in plain english. Importing private label items from China is the process of getting one’s goods manufactured in China (or other country), imported to the US, prepped, delivered to and listed on online marketplaces like Amazon.com.

What does this have to do with Earth Class Mail? Read on.

Rewind the clock two years. Jim Wilson, President of Earth Class Mail, sat at his desk, and said, “whoa” as the proverbial lightbulb lit up over his head. He had noticed a growing handful of customers asking for a specific kind of help. These customers needed logistical support to help them sell on Amazon and other online markets. These customers would ship us palettes or even shipping containers full of merchandise. They would then ask us to inspect, package, and prepare the items for Amazon’s strict FBA requirements. Imagine our thrill the first time we got a knock on our door and saw a shipping container full of imported merchandise from China. This presented quite a different challenge than receiving and scanning in people’s mail.

Seeing that demand, Jim launched an internal service we dubbed “Virtual Warehouse”. Jim & team ran that business, growing it steadily until new investors bought Earth Class Mail last June. At that point we huddled and decided to give the virtual warehouse business the chance to stand on its own two feet. To our delight, the virtual warehouse business proved itself worthy of leaving the Earth Class Mail nest and navigating it’s own path.

With much delight, I officially announce the launch of Varehouse.com. Jim Wilson, who launched the business years ago, will lead it as Founder & CEO. We’ll continue to support it at Earth Class Mail, and will be their biggest cheerleader. For any readers out there interested in launching your own Amazon business, head on over to Varehouse.com, Jim, Kyle and team will gladly help you find success.