Utility, Pricing, and Entrepreneurship — The Bootstrapped Founder 229


This week, I talked to Kevin McArdle — the man who changed my life. Back in 2019, Kevin acquired my SaaS business for a life-changing amount of money, and he's just started a new acquisition venture.

In our chat, we go from start to finish: how to make your business sellable, what PE and holding companies are looking for, and what the future holds for SaaS.

And we complement each other a lot. If you want to see two happy people chatting, this is for you. If you want to make millions selling your business, it is ALSO for you.

So. Yeah. Check out our chat on The Bootstrapped Founder.

Talking about sellable businesses: people buy useful businesses. Businesses that provide clear utility.

Utility isn't just "being a Swiss Army knife."

In fact, this might be one of the biggest misconception in entrepreneurship.

Too many founders conflate the value of their products with the amount of potential problems it can solve. They spend their time and efforts to slap on more and more perceived “functions” that end up diluting the actual overall utility of the product.

The Swiss Army knife metaphor is particularly powerful here. Have you ever seen a chef using a Swiss Army knife to filet a pricey Tuna? Or does a roofer screw in the tiles of your new fancy metal cladding onto your house with the flimsy screwdriver bit of a Swiss Army knife?

Of course they don’t. They are using professional tools to do a professional job.

Or at least, they learned not to use the generic tools any more.

That’s why many successful SaaS businesses originate from self-built Excel sheet monstrosities: initially, the generic spreadsheet tool was good enough to handle most things that were needed to solve the problem. But, at some point, complexity caused diminishing returns: edge cases made the spreadsheet hard to use. From high utility to low. A fertile ground for a for-this-use-case-only software product.

Utility is strongest when it's dual-sided: the products are useful for the customer and the business selling the product is profitable for its owner. A successful business sticks around and reliably produces and distributes a useful product to the people who need it.

But once again, we run into diminishing returns. This time, on the founder side of things.

People will only pay so much for any given solution. In fact, they will pay only as much as the problem that the solution is for costs them. That’s why founders find it easier to land a $5000 customer than a $50 customer: a $5000 problem hurts way more than a $50 problem.

I experienced this when experimenting with the pricing of FeedbackPanda, the online teacher productivity SaaS I co-founded and eventually sold in 2019. We had an extremely cheap subscription plan of $5 a month, and the customers that bought that one were much more likely to cause customer service headaches than the ones that had bought the $15 subscription we introduced later. A subtle difference in price, but a major shift in psychology: if you consider the monetary value of your problem to be higher, you start valuing the solution more.

But only to a point. There is a ceiling to any pricing effort, mostly dictated by a budget that itself is determined through many factors. If you sell to people who freelance and make less than $2000 a month pre-tax, your service can’t cost more than $100. There just isn’t room for this kind of expense.

This introduces an outsized impact of fees. If you offer a software product, Stripe takes a cut of every transaction, and the lower your price, the higher their share of your profits. When you build something physical, like a set of 3D-printed keycaps for a mechanical keyboard and list them on Etsy, you have to deal with a listing fee, a processing free, a transaction fee, shipping, expense fees, and the cost of your raw materials. That’s often more than half of what you can price things at.

That’s why SaaS businesses are all the rage: their marginal cost is almost zero. It costs you next to nothing to allow one more customer to use your product. But you do need a critical mass of customers to initially become profitable.

And that’s where utility comes back in. A tool that’s spectacularly good at solving one particular problem and nothing else is highly useful for the people who have that exact problem. They are also able to (pretty accurately) determine what cost not solving this problem incurs. If your product is priced anywhere below that cost, it’s a purchasing decision just waiting to happen.

So, if price pressure is high, where can you go to build a high-utility business?

Utility can also be something you can't find anywhere else. Something specific.

As an entrepreneur, the most impactful place for your work is at the intersection of all your fields of interest. If you're a person who loves to tinker with electronics, has a 3D printer, and knows how to set up an eCommerce website, you can quickly build and sell bespoke gadgets that no one else is building. Sci-Fi themed power outlets that have illuminated lightsabers sticking out of them as nightlights? Delightful.

Intersectional specificity is magic.

What matters is that you make things for a very narrowly defined niche of prospective customers who are already aware of their budget. You need your customers to understand what utility looks like.

Something made especially for them will be the easiest for them to judge on its utility. Be their Chef’s knife or their high-powered screwdriver. Offer the thing that professionals use to do their professional jobs.

Solve one problem really well, and not much more.

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Arvid Kahl

Being your own boss isn't easy, but it's worth it. Learn how to build a legacy while being kind and authentic. I want to empower as many entrepreneurs as possible to help themselves (and those they choose to serve).

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