Follow the Money and Turn Costs into Revenue

Don’t look for clever ideas and don’t ask people what they want. Instead, just follow the money.

This is the best strategy because people say that they would pay for all kinds of things if you ask them even though this isn’t true. Saying that you will do X is not the same as doing X. And oftentimes, people are just polite and don’t want to hurt your feelings.

In contrast, if a group pays money for a certain type of product, that’s an undisputable fact and hence a perfect starting point.

For example, small SaaS companies, with 1-10 employees, typically spend money on the following things:

  1. Hosting (Digital Ocean, AWS, Heroku, WPengine, Flywheel)
  2. Marketing (MailChimp, ConvertKit, Mixpanel, Buffer)
  3. Messaging (Intercom, Gmail, Superhuman)
  4. Office tools (Slack, Clubhouse, Basecamp, Gsuite, Excel, Calendar)
  5. Finance (WaveApps, Baremetrics, Quickbooks, Bench)
  6. Hardware (iPhones, iMacs, Macbooks, Surface)

Try to understand why they spend the money. What problem exactly is solved? And how well is it solved? If you find a way to build something that targets the same problem but puts a new spin on it (i.e. is simpler, friendlier, cheaper, privacy-focused, etc.), chances are high that you’ll find paying customers.

Defining new categories is a job best left to big companies with huge marketing budgets. Convincing customers that they need a new type of product is just too expensive for humble entrepreneurs.

Turn Costs into Revenue

Admittedly, it’s often quite hard to do this kind of research for groups you’re not part of. For example, if you don’t run a small SaaS company it’ll be quite hard to understand why exactly they spend money on a certain kind of product and to find opportunities for improvement. Hence it makes sense to start by paying close attention to what you’re spending money on.

Since as a humble entrepreneur you usually don’t want to create a consumer product, this strategy works best if you already run some kind of business. By looking at the kinds of things you spend money on, you can quickly draw conclusions about the costs of other businesses in the same niche.

Most importantly, pay close attention how happy you are to pay for each item on your list. If you feel like you pay far too much for a certain type of product, it’s worth digging deeper. Is it maybe possible to isolate the small numbers of features that you really use and offer them in a better, simpler way at a cheaper price?

This will not only allow you to save costs but also turn them into new sources of revenue.

A company that has perfected this approach is Amazon. In the past 20 years, Amazon has managed to turn every major cost they had into a significant source of revenue:

  • product costs → Amazon Kindle, Amazon Basics, Amazon Fire, Amazon Echo
  • shipping costs → Air Transport Services Group (ATSG)
  • fulfillment costs → Fulfillment by Amazon
  • technology costs → Amazon Web Services (AWS)
  • payment costs → Amazon Payments

Now it’s your turn to do the same on a smaller scale.

Written on July 23, 2020
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