While at CodeMash last week, I wandered by an OpenSpace which I will broadly call ‘So I have questions about running a Startup — with chocolate’ since I can’t remember the official name and there was chocolate. The discussion ranged from hiring, to marketing, to twitter sniping. One thing that got mentioned was the area of pricing, which kinda surprised me. To me, this is actually the area I have the least questions about for my not-really-started-but-kinda-started startup. In fact, it is just straight math.

Context:

  • My product is to be SAAS a service
  • I don’t want to be the next Google – If I ever get over 25 employees, someone point out this post to me. In fact, I realistically see it only being me for a decent length of time.
  • It is my intention to have only one obvious product – Some companies have a portfolio of products with the intention of driving traffic to their main one. I don’t want to be that. Do one thing, really, really well.
  • Bootstrapped – I understand why some people turn to VC, etc. but since I don’t want to be the next Google and don’t need to build my own private cloud, etc. I’m thinking I’m ok here. (I’m also have lots of opinions on startups and don’t want to cede control of things.)

Ok, that is a pretty stringent set of assumptions, here is my math.

  • $desired_income + $fixed_costs + $variable_costs = $total_needed
  • x * y = $total_needed

Let’s break this down. I actually think that the first equation is the more important one. You need to figure out what you want out of things in order to be able to do anything else. So let’s pretend I need $5000 take-home a month, which for arguments sake is $7000 before taxes (I have no idea if that math works; I’m currently in the ‘so screwed’ category for my taxes…). Thats only $84000 a year which doesn’t seem that great from a living in the lap of luxury perspective, but we’re just playing with numbers.

The fixed costs and variable costs are nothing that surprising: rent, servers, internets, phone, etc. For the sake of easy math, let’s call that $1500 a month.

This means that my startup only needs to bring in $8500 a month. That’s it.

On to the next part, which is actually surprisingly un-complicated in comparison now that we have a number that the math must meet. x is the number of users of the system, and y is the monthly subscription revenue. (Subscription is the model for the future btw.). Which means the all these are possible pricing structures…

# Users Subscription Amount
4 2125
8 1062.50
16 531.25
250 350
500 17
1000 8.50
2000 4.25

One other ‘context’-y point is my gut feeling is the ‘right’ price point is $5 / user, but I have nothing to base this on except that is what FogBugz was per user and that seemed reasonable. I could keep busting numbers now, but it looks like I would need to hit around 1700 users to achieve my goals. Which isn’t really that large a number. And anything after that is gravy.

Oh, and yes, I know that as the number of users increases, so too does the costs so the number is likely higher than 1700, but not that much higher to completely invalidate the number exercise.

The trick in all this is to do the first half of the exercise and figure out what you want out of your startup? Insane amounts of wealth and a drunken trip to the Porsche dealership on IPO day (I know people who did this during the first bubble — shockingly, you can’t buy a car with champagne oozing out your pores) or an app that fills a niche and provides you with a sustainable income. I’ve done the exercise and I’m choosing the second.

Now to find the time to write some code…