Today I'd like to introduce you to Venkat Rao. He writes Ribbonfarm, and he's mastered the difficult challenge of writing smart, novel, entertaining, eloquent, controversial, and accessible content - at the same time. Most people can't do this.
Venkat wrote an excellent reply on Quora to the question, "Is it hard to build, market and maintain a web app that makes at least $1000 a month?" Quora's TOS actually allows you to republish things in full with attribution (and some other requirements), and I thought this would be an excellent introduction to Venkat for you.
This whole reply is brilliant. He's got the orders of magnitude on money, time, and requirements basically dead-on. Extraordinarily impressive read here -
"Is it hard to build, market and maintain a web app that makes at least $1000 a month?"
This is a very interesting question, and the responses are very revealing. It is instantly clear who knows what they are talking about.
My litmus test for sorting out those who have actually tried to make money online and know what they are talking about is mention of the word "churn." The hard part is not getting to $1000 a month. It is staying there. Actually "staying there" is much harder than either "going beyond" or "falling back to $0" because Web/digital products (unlike say a baker's shop) are fundamentally not stable cash flow generators. They are unstable in either good or bad ways. The only thing worse than having a $1000/mo idea fall back to earth by itself is to watch someone else with more drive taking a clone to $10,000/mo and killing you in the process, because YOU didn't have the drive to run with it. This is a fundamental weakness of lifestyle business ideas. Good ideas have a tendency to quickly break the 4-hour-work-week effort ceiling. Bad ideas fall back to earth.
I've "gotten there" with 2 different products in the last two months. The reason I am not shouting this from the rooftops and trying to sell my "formula" to others is that I haven't yet solved the problem of how to stay there with either product with sufficiently low costs on my side.
From the question it sounds like the intent is to have a passive stream of income (a common lifestyle business goal). So to qualify as "sufficiently low costs" the ongoing effort should be less than the hours spent at a regular day job to generate $1000/mo. Assuming an $80k entry level s/w developer job for 2000 hours a year (fifty 40 hour weeks), the number to beat is about $40/hour. That's about 25 hours. If you are spending more than 25 hours a month supporting this app, you're losing. Sure you could consider intangibles like building up a market that trusts you for future apps, a brand, having independence from pointy-haired bosses etc., but those come later. The baseline must be beating the lifestyle you could support in immediate cash flow terms, compared to a regular job. Gravy comes later.
$1000 per month in a 100x$10 or 50x$20 configuration sounds simple. It is not. Development work for an average app, given the idea, is not particularly hard engineering, so if all you needed were the engineering chops for it, you should see one out of two engineers quitting their day jobs to do this. Why don't we see that?
It's because the hard part is not the engineering.
How Hard is the Marketing?
Do the math. Whatever your main acquisition channel, after back-calculating "new user impressions" from current subscription rate, you'll likely be left with something like needing a blog or e-newsletter that hits 100 new people a month in order for you to acquire one new user (example: if referrals via your e-newsletter are your main mechanism, and 1 in 10 users forwards your newsletter to someone new, and 1 out of THAT 10 is likely to sign up... you're at a 1% conversion rate. This is VERY optimistic. Search marketing or blog marketing have similar profiles).
If your app hemorrhages existing users at the rate of 20%, you'll need 2000 new users exposed to your pitch in order to replace the users you are losing.
That is a VERY tall order. Since most marketing channels are designed to simultaneously serve acquisition and retention needs, it is easy to let the numbers fool us. We report acquired numbers (subscribers). What's more, the acquisition/retention tradeoff is very hard to manage on a single channel. The more you try to make your marketing appeal to new audiences, the less it will serve retention needs, and cause hemorrhaging.
What about maintenance? Well, even for a non-tech product that relies on 3rd party tech, like my wordpress blog, simply keeping the software and plugins up to date and compliant with the latest releases of related software... that can take a couple of hours a month. What do you think it is going to take to support software YOU wrote? What about random spikes, like an API you rely on being completely rewritten, requiring you to rebuild the whole app? What if a competitor app pops up that does better, forcing you to re-engineer and fight back? Trust me, if there's a market, there will be competition. Even if your app discovers the market, merely the fact of you making a steady $1000 a month will attract hungrier people, willing to do better for less money to take away your market.
There's a lot hiding under "maintenance."
Between managing churn via continuous marketing, and doing frequent updates and maintenance to keep up with technology and the competition, you're easily talking something that takes more than 25 hours a month. More like 40. Or a 25% time commitment. Which brings your hourly rate earnings to $25. And don't think moving to Bali will make that $25 stretch further. Your marketing will grow harder in proportion to your distance from the American market you are serving.
And Oh Yeah, It's Boring
Did I mention that sustained marketing and maintenance are among the most boring types of work, especially for someone who gets kicks from building new stuff?
So since the effort investment is roughly:
marketing >> maintenance >> original engineering
you are talking a very boring 25% job that pays less than a day job for the same skills. (assume each >> to be a a 10x increase.)
In other words, the initial developer's work is the trivial part of it. Marketing and maintenance are the really tough parts.
This explains the most common failure mode: having a good initial product and a great launch month, followed by a flame-out.
So Should You Do It?
After that very cynical analysis, it may surprise you to hear my recommendation. You should STILL do it.
Here's why: something like this is a GAMBLE.
A regular job has a higher guaranteed upside that hits its ceiling very quickly. Even if you beat this scenario 3-4x and are in a job that pays $120-$160/hour, you'll never get off the treadmill, because the treadmill is designed to never let you off. It is Hotel California. If you are making $300k, chances are you are a mission-critical linchpin, and The Man will figure out a pattern of incentives to keep you where you are.
Your app... 90% chances are it will perform as I outlined, even if you do everything right to the best of your abilities. In other words, 90% of the time, you will do (say) 80% as well compared to a regular job with the same effort. So the contribution to a normalized expected value computation would be: 0.9*0.8=0.72.
But there's a 10% chance that you'll hit upon an idea that just hits some market nerve and takes off on a wild trajectory of success, requiring no marketing and escalating inbound demand, and growing so fast that the competition cannot catch up (if you are willing to get off your lazy behind and tighten your grip on the tiger's tail that is; otherwise someone will very kindly take your market away from you).
There is almost NOTHING you can do to make this happen, other than to place as many bets as you can, as frequently as you can, without shortchanging any of the ideas on the effort side.
But if one of the ideas takes off, you're done. Screw the rest of the portfolio. Sell or abandon them. Double down HARD on the one that's taking off. Ride it all the way out of the crappy financial prisons that counts as "life" for most of us.
So it REALLY only comes down to a SINGLE question.
Do you feel lucky, punk?
Brilliant reply there. Agree with all of it, except about marketing being boring - I think marketing is one of the most fascinating things in the world, since it's about fundamentally understanding real, true human nature. But the orders of magnitude are correct here about what's required for leads, sales, attrition (churn), etc. And indeed, the payoff is the very high upside.
I'd strongly recommend you check out Ribbonfarm.com for more of Venkat's great insights. He blends history, culture, pragmatism, etc., to good use. It's one of the sites I read when I'm having a hard time doing creative work, since he always gets the gears turning.
This is an interesting post. Based on my experience, I would say he is fairly accurate.
I just looked up RibbonFarm. He definitely has other good writing as well. Thanks for the link.
The way he writes is discouraging probably because it's so realistic. I've never read something that outlines more clearly what it is really like to build something online.
I think there is something to be said for not comparing your earn to the job you could have if you derive a lot of your utility from simply creating things on your own - having more control over your life/time. Basically, for some people (myself included) I would say that I would be happier to fail, make less than what I COULD be making, or spend more time making the same amount of money as long as it was something that I created, versus something where I filled a role in someone else's dream.
You bring an interesting point up with the linchpin situation. It is hard to get out of a $40K/year job because any goof can give the right incentives to make you stay.
But I like the gamble when the gamble is on my own shoulders. It may be crazy, but I'd rather live with that calculated risk and keep trying than plug away at a dead end up for 2000 hours a year and melt my brain in the process.
August 11th, 2011. Chiba, Japan.
A mix of confusion and awe as I step off the platform.
I must have made a mistake. But maybe a good mistake.
Birds caw and cicadas click gently, filling the warm afternoon air with sounds of nature. The train platform is open to the air and on the other side of the tracks is a high fence. Beyond it, a bicycle and walking path leading to a park.
Children are running around and playing in the park, but surprisingly quietly. Very Japanese.
From February to late March my life mostly consisted of being online all day everyday. I was making money with a method one of my friends recommended me and it was going well. I would say it was around 30 dollars an hours when you factor in how much flexibility and little effort was involved, even though I was technically online 12 hours a day, a lot of it was spent multi-tasking in between netflix and messing around. I could’ve cashed out with a lot more, but due to circumstances I didn’t. C’est la vie. Now that the method is gone, for the past couple of days I’ve been thinking about what to do, what to pursue as my next side-venture and I’m using this blog to outline my thinking process using tips I’ve learned from countless books and bloggers.
First some groundwork: What am I doing know? why? and what do I want to do? why?
1. I don’t really know why I go to college other than the fact that its costing me barely anything and having a degree could be good back up for teaching English abroad and getting into internships. I’ve posted before how I don’t really like college. Other than the social aspect and the occasional ambitious people you meet. The majority of people are kind of lost and just following the crowd. It reminds me of a line I read in Education of Millionaires where, while most of these people are in college they are creative, free and go-getters, but then when graduation comes around they settle into their business suits and take on an office job. I don’t want to be this person.
Yet at the same time I feel college is giving me borrowed time to act. At times I feel like I’m not completely utilizing time, but that has changed drastically in the past year and I am doing the things I want to do more than ever. In the end, unless I really make a lot of money or find an idea I am insanely passionate about and a way to pursue it without spending to much money, I will probably remain in college.