Yesterday @ConvertKit hit $1m MRR. Thank you so much to everyone who has helped along this journey! We’ve now got an incredible team of 34 supporting 18,872 customers.
— Nathan Barry (@nathanbarry) March 19, 2018
On March 19 Nathan Barry, Founder, and CEO at ConvertKit announced in a tweet that the company had reached $1m in monthly recurring revenues (MRR)! How did they get there?
The story of ConvertKit is quite compelling for anyone that is trying to build up a business from scratch, bootstrapping it while sharing the financial results with its users. This is one of the most compelling business cases of the last years in the digital marketing world.
In fact, as ConvertKit is part of the Open Startups Project from Baremetrics, the company has been sharing its revenues and metrics transparently. Thus, there are a few critical lessons to learn here.
The Web App Challenge: too ambitious?
It was December 31st, 2012; this might sound a year-end resolution yet on that day Nathan Barry started out its web app challenge:
I could just start a new web app and work on it quietly for a year before launching, but where is the fun in that? Writing and launching Designing Web Applications in only three months taught me that if I compress the deadlines I can meet a goal much more quickly. So here is the challenge:
Within six months build a web application to $5,000 in recurring revenue each month. A friend just referred to that timeline as “aggressive” so let’s add some more restrictions to make it more difficult:
- I am starting without an idea. So I don’t know what the application will be, what it will do, or who it is targeted towards.
- I can only spend $5,000 of my own money in this entire process. Meaning all other funds necessary have to come from paying customers. Since I will be hiring out the development, getting paying customers right away is mandatory.
- I cannot spend more than 20 hours a week on this project. If allowed, I waste tons of time on projects. This limit is partially because there are other things that need my time (contract projects, writing, etc) and to help keep me focused.
The best part of this is that I am going to be completely transparent about every step of the process. Follow along on this blog to hear how things are going, what I’m learning, and the mistakes you shouldn’t repeat. The deadline is July 1st, 2013 to have $5,000 a month worth of paying customers. That could be 50 customers paying $100 a month, 10 customers paying $500 a month, or somewhere in the middle (most likely) Think I can do it? Good. Me too.
Thus, with no idea of what he was going to build next, and a deadline on July 1st, 2013 Nathan Barry was setting up an ambitious goal of hitting $5,000 MRR per month.
Entrepreneurship is not only about ideas but practical solutions to existing needs
As Nathan Berry put it back in January 2013:
Sorry to burst your bubble, but an idea you come up with is a terrible place to start a new business. The reason is that businesses need to make money if they are to be sustainable. To make money a business needs customers. Customers don’t pay for ideas; they pay for their problems to be solved. So rather than looking for an idea for what to build, you should be looking for a painful problem that you can solve. People will pay to make pain go away. The more painful and frustrating the problem is, the more they will pay.
So rather than sitting around dreaming up ideas, we want to find a painful problem to solve. That solution will become the idea for our business.
The birth of CovertKit: The Idea Extraction framework
At the time Nathan Berry was listening to an episode from Pat Flynn’s Smart Passive Income, which also focused on the idea extraction process to come up with business ideas. What is the business idea extraction process?
As Nathan Berry put it back then:
Idea Extraction is really pretty simple. Talk to potential customers to find their pain. Once you come across a painful problem, validate it with other companies in the same industry. Then find out how much these companies are willing to pay for this problem to be solved. This is the most accurate way to determine how painful the problem really is.
The process consists of a few steps:
- Pick up a Market
- Get your potential customers on the phone
- Start conversations focused on understanding their painful problems
- Uncover those problems
- Understand whether they would pay to get that problem solved
That is how Nathan Berry came up with the idea of ConvertKit
Not a promising start!
In June 2013, after the launch of ConvertKit revenues seemed to pick up slowly as Nathan Berry remarked at that time:
Currently ConvertKit makes $1,888 per month, which means I am 37% of the way towards my $5,000 per month goal. Growth has been quite slow after the preorders, averaging a new trial account every other day. That needs to increase considerably in order to meet my goal.
Also, many of those trials are not converting into paid accounts, which means I need to do more work with the on-boarding process to increase that conversion rate.
With only 27 days left until July 1st (the deadline), I really need to step up my game. More on that later.
What to do?
Nathan Berry came up with a few ideas. He leveraged on his already existing audience. In fact, as he had launched his book recently, he thought to reach out to his audience and offer a deal on ConvertKit. So far Nathan Berry had been using a passive approach, solely based on content marketing. As he was coming back from BaconBizConf, where he had listened to Ryan Delk from Gumroad, which at the time was using a direct sales approach. Nathan Berry realized he could use the same strategy. That is how he set up to reach out authors, founders, and anyone else who could be a good fit for ConvertKit.
Nathan Berry also planned a guest post and podcast campaign that would allow him to leverage on other people’s networks to bring sales back to ConvertKit.
He also launched a new course about email marketing, which would be used as a lead generation tool for ConvertKit.
Last but not least Nathan Berry decided to contact anyone from its 750 people list personally to see if they were interested in activating a ConvertKit account.
ConvertKit challenge? Half a failure
Just six months before on July 1st, 2013 Nathan Berry had set out an ambitious objective: reach $5k in MRR for a project he didn’t even know yet. Yet after using the idea extraction process, he came up with ConvertKit. However, at the end of the challenge, CovertKit was only at $2,480/month.
In fact, at the end of the challenge ConvertKit had generated a small loss for Nathan Berry:
- Rackspace: $997.00
- Sam: $6,344.40
- Ben: $3,471.00
- Domain & Certificates: $37.30
- Amazon EC2: $29.42
Total expenses: $10,879
- Preorders: $4,541
- Stripe payments: $1,093
Total revenue: $5,634
Initial Investment: $5,000
Cash on hand: -$244.49
At hindsight success always makes sense. However, by looking at those numbers, it’s hard to realize that ConvertKit would later become a company generating over $1M in MRR.
ConvertKit and the slow ramp of death
CovenrtKit is part of the Baremetrics open startup program. In short, Baremetrics is a tool that allows monitoring the primary metrics that drive the growth of a startup. For a company like CovertKit, which business model is based on a subscription plan, the MRR is one of those essential metrics to monitor on a monthly basis.
There are a few interesting things to notice. In fact, when Nathan Berry had set out to grow ConvertKit, at a certain point, it hit a plateau. In short, it seemed like growth wasn’t picking up!
In the start-up jargon, this kind of pattern is sadly called the “slow ramp of death.” In fact, when you stop growing, there might be a structural issue related to the business model, a problem in the product or just a lack of strategy.
What was going on with ConvertKit?
Man, you better shut down ConvertKit!
A year and a half after starting out ConvertKit Nathan Barry was facing a decline in sales. In part, this was due to his loss of interest in the project. Nathan was returning from a conference with Hiten Shah. Just to give you some context Hiten Shah is a serial entrepreneur. He founded companies like CrazyEgg, KISSmetrics, Quick Sprout. When Hiten Shat met Nathan Berry he told him plainly:
I think it’s time you shut down ConvertKit.
and he continued,
You’ll be successful at whatever you do, but you’re well over a year into ConvertKit, it’s not growing, and it’s time to shut it down.
This seems madness now. Yet there was a profound truth in those words. Nathan Berry didn’t believe enough in that project. In fact, he was working on it part-time. Those words made him think about ConvertKit with a different perspective, for the first time since its inception! In fact, when they caught up again Hiten Shah added:
Or, you take ConvertKit seriously and give it the time, money, and attention it deserves. But whatever you’re doing, it’s not working.
Traction is not an easy game. Yet as months went by ConvertKit kept slowing down until it reached its lowest point in September 2014, when it generated $1,233 in monthly recurring revenues.
Either shut it down or double down!
Instead of shutting down ConvertKit, Nathan Berry doubled down. How? He hired a full-time developer and invested $50k from his other business and went all in with ConvertKit!
As Nathan put it at the time:
The biggest mistake I see authors, bloggers, and entrepreneurs making is they quit too early.
The blogger writes a dozen posts and no one cares. The author tries to get a book deal but can’t even get an agent to sign them.—let alone a publisher. And the entrepreneur throws up a sales page and starts promoting their software, but no one bites.
and he continued:
If this is your full-time thing you need to grind it out. You have to make it work, because you’ve staked everything on this project to provide for you and your family…
…But before you decide, ask yourself these two questions:
- Do you still want it as much as you did when you started?
- Have you given this company or product your best possible effort to make it succeed?
Ok, Nathan doubled it down, but what to do next?
Time for some direct sales
Many believe that growing a startup is a matter of automation and optimization. If that is true for a particular stage of growth; the initial traction needs a lot of human interactions to understand what it takes to grow the business. How your users are feeling about your product. And what you can do to improve that.
In fact, Nathan Berry realized it was time to reach out. He cold emailed professional bloggers to set up Skype demos. He realized there was a significant obstacle to ConvertKit growth: it was too hard and too much work for those bloggers to switch to a new email provider.
Thus, for how much they loved the idea behind CovertKit they would not switch to it because it was too burdening!
What to do?
First traction phase: Concierge migration and word of mouth (up to $20k MRR)
Nathan Berry said one thing to those professional bloggers that found it too hard to switch to ConvertKit: I’ll do it for you, for free!
This is how growth started to pick up with what they called at the time “concierge migration.” After six months, on March 2015 ConvertKit grew at $5,020 in MRR:
This strategy allowed ConvertKit to focus on higher quality customers, with more extended lifetime value. This kind of growth, fueled by direct sales and word-of-mouth made ConvertKit reach over $20k in MRR:
Second traction phase: affiliate marketing at the smart passive income way
ConvertKit had attracted a niche of professional bloggers which made most of their income through affiliate marketing. At that stage, Nathan Berry thought to test an affiliate marketing program based on recurring revenues for the affiliates, rather than an upfront payment. That turned out to be a powerful weapon. In fact, as those professional bloggers liked a stable income over-time, a 30% recurring commission seemed quite attractive to them.
Just to give you an idea of how effective the affiliate marketing distribution channel was for ConvertKit, I looked at Pat Flynn’s Smart Passive Income report for October 2015. That is what he said:
Amongst the email marketing content that I published in October, I also used that opportunity to talk about the new email service provider that I’ve been using. In a highly viewed post titled Why I Switched from AWeber to Infusionsoft to ConvertKit, I revealed some of my struggles with other email service providers that I’ve used, and why I landed on ConvertKit as my ultimate solution.
Can you guess how much revenues Pat Flynn made to CovertKit on that month alone?
Pat Flynn that month generated $1,463 in affiliate revenues. If those represented 30% of the total revenue, it means that Pat Flynn alone allowed ConvertKit to grow by almost $5k in MRR in October 2015. Not surprisingly the growth rate grew exponentially. By November 2015, CovertKit reached $68k in MRR.
This was one of the most successful articles from Pat Flynn which brought new customers to ConvertKit:
Why I Switched from AWeber to Infusionsoft to ConvertKit
In December 2017 Pat Flynn generated $36,956 in affiliate earnings from ConvertKit. If those still represents 30% of revenues, this means Pat Flynn alone contributes to more than $100K MRR for ConvertKit!
Note: The assumption here is simple. ConvertKit paid 30% in recurring commissions to its affiliates. Although today it pays 10%, we can assume that for large and long-time affiliates like Pat Flynn they kept the agreement as it was back then. Thus by dividing up 100%/30%, we get 3,33. By multiplying the affiliate earnings of Pat Flynn by that ratio (3,33), we get the actual revenues he generated for ConvertKit.
Third traction phase: there is no scale without profitability (FROM LOSING MONEY TO A 51% PROFIT MARGIN IN 5 MONTHS)
On his blog Nathan Berry showed a quick timeline of the growth from 2013-2016:
JAN 2013 — Started on the idea for ConvertKit
JUN 2013 — Reached $2,000 a month in recurring revenue (MRR).
SEP 2014 — Revenue declines to $1,330 per month.
OCT 2014 — Make the decision to double down on ConvertKit. Focus full-time, hire a team, and invest $50,000.
JAN 2015 — $3,000 MRR
JUN 2015 — $10,000 MRR
OCT 2015 — $25,000 MRR
DEC 2015 — $97,000 MRR
FEB 2016 — Growing quickly, but just barely profitable with only $30,000 in the bank. Make the decision to get profitable as quickly as possible. Goal of 3 months of expenses in the bank by July 1, 2016.
A company that grows fast but is not able to achieve profitability is fragile. I recently covered Snapchat Business Model and Tesla Business Model.
When you focus on profitability growth will slow down. However, you’re also allowing the company to become structurally more robust.
Where is ConvertKit today?
The growth of CovertKit has been an incredible ride:
What lessons there are to learn here? I believe quite a few.
Accountability: there is no better judge than your audience
One interesting aspect of Nathan Berry project since the beginning has been to make them public. This I believe is also what contributed to ConvertKit growth. In fact, by taking part in the Open Startup program from Baremetrics, ConvertKit was accountable. This is a great incentive to focus on growth and avoid to get distracted.
When Failure goes beyond yourself, it becomes purpose
It’s also interesting the perspective of Nathan Berry on failure when he first took the Web App Challenge:
I don’t think it is likely that I will fail completely. A more likely failure is that I reach only a couple thousand in revenue, but that’s still a partial success. If it does completely fail, then it will be public. At least I, and everyone reading my posts, will have learned something to apply to future projects.
Thus failure becomes not only a way to learn from your own mistakes, but also to allow your community to learn along the way. This makes failure better digested – I argue – because you give it a meaning that goes beyond yourself. Now, you’re not doing something for your own. You’re doing it so that others can learn from it and get inspired. That is a significant paradigm shift.
Transparency is what makes you real
By sharing his story and numbers, Nathan Berry showed to be real. Transparency isn’t something you find easily in today’s marketing world. In fact, social media have contributed to creating fake influencers and social media gurus, that don’t make a dime but by advising others on how to make money. Instead, when you’re transparent, you allow people to know that you’re real. You’re not faking it, and that is why they can relate to you. Which brings us to the next point:
Community-building is a matter of trust
When people can connect with you because they know you’re real; as you’re not faking it and you’re sharing with them your failures, building up, a community becomes way more natural. That community will be what will help you out build a sustainable business.
Scalability isn’t linear yet requires focus
We like to think linearly about things. I do this, and I get that. Yet as ConvertKit story shows, scalability follows weird paths. You’ve been working for two years on a project just to find it on the slow ramp of death. Then, you start doing something right, and growth picks up exponentially. In short, in a matter of two months, growth accelerates by 10-20 folds. For how much we like to believe in self-help stuff that teaches us to grow every day, just like we were a computer program, that is BS. Real life often follows power laws.
Does it mean you need to stop doing things that “don’t matter”?
Rebalancing the 80/20 principle: can you really focus only on what seems to matter?
Few things will make a huge difference in your life. While the rest will matter not much in terms of results, happiness and so on. This fueled a myth that you can give up those things altogether, and your life and business will take off. That is wrong. Why?
Those things that apparently aren’t giving you any results are still significant. For instance, when Nathan Berry was focusing on his blog, that wasn’t making any money for him. Yet, his influence was growing; and as his influence was growing, his direct sales were more efficient.
Why? People contacted by Natan Berry were honored that he was taking the time to get in touch. Thus, if before he was perceived as a sales guy. After growing his influence, he got seen as a mentor.
Of course, if you take an approach based on optimizing things you might leave out things that at subtle level might seem unimportant. Most times the overall strategy works when you work on several aspects of your business and life. So what it looks useless might turn out to be quite remarkable after all.
Rebalancing Automation: when is it too early to automate?
In the start-up world automation has become a must! However, automation doesn’t work initially. As we saw in the ConvertKit’s case, Nathan Berry had to jump on hundreds of Skype calls with people before his business would take off. Of course, only after you’ve mastered the process you can automate. In fact, today if you go on ConvertKit request a demo page, you now get a recorded video. Yet this was possible after years of tinkering and talking to customers. Without that process that recorded demo would have been meaningless.
Today marketers stress out too much automation, with the risk of automating too early and too badly. Automation starts with tinkering and talking to people. After you’ve mastered that process, you can automate.
Summary and conclusions
Started as a challenge on his blog, CovertKit eventually managed to grow at $1M MRR in March 2018. This is a significant milestone for the company but also an interesting story for those that are thinking about starting, are trying to grow or are facing trouble with scaling up an online business.
Nathan Berry managed to turn around his business with focus, and dedication. Counterintuitively to what you think today, he didn’t use automation. He used direct sales. He didn’t do scalable things. He invested his own time in migrating mail list to ConvertKit for free. Anyone would think this is crazy as it doesn’t scale. Yet without it, it would have been impossible to grow the business.
Also, Nathan Berry at a certain stage of the process understood that profitability was critical to take the next step in building his startup, even though this meant slowing down the revenue growth.
The post ConvertKit Startup Story: How CovertKit grew from $0 to $1M in MRR with direct sales, word-of-mouth, and affiliate marketing appeared first on FourWeekMBA.
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