229: Utility, Pricing, and Entrepreneurship

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Welcome to the Bootstrapped Founder, my name is Arvid Kahl and I talk about bootstrapping,

entrepreneurship and building in public. Today I'll talk about the concept of utility,

what makes a product useful and how does that relate to what it's worth. Before we get to that,

let me thank the sponsor of today's episode. One thing that I am personally always confused by in

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Alright, now let's get to our main topic today. Utility isn't just being a Swiss army knife.

In fact, this might be one of the biggest misconceptions in entrepreneurship. Too many

founders conflate the value of their products with the amount of potential problems that they

can solve. They spend their time and their efforts to slap on more and more perceived functionality

that will then end up diluting the actual overall utility of the product itself. The Swiss army

knife metaphor is particularly powerful here because have you ever seen a chef use a Swiss

army knife to fillet a pricey piece of tuna or does a roofer screw the tiles of your new fancy

metal cladding onto your house with the flimsy screwdriver bit of a Swiss army knife? Well,

of course they don't. They are using professional tools to do a professional job. Or at the very

least, they have learned not to use the generic tools anymore. They may have started with it,

but they've gotten to use the professional ones. 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 started and it causes diminishing returns. Edge cases make that

spreadsheet hard to use, from high utility to low. Fertile ground for this use case only

software product in the making. 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 then distributes a useful product

to the people who need it. But once again, we run into diminishing returns. And this time,

it's on the founder's side of things. Because 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.

And that's why founders find it much easier to land a $5000 customer than a $50 customer

because a $5000 problem hurts way more than a $50 problem. And I experienced this a little bit when

experimenting with the pricing of Feedback Panda, the online teacher productivity SaaS that I

co-founded and then eventually sold in 2019. We had an extremely cheap subscription plan of $5 a month

and the customers who bought that one were much more likely to cause customer service headaches

than the ones that had bought the $15 subscription that we introduced later. A subtle difference in

price, but it was a major shift in psychology. If you consider the monetary value of your product

or of the problem, if you're a customer and you consider that a monetary value of the problem

higher, then you start valuing the solution more as well. But only to a point. There's a ceiling for

almost any pricing effort, mostly dictated by the budget that itself is determined through many,

many factors. If you sell to people who freelance and make less than $2000 a month in pre-tax,

your service can't really cost more than $100. There just isn't room for this kind of expense.

So you have to think about that. And this introduces an outsized impact on fees. If you offer a software

product, Stripe, if you use that, takes a cut of every transaction. And the lower your price,

the higher their share of your profits. And when you build something physical, like a set of 3D

printed key caps for a mechanical keyboard, and you list them on Etsy, you have to deal with a

listing fee and a processing fee and a transaction fee, a shipping and expenses fee and the cost of

your raw materials. That's often more than half of what you can price things at because it costs you

so much. And that's also why SaaS businesses are all the rage right now. 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 is 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 would incur for them. So if your product

is priced anywhere below that cost, it is a purchasing decision waiting to happen. So now,

if price pressure is high with competitors and stuff, where can you go to build a high utility

business? Well, 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 own

budget. You need your customers to understand what utility looks like. Something made especially for

them will be the easiest thing 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. And that's it for today. Thank you for listening

to the Bootstrap Founder. You can find me on Twitter at @arvidkahl If you want to

support me and the show, please subscribe to my YouTube channel, get the podcast in your podcast

layer of choice, and leave a rating and a review by going to ratethispodcast.com/founder. Any of this

will help the show. Thank you so much for listening and have a wonderful day. Bye bye.

Creators and Guests

Arvid Kahl
Arvid Kahl
Empowering founders with kindness. Building in Public. Sold my SaaS FeedbackPanda for life-changing $ in 2019, now sharing my journey & what I learned.
229: Utility, Pricing, and Entrepreneurship
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