The food and agriculture sectors are on the precipice of a fundamental shift that shows many of the hallmarks of the change that software and computer infrastructure started going through 15 years ago.

The Cloud sparked a sea-change to an entrenched trillion dollar IT industry.

The two poster-children for ‘the Cloud’ revolution (which has been called ‘Cloud Computing’, ‘Web 2.0’, ‘Infrastructure as a Service’ and ‘Software as a Service’) have been Amazon Web Services (AWS) on the hardware side, and Salesforce on the software side.

Since the 1970's, software was installed ‘on premise’ (in your office), on a bunch of servers hidden in an IT closet. It was a large single-purchase, with a big install charge, and an annual maintenance contract. The server and network infrastructure needed to run it was sold in much the same way. Then every couple of years a new version would need to be purchased, and computer hardware upgraded to run it. Big contract — large cash expense — depreciated on the balance sheet over five years.

The problem with this model is if your business grows or shrinks, you would have a large stair-step expense to increase capacity, but no way to reduce costs.

This was, and still is, a massive industry — on the trillion dollar scale — with incumbent brand names like Oracle, Siebel, Cisco, IBM, and Hewlett Packard.

Then the Internet matured to create an ‘inflection point’ where better, faster, and cheaper, was possible.

In 1999, Salesforce launched a web-based customer relationship management tool. They charged per-seat, no install fees, and since it was web-based, all you needed was your existing computer and an Internet connection — no server closet. The first version might have been pretty feature-light compared to what the entrenched players like Siebel offered, but the business model was a game changer for prospective customers.

As the SMEs grew, and as Salesforce matured, the product got better, quickly becoming better AND cheaper than the old ‘on premise’ world could offer. Winner = Salesforce (~$15 billion in revenue). Heard of Siebel lately?

AWS was much the same — they had no existing business in the computer infrastructure world — nothing to protect and nothing to lose — and when they launched a Simple Storage Service (called S3) in 2006, the traditional hardware world scoffed. “No self-respecting business or software company would host on a book seller!”. “This is just their spare capacity, it’s not reliable!”. They were wrong.

The incumbents told themselves that story, incredibly, for nearly a decade, despite the meteoric rise of AWS. It was a vastly superior business model for customers — pay as you go, unlimited scaling up and down, no contracts. It was the difference between building an electricity generator to boil the kettle at home (the old way) and plugging the kettle into a socket in the wall connected to an electricity plant somewhere many miles away (the new way).

AWS continues to be one of the fastest growing businesses in history, with over $40 billion a year now. How much of your IT spend is on on-premise hardware and software these days? Odds are it’s shrinking, or it’s already zero.

The Food and Agriculture Industry is hitting an inflection point.

The market is huge; food and agriculture is a 1 trillion dollar industry in the US alone.

The incumbents are behemoths — the likes of Tyson, Purdue, and Monsanto — and they wield massive power. They are regularly accused of having monopolistic traits, and exerting far too much control over the Farm Bill through excessive lobbying (Mark Hyman’s Food Fix book goes into this in detail).

These so called ‘Big Food’ and ‘Big Ag’ companies have invested countless billions into their supply chain — forcing farmers to use patented seeds, converting pastures into mono-culture grain fields, many of which are grown for animal feed (instead of grass and forage — which is free — but free is not good for Big Incumbents!) and consumed in industrial feedlots.

Their purchasing power and regulatory influence drives prices down and reduces farmers to being consistently near bankruptcy.

Up until now, consumers have been largely locked into this Big Food system too, with no alternatives to nutrient poor, sugar rich, chemically treated and often heavily processed foods — that wreak havoc on the environment and cause many health issues.

But consumers’ awareness that food quality matters is growing fast — and they are already voting with their wallets when they can.

The change is starting — Regenerative Agriculture could be a ‘Cloud’-size opportunity.

A new form of farming called Regenerative Agriculture is gaining traction. It’s a reversion to a more natural model of farming, that actually creates more nutritious food, without any reliance on fertilizers, pesticides or antibiotics.

Better outputs and fewer inputs increases profit for farmers. Farmers practicing Regenerative Agriculture can become independent and profitable businesses again. Farming should be an attractive and rewarding profession — it’s certainly an important and large enough one to warrant making sure farmers can succeed.

While Regenerative Farmers currently lack the distribution model, infrastructure, and brand recognition to scale, as the movement grows, whole new ecosystems of software tools, processing plants, packagers and distributors, and consumer brands will be created.

It’s Day 1 today, efficiency will come, but the business model of Regenerative Agriculture is a game changer, and it’s already a better deal for farmers.

The consumer model is nascent — consumers can buy groceries and meats from independent farmers through Farmers Markets, directly from the farmer or on their website, or from emerging Direct to Consumer (DTC) brands like ButcherBox or Greensbury. As the ecosystem grows, consumer brands will emerge and traditional retailers will carry them, bringing Regenerative Produce mainstream, and removing some of the middle-men — the incumbents.

What about the incumbents?

Existing entrenched and successful players rarely innovate their existing business model out-of-business. It’s not just because they lack the outsiders creativity, it’s also because they have such tremendous amounts invested in their existing infrastructure. Those business leaders, employees, suppliers, and shareholders, would revolt if the infrastructure that’s taken decades to build up — the moat that it’s created against competition — were to be sacrificed.

The reality is that it’s nearly always industry outsiders who create the next waves of businesses that displace the old ones. (Safi Bahcall’s book — Loonshots — explains this really well).

Industry outsiders are unencumbered — some would say naively so — by years of ‘knowledge’ of what works and what doesn’t, and what the customer wants. I say ‘knowledge’ because it’s really just decades of norms built up in the current model and inside the existing players, with assumptions that the current way is the right way, and years of compounded doubling-down on investing more and more into that model.

Outsiders don’t see the pitfalls. Outsiders don’t have the investments in infrastructure, lobbyists, supply chains and so on — which are an asset to the current way but a hindrance to a new and different way.

To make matters worse for an existing player, often the sacrifice — the new business model — on the face of it seems inferior: less profitable, less scaleable, lower margins, less protection from competition. But to an outsider — all of that is still new business and low margin business for a startup is fine, but existing companies would never invest in lower-margin producing projects.

The software and computer hardware incumbents didn’t react because they didn’t believe ‘the cloud’ was a credible threat, and even if they did, they simply would not have the willpower or stakeholder support to radically change their successful, massively-invested-in, business infrastructure.

Why won’t the incumbents own Regenerative Agriculture?

The current system is broken. Feedlots, chemicals and antibiotics, massive amounts of grain grown to feed animals that really only want grass, and a system that perpetuates its own demise with continually reducing soil, and therefore nutrient, quality.

Big Ag’s infrastructure is actually a barrier for them. Can you imagine how hard it would be to have invested billions, over decades, in a supply chain that focuses on quantity-at-all-costs, and then start decentralizing it and disrupting yourself? It’s just not in their DNA, or in their short-term quarterly-earnings driven self-interest.

The lobbying power and regulatory barriers created as a result will prop up these incumbents for a while, and may slow down the mass-market affordability of regeneratively farmed produce, but there is plenty of pent-up demand that will fuel the growth of regenerative farming.

Regenerative Agriculture is going to give farmers back their independence and pay them fair prices for their labors; it’s going to heal the land and help restore the environment; it’s going to produce great, natural-tasting, healthy and nutritious food for consumers; and it’s going to mint thousands of new successful entrepreneurs.

One-Liner: Regenerative Agriculture is a form of farming that works with all of nature to produce food that is both healthy and nutritious, and restorative to the environment.

The Short Version:

What Regenerative Agriculture is is in the name — it’s agriculture that is regenerative to the environment, the fields, the soil, and also to our bodies. It’s a system of farming that works with all of the amazing complexity and synergies that nature has worked out of hundreds of thousands of years.

Regenerative Agriculture does not use artificial inputs: no chemicals, no fertilizer, no pesticide or herbicide, no hormones or antibiotics. Any food — meat, grain, fruit or vegetables produced this way are definitely going to be good for you!

Since using no ‘artificial stimulants’ and doing nothing else would result in fields of weeds and pests, Regenerative Agriculture replaces the artificial with the natural. Soil needs to be fertile to grow forage or crops — so ‘cover crops’ that naturally add nitrogen and other nutrients to the soil are planted in off-seasons, cattle graze tall grasses and often the cover crops, and move regularly to never over-graze and damage a pasture. Bugs and ‘pests’ are not just tolerated, but encouraged, because each part of the natural ecosystem actually has a beneficial effect on the whole farm — nature has had a long time to figure out how to do this harmoniously!

Regenerative Agriculture embraces and harnesses the millennia of natural evolution that created stable and productive ecosystems. Using nature as a co-farmer rather than trying to control nature results in creating better soil, which produces more nutrient dense food, and great natural flavors. It also helps farmers make more money, since unlike the chemical and feed companies, nature doesn’t charge them any fees!

The Longer Version:

Regenerative Agriculture, as the name suggests, is a form of farming that works to continually improve the land (“regenerate it”) while producing high quality foods.

The way we farm today is extractive and destructive.

We grow the same crops year after year, in the same places, and when they are harvested all the nutrients they have taken in from the soil get extracted. Soil fertility, like anything else that gets continually extracted, is a finite resource and we have gradually been depleting it, to the point that within 50 years we will not have enough fertile soil left to produce the food we need.

To combat the problems mono-cropping (growing a single crop over and over again in the same soil) has created, the industrial agriculture machine supplies chemical fertilizers that add synthetic nutrients into the soil to help the crops grow (and then extract that again at harvest time, creating a vicious cycle).

We spray more chemicals to kill weeds and kill crop eating pests. The result of this is we also kill all the good creatures and soil bacteria that helped create resilient crops. We’ve lost an alarming percent of our wildlife — from birds, to bees, to critters and bacteria.

The way we do livestock (cows, chicken, pigs) is equally as bad, stuck cooped up in sheds, crammed together, and forced to eat masses of food they wouldn’t eat in nature. The conditions create and spread disease so we pump them full of antibiotics, and hormones to grow faster. Instead of their excrement going on pastures where it’s a super fuel for soil and attracts all sorts of soil enriching bugs, it goes into effluent lagoons that ultimately poison the land, waterways and aquifers. You can’t store mini seas of chemical rich concentrated animal excrement without expecting some problems!

This all boils down to a system of farming that is destructive and cannot continue. Regardless of any environmental conscience, this way of farming has an end point when we have destroyed soil to the point where even chemicals won’t work.

For consumers, aside from putting our food security at risk, the tangible ‘now’ problem is that the food produced in this way just isn’t good for us. Countless studies show the negative health consequences from humans ingesting toxic chemicals that are sprayed on our food and eaten by our animals. It’s pretty obvious that toxic chemicals aren’t something we should eat, right?

What about organic and fake meat?

A quick side-bar on the inevitable comment about the solution being plant-based meat. First of all — meat isn’t the only problem in industrial agriculture. The biggest problem is soil destruction — from the way we produce grains for ourselves, as feed for confined animals, and as a core ingredient of plant-based meats. Plant-based meat has no impact on soil improvement, it uses the same farming practices that got us here, and instead of stuffing animals full of chemicals, corn, soy, and others are chemically transformed into fake-beef, fake-chicken, fake-shrimp. The core problem is soil destruction caused by artificial chemical use. Fake meat is a champion of the industrial chemical complex.

What about organic? It’s better! But organic is still an generally extractive process and allows the land to be tilled (releasing stored carbon into the atmosphere), and while it reduces chemical use, many are still allowed.

What about grass-fed? Potentially great! But because it’s not certified or graded, grass-fed might not mean what you think it means. It could mean the animal started life on grass (they all do) and spent the last 12 months in a feedlot. It could mean they had access to a paltry little pasture for an hour a day. It could even mean they were fed grass-pellets while in the feedlot, mixed into their grain and hormone soup!

Regenerative Agriculture: The solution is to use an incredibly complex system, with many participants, that has been developed over thousands of years: NATURE.

We should be careful not to underestimate the power, complexity and maturity of nature. Nature has quite the head start on us and has figured out how to make symbiotic ecosystems that produce great food while maintaining and enhancing the environment.

Regenerative Agriculture is a natural method of farming that works with all of nature. The ‘all’ is a key word — all includes things typically farmers would see as harmful to their food production: weeds, pests, flies, crop eating bugs and small wild animals. It turns out that all these things have evolved with nature to form a balanced ecosystem.

Ultimately the single goal and measurement of success for a Regenerative farmer is the quality of their soil. It all starts with the soil: good soil = good food. There’s no way to repeat this too often — Regenerative Agriculture, in fact all food production, is all about the soil. Regenerative Agriculture is about restoring and maintaining rich soil, whereas industrial agriculture is about loading it up with chemicals and killing anything unwanted to try and extract as much as possible.

In a balanced and natural ecosystem, nature works to create produce and life — from the microbes in the soil, to the bees pollinating the plants, to what used to be millions of Bison roaming the land. That’s what nature is all about — restorative, repeatable, ongoing growth. We don’t need a hundred years of human engineering to replace and destroy what nature has been doing since the beginning!

So how does a regenerative farmer improve their soil (and as a result, the quality of their produce)?

Plants (grasses, ‘weeds’, vegetables, grains) all have benefits for the soil. Some are nitrogen rich, some ammonia, and all have root systems that attract and feed bacteria, bugs, and worms. Instead of adding chemicals to the soil, Regenerative Agriculture uses a mix of crops to add nutrients to the soil. Instead of extracting these nutrients, many of the crops are grazed or cut down but left on the soil, think of it like a mulch, as they decompose they add their nutrition back into the soil, and have the added benefit of helping protect the soil from heavy rain. The soil is never ploughed or tilled, new crops are sown with ‘no till drills’ on the remnants of cover crops. Plants root systems also help the soil store rain water — so no soil ‘runs off’ as you see on typical industrial farm fields, and water rich soil is drought resistant and produces high yields.

Grazing is also a huge part of this — grazing animals is the oldest form of soil management. Before farming even existed, herds of animals (like the 30 million bison that used to roam the US) grazed open prairies. They would never linger or over eat grasses down to the ground — after all the best grass is the top of a long grass. Regenerative Agriculture replicates this with rotational grazing — moving animals regularly onto lush pastures, where they eat a little and trample a lot before moving on, which helps grasses grow back stronger and roots go deeper — improving soil life and actually removing carbon from the atmosphere. This process and their dung attracts a mass of insect activity which further promotes soil health and ecosystem diversity.

There’s so much more to this exciting approach to agriculture, my goal with this article was to give socially conscious eaters and food buyers a non-technical explanation of what Regenerative Agriculture is so you can spread the word. As we transition farming to this method, we can restore the land, turn farming into a climate-solution, and ensure a long-term supply of nutrient dense, healthy and natural food for everyone.

If you would like to learn more, here’s some great resources:

• The Third Plate (Book by Chef Dan Barber, his Ted Talks are also great).
• The Omnivore’s Dilemma by Michael Pollan.
• Joel Salatin’s Ted Talk and many others he has done, on YouTube.
• Dirt to Soil by Gabe Brown (he has also done a lot of Podcast interviews)
• Biggest Little Farm film about a family restoring land into a productive farm.
• Kiss The Ground film about soil and regenerative farming.
• Wilding by Isabella Tree about harnessing nature to ‘rewild’ a farm in England.
• The Regeneration (Soilworks weekly newsletter summarizing regenerative news and developments)

Let’s not underplay the current situation — we are in crisis mode. Not because we’re heading towards a recession, not because SaaS companies might shrink, but because of all the unknown unknowns. Fear causes irrationality so SaaS CEOs must demonstrate reasoned leadership, making decisions that protect the business, and the team, for the short and long-term.

Remember — long-term thinking is good. But not if you don’t exist. On the other side — too much short-term thinking is bad — because there won’t be a long-term if you take too many steps backwards.

I hate to over-use our favorite phrase, but now really is a time to exercise ‘common sense’.

In this post I’m going to focus on finance management — and mostly on cash. A lot of SaaS founders have never had to deal with a cash crunch — VC funds, growth, and high margins have made cash a given. But now CEOs must embrace the phrase ‘CASH is KING’ and dive into understanding the inflows, outflows, timing, forecasting, and scenario planning.

Let’s start with the positives

Recurring revenue is a gift. In SaaS, we are so lucky to have a business model that self-regenerates. Most businesses have to work for every single sale, or for every hour of billable work. We are in a great space.

The ability to work from home is a gift. Many cannot. SaaS businesses can continue to sell, support, and work on the product with low operational impact in a distributed manner, even if it’s not forever.

High margin is a gift. It means we have levers to pull. High-margin businesses tend to be a little fat around the edges, because they can tolerate inefficient spend in ways low-margin companies couldn’t dream of. If 80 cents of every dollar in revenue you generate is available for after-cost-of-sale expenses, you have a lot of room to make changes. Imagine you generated $10m a year and only had $1–2m to run the entire business? This is the reality for many companies!

Quick Mental Alignment

Here’s the page I’m on: don’t bury your head in the sand. This is not business as usual — most likely your business is going to experience cash, collections, and total revenue issues over the next few months.

In times like these, I think it’s better to over-react than to under-react. If you over-react, you might end up discovering you were too conservative — but you know what, you’ll do that from a your desk where you’re running a business that still exists. If you under-react you won’t get to think long-term. The common sense balance is this — think long term, but remember there won’t be a long term if you don’t make it through the short-term.

What follows is all just basic financial advice — I’m not an accountant, but I’ve run a few SaaS companies and sit on the board of a few too — this is the advice I am giving our CEOs. The reason I’m writing it is that I’ve observed — and experienced — that for SaaS companies, growth trumps efficiency. In fact I think I’ve said this at board meetings — you can’t be focussed on growth and penny-pinch at the same time. Pick one. Well — now is the time to pick the latter, and the good news is the growth focus has likely created lots of inefficiencies that are low-hanging fruit ways to save some dollars.

This is a positive exercise — getting on top of your finances, in particular your cash flows, in a level of detail you never had to before, is a great skill to build and you’ll use it the rest of your business career — as an operator and advisor.

Cash Management Plan

Cash On Hand: Do you know how much cash is in the bank right now? Do you know how much was there yesterday and the day before; and what’ll be there tomorrow? Do you know what money in on it’s way in and out?

When cash-in is likely to be substantially slowed-down, you need to be 100% aware of your cash balance — the likelihood of getting an overdraft facility from the bank is low — so you simply cannot run close to zero — no matter what.

Accounts Receivable (AR): This is going to be an indicator of future cash flows so watch the trend in this number. I would make a list of all customers in AR, and as well as aging them by 0–30 day, 30–90 day, 90 days +, I would add columns for ‘likeliness to pay’, ‘communicating (yes/no)’ , and ‘expected date of payment (if any)’. And then build that into an ‘AR to Cash’ forecast for the next 6 months.

Your Profit & Loss might say you’re profitable — but if your AR is high, aging, and increasing, you’re probably burning through a lot of cash. You probably have customers ringing in looking for a deferral of their payments — this all goes to AR too even though top line revenue in not impacted.

Managing AR now is crucial — don’t delegate this only to your accountants — Customer Success should be helping (especially on the soft factors like ‘likeliness to pay’) and if have sales people that aren’t as busy selling right now, they can help too.

Deferred Revenue (DR): In the context of running the business with a cash flow mindset, deferred revenue — and a deferred revenue forecast — are important. Remember — deferred revenue is money you have already collected (for 12 month prepays most likely) — so it’s cash in your bank, or cash you’ve spent, and while it’s revenue on your monthly P&L, you don’t get the cash until they renew.

Make a spreadsheet of all your annual (or greater-than-monthly) accounts that had pre-paid — add when their renewal date is, the expected contract value, and the likeliness to renew. Then build this into a ‘DR to Cash’ model you can add to your cash flow forecast for a more detailed guesstimate than you might normally have.

Trends: As well as cash, make sure you are watching the leading indicators. What’s happening with your pipeline and funnel? Are deals taking longer to close and get into billing? Your growth and installed base forecasts need to have a high-low model too.

Accounts Payable (AP): You’re probably on the receiving end of people being more mindful and frugal with each line-item on their expense sheet. Make sure you do the same. Get your credit card statements out and look through all supplier payments, it’s a safe bet that there’s thousands of dollars a month to be saved here without making extraordinary cuts.

Some larger suppliers may extend payment terms from 30 days to 90. Ask them all. If they don’t, ask again or ask for a reduced payment and ramp back up. Deferred payments or extended terms are better for both sides than a churned customer.

The harder you push here, the less impact you’ll have to make on your team when or if it comes to cutting costs further.

Cashflow Forecast: This is the most important worksheet. You absolutely must know your expected cash flow for the next few months, otherwise you will get caught flat-footed and risk the entire business.

I would have a row for ‘monthly credit card receipts’. Base these on your revenue projections now. Are you expected growth, increased churn, slower bookings to billings.

Add rows for ‘monthly invoiced’ (customers that pay by debit/wire/check) with an ‘expected’ (what you hope to get) and a ‘conservative’ line.

Add ‘usage’ if you have a usage component that’s billed monthly — and project the expected and the conservative estimates. If usage is a big part of your business, you’ll need to dig deeper here and watch daily trends of your customers usage to predict the high and low of where’s trending.

Insert your AR and DR cash flow forecasts — with ‘expected’ and ‘conservative’ views too if you have them.

Expenses you should already have, put in what current monthly costs are and forecast the changes, and times when one-off payments are due. Don’t forget to add non-P&L expenses like debt and interest payments to your outflows.

The net result should be a detailed expected and conservative view of your cash in and cash out for the next 6 months. If V1 sends you into the red on cash and you have no credit facility, you simply must find ways to cut deeper or collect cash faster.

Summary

Unless you have a huge cash surplus (12+ months runway) you must work on getting to cash-flow breakeven. And remember cash flow break-even and P&L break-even are not the same thing!

The break-even number is a moving target like it never has been before.

Growth, Churn, and Payment Timing have future unpredictability. You need to be all over the moves here so you can adjust.

3 Take-Aways: Over-react, don’t under-react. Protect the long-term, but survive the short-term. CASH IS KING.

In this article I want to introduce Natural Capital — as we define it at Soilworks — explain why it is a critically important resource and why businesses and entrepreneurs should get involved.

Natural Capital is the world’s stock of natural resources, which includes geology, soils, air, water and all living organisms (from Wikipedia).

For the the last 100 years or so we have been depleting our Natural Capital at an ever increasing pace. The state of our Natural Capital now is one that will not support future generations, and is already impacting this generation.

• At our current rate of topsoil erosion, we have 60 years of farming left.
• Today’s food is up to 30% less nutritious than in generations past — causing a ‘hidden hunger’ in 2 billion people, where they consume enough calories but the food does not provide sufficient nutrition.
• Ground-water and aquifers are in steep decline across the board, and water contamination from chemical and industrial farm runoff is causes human and environmental disasters.
• Greenhouse Gas Emissions drive pollution and climate change, with Agriculture contributing ~11% of that (which doesn’t include the massive carbon store we lose as we erode soil and release carbon back into the atmosphere).

If we don’t do something to reverse this trend, you don’t have to be a math genius to figure out we’ll eventually run out of resources.

The good news is — more and more people are aware and concerned about their health and the environment. The bad news is, it’s hard for people — consumers — to do much about it. Good intentions are one thing, but intentions often don’t lead to actions. Especially when the outcomes are indeterminate or require sacrifice.

My business partner Lew Moorman calls this The Prius Problem: getting less and paying more. The Prius was expensive, ugly, and slow. The opposite of this the The Tesla Way: the world’s best car on many dimensions, and it’s environmentally friendly (and soon to be cheaper too).

The other good news is, at least for the areas of Natural Capital that Soilworks is focused on, we know how to solve them and reverse the damage done.

The solution is called Regenerative Agriculture. I’ll save the detail on it for another article, and there is already plenty of information available. Essentially, Regenerative Agriculture is a system of farming that consistently works to improve soil quality using natural practices.

It all starts with soil. If the soil is healthy, the forage and crops it grows are highly nutritious. If the forage is rich, the animals that eat it will be healthy, happy, and ultimately convert it into nutrient dense protein.

The corollary is that enriching the soil solves a lot of environmental problems too— restoring topsoil, which restores food nutrient quality, and since soil requires carbon to grow anything, healthy soil takes it from the atmosphere and puts it into the ground, aiding in the reversal of climate change. Healthy soil is also great at holding water which helps stave off drought and reduces soil erosion from flooding.

What we need to do now is take Regenerative Agriculture mainstream. Otherwise we’ll have the Prius Problem — some well intentioned farmers and early adopter consumers that both work harder than it should be to have good land and good food — consumers paying more, and farmers making less.

To take Regenerative Agriculture mainstream, we need to make it better for farmers, and better for consumers. We need to build consumer brands, we need to redefine supply chains that focus on small farmers and maximize local retail and delivery options. We need to create a whole new eco-system for farming and food production, since the current one has been built for quantity-at-all-costs, sacrificing quality.

This is a massive space — food and agriculture in the US alone is a 1 trillion dollar industry. The opportunity for entrepreneurialism is huge — hundreds or thousands of companies will be created to address all sides of the eco-system.

We started Soilworks Natural Capital to help fuel this movement. Our mission is to ‘accelerate the worlds transition to Regenerative Agriculture’, and we have 4 guiding principles:

1. Produce natural nutrient rich foods.
2. Restore plant and animal diversity to our lands.
3. Regenerate soil and remove carbon from the atmosphere.
4. Make farming an attractive and profitable enterprise.

Entrepreneurs — consider the food and agriculture system for your venture. As well as being a blue ocean of opportunities, it’s a worthwhile and impactful mission.

We’ve had a great decade long run in SaaS — abundant capital, thriving economy, and a massive existing market shift from on-premise to Cloud.

But the good times will end and challenges are coming.

I’m not predicting when it will happen — maybe it’s the spread of COVID-19, or maybe the market recovers and goes on to set new records — but one thing is for sure, recession will come, it always does.

Since a lot of SaaS leaders have never run a business through one, it might be helpful to share some ideas on how to be ready for the inevitable slump. One of the greatest assets a SaaS business has is high margin, recurring revenue — that should provide more leeway in making changes to get through a downturn, than many other types of business.

I’ve broken this guide into the macro — things that happen to you; the levers you can impact in your business; and some notes on how to keep your stakeholders supportive.

Funding Environment

Credit tends to dry up in a recession — but lucky for SaaS — bank debt has never really been available, so it’s unlikely this makes much difference! The new breed of SaaS debt providers should be able to keep providing credit through a recession, since they understand the real asset of recurring revenue. They may get more conservative in the amount of money they will loan, especially if signups are down and churn is up, but debt should be more available for SaaS than in other sectors. Make sure you know your funnel and install base metrics — these should provide confidence to a lender.

Who knows what’ll happen with VC. There has been so much money raised by new and ever expanding funds, that they may keep investing. Valuations are likely to drop and the world will move more investor-friendly than founder-friendly, and check sizes will drop in line with valuation for VCs to get the same equity for less money. Good business is good business in theory, but ‘growth at all costs’ is harder and more expensive in a recession. Where FOMO (Fear of Missing Out) drives VC in good times, plain old fear holds them back in bad ones.

Customers and the Addressable Market

This is nuanced depending on where you win customers from. Do you save them money over their existing solution? Or cost them more money than how they do it today? Even if their current solution isn’t a good one — the sales pitch for change is much harder in a ‘batten down the hatches’ world than a ‘shoot for the stars’ one.

If your customers are moving from old-world on-premise software — then you should be in good, or even in better shape, as they accelerate the move to SaaS which saves them money, and reduces overhead and capital.

Customers who do what you offer in-house could be a slower, harder sell. This model is already tough — it’s all about customer timing and being front of mind when they are ready — but you can be sure most projects will get shelved or postponed by customers who are reacting to the downturn and it’s effects on their business. You’ll have to work extra hard on white glove onboarding to remove cost and hassle, and make sure you have a credible ROI narrative that will rank your product highly on the new short-list of projects that stay approved.

If you’re winning business from customers moving between SaaS tools — like someone swapping out Jira (a SaaS project management tool) in favor of Asana (another SaaS project management tool) just make sure you are the clear ‘recession-choice’ provider — otherwise the flow might go the other way and not only will new sales drop, churn will increase.

Then there’s the new project sale — selling a solution that doesn’t current exist inside your target customer. Maybe it’s a new way doing things, or a product built for an emerging market, with low competition but low awareness too. Think recurring revenue billing for SaaS — this problem is SaaS-only, and SaaS is still relatively new — it’s unlikely a customer is using Quickbooks! Or remote team management software — remote teams working on computers all day is a new phenomenon. In a recession, all new projects are going to get ranked by must-do and optional, and the must-do list by impact and speed of impact to the bottom-line. Be able to 100% prove you deliver value quickly.

Infrastructure Costs and Credit Cards

There’s always some room in the hosting and devops setup — you don’t want to take risks — but if you’re like most SaaS companies, cost optimization hasn’t been the top priority since you’re growing and gross margins are already so high. Optimize AWS (or whoever you use) — make sure spot and reserved instances are used where possible, you’re running the appropriate instance sizes, and all running instances are actually utilized. Reduce or cut optional monitoring and devops tools — there’s always a little overlap here.

Audit your credit card statement — do you really need all those SaaS tools? Or better yet, cancel your credit card and get a new one — only re-add the tools you want as the dunning emails come on. I guarantee you’ll find things you’ve been paying for that you didn’t even know about.

Consider getting rid of company credit cards. They get overused and bad habits seep in. When expenses have to be justified to get reimbursed, magically the number seems to drop a little. The burden of proof makes people act more frugally.

Cash and Finance

Know your cash. Simple statement — but unfortunately rarely the case. You can’t rely on stories, promises and spreadsheets — you need to log in to the bank account multiple times a week. This isn’t hard and you’ll build a gut feel for your cash position and its movements quickly.

Know your cash revenue. Annual and Monthly Run Rate (ARR/MRR) matters, the Profit and Loss account matters, but in tough times, cash is king. If you get low in cash, and think you’re profitable because your P&L says so, you run a serious risk of going out of business.

Cash forecasting is essential — your run rate and your cash often don’t correlate — any pre-payments show up in revenue, but you don’t get that cash every month, so it may already be gone. The same for booked revenue that hasn’t paid and sits in aged accounts receivable (AR) — again, revenue but no cash.

Optimize your Deferred Revenue and Accounts Receivable. Try to get more pre-payments without giving too steep a discount — bolstering your cash position. Who owes you money? Chase it. You can’t afford to have a system on, regardless of the margins, if a customer isn’t paying for it.

You must take the ‘no-surprises’ approach to running finance. Any payments above a (low dollar value in recession world) threshold — the CEO should approve.

People

The team is the most expensive and important asset in every SaaS company. But, if you go out of business, you lose all of these assets, so it’s essential to make the hard choices in time.

That might mean voluntary or involuntary exits. You could literally ask those who believe in the vision and long-term to raise their hands and tell you who they are. It might mean the end of a bonus structure. It might mean asking people to take salary reductions (it’s salary reductions or headcount reductions — depending on the team the leaders need to figure out which puts the business in better shape).

Assess your cultural norms — do people really value the free snacks, lunches, book allowance, and so on? You don’t have to zero-out your culture, but there’s lots of things you can do (like a potluck where everyone brings in food and cooks for each other) that are great fun, build camaraderie, and are cheap or don’t cost anything.

Existing Customer Base

In a recession, these are your most prized assets. You need to show them you are here for the long-haul, are still investing in providing the best product, service and support. Start customer advocacy programs, share more customer success stories and connect groups of like-minded customers together. When new sales drop, retaining existing customers is absolutely essential for the survival of your business. Invest more here during a recession.

Pricing

Many people’s first reaction in a downturn is to reduce price. Resist this! First off — it instantly reduces your margins, and your free cash flow. Then if you don’t reduce price for existing customers, you’ve frustrated your install base as well as hurting your bottom line.

Price is a signal — to customers, the market, and your team. Businesses that price cut send a signal that they are in trouble, they need cash, and are prepared to take a hit to get it. This is not a strategy to attract long term customers!

Additionally, it’s damaging to a business to attempt one-off ‘recession pricing’, because once you come out of it, it’s nearly impossible to regain the premium brand and price you once commanded. Price decreasing is a one-way street.

You do have levers — work with customers on payment plans, on ramp-ups or regular usage audits, and on pre-payment discounts. You can tweak your pricing model to keep the price where it should be, but reduce the burden to your customers. A policy that can easily be retracted post-recession.

Communicate

With customers, with stakeholders, with employees. Lots of companies are so focussed on building the business that they forget to give ‘business updates’ to their community. That’s okay when the updates are great and everything is praiseworthy. But when the world is shaky — regardless of whether your business is or not — all your stakeholders will be nervous. Tell them what’s happening, give them confidence that you’re in the details and have a plan to address every area of concern and risk.

Do this early — not when you’re already in trouble — and your community will realize you’re one of the few solid companies with your heads firmly fixed to your shoulders.

Summary

Recessions come and go. This is the first test of the durability and resilience of SaaS companies — but there are sources of power with recurring high-margin revenue. Be conservative. Increase transparent communication. You can, and should, think long-term during a recession: make it through the short-term but don’t destroy your brand, community and company cultural equity to do it.

Whatever you do — remember your customers and employees will remember it when the economy starts growing again. Act responsibly.

This is by no means intended to be an exhaustive list or complete plan — I’d love any recommendations to other articles and guides that might be helpful for our SaaS community in Scaleworks — message me @edbyrne or email ed@scaleworks.com. Thanks!

There comes a time for many founders when they are ready to pass the baton of running their business to someone else. It’s a rare founder that wants to go from zero to running and scaling a large long-term company. When that time comes — you may have expectations on what you would like to exit for, or have read stories about other company valuations — but I thought it might be useful to share some of the other sides viewpoint. So, here are some of the criteria we use at Scaleworks when evaluating a new opportunity.

Rule 1 — Don’t Lose Money.

The cliche of course is ‘Rule number two: read rule number one’. Make sure any acquisition you consider is at a fair price, and that you have identified some ‘low-hanging fruit’ opportunities for improvement that you are confident in your ability to execute on.

What does a fair price mean?

For us — it means a price we have confidence we can either pay back over time from cash-flow, or sell the business on a profit multiple for the at least the same price we bought it for.

If the world changes and revenue based valuations go away for SaaS companies, make sure the ‘notional EBITDA’ (notional being if you ran the business for profit and cash flow — what would your earnings look like?) is enough that an exit on an EBITDA multiple will return your purchase price, or close to it (you can always run for cash for a period too, to return a % of the purchase price).

The more you pay for a business —in valuation terms (hopefully because it’s growing well and in a good market)- the less likely you are to be able to run it for cash flow or move to an EBITDA exit on day 1 and return your purchase price. So it’s important to identify ‘low-hanging fruit’ opportunities that you believe you have the skills to execute.

Identify Early Wins

Some examples of low-hanging fruit: under-investment in sales and marketing, a support team that isn’t realizing its full potential to serve customers, opportunities to do more for the existing customer base — and in providing more value, generate increased revenue and lower churn.

Look at your existing businesses unique skills — if you have sales expertise — maybe you can quickly build a much enhanced sales organization; if you’re a product person — maybe you see obvious gaps in the roadmap, on-boarding, or UI and UX.

Combining growth from executing the low-hanging fruit with paying a fair price, hopefully you’ve de-risked the deal to the point where losing-money has a low probability. This approach takes a lot of deals off the table pretty quickly — but if you believe in value and pragmatism then being the high-payer, regardless of the companies ‘future potential’ is too much of a lottery ticket to buy. Stick with backing yourself and your teams ability to deliver.

Ask ‘Why Am I the Lucky One’?

If this is a good business, and you are buying it at a fair price, why are there no other bidders, or why is your bid the best? Why are you the only one able to get it at this price? The market is supposed to be efficient! You know how the saying goes — “if you don’t know who the patsy is, it’s you”. Make sure you have plausible reasons why you are the one that is getting this business that others don’t value to the same degree you do. What do you know that they don’t? What skills and experience do you have that de-risks the deal, and justifies the price?

Ideas Should Be Plentiful

Whatever idea you come up with now is probably wrong, but if you’re buying the business at a fair price, there should be upside you can bring to the table. If you and your team have a stream of ideas for this business — new marketing ideas, product features, ideal customers, partnerships, opportunities to do more for existing customers — it’s a good sign that you’ll find some that work.

One of our principles is ‘Category Design’ — we want to create a category or sub-divide an existing category into one that we can own. Often that’s a smaller category than the one we acquired in — but being #1 is a whole lot easier than #5, and a good position of strength to grow from. Do you see ways to narrow the company’s focus that will provide category power?

On the other hand, if you are struggling to come up with credible ideas, don’t force an acquisition just because you like the price. Maybe the space isn’t mature enough yet, or you and your team aren’t the right fit for bringing a fresh perspective to it. Maybe it’s just too competitive, and you’re not getting inspiration on how to break out into a new category.

Ideas need to come easily, and be plentiful, otherwise what’s the upside potential? Don’t do a deal where all there is is downside protection — make sure there’s a chance to win big too!

Fundamental Criteria

• No Revenue 80/20. You don’t want 80% of revenue coming from 20% of customers. Don’t buy a business that has a few customers making up the bulk of revenue. It increases risk and reduces your growth levers and scalability. For a $10m ARR business, you want hundreds or thousands of customers, paying hundreds or thousands of dollars a month. There’s a margin of safety built in with a more numerous customer base.
• High Margins. Software, for now at least, is in the super-normal profit zone. Margins are 80% and above. While this can makes us lazy and financially inefficient — for prudent operators — it also creates a fantastic safety net when the economy goes through a downturn. The ability to suffer a revenue reduction, and restructure to be profitable or break-even, means your chance of coming out the other side of a set-back is high.
• Default: Alive. Do not buy a shrinking business. Warren Buffet says it simply: “turnarounds rarely turn around”. Why make life harder by taking on a challenge like this? If you buy a growing business — even if the assumed low-hanging-fruit doesn’t materialize and you find your ability to impact growth is low — you still have a good business!
• Manageable Churn and Healthy Install Base. Gross revenue churn — that is, the average monthly amount of revenue that cancels or does not renew — should be less than 2% (remember that’s a quarter of the business GONE in the first year you own it!) and the install base—revenue from existing customers, plus upgrades and less downgrades — should be flat or positive. Hopefully you see some ways to reduce churn and add more value to the install base. Ultimately — the goal is to get to a positive install base, where the business grows naturally.

Check the Finances

• Look for budget misalignment. Is one area getting more than its fair share of dollars, so that another is losing out? For example — is the Product and Engineering line eating up the bulk of the spend, while Sales and Marketing has a low allocation that stays flat? A rule of thumb for us is ‘equalize the buckets of cost’ — that means, after cost of business (should not be more than 20% in a SaaS company), sales and marketing, product and engineering, and general admin and management should be approximately ⅓ of the budget each.
• Validate Financials. Hopefully this is the most obvious statement. But — some things to look for — high AR (accounts receivable) could mean unrecognized churn; and high DR (deferred revenue) means customers you need to provide service for without getting paid, and that may not renew. Make sure the renewal and upgrade rate is high (a good rule of thumb is that at least 80% of customers renew and 20% upgrade —close to a flat installed base), otherwise you have a ‘leaky bucket’ problem. When you’re valuing a company based on a multiple of it’s revenue - paying for revenue you don’t receive and customers that may not renew doesn’t really make sense!

The summary we like to use is this 3-fold check:

1. Downside Protection: Are we confident we are not going to lose money.

2. Median: If we work hard, focus on good business operations, and execute the low-hanging fruit, will be able to grow this business enough to make a solid return (solid return being an increased valuation multiple from a higher revenue base).

3. Upside: If one of our category creation ideas pans out, and we succeeding in winning a very targeted segment of the market, is there an opportunity for this business to be a real winner and provide outsized returns?

Buying and taking on someone else’s business is always a scary proposition — the unknown unknowns — but if you get comfortable with the fundamental of the company, acquisitions can be a real accelerator compared to the epic effort — and high risk — of starting from scratch.

There’s a lot of power in simplicity. The best writers and communicators tend to write in short sentences and use common words so that their audience can quickly understand the message, and not spend too many brain cycles deciphering the words.

Simple ideas spread faster. Simple ideas are easier to remember. Simple ideas are more shareable — and suffer less dilution and misinterpretation as they spread.

Obviously the opposite of simple is complex.

Complex ideas often sound smart — but are not. Complex ideas can fall apart once they get started, and tend to need the originator to be a big part of them, as the message is too complicated for others to run with on their own.

We are not encouraged enough in business to work on distilling ideas and messages down to their simplest, and most direct, form. In fact it is the opposite — especially for young and up-and-coming executives — they fear simple is the enemy of intelligent, and therefore hinders their progress.

I’m reminded of the classic ‘Microsoft redesigns the iPod packaging’ video. No sacrifice — no simple message — rather it’s put everything there so people can find out everything they need — which of course results in it communicating nothing.

Another issue is simple gets conflated with easy. This is not true. There is nothing necessarily easy about a simple concept. ‘5000 songs in your pocket’ is a simple idea but you can be sure it was not easy to deliver that.

I get accused of over-simplifying things (on a regular basis!) — and of course there is some truth to that! But the real issue isn’t over-simplifying, it’s that simplifying implies ease.

Again, this is not true.

There is power in distilling a project that at face-value sounds daunting and complex down to a few simple tasks or milestones that achieve the bulk of the goal.

The tasks themselves might have multiple steps, involve multiple stakeholders, and each take an investment of time and energy to complete.

Recruiting is simple — identify people, contact them, qualify them, interview candidates that make it that far, and offer the role to the best one(s). But this is hard work, for certain roles it can be VERY hard work! No one in the current economy would say recruiting is easy — it absolutely is not — but this does not mean it’s complex.

Moving to a new billing system sounds complicated — but if you put your solutions-hat on and try and distill down some simple actions — it might just turn out that what sounds daunting at face-value, is actually doable with a few simple actions, albeit that they are time consuming and hard work. For example — take each customer contract as it renews, and each new customer signed up, and manually add them to the new billing system. Over a 12 month period 100% of customers are moved.

Of course there are fall-out factors like running 2 billing systems, so maybe an all-hands effort to move every customer over a 1-month period (if it’s a manageable amount of accounts) would be better.

The point is — don’t be closed to ‘simplifying’, remember that it doesn’t imply ‘easy’ — and if you can start with a simple idea and goal — it’ll be easier to align the more complex sub-tasks towards getting it done.

You don’t hear many stories of simplifying and succeeding — typically it’s the complex ones people like to share. If you have any examples of how simplifying opened the door to a win — please share in the comments!

If you’re a SaaS business — you’re likely overwhelmed with data and an ever growing list of acronyms that purport to unlock secret keys to your success. But like most things — tracking with you do has very little impact on what you actually do. It’s really important to find one, or a very small number, of key indicators to track and then base your activities against those. It’s arguable that SaaS businesses are becoming TOO data driven — at the expense of focussing on the core business and the reason they exist.

In this article we’ll look at focussing on metrics that matter, metrics that help form activities, not just measure them in retrospect.

Most of the metrics we track, such as revenue growth, are lagging indicators. But growth is a result, not an activity you can drive. Just saying you want to grow an extra 10% doesn’t mean anything towards actually achieving it.

Since growth funnels are generally looked at from top to bottom, and in a historical context — a good exercise can be the other way around — go bottom-up, starting with the end-result (the growth goal) and figure out what each stage needs to contribute to achieve it.

You can do this by looking at leading indicators. These are metrics that you can influence — and that as you act, and see them increase or decrease, you can be relatively certain of the knock-on effects on the rest of the business. For example — if you run a project management product, the number of tasks created is likely to be a good leading indicator for the growth of the business — more tasks created on the platform equals more revenue.

Remember — what gets measured gets manipulated — so you have to be careful not to pick one that is easy to game. Quality and Quantity matter. In the project management company example — it can’t be an increase in automated task jobs on inactive projects.

Let’s start by running through a typical example of discovering a measurable, daily, lagging indicator for sales and marketing to hit a revenue target.

Finding your daily sales goal:

• Our hypothetical business is doing $5m ARR, with an annual goal of 50% growth.
• That works out as an increase of 3.5% a month to hit $7.5m ARR in 12 months.
• Which is an average of $15k net incremental revenue in Q1; 16.5k in Q2; 18.5k in Q3; and 20.5k in Q4.
• So for the first 90 days — this business needs $750 a day in incremental revenue. (Assuming 20/days a month)
• Average Revenue per Annum (ARPA) is $200. Churn is 2% and Installed Base Growth is 1% a month.
• So — we lose ~$8.5k a month in Q1 to churn, and gain ~$4.5k in upgrades — for an installed base loss of 1% or $4k each month .
• That’s a daily starting position of negative $200.
• Now our $750 a day growth goal becomes new sales of $950 a day.
• Which at an ARPA for of $200 is 5 new accounts per day.

Now that we have our daily sales goal, what does the sales team need to do to close 5 accounts a day?

• This business has a sales qualified lead (SQL) to close rate of 33% — 1 in 3.
• So we need 300 new leads a month — 15 a day — to get to 5 new accounts.
• Step back up the funnel — a third of marketing qualified leads (MQLs) make it to SQLs — so we need 900 MQLs a month, or 45 a day, to get 15 SQLs.
• All MQLs come from the web site, and visitors convert to leads at a 5% rate. So you need 18,000 visitors to get 900 leads. 900 new visitors a day.
• Now we have our marketing goal — 900 visits a day of high enough quality traffic that maintains the conversation rate at 5%.

What does marketing need to do to get to 900 visitors a day?

We’ve worked out what sales and marketing need to do on a daily basis to achieve the growth goal, but saying ‘get 900 visitors and close 5 new accounts a day’ is missing a key ingredient — The HOW.

Measuring how you are doing ahead of time is likely to be trackable by looking at a core usage — number of emails, number of users, number of tasks, number of scans, whatever your business is there’s probably one good usage metric that is a proxy for everything else.

In our project management business — the leading indicator is going to be the number of tasks created. It’s a fair assumption that if we can increase the number of tasks 10%, revenue will be somewhat in line with that. Leading indicator — tasks created, lagging indicator, revenue growth. Get these two numbers up on a dashboard and in an automated email report to everyone in the company, every day.

What are the activities you could do to drive the core usage metric?

Once the core usage metric is agreed, and a goal is set against it — so 10% growth in tasks created in our sample use case — the whole team can brainstorm around what they can each do to drive that number.

You could focus on reducing friction, finding multiplier effects, partners, helping customers add users and teams within an account, find more uses for the product, and so on. If you can improve the flow from visitor, through signup and activation, it follows that usage will increase. And if usage increases — more people are going to end up paying.

Lots of small investments to help get 1% better each day will compound to big results!! If you invest in the website to increase your current conversion rate by 20% (from 5% to 6%), invest in the new lead qualification and on-boarding to increase MQLs and SQLs by 25% (from 33% to 40%) — the knock on effect is nearly 30% more sales or nearly 6k in extra new business each month in Q1. Try this yourself — take churn down by a quarter of a percent, and increase upgrades by the same amount. You’ve halved your install base shrinkage from 12% a year to 6%!

The summary here is if you focus on the lagging indicators of the traditional funnel, you are actually flying blind to some degree — using historical data to manage your business. But if you use a leading indicator of core usage — your whole team should be able to come up with a whole host of ways they can contribute to increasing that core usage metric; and the result of that pro-active set of activities, will follow all the way through the funnel.

And you can influence the leading indicator far far more than the lagging one.

How do you know your product is priced too low? One way is when you raise the price between 13 and 18%, you have almost no churn, not many complaints, and your stock price actually goes up!

When Netflix increased their prices a few weeks ago, investors were so confident in the revenue increase that would be delivered that they didn’t even wait to see what customer’s reaction would be.

Netflix spends an astounding amount of money on content rights and content development — supposedly budgeting $15 billion for 2019 — and resulting in $3 billion in negative cash flow, which is heavily funded with debt — at $10.4 billion by the end 2018.

Even at its already large size, the company continues to grow rapidly, so I am not suggesting their cash flow or spending is any cause for concern.

What I am suggesting is that Netflix is too cheap, and could likely be cashflow profitable without reducing investment in content, by implementing some pricing model changes. The fact that customers and investors did not seem to bat an eyelid at the recent price increase gives me some confidence that they are not maximizing profit per customer!

In some scenarios, especially early on, companies decide to focus on customer acquisition at the expense of revenue maximization. Other than the unfathomable madness of some companies that do this while running a negative GROSS margin (a big ‘thank you’ to their investors for subsidizing consumers!), market share ‘land grabs’ in B2C can make sense. It looks like Netflix has been focussed on market share for a long time and continues to focus on maximizing subscriber numbers over profit.

But is it really a linear equation — where an increase in price will result in a decrease in new subscribers or total subscribers? Clearly not in this case. Wouldn’t it be worth at least testing variations on the pricing model in some market segments to discover the optimum value price?

Quick definition — the Optimum Value Price is where you can capture the highest number of customers, at the right price for each type of customer.

Right now — Netflix differentiates price in 2 ways only — number of screens, and HD or Ultra HD. I think Ultra HD is a bit of a red herring as most devices and connections are not capable of getting it, and there’s not much content either. So really — the primary driver of price is number of screens — 1 for $9, 2 for $13 and 4 for $16.

This assumes the only difference between customers is the number of devices they want to watch content on at the same time. This is a misnomer. No one is watching 2 devices simultaneously— one with each eye?! So it’s really the number of users on an account — 1 user for $9, 2 users for $13 (nearly a 30% discount off list) or 4 users for $16 (a 45% discount from a single user account).

Consider some of the likely differences between consumers, and the variables by which they derive value:

• Number of Hours Watched
• Variety of Content Consumed (number of different shows and movies)
• ‘Binge Watchers’
• Demographics (geographic and individual)
• Devices, Connections and Locations Watched From
• Frequency and Length of Simultaneous Connections

If you wanted to be aggressive, you could think about time of day, early access to new series and movies, premium content, subscriptions to different genres. But lets keep it simple for now — here’s a slightly more value-based pricing plan idea:

The base plan price hasn’t been changed— but that may be doable — so these increases are from what might already be a not optimized starting point.

On the Unlimited Plan — think about how many people have more than 1 user, watch Netflix multiple times a week, don’t ever want to think about usage limits and are not price sensitive to $30 a month for something they use regularly (and that has exclusive content they really want to see — Netflix has so many ‘must watch’ shows!)? Is it 10% of US subscribers? If so, a back-of-the-envelope calculation shows that’s likely over $1bn in 100% margin contributing revenue.

The real question is this — if Netflix changed its pricing model to be a little more complex and value-based — what is the level of change that can be sustained without materially reducing subscriber retention and addition? My guess is there’s at least enough leeway to reduce the need for debt to fund content.

How optimized is your own pricing? How often are you changing it and how much time do you spend thinking about pricing? For most businesses — the investment in pricing is abysmally low. Yet your product, team, the value you bring customers, the type of customers you are attracting, all changed every few months as you mature. Why isn’t your pricing adapting in line with this?

This is not about maximizing price and penalizing small customers — it’s easy to increase the price and turn away prospects — but short-sighted. It’s also not about maximizing customer numbers — that’s also easy — just pay people to use your product! The right approach is to maximize the number of customers that are willing to pay, and achieve the optimal ‘willingness to pay’ price for each type of customer. There is no one-size-fits-all price.

Pricing really is an under-utilized lever. If you’re not maximizing your value-price-per-customer, you are leaving 100% spendable cash contributing margin on the table. It’s up to you what to spend it on … but most growth oriented businesses plow all their free cash flow (and more- as it this example with Netflix raising debt!) back into R&D, product, recruiting great people, and telling more people about the product.

Why wouldn’t you want to do that?!

Why? Because it’s free.

Free isn’t a business model. Charging isn’t only about making money (gasp!), it’s about creating the perception of value — and people use things they value.

Conferences that charge for tickets have a much higher attendance rate than those that let you register for free. Most people I talk to aren’t surprised by this — if you can have the option of attending by registering and it costs you nothing, all you are really doing is declaring interest, not commitment. On the other hand, if you pay for a ticket, you are likely to make a real effort to turn up (even if your company paid for it).

People are surprised when I say giving a book away for free (or nominally free) is a strategy to reduce engagement, not magnify reach as they intend.

Reading a book is a commitment — it’s (for most people) a multi-day or multi-week project over numerous hours to complete. Any time you ask someone for a commitment, you will increase their perceived value of it, and the likelihood of engagement, by putting a value on it.

Charging also creates a little bit of scarcity — not because of limited volume — but because there’s a barrier to entry. If you pay to pass, you’re not only more likely to read the book, but also to comment on it and recommend to others — a little bit of the status enhancing “did you read this great book that I just did?”.

For some reason the exception to this rule, at the current time, is news and short-form content. It’s possible to get a lot of high quality journalism online for free. The unfortunate thing here is there is also incredible content that is paid, and missed by the masses, precisely because free is ‘good enough’. I’m not convinced free (ad supported) high-quality content is a long-term business model though, so this might just be an Internet-created blip in the long run.

Free is not a business model. It’s a marketing tactic, and certainly not always most effective one. Use with care.