Bootstrapped Founder #69: Audience Discovery: The Importance of Budget

Dear founder,

If you prefer listening over reading, you can listen to this episode of The Bootstrapped Founder on my podcast.

When founders are looking for that perfect target audience for their business, they often get many things right. They pick audiences that they know intimately, that have interesting problems to solve, and that they really care about helping. However, I see too many founders struggle with a vital part of the Audience Discovery process: making sure your future customers are willing to pay for solutions to their problems.

I want to dive into this issue today because it might be the most dangerous tripwire on your entrepreneurial journey.

Not everyone who has a problem is willing to open their wallet for a solution. For founders, that means a big difference between an interesting problem and a problem worth solving.

Consider people who love coffee. While they are willing to spend a lot of money on a good coffee maker and pay a premium for imported beans, they usually have a limited budget. Even if you are a coffee enthusiast yourself, you will have a hard time convincing other bean experts to pay a monthly subscription fee for your Roasting-Aroma-Optimization SaaS. It's the old discussion of the main dish vs. side dish: what's the most critical thing you can help people with? What will they spend their money on? The coffee beans? The machine that grinds them and turns them into a hot cup of bliss? Or will it be your product?

Willingness to pay is something you need to measure before committing to building anything for a particular audience. I chose the coffee example purposefully: there is a clear budget expressed there. People will pay for beans and machines. They have to; otherwise, they wouldn't get to drink coffee.

Some audiences might not have a budget for your digital solutions at all. I've seen dozens of founders attempt to build digitally-enabled tools for hair salons and fail every single time. No matter how promising their SaaS products were, they were either not adopted at all or quickly abandoned after a short trial period. In an industry where scheduling is done with a phone, a pen, and a calendar, it is incredibly hard to sell a replacement solution. Many hair salon owners don't have a budget for digital tools. They never had one, and it's tough to convince them to create one.

I remember how we debated this when my partner Danielle and I started our business FeedbackPanda back in 2017. Our target audience was Online Teachers, and we wondered if they would ever consider paying money for a SaaS-based solution to ANY of their professional challenges. We didn't want to build a business only to find that our prospective customers didn't have a budget for professional tools.

We asked ourselves two questions:

Do they already pay for solutions to their problems?

Since we were deeply embedded inside the Online English teacher communities, we had an easy time figuring out if they had a budget for digital tools, to begin with. We observed that whenever a new member joined the community, they would be greeted with many recommendations to make their job easier. One of them was the suggestion to purchase a $50 license for a webcam-enhancing software called ManyCam, allowing teachers to change their screen background and add quirky animals and shapes to their video streams. Seasoned teachers recommend this because it's imperative to keep the students engaged to get above-average teaching results. With those results come good ratings, and with that comes better pay. It's a clear value trade: you invest $50 and reap the benefits for a long time.

This was where our validation efforts ended: we knew they'd pay for software, but we didn't know if they would pay for service subscriptions. That uncertainty affected our initial pricing, which was on the lower side, as an attempt to remove any obstacles from the initial purchase. Not knowing if people would resonate with the subscription model also made us focus on providing the clearest value proposition from the start: we positioned our tool as a means for the teacher to earn more money and spend more time with their family. We trusted that paying $10 a month to get back two hours every day would speak for itself. And it did.

Do they have purchasing agency?

The second question about the budget that we researched was who would purchase our subscriptions. We were selling into a "gig-economy" market. The online schools would hire teachers as contractors and pay them on an hourly basis. This immediately deterred us from trying to sell to the schools. Not only would it have been hard to sell to Chinese businesses in the first place, but since the teachers we were aiming to help weren't employees, it was quite likely that there was no budget at the schools to support them more than necessary. We looked into that and found that other businesses had reliably failed to reach agreements with these Chinese educational institutions and businesses.

That left the teachers themselves. We noticed that many teachers understood that they were freelancers, essentially self-employed teachers. With that came an understanding that they were responsible for their own success. Additionally, they suggested to each other within their communities that purchases like software were tax-deductible. Seeing all this gave us a clear indication that selling to the individual teachers was a good idea. They had control over their budgets and could choose to buy without having to ask anyone else for permission.

Purchasing agency is exceptionally relevant when it comes to budget. If the person you're building your business for has no means to buy your solution, then either you lose the sale, or you need to convince them to escalate the purchase to someone else who has the means to buy. Essentially, you'll have to equip the people who want to use your product with convincing material to present to their superiors.

For a bootstrapped business, this is asking quite a lot. You'll likely be busy building the product, making sure existing customers are supported, and creating a professional brand around the service. The less hand-holding you need to do, the better.

When you find a target audience that you want to serve and figure out a problem you want to help them with, make sure that the distance between those you're building for and those who'll have to pay for it isn't too high. In the best case, there is no such distance, and you sell directly to the person who uses your product. It's easier to sell a freelancer-invoicing-solution directly to freelancers who need to write invoices than it is to sell a developer-productivity-tool to large enterprise businesses where the user is a developer, but the buyer sits in a completely different business division in another building.

There might be a switching cost to adopting your product that your users don't see, but the purchaser might understand. Knowing exactly what you're up against is instrumental in getting your sales pitch right. Also, consider that there might be a reputation risk for your users to bring this up to their boss: what if they suggest this and it crashes their servers a day later? What if it becomes super expensive and causes damage to the business? You'll need to have answers for users who might anxiously ask you these questions.

Budget and purchasing agency are things you need to figure out before you dive into your business. You need to make sure that there is at least a reasonable chance that you can reliably sell your product to your target audience. This is a validation effort that needs to happen early. Don't fall into the "build-it-and-they-will-come" trap. Your entrepreneurial optimism will blind you to the reality out there. Leave the building, peer into that reality, and ensure that your business is built on a solid foundation.

Thank you for reading this week's edition of The Bootstrapped Founder. If you like what I wrote about, please forward the newsletter to anyone you think would enjoy it too.

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See you next week!

Warm Regards from Berlin,

Arvid