25 Feb

Can preorders work for software-as-a-service companies?

When working on a new product, the most important thing you need is validation. Not to stroke your ego, but instead so that you don’t waste valuable time building a product that no one needs. After all, for you to run a successful business your customers need to pay you.

To start validating the idea for ConvertKit, my new email marketing application, I called a bunch of friends who are knowledgeable in the space. After talking the idea over I would always ask, “Is this something you would buy?” Eight out of 10 said yes. The last two said no and maybe, but for very specific reasons that shouldn’t affect my decision to move forward.

Taking it further, I asked some people if they would preorder ConvertKit. Again, the overall answer was yes. A few sounded very eager to preorder.

Sweet! That meant I had an idea with real validation! I excitedly posted the following message on Twitter:

A few smart people (including Dan Shipper above) reminded me that’s not real validation. People will say one thing, but then never follow through.

It was always the plan to capture payments as quickly as possible. I just didn’t have it set up when I was talking to these people on the phone.

A few weeks later, with the help of Amy Hoy, I wrote and launched a sales page for ConvertKit, complete with options to preorder at the bottom. Once the page was ready I published it, posted about it on Twitter, and sent an email to all my subscribers. Then I waited. And… nothing.

 

Will it work?

Preorders are often done for books and other products, but I’ve never seen them done for software-as-a-service subscriptions. I’m sure someone’s done it, I just haven’t heard of it.

So… would it work? A few of my friends were skeptical. So was I.

With a SaaS application there are all kinds of issues with preorders. When does their subscription start? Should they preorder multiple months at a time? What benefits do they get for preordering?

I put together three different price tiers to choose from. Each one was discounted by 25% for life and included one month free, all as an incentive to preorder. Since I needed extra money for the development budget, I had people preorder the first three months up front (which caused some confusion on the purchase page).

The packages ended up looking like this (after the 25% discount):

  • Beginner $112 (3 months at $37/month)
  • Intermediate $281 (3 months at $93/month)
  • Expert $562 (3 months at $167/month)

* Note: because I rounded to full dollar amounts the math isn’t quite exact.

 

The first preorders

Later that day a few preorders did come in, enough so that I knew the page worked. Surprisingly, none were from the people I’d talked to earlier who said they would preorder. So I followed up by email. They had a few reasons why not to preorder now. Some were working with another tool; others had questions about specific features.

But ultimately Dan and a few other skeptics were right:  It doesn’t count as validation until they have paid you money.

Verbal commitments, sometimes even contracts, mean nothing until money has transferred hands.

 

More preorders

Despite that minor setback, preorders kept coming in. They mainly came from people on my email list, but a few were Hacker News readers and Twitter followers. Each time I received a new preorder notification I calculated my estimate monthly revenue from all of them.

First it was $121 a month. Then in the low $200s.

I wrote a few more blog posts and mentioned the preorder at the end of each one.

Now I am thrilled to say that I have received 19 preorders for $972/month in revenue. Since each payment was for three months together, I’ve added a total of $2,916 to my development and marketing budget. Since my budget was only $5,000 to start with, a 50% increase is pretty significant!

When I started the Web App Challenge at the beginning of this year my goal was to reach $5,000 a month of recurring revenue by July 1st, 2013 (six months later). I am now proud to say that I am at almost 20% of that goal, and I haven’t even launched yet.

Though none of this would be possible without the 19 wonderful people who believe in me and ConvertKit. If you preordered, thank you so much! I look forward to helping you radically increase your conversion rates.

 

To answer the question…

The question in the title is if preorders can work for a SaaS application. The answer is a definite yes.

It’s a great feeling to know you are building a product that people want so much they are willing to pay you for it even before they’ve seen it.

 

One last question

I wouldn’t be a very good startup founder if I didn’t also ask you an important question. Would you like to preorder ConvertKit? 

In addition to getting to be one of the first people to use ConvertKit, you get these other awesome benefits for preordering:

  • A 25% discount for life.
  • One month free.
  • And the next 7 people will get invited to a private online conference on email marketing and increasing conversion rates. Only the first 25 preorders are invited and there are 7 invitations left.

You can preorder three months now for $112 and get all of the above. If you want to see other plans or read the entire sales page, go here.

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14 Responses to “Can preorders work for software-as-a-service companies?”

  1. A good read, Nathan. Thank you for the update. I couldn’t help but be reminded of successful projects on Kickstarter, many of which are game, film, or software ideas. Though in the case of Kickstarter, it is even a step lower than preordering; people are not guaranteed a product at the end of the day. So I think that this increasing number of funded projects validates your point: prepayments can work. A growing number of people are confident enough to invest in that stranger they meet on the street, to use your words. I do it when I buy an app or a book online, as do millions of others, and it is reassuring to see the success of Kickstarter and your preorder testing, for instance. I agree that running such preorders should be encouraged.


  2. Can you reveal what is your landing page traffic like for converting 19 sign ups?


  3. I’d be curious to know the traffic too and see the conversion.

    I learned the hard way with a previous startup than “this is great, I will buy it” does not count as a validation. No money, no validation.


  4. From http://nathanbarry.com/step-by-step-landing-page-copywriting/

    “So far 6,397 people have visited the page and 228 people have subscribed to the email list. So a 3.6% conversion rate. Not as high as I would have liked, but a lot of that traffic was from Hacker News, which always converts a bit lower.”

    That gives a few numbers that can at least ballpark the traffic and conversion rate for sign ups.


  5. Hey Nathan,

    So if someone preorders, what are you giving them in return. I know Gumroad requires you to attach a file, but what did you attach?


  6. […] customers to pre-order memberships before the product is available.  It doesn’t get more validated than this.  Customers have […]


  7. Shola says:

    Did you have markups, wireframes, etc? Also Jason Cohen talks about the concept of “just getting 10 paying customers” as a way to validate the idea. All the skeptics who say “well just getting a few people to pre-order doesn’t mean it will be successful” -are missing the point. There are very few things valuable enough that people are willing to exchange money for. Ex. everyday, something like 25,000 marketing/advertising messages bombard consumers – all trying to get them to buy. In my limited testing for every 1 person who pre-orders, there are 10 or 100 people who would buy the product if it were complete. I’ll take working on an idea with 10 pre-orders over another “magical” idea gleaned from people off of forums or blogs anyday. I’ve done both methods and while hunting for a pain-driven problemm through observing conversions of your target market is better than picking an idea out of the blue, the pre-selling method trumps that hands down.


  8. Anonymous Coward says:

    What mechanism did you use for the preorders?
    Will a payment mechanism be part of ConvertKit, and analytics on who is visiting and converting?


  9. Adrian says:

    I forgot where I read this, but a 3% conversion ratio is expected.


  10. […] discussed using pre-orders for ConvertKit in this post. On July 1st of 2013, after working on ConvertKit for six months, Nathan wrote a blog post about […]


  11. Thank you Nathan for taking the time to share all of these. And then making it specific on Saas revenue model. I feel my time spent finding your content/article on Google is well spent


  12. Hey Nathan,

    I just remembered to ask –
    Which payment processor did you use to add up that amount to your Dev/Marketing budget?


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