A version of this article previously appeared Forbes.
Long before author Stephen King sold over 350 million books, he was a budding entrepreneur. In order to pay his college tuition, young Stephen created a sole proprietor startup with a very entrepreneurial pricing structure.
Leveraging his core competency, Stephen cranked out term papers for his fellow students. Papers that resulted in an “A” grade earned him $20, “B” papers cost his customers $10. There was no charge for “C” level papers. The most enterprising aspect of King’s business model was his promise to pay his customers $20 for any paper that didn’t earn at least a C grade. According to King, “I made sure I would never have to pay, because I couldn’t afford it.”
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Activities Vs. Results
Unlike entrepreneurs, whose survival is similarly based on their ability deliver value to their customers, politicians and big company executives routinely confuse activities with results.
Government officials proclaim the number of missions flown, bombs dropped and dollars spent to defeat ISIS, but there is scant mention of the actual impact of these efforts. In a politician’s world, “trying” is the measure of success. In contrast, startups which confuse inputs with outputs are assured an unceremonious death.
Performance Propels Velocity
Startup selling is largely predicated on velocity. Indecisive prospects diffuse a startup’s focus and slow its sales velocity. The more rapidly a startup can determine which prospects are likely to purchase in the near term, the more effectively it can deploy its limited resources.
One way to quickly qualify a prospect is to offer them a proposal with little risk. If they balk, you can be assured they are not worthy of additional near-term attention.
At RevUpNet, an online marketing agency which I co-founded and subsequently sold to Coull, we partnered with our clients and shared the revenue we helped them generate. If we were unable drive incremental sales, we didn’t get paid. As such, we were highly selective of our prospects, only approaching companies which we were highly confident we could make a meaningful impact.
Our sales velocity was extremely high because, like young Mr. King, our pitch was clear and compelling. “We are willing to invest our scarce time and resources into a partnership with you because we believe we can tap into revenue sources you haven’t yet explored. If we fail, it will cost you next to nothing. If we succeed, we’ll pay our own way. When can we start?”
In order to further qualify them and ensure that the prospect would apply adequate attention to our partnership, we charge them a nominal flat fee during the first few months of our engagement. The size of the fee varied, but it was typically a couple thousand dollars and it went away once we began generating revenue. Even in the rare cases in which we could not make a material contribution to our customers’ sales, we always generated enough revenue to more than offset our de minimis fees.
We took a similar shared-success approach with our employees, many of whom were my former students at UC Santa Barbara. We paid them a base salary that was significantly less than what they could earned elsewhere. However, we rewarded their performance by sharing the revenue we collected from our customers. This allowed our top performers to earn in excess of $100,000 annually, while still in their early 20’s.
This performance-based compensation plan and business model allowed us to produce in excess of $100 million in sales for companies such as Angie’s List, Sonos, eFax, Stamps.com, Picassa and Green Border (both purchased by Google).
Service businesses are typically difficult to sell at a premium, yet we were fortunate to be acquired at an aggressive multiple of our sales, largely because our “put up or shut up” business model resulted in a robust recurring revenue stream.
Outputs, Not Inputs
By definition, startups are unproven. Rather than attempt to convince stakeholders to believe your words, a performance-based business model shows them through your actions that you believe in yourself.
A pure performance-based business model is clearly not relevant to all industries. However, wily and creative entrepreneurs incorporate an aspect of rewarding results into most of their business relationships.
If you don’t believe in your ability to deliver, why should your customers?
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Images: AP Photo/Francois Mori