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This is a comment I made on a blog post about XERO and revenue.

I’m talking about the need to stay focused on the business model in the first year. I think they’re doing really good so far…  Just thought it was worth a mention on J101 as the principles below apply to ALL software co’s. Feel welcome to comment.

Source Blog Post:

My Comment:

Re: “I imagine that, in it’s first year, AfterMail made a loss, like most businesses getting off the ground do”

– Ultimately, none of us know if they made a loss in the first year and it’s the result that matters, not the means. Good on AfterMail.

However, from experience, our company ProActive Software – and a few others I know of have built globally trading software businesses without incurring losses or any debt. Just bootstrapping forward, so it’s definitely possible.

But… That doesn’t mean we’ll necessarily scale any faster than XERO or other debt or Investment funded software co’s. In fact, if XERO have the business model right, they’ll scale a lot faster. They simply have more resources and means at their disposal (never a bad thing). As I see it, I wouldn’t expect to see XERO scale too much in the first year. I would imagine (and I think I’m right) that they’ll be working on refining and experimenting with the business model (and sales/marketing models) prior to ‘pushing the scale up’. And that’s great – it’s where they should be focusing at the moment.

To be honest, it’s really encouraging to see XERO experimenting with the business model and trying lots of different things. Too many software co’s just create a product, sell it on a website and never give thought to the business model and infrastructure. Unless you do this ‘hard yard’ experimentation, you can’t position yourself for growth.

Ultimately though, for all software companies there’s only one equation that matters and this should be focused on by ALL software co’s…

Cost of acquiring Customer
Revenue from Average Lifespan of Customer

For Example:

If you spend $2000 of time acquiring a customer worth $100 per month (20 month payback)and the average time they stay with you is 3 months, you’ve just LOST $1700. (Scale that loss up!)

but: if you spend $200 of time acquiring a customer worth $100 per month (2 month payback) and the average time they stay with you is 12 months, you’ve just MADE $1000. (Now Scale that profit up!)

So you can see that focus should be on business model and sales/marketing systems prior to scaling up. Hopefully that’s as clear as mud!  ;-)

Disclaimer: I don’t own XERO shares. (more of a property guy).


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About The Author:
Julian Stone begin_of_the_skype_highlighting     end_of_the_skype_highlighting is the CEO of ProActive Software, developers and creators of the leading web based project management software