“Break Even” is about going from product-market fit, to experimenting with revenue models, to achieving profitability, based on my experience taking 7 Cups from an entirely free service running on seed capital to a profitable company without taking any venture capital rounds (with $5m in revenue in 2018 and on track for at least $20m in 2019).
“Break Even” offers insights from the arduous path of taking a raw startup idea to the rare milestone of profitability (first “ramen profitable” and ultimately revenue enough to grow on).
Christian Crumlish: Product Leader – PathCheck Foundation
Christian joins us from Palo Alto. This talk is called Break Even, which represents a moment in the life of a startup, it’s a goal, and it’s an exhortation to everybody.
Product people, don’t be afraid to think about the money and figure out revenue! Christian will tell a few stories around how to break even and get a product to a break even point.
Why we should listen to Christian: Christian’s background is in design/UX management and leadership at big companies like Yahoo, where he was the curator of the Pattern Design Library and from that co-author with Erin Malone of Designing Social Interfaces. He left Yahoo for AOL where he served as Senior Director for Consumer Experience and transitioned into product management. From there he moved to startups and was Director of Product Management and UX at CloudOn (later sold to Dropbox) then moved to a company called 7cups where he was Head of Product. 7cups will be the main focus on this talk.
7cups, originally named 7 cups of tea, is a mental health/behavioural health product that leverages self help, community care, peer to peer support, and active listening. They have won many awards. Stanford MedX Award and WEF Pioneer Award.
He currently works in consulting for various clients and startups, some around mental health and some around civic tech. Has spent much of the past year working for nonprofit PathCheck Foundation on an open source contact tracing tool that preserves privacy while trying to help fight the pandemic.
7cups is an anonymous, free service to provide online emotional support. Famous advocates include Maisie Williams from Game of Thrones who experienced bullying after becoming famous very young and cited 7cups as a core tool in offering her support.
7cups was an experiment in trying to build a supportive online environment that was healthy, compassionate, and caring.
The challenge from a product point of view is how do you pay for/make a living from this? Particularly when you want to offer it for free.
7cups was a lean, scrappy startup. Grew out of Ycombinator, raised seed capital and used ‘the problem is the path’ methodology to overcome obstacles.
Christian’s test for evaluating product market fit is ‘will the customer crawl through glass to get the experience?’ In the case of 7cups, yes. The product was brilliantly coded but organically assembled and when Christian joined it did not necessarily know how to present itself but it was already very popular.
They knew the product had touched a nerve and that if they made it easier to use and understand that it had huge potential to help millions.
One strategy they used to get people interested in self help and to participate was the concept of a ‘teacup motivator’ which would go down in level if you missed a day of logging in – keep your teacup full. But the growth was not the J-shape typically predictive of revenue potential.
Many methods used to hack the growth and learn new ways to find customers; things like translating to mobile, translating into other languages, reaching out to various age groups, visitor conversion, etc. Nonetheless, they did feel there were limits to the resources and trying to raise series A without sharp growth was a challenge.
One of the effects of not being able to raise the user base fast enough was to ‘solve’ revenue. Seed funding would only last so long if they couldn’t raise venture capital and revenue would have to replace that.
If you are trying to raise funds without exponential growth, if you are growing revenue on top of raising the user base then you are demonstrating an ability to monetize your users and figure out a break even point for the future. Ultimately, the pressure was to find and grow revenue if they weren’t able to grow their user base as quickly as they would have liked to in Silicon Valley.
Initial (0-1) Situation. The basics were that they had a service people could use if they could find it, and anybody could ask for support.
Early issues arose trust and privacy, users not wanting to share data, the two minute lag time led to users leaving. There was definitely room to improve user onboarding and drive engagement and ultimately to find a revenue path.
They tried five core revenue raising experiments and these examples will form the remainder of the talk.
Example one: Donations. 7cups is not a non profit but it is free and provides value and meaning outside of a transactional relationship.
They considered just asking their most users to donate using the NPR model. Would people donate to a for-profit company? Christian had doubts, but part of being a product leader means you voice skepticism and you often have to agree to disagree and still move forward. Again, that tension can yield unexpected positives.
They looked at various models of donations, such as one time vs recurring, and a ‘compassion jar’ which had a daily funding goal and metrics – an attempt to gamify or socially engineer the process.
The result was that they did make some money, but more in the petty cash realm and not enough to sustain the company.
A recurring theme to these experiments is that they didn’t abandon a revenue stream simply because it wasn’t high performing. To this day the compassion campaign is active on the site. 7cups is also not the only for profit site asking for donations. Christian recently noticed on Twitter that Bot Sentinel is also using the donation model. There is nothing wrong with asking for money but in and of itself this is not enough.
Experiment 2: Upgrades.
Payment unlocks additional services. Also called ‘freemium’ model with free vs premium versions delineated by a paywall.
7cups has a ‘Growth Path’ which is a self help series of steps to be taken daily including various modules like breathwork, CBT, etc. This feature was inspired by the Headspace model, a competing mental health app using a freemium model, and proposed by an early angel investor. Again not Christian’s ideal model, but he had to be willing to give it a go.
Christian had experience with pricing and experimenting with freemium models from his time at CloudOn. At that company they found their sweet spot between free users and pay users in having one single payment to unlock all premium features.
Tried a new version of ‘yoga onboarding’ – rather than throw users headlong into the experience on day one you start with easy, simple steps and build over time into a path.
At the same time, you are trying to walk people down the growth path to the point at which you can upsell the premium version. At 7cups, this translated to unlocking features related to a specific user’s concerns – depression, ADHD, bullying, coming out etc.
The biggest problem with this approach was that the primary value proposition of 7cups was to offer online immediate support in the chat function and the growth path was an important part of creating longer term habits, but the growth path was secondary and by using that as the main monetizing element they ran the risk of cannibalizing their core mechanism of growth.
On the other hand, it was making money and generated revenue. Took time to play out, trying different packages and discount models. It was lucrative, and a valuable learning experience but not in any way the Holy Grail for supporting the company financially.
Demo slide detailing some of the onboarding upgrades like introducing a chatbot for the waiting room experience, adding graphics and animations to guide users in breathwork, and strategies to hook users onto monthly subscription to the ‘Growth Path’ track.
Experiment 3: White Label. This is an unbranded platform version of the product that customers can integrate with their own site through co branding or their own branding.
Started with partnering with universities, who have mental health high on priority list. Learned a lot about how to generalize the product and work with partnerships as well as how to charge for it.
It did represent another meaningful revenue stream but in a different way than how the upgrade path was a distraction from the chat, the white label product in some ways was a distraction from the direct to consumer model that had been working well.
Another challenge was that the white label product added new stakeholders who often were pulling the roadmap in a different direction. For example salespeople committing to deadlines that you haven’t agreed to, resulting in you having to either deviate to their agenda or ask them to go back and renegotiate. Tricky to navigate partnerships.
White label was a high yield revenue stream, generating tens of thousands of dollars per year but with a longer pipeline and pulling you into the sales field rather than app store or SEO models of marketing.
Experiment 4: Directory. Build a directory of professional therapists for the site. This stood in competition to the largest directory at Psychology Today.
You are competing with a huge brand, and most therapists subscribe to the publication, which pays for itself if the subscription leads to just one referral. i.e Psychology Today is a proven conversion model vs 7cups as a young upstart.
Again, though they did not make money at this, the experiment still proved valuable in that having the directory on the site highlighted that 7cups worked with a network of professional therapists not just volunteers.
Also fed into the next experiment – online therapy.
Experiment 5: Paid Therapy. Core product is free and eighty percent of the time they help as well as therapy because a core part of the help is simply having somebody to listen and talk with. But some people need a professional, a clinical therapist.
If we can reduce some of the overhead to make this more affordable than a physical session, it will have broad appeal. So this was a second freemium model – free support from volunteers vs paid support from professional therapists.
Reverted again to online onboarding beginning with chat (the core value proposition) and funneling some users into the upsell stream. Worked to make the onboarding/concierge chatbot (Noni) smarter and introduced a second therapy stream chatbot (Sophia) to help users in that stream.
Christian was skeptical of this stream, it was $150 monthly sign up which is significant, but there was definitely a market for it and it aligned well with the core values and product.
Began by introducing people to the community and giving them an idea/demo of what a chat was like. Then Noni would take them through a series of options and direct them to the therapist directory as needed.
Took the process of experimentation very seriously and rigorously. Scored them based on various metrics and then ranked and prioritized them. Then tested them in AirTable. They created a database for all the experiments, even those that ‘failed’ as they still had value and learnings. ‘Stacking up wins’.
Testing still tells you something even when that might be ‘this thing makes no appreciable difference’. Other times you see huge differences. For example when testing various header buttons. Volunteers at 7cups are called ‘listeners’ as they are trained in active listening. But users do not know what a listener is as here it is contextually specific. So a header button labelled ‘Become a Listener’ had low conversion. But testing a button that said ‘Volunteer as a Listener’ generated many more clicks.
Over time this worked.
Example of a queueing algorithm for which therapist gets the next referral. Playing with that algorithm to tweak for retention or feedback and reviewing constantly yielded continuous improvements.
Constant experimentation drove up funnel conversion rates. They used Amplitude, a product analytics tool to measure success. With a predominantly UX background, Christian had to learn about the business side of things. Tools were helpful.
You have to like math to be a product designer! Data yields insights. They had high level funnels showing major milestones along the signup flow, showing how elements were performing over time, as well as smaller funnels, and used analytics constantly to review strategy and performance.
In the end, they did generate the revenue they needed as they introduced new experiments, improved processes and features, and stacked their wins until they reached break even point.
Break even is seen as the holy grail for startups and its important to parse this. There is a saying in NYC that most restaurants fail in their first three years. Startups are the same. Startups are also up-starts, they are inherently experimental and trying to break into a space that either doesn’t exist or has incumbents. There is no shame in failure. Over time the house always wins.
You hear about the game changers and unicorns and yes they exist. But you have to look at the ratios. Don’t fall into the ‘winners fallacy’ and look at successful companies and their path as the only route to success.
He is talking about startups here and not all products managers work in startups, but a lot of products have revenue and need to pay their own way. All of these techniques and relentless looking for a model – the investigation of how you can make money and where is my product value is a fun and creative part of being a product manager.
Once you strike oil, how do you optimize? And as you start to optimize, is that going to be enough to monetize appropriately? If yes, great, keep improving. If not, take the lesson and move on.
Concept of the runway. How much money you have minus your operational burn rate (which in startups is mostly HR and overhead). When you break even, the runway extends out to infinity and in theory you have now found a perpetual motion machine. In reality life is more complex, and once you break even you have to grow and evolve.
At the stage 7cups was now ‘Ramen Profitable’ (profitable enough for the founders to have a steady diet of ramen noodles) and had reached break even. But they were cheating in the sense that they were paying themselves below market rate and subsidizing the company. So they had to make strategic decisions about what to do next.
They had three potential directions and they did not know which was best.
Direction 1: They could continue to grow organically and tighten up and improve systems already working.
Direction 2: Typical Silicon Valley strategy – raise money from investors based on the business model that they’ve already proven to be successful. Using big ballpark numbers – they had a 0.01 conversion rate to break even. This meant that 999 people could use a free service because one person was willing to pay for their service. Market yourself as a lead generation business.
Direction 3: The prospect of very big deals. Go for broke and pursue 100 x opportunities. Fundamentally different directions.
When Christian pitched this talk to John a year or so back, this was the end of the story – this is how we broke even and now we have some great prospects ahead and it’s a great story. But the plateau is theoretical, and it still matters what you do with it.
Epilogue: California Dreaming. So during the last year they pursued some of those 100x opportunities in direction three. The California Mental Health Services Act (CalMHSA) which adds an income tax surcharge on people who earn more than a million dollars a year (also called the ‘Billionaire’s Tax’) which is put in a fund to pay for mental health services via Medicaid. A percentage of this fund is earmarked for innovation and it was not being spent. Why? Because innovation is hard, and government innovation is especially hard.
They heard about this and partnered with another co called Mindstrong and put in a proposal as a white label. They intended to ask for a million dollars but a casual conversation with a partner revealed that they could ask for a lot more. So they upped their ask to twenty million and ended up with nineteen.>
This had both positive and negative consequences, again it became a learning experience. They learned how their product could integrate with government and mental health services which was a long term goal. Also built on the white label product and catapulting it into the realm of millions of dollars. In some ways this was great, but again it was changing the model of the business toward enterprise, government and program management as opposed to direct to consumer.
Christian was not terribly excited about it, but couldn’t deny the revenue proposition. Challenges arose around anonymity, trust, public perception and liability. A whole different scale was involved. By the time Christian left the project was in trouble and scaling back.
Suddenly the company had to depend again on the therapy revenue which had been a mainstay all along, which had been neglected in favour of working with the large and deep pocketed partner.
Ultimately Christian had a great experience with 7cups but after four years it was time to move on. The company was going in a different direction. But if he had it to do over, he would have chosen a version of option two, where they continue to optimize the therapy business and not just to get to 2x, but 5x or 10x. Ultimately turn it into a great business and figure out how to bring more customers, and then go to government with a thriving business and bring them in as payers.
These are retrospective thoughts after reaching break even, getting to the crossroads, and having a very exciting period of growth and expansion followed by time to reconsider.
Closing thoughts: It’s fun to focus on design and creativity and geek out on technology, particularly if you have a UX background, but business and revenue are core product responsibilities. Don’t be afraid of the money side. Also, experimentation is a core product mindset. What to build, change, and test will drive your product growth.
Be willing to experiment with wildly different revenue models and recognize the value beyond a dollar value of maintaining various revenue streams. Being rigorous, thoughtful and careful about an experiment, being scientific about it pays off, as does being honest with what’s not and being willing to change or even throw away elements is also important. Stack up wins and learn from failures. If and when you do break even think long and hard about what you will do with the opportunity that your temporarily infinite runway affords.
Book Plug! Christian’s book Growing Product People: Creating a Product Culture One Person at a Time is coming in 2021 from Sense and Respond Press . Thanks and looking forward to Q and A. You can find Christian online at Design In Product they also have a Slack community for people interested in the intersection between UX and product, if you’d like to be added please reach out!