How to Get Your Customers to Fund Your Product
Let me tell you a story of how a marketing sweatshop turned into a software powerhouse.
We have to go back in time a bit, to when I was part of the leadership team at a marketing services company. The services we provided were telemarketing (I know, yuck), email campaigns, and direct mail. We served a niche market. Of course, the more campaigns we did the more data we aggregated — and all this data was going right to clients. In fact, the data sets got so big that clients really couldn’t deal with the volume and it started to create some communication and collaboration challenges.
What our clients and our agency both needed was a tool that didn’t exist — but we didn’t have the resources to build it immediately. This is our story of getting getting a customer to fund the development of our product, which could also be a viable option for your own funding if you can’t bootstrap it or get investment funding. You also may not have to give up much, if any, equity. Here is a little of my experience in getting a customer to fund your product development.
Into the Data Mines We Go
The challenges weren’t just the volume of data — it was its complexity. It included all of the downstream actions our marketing campaigns generated. Customers needed to get qualified and scheduled for appointments, which meant schedule coordination and management. There were reminder campaigns, if-then campaigns, and entire processes that kicked in depending on the actions of a visitor. How could we easily get every client to understand the effectiveness of strategies it took us years to perfect?
This mess screamed for an application to make things more effective. We looked at existing solutions to see if we could customize something to our needs, but after evaluating over 50 applications — we had no luck.
We had a dilemma: the only way to fix this problem is if we built the solution ourselves.
We didn’t have the money to develop the product, and we didn’t think we could raise investment capital because our product was so niche: probably 200 potential clients worldwide.
What we did have was conviction: we knew that if we created this tool, it would be highly profitable, would differentiate us, and would increase the value of the company substantially because we wouldn’t be just a marketing services firm. We would now be a software company with marketing services.
Transforming Customers into Backers
At the time, one client was 30% of our business. They knew the data challenge well, and were part of many conversations about the necessary software. They were engaged, supportive, and interested from the beginning.
Then came the epiphany: why not ask the large client to fund the development and become partners with us?
Our pitch was simple. In essence, the client had the same challenges we did and they would also receive significant value if the application existed.
We proposed a deal: an investment of about $250,000, and in return they would get to use the application for free. We sweetened the deal a bit more by offering a share of revenues on any copies sold until the company recouped its investment, followed by a royalty on all future sales. The value proposition of the software and the long-term financial offer were so compelling they agreed after only a couple of meetings.
Building a True Partnership
One of the added benefits of having a client fund and be invested in the software was their ability to be a market maker. Our client booked speaking gigs at industry conferences talking about our product and how it was growing their business. The exposure and credibility was incredible, helping our software generated almost $1M. We couldn’t have predicted the value the client would have in helping to market and sell the software.
Having a customer fund your product development might be an option worth considering if you have some well-established customer relationships or you can form a customer advisory board where multiple companies are funding you. You might discover, as we did, that you not only get funding, but you get an invaluable market maker.
Originally posted on www.startupgrind.com.