My Accidental Entrepreneurship - Picking the Right Business Model and Pricing

In my previous post (The Beginnings of My Accidental Entrepreneur Journey), I discussed how the idea for a small software solution came to me. After I had decided to monetize it, I needed to think about the specific business model.

My software in a nutshell

To set the stage, here's what to know about my software: it was a plugin for a specific accounting software. It wasn't too complex but solved a severe problem, eliminating countless hours of mundane but error-prone work. 

It took the transaction details from the clients' banks, looked up the invoices in the accounting software, matched them, and prepared a file that the accountant could import. Piece of cake.

Value for money

Most accountants calculate their fees by adding a constant amount for mandatory tasks and a variable amount based on the quantity of the invoices and bank transactions the clients produce. It was not an overstatement to say that this solution could disrupt the whole SMB accountant business segment by reducing this variable, manual work; even sole proprietors could take multiple more prominent clients, like webshops that were booming in 2020.

The landscape

Disclaimer: The business was in Hungary, but I converted the prices to EUR for easier understanding.

I knew my potential customers had anchors for the price they would pay for such software, so I analyzed my market research in detail.

The accounting software (let's call it TAS from now on) was dirt cheap compared to its competitors. Its creators charged a one-time €200 fee and a €40 per year maintenance fee, and they dominated the Hungarian SMB accounting space. However, they were always busy keeping up with regulatory changes, so this opportunity to create additional value remained open.

Existing competitors - business models to beat

By the time I entered the market, there were three main participants. Their solutions were entirely different:

• Competitor A had multiple Excel sheets with VbaScripts.

• Competitor B offered a complete ERP solution that could work with TAS.

• Competitor C, who built a SaaS connecting with more than ten different accounting software, had the most significant market share.

They all charged a monthly fee based on the number of banks or clients they supported or the number of transactions they processed, with a minimum threshold. Moreover, Competitor C even charged a one-time registration and onboarding fee, additional sums for more users, and different email or phone-based customer service tiers. So, depending on the solution chosen, an average customer would pay from €25 to €250 per month, with an additional €200 upfront cost. In reality, only the last, most expensive competitor's product was usable.

Safe to say, the market was not at rest with a standard business model but rather in its storming phase. Spending 10-to-100 times more than the base product monthly on a plugin seemed crazy.

The dynamics of developing a business model and navigating the business landscape - Generated with DALL·E

My evaluation

Deciding on the basics

Since the accounting software was a desktop application, I also decided to develop a desktop application. This also saved me from cloud costs and the need to create a robust but cost-efficient architecture.

I wanted to build a subscription-based business because the software needed constant updates and used various inputs from different providers, which changed almost daily. 

I had a few additional primary drivers in mind when I thought about my approach. 

• I wanted to charge a fair price, which justifies the work I put into this endeavor at nights and weekends while I keep my regular job.

• I wanted to build a service I would gladly use as an accountant.

• I wanted the business to be as simple as possible.

Inviting them through the door

Free trial

The first thing I decided was that I wouldn't charge a registration fee. Instead, I offered a 30-day unlimited trial that I extended if the customer couldn't make the time to test out the software. I didn't require a credit card upfront; I just needed a registration with billing details and a phone number.

Free, personalized onboarding

We scheduled a one-hour free onboarding call within hours after registration. Some companies automate their onboarding with videos and popups in the software. Some use a prepared dataset to show the main features. I took a hybrid approach: I recorded a video that went through all the main features and placed it on the landing page. In the registration confirmation email, I urged the customers to watch it again and pick one of their clients to test the software with. My customer representative held the onboarding on the customer's computer with screen sharing. With their help, customers could process their first datasets and load them into their accounting system. We could ensure the customer had their "aha moment" within hours after registration, and we built a genuine connection.

Unlimited customer service

Limiting how customers could reach them was a bad practice at our main competitor, in my opinion. If a problem appears, it mostly happens when the client is in a hurry. So, I wanted to avoid creating tiers for whether they could get us by phone or email. To go one step further, knowing the customer base, which consisted mainly of 50+ year-old women with modest computer knowledge, the primary line of communication was the phone.

Results

These could all seem counterintuitive: spending this much effort on a non-paying customer and letting them nag us over the phone. However, the results were even better than anticipated: we had a 70% trial-to-paid conversion rate for the first year, and the customer representative never worked more than 20 hours weekly. Most of that 30% didn't go through the onboarding, tried the software themselves, then left or haven't even installed it. So, onboarding was the critical success factor.

On the matter of fees

Quantifying the added value

I considered all the possibilities for calculating the monthly service fee.

As mentioned above, the accountants used the number of transactions handled as a metric to calculate and justify their costs. So, if the client's business grows, they can charge more, right? So, I can incorporate expansion revenue in my business, too, right? 

The sad truth is that most clients view accounting as a necessary evil and wouldn't want to pay more for the "same service." They would even argue to spend less after they learn that their accountant reduced the work hours needed by half or more. One other side-effect I envisioned is that customers would optimize their usage, only using their quota for the more complex data, and eventually cancel the subscription when that complex client leaves. I wanted them to get hooked and use the software for all their clients, even the smallest ones. I wanted resiliency.

To tier or not to tier?

The last thing to contemplate was whether to have tiers at all. Should a sole proprietor really be expected to pay the same as a firm with five accountants? Or should I base it on the number of clients? Nothing seemed right; it was tough to draw a line.

Instead, I changed my perspective. I decided to charge a €57 monthly flat fee that was low enough that a single accountant could afford it but high enough that it advertised its intrinsic value. It was much cheaper than the most significant competitor's price, and it served me well: together with the free trial period, it was easier to convince people to at least try out my solution. I decided to monitor my customer base and introduce tiers only when it would make sense.

Conclusion

Examining existing solutions, I realized that I am only against one heavily overpriced competitor, most certainly because of their high maintenance costs and, of course, their monopolistic position.

I entered the race with a more reasonable price, a customer-centric mindset, and a better software solution. Of these three differentiators, I considered the lower monthly fee less important in my early success. Instead, I worked tirelessly on creating a better user experience. But was I right, eventually?

I will write about it in my post, Building With the Exit In Mind, telling you how I realized it's time to sell.