One of the more interesting books I read lately is the lean startup by Eric Ries. I will probably not do it any good by trying to summarise it for you. But let me try to explain what I have found most interesting and relevant.

Eric discusses leap of faith assumptions, the kind you make about what consumers really want or what problem you think you are solving. Two kinds of assumptions include the value hypothesis and the growth hypothesis.

• The value hypothesis tests whether a product or service really delivers value to customers once they are using it.
• The growth hypothesis tests how new customers will discover a product or service.

I wanted to start with the 2nd one - Are we able to find enough customers to sustain our business?

Let's not kid ourselves when I decided to start Nominal the market was long established with the two main players doing business in this country for more than 20 years. This is not exactly a smart place for tiny startup to try it's luck, but that's another story for another day.

For now we want to gather some information and make some informed decisions.

The good thing about our market is that we have a few public companies as competitors, which means I could find all kinds of interesting information about the market size and growth. My research based on revenues of the two biggest companies has estimated the total yearly sales for small business accounting software at around 180M per year. This is probably not accurate but it is enough to start with.

One of the best things we managed to do is to position ourselves with very good Google organic results as the 2 or 3 listing for "accounting software" and other related keywords. This is currently our main source of visitors, leads and customers. But the number of visitors cannot account for the number of sales made by MYOB/Quicken, which probably means online visitors and sales is not accounting for the majority of their sales.

To help me understand the growth potential of our own company I have decided to look at how Xero performs, Xero is undoubtedly one of the most recognised online accounting vendors in the world and certainly in Australia. And although I am not a big fan of online accounting services I do recognise that their product is good. One thing is for sure, Xero makes the most amount of noise/buzz and their growing tribe is making accountants look like groupies (in a good way) - which is probably at the heart of their system.

So let's look at some of Xero customer and account numbers from their publications:

One thing that blow me away when I saw these numbers was not the 5 fold increase in 4 years (they spent a LOT of money to get there). It is the fact that they 25% conversion rate from users to customers. 25% means that one of four people that uses Xero decides to start paying for it and considering the fees are around $600 per year - this is not an easy decision for some people - but the experience must be so good that they open their wallet and pay. ( I am sure some of the decision was made even before they typed xero in their browser, from word of mouth, their accountant, forums etc )

Looking at the actual number of customers we can see the growth over time:

And on average about 68 new customers PER DAY - that must feel nice.

The last bit of the puzzle is how much of business is Xero doing in Australia - which is what I am interested in. Xero didn't fail me on this one and provided these details:

Xero by Region 30/09/2011 30/09/2010
New Zealand 4.6 61% $2.50 71%
Australia 1.8 24% $0.50 14%
United Kingdom 1.1 15% $0.50 14%

Xero are growing rapidly in Australia and 24% of their income for that period came from Australia.
So we can assume the number of customer per day in Australia will be about one quarter of the total.

 

With the average 16 customers per day - I am not sure why the big gaps between lower and higher numbers, I would think that the growth should be mostly increasing, but perhaps I am missing some of the figures.

One more thing I could learn about Xero is the estimated number of unique visitors to their website:

Do they have more than 2100 unique visitors per day in Australia? Where are all those people coming from? I wouldn't think that organic search can bring in that many people. I also know they must be spending a lot on ad words - just because I see their ad every single day. (but I don't click on it, don't want to waste their money )

We can estimate their user conversion rate from these numbers. The conversion rate is the number of people that register for free trial (to become users) as a percent of the unique visitors in that time period.

So we estimated the number of customers per day in AU at 30.3 (on the last month). The number of users will be about four times that at 121. The visitors per day should be around 2110 and hence their conversion rate is 5.7%

That's not too bad (we actually do better) but not as brilliant as the 25% conversion.

So what did I learn today? that our website has a good conversion rate. That we can do much better in converting trial customers to paying customers. I thought I knew all of that already, but now I feel better that I have read a book and implemented a new way to look at things.

The 2nd thing is that Xero has ~2100 visitors per day in Australia, they are not exactly spot on my target market - but they are there.

I need to learn how to drive these kinds of numbers to our website, which is the whole point of online marketing. (another book another day)

Another important lesson learned is that most of Xero visitors are not coming from organic search, so where are there coming from and can I do it as well? and more importantly the number of sales that MYOB/QuickBooks are making is not coming from their organic search and probably not even from their website. This means that strengthening our channel is a priority.

Hopefully all the calculations and measuring have not scared you off by now and maybe you can even have a look at your own leap of faith assumptions. These assumptions are at the heart of your business and you need to verify them as soon as possible.

Good luck with your business!