Fireside Chats with Fiery Entrepreneurs – Part One, with Michael McDerment, CEO, FreshBooks

I am pleased to present Part One of Fireside Chats with Fiery Entrepreneurs™, an exclusive, six-part series of candid one-on-one conversations with some tremendously talented and successful entrepreneurs from a variety of different industries. The overall objective of this series of chats is to allow you to get a glimpse into how these entrepreneurs approach business planning. I am respectful of your (my readers) time, so I’ve limited the number of questions to six (I really tried hard to keep the list down to five, but simply couldn’t knock any of the questions out as I felt they were all important).

For Part One of this series, it is my pleasure to have spoken with Michael McDerment, Co-founder and CEO of FreshBooks, a Toronto, Canada-based online invoicing company. FreshBooks serves over 800,000 users worldwide and recently made Entrepreneur magazine’s list of “100 Brilliant Companies.”

I have a deep admiration for FreshBooks, not only as a customer (I’ve been using the service for close to two years), but also as an entrepreneur. I believe it is very important that emerging, entrepreneurial companies not only provide terrific customer service, but also position themselves in ways that help them stand out in a crowded marketplace. FreshBooks hammers both of these principles out of the park. To give you an example, a few years ago a FreshBooks customer in Fiji lamented the fact that he couldn’t purchase Triscuits in that country.  In response, the FreshBooks folks in Toronto promptly delivered a carton of Triscuits to his door to cheer him up! In my opinion, this epitomizes FreshBooks’ overall business philosophy: these guys simply go out of their way to please their customers – and have fun doing it. What is more, delightful marketing tactics such as this get customers talking about FreshBooks in a positive light, help spread the word and solidify FreshBooks’ market position as a fun company that obsesses over its customers. The key lesson learned here is this: FreshBooks’ way of doing business could work for any company, including yours.

So without further ado, let’s get right into my chat with Mike.

Faheem Moosa: Mike, thanks for taking the time to chat with me. In your opinion, what are the best ways an entrepreneur can research and understand his or her market?

Michael McDerment: I have a couple thoughts there. Really there is so much you can do on-line now – studying public market comps, SEC filings or a prospectus or reports by analysts is a good way to learn about a market.

The best of course is if you know the market through past experience and it’s not a figment of your strategic and theoretical mindset – a market with which you are intimately acquainted.  I say that’s the most important one of all because sometimes you’re unlocking a new market or building a new category and when you’re doing that, there’s nowhere to go for the data you’re looking for. So the point there being is that if you have some kind of experience with that market, you just may have a gut-feel as to its size and the fact that it’s being untapped or under-served and may choose to pursue it despite the fact that you can’t find (data) out there in the marketplace to validate what you intuitively know.  And that’s not going to be a problem until you try to raise outside financing.  At which time the trick then is to find (investors) who share the same conviction about that market.  Maybe they’ve made an investment in a related space or what have you. A lot of people just won’t believe in your market – sometimes they’re right but other times they’re not.

FM: When there are several growth opportunities ahead of you, what criteria do you use to analyze those opportunities and place your bets?

MM: Customers.  Customers lead the way, so constant tight feedback with customers is key.  I have said this lots of time but customers actually hold all the answers.  Sometimes they don’t even know what they’re saying, but if you listen right and you listen to enough different customers, listen to their needs and not the features that they want, they possess all the answers and will lead you in other places. Frankly I would say if you’re blessed with a little vision as well, you may deliver something to them that they never knew how to articulate. You can’t take your customers literally. You need to listen to their pains and envision something that delivers what they need – not what they say they need. That takes a bit of vision from time to time. But it should still be rooted in what your customers are saying. Or alternatively, if you have a vision (of your own) and your customers are not hinting at the need for (your product or service) you’re probably building the wrong thing.

FM: Do you think it important for young, entrepreneurial companies to have a well-defined target market and value proposition? Why?

MM: I think it depends. I mean, yes you need to have a value proposition and you need to – as quickly as you can – find some way to quantify that.  Trouble is you need to have at least a prototype where you can talk to users to get there.  At least have some sample people who are willing to try out your (product or service) so that they can articulate it. While you can guess and run tests to determine your value proposition, I just don’t believe in that kind of thing.  I believe it when customers or users or people out in the world tell me that unsolicited.

As far as determining your target market – you’ve got to have somewhere to start, but your target market may not prove to be the one you thought it would be. So you want to start spending your dollars in a focused area but I think you have to keep yourself open to the fact the people who really start using or adopting your (product or service) might come from left field from your point of view. And you’ve got to talk with them and understand that and maybe you want to shift that target market based on what you learn once you’re out there.

FM: Describe your philosophy with regard to spreading awareness about your company. How do you recommend entrepreneurs approach and plan this task?

MM: It’s not easy. I think, again, go back to your customers. First, build your marketing plan out of supporting your customers. The thing you need to do there is determine the benefits of your service in the eyes of your customers. Don’t ask them what features they like best. Literally ask them, “What would you say is the biggest benefit of our product or service?” And they’ll tell you that. And it might not be what you think it will be, but if you hear it enough times from enough people, you realize that they’re right and you’re wrong. And once you know that – that’s your value proposition. That’s the foundation of your marketing, because if you don’t have some value to offer to the market or if you get your value proposition wrong or if people say it’s something else, you’re going to be missing out. There’s going to be a mismatch there and people are going to figure it out and the wheels will fall of.

And I’m a big fan of service and just taking care of the customers you have because chances are you can either sell them more stuff or they’re more likely to refer more people to you. So I would start there. Customers will also give you new ideas for new products or how you can evolve what you currently have. And then once you have all of that, I think it’s all about finding ways to get your story out there. There’s some very economical ways to do that these days through things like a blog. Focus on telling your own story. If you’re not good at crafting that, think about engaging some PR help. But it’s really hard to get the ROI on PR help in a lot of cases unless you have a pretty good sized cheque to write.

I didn’t even know how to tell a story a long time ago. I think I’ve got it down now. But I can’t overemphasize the importance of knowing how to craft your stories. I sort of figured that out through trial and error, despite the best efforts of people to tell me what would work.

Also, I think the web’s awesome for test marketing. Not every product can be best sold or distributed online, but you can do things like pay-per-click or targeted ad buys that don’t cost a lot of money and you can test response. I think you can do some incredible primary research there at very low cost, and I encourage any entrepreneur to try and do that.

FM: What are the key factors for success for running and growing a profitable web-based company with a ‘Freemium’ business model?

MM: I think it comes down to understanding the economics of the business. Converting people to trials, understanding their needs, delivering a feature-set that converts them to paying customers and then working hard to ensure that feature-set retains them for a significant period of time and gets you a return on the cost to acquire them and serve them over that period of time.

FM: What do you feel is an entrepreneur’s biggest challenge when it comes to implementing a business plan? How can entrepreneurs be successful at implementation?

MM: I think it totally depends on the entrepreneur. A business plan written by a management team or entrepreneur who’s done it before is more likely to be executed on and to be quasi-realistic or have some kernels of truth. I’m not a huge fan of the detailed business plan. I think it’s a good exercise to go through as it forces you to think of a framework with which you can look at the business, communicate it and know what to track. But I’m of the opinion that once you get started, throw the business plan out the window.

I’ll tell you what we do. We’ve written detailed business plans and talked about the markets we are looking to address and that kind of thing in the early days. We haven’t written one of those things in a long time and don’t think we are likely to in the near future. But we do have a financial model we use to guide the business. And I think that that is actually perhaps the most valuable tool you can have. Just to understand your conversion rates and your expected sales and what have you. You’re going to get the numbers wrong when you start out. But if you have that framework in place, it’s going to force you into some structured thinking. And it’s also going to encourage you and give you a way to understand what’s important for you to track in building the business. It could be just as simple as leads or closing or average ticket price or whatever it is. But a lot of entrepreneurs – especially those just getting started – may be so excited about a product or an opportunity that they may not even think in that way. And I think it’s important that they get some sort of discipline around that.

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For an analysis of this interview, click here.