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SEASON 2 - EPISODE 0028 - MAY 10, 2022 REWORK Revisited

Sell Your By-products (Season 2)

with Jason Fried and David Heinemeier Hansson
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Henry Ford turned wood scraps from Model T production into charcoal. That company is now called Kingsford and it’s the leading manufacturer of charcoal in America. 37signals was a small web design firm before it started selling the project management tool it made to communicate with clients. That’s now called Basecamp. No matter what you make, you’re always making something else as well and there’s probably a market for that too!

Show Notes

Transcript

Shaun Hildner: Welcome to REWORK, a podcast by 37signals about the better way to work and run your business. I’m Shaun Hildner and, as always, I’m joined by the co-founders of 37signals and the authors of REWORK, Jason Fried. How are you?

Jason Fried: I’m doing well. How are you?

Shaun Hildner: Wonderful. And David Heinemeier Hansson, how are you?

David Heinemeier Hansson: Good, good, Shaun.

Shaun Hildner: Fantastic. This week, we’re talking about selling your byproducts and I think maybe to start off, can you give us a refresher of how 37signals, a small web design firm, started selling project management software?

Jason Fried: Well, the recap is that, we built it for ourselves, initially. We didn’t intend to build a product for others, really. We were really busy, needed a better way to manage the work that we were doing. We were shooting emails back and forth, actually using Aim, AOL instant messenger…

Shaun Hildner: Awesome.

Jason Fried: To talk and it’s fine for a minute and then, you lose track of things, especially, as you get more work at the same time. So we built our own. Actually, the initial, initial early version of Basecamp was a manually updated blog and then, we eventually automated the whole thing and we went from there, but yeah, and then, it became something that was a product that other people could use and turned it into one of those and put a price on it and put it on the market and crossed our fingers, not really knowing what was going to happen, but had a good feel for it. And about a year and a half later or so it was doing more business for us than web design, so we stopped doing web design.

Shaun Hildner: When did you decide? What was that transition? When did you decide to start selling the thing? What was the tipping point, I suppose?

Jason Fried: Well, I think it was pretty early we had a sense that we were onto something. We can’t be that unique. There’s other companies like us who probably need the same thing and struggling with the same stuff, but I don’t know, we didn’t really think about the commercial aspect of it too early, but we, on day one, it was for sale. It wasn’t something we gave away for free for a year and then, decided to sell later. The moment it came out, we had three prices on it and a free, basically, freemium model, free trial kind of thing. Limited use set up. So that was baked in from the start, but it wasn’t the first thing we started to do.

Shaun Hildner: And so you start selling project management software and you stop the web design business. What was the next spinoff? What was the next byproduct?

David Heinemeier Hansson: I think the first thing, actually, right after, was we launched straight into doing workshops, the building of Basecamp workshop. I believe maybe even the first one we did before we’d gone full time. I’m trying to fully remember, but we just thought that that experience of launching Basecamp, which was launched at a time where SaaS was not a term. That didn’t even exist yet. That wasn’t coined until quite a few years later. The general way people distributed and sold software was they put it on a CD and they send it out to folks. Not that there weren’t other packages of software you could download over the internet, but this idea that it was a service running on someone else’s computer was a novel concept and we thought that the experiences we’d gone through building this SaaS business before it was SaaS was something that seemed so good, so obvious, in so many ways that this has to be the future and if this is going to be the future, we’ve been amongst the pioneers here. Can we, perhaps, help inspire someone else to do it?

David Heinemeier Hansson: And also, there was a lot of attention around it online. We had the Signal Versus Noise blog and lots of people were interested in it. What are you doing? What is this thing? So it just seemed like there was a market, right? We thought in the beginning of, then, do you know what? Could we sell at whatever 40 seats at a thousand bucks? I think it was a thousand bucks for a whole day, eight hour thing. Well, if we can do that, that’s 40 grand. Again, you got to remember the time here. This is, what, late 2004, early 2005. Basecamp is not pumping out millions here.

Shaun Hildner: Right.

David Heinemeier Hansson: Right? We’re hustling in the sense of the word, not using up all the hours, but trying to find the business where it is.

Shaun Hildner: Yeah.

David Heinemeier Hansson: Is there a good buck here that can be made selling something useful that’s a byproduct for what we’ve been doing? So the workshop really was the first thing, although, that’s not technically true. There was actually another book before we started writing books together that I suppose was done even before it was a product business, which was Defensive Design, which came out in 2002, three, something like that, which was also a byproduct book of web design, of the business before the software business that, “Hey, there’s a bunch of people designing things for the internet. They’re not really thinking about the stuff that could go wrong. Here’s a book about that.”

David Heinemeier Hansson: The business 37signals was already a bit in the swing of this, in the swing of the hustle of finding these other ways to, I was just about to say monetize, but I hate that word with a serious passion so I’m not going to use it, sell other things to the business and I thought that was just a fun start that really, actually, then, version two or version three became the books. So much of what was written in Getting Real were extracted from the workshop series building Basecamp.

Jason Fried: Yeah. I think the byproducts’ concept is not necessarily… It’s not releasing additional products necessarily. Although, Ta-da List was a byproduct of Basecamp.

Shaun Hildner: Sure. What was Ta-da List, real quick?

Jason Fried: Ta-da List is just a dead simple to-do list tool.

Shaun Hildner: It was the to-do list that was in Basecamp, right?

Jason Fried: Essentially, and then, simplified even more and whatnot. But yeah, I think the Building a Basecamp workshop is a great example and Getting Real, that book, and some of the other things, those are the real byproducts. They are the remnants of doing other work and you can package that together and there’s value in that.

Shaun Hildner: That’s the thing, right?

Jason Fried: Yeah.

Shaun Hildner: You’re already doing that work, so why not sell it?

Jason Fried: You’ve already done it. I think the key is, is to look and see what the byproducts are. Right? You can chop down a bunch of trees and you’ve got sawdust. Now, sawdust used to be just junk that no one cared about, but then, someone realized sawdust could be used for pet bedding or all these things and we can reassemble it into particle board and it’s that whenever you make one thing, you’re always making something else, at least, one more thing and paying attention to that and being aware of it and going, “Ah, there’s something here.”

Jason Fried: Now, sometimes, it’s just, literally, junk. There may not be anything you can do with it, but there is always something that you’re making at the same time and sometimes, that’s particularly valuable. In the case of the Building of Basecamp workshops, it was simply our experience. So we weren’t making a physical thing. We were learning something, which then, became valuable to others, which then, we packaged into a workshop and, essentially, shared all of our ideas and the learnings that we had. So there’s that and books are like that, as well.

David Heinemeier Hansson: What’s interesting about that is, it’s a flywheel effect, if you will. So we start doing these workshops, which satisfy a demand for our experience building the SaaS thing, right? That ends up building more of an audience. We ran quite a few of these workshops. Those people, in some cases, became even more interested in what we had to say, which cultivated a market for a broader version of that, which led to the books and then, by the time we’d done some of the books, we had cultivated a broader audience.

Shaun Hildner: Right.

David Heinemeier Hansson: Weren’t necessarily directly interested in the products, but were interested in our experiences building things because they were trying to build something else. Now, we had an audience. The audience, in itself, turned out to be a bit of a byproduct that we could then, sell things like a job board to. Right? Now, you have an audience of people in the industry that those people are highly sought after for employment by a bunch of companies. A lot of these things can just keep on going. You can have the byproduct of your byproduct of your byproduct.

Shaun Hildner: Right.

David Heinemeier Hansson: And all along the way, there’s ways of breaking this down more finely and turning this into something else and that these things then, feed together back into the original idea. “Hey, if we’re running a job board and companies are advertising here, then, applicants will go there and then, some might end up here who haven’t even heard of 37signals. They just go to job board because they’re looking for a job and then, we introduce them to the books and maybe they want to get on a workshop. Oh. And maybe they learn about the product and they sign up for that too.”

David Heinemeier Hansson: So that you have this flywheel effect where all the things you’re doing are helping all the other things you’re doing and they’re all businesses. Not all, but a lot of it is a business and you’re doing it not just on, “Well, I think 20 years from now that will pay off nicely.” Although, we also did those things, but there was a practicality to it that I think really helped shore up the business and actually accelerated in certain ways. In the early days, that kind of money, making 40 grand on a single day, because you got 40 people to show up to pay you a 1000 bucks and our expenses were… Our expenses weren’t basically there. We were reusing, by the way, an office we had already sub-let and we were just asking, “Hey, could we use it, basically, after hours or something,” and then, brought in catering. Right?

Shaun Hildner: Yeah.

David Heinemeier Hansson: Total expense is, what, 500 bucks?

Shaun Hildner: Right.

David Heinemeier Hansson: And we made 40 grand. Off something, as Jason said, we already had. These experiences we’ve already lived. We weren’t developing a complete curriculum from thought scratch.

Shaun Hildner: Right.

David Heinemeier Hansson: I remember, Jason and I would often sit… The day before we’re doing a new version. “All right, let’s run through it.” And then, we could produce eight hours of material because this was stuff we already had inside us.

Shaun Hildner: Yeah.

David Heinemeier Hansson: These were experiences. We were, basically, were like, “Oh, this was a problem we faced. This was the solutions we looked at. This is what we think you should do.” It was already there. And then, the profit margin on that 500 bucks worth of expenses, 40 grand worth of income. Pretty good.

Shaun Hildner: Right.

David Heinemeier Hansson: Right? So it actually mattered. Right? In particularly, in the beginning. Now, once you get at scale, certain things change somewhat, perhaps a little bit, but also, not that much. You look at the… REWORK, the book, sold over half a million copies. We’re still getting royalty checks that are like, that’s a nice royalty check. They’ll, if not pay for a meetup, then, pay for a lot of meals and meetups and so forth. So it can still be something that matters.

Jason Fried: Yeah. And to add to that, we still do this. So, Shape Up, which is our latest book, which details our process for building software is something we’ve developed over 20 years of trial and error and figuring it out and figuring out a unique, novel approach to doing this. We could have kept that to ourselves, but we wrote a book about it and we’ve put out some additional supporting materials about it and we continue to talk about it and we continue to do it and refine it and we answer emails about it and all those things. And Shape Up is free online to read. We don’t even make anything off that because it’s really more about let’s just share this methodology. There is a paperback book that does cost something, but, basically, it costs, essentially. But anyway, the point is that, that’s stuff that we learned and practiced and perfected, although, it’s not perfect, we put the time into putting that out, as well.

Jason Fried: And I think we’ll… We hope to continue to do those kinds of things as we move forward. I think that’s a big part of what we’ve always done and how we do things. David and I have talked about getting back into doing more of that. I think we used to do more of that as a company.

David Heinemeier Hansson: Yeah.

Jason Fried: Where we’d share more of the behind the scenes stuff and decision making and why we did this and why we did that and code reviews and design reviews and stuff. And I’d like to get back into that at some point, because it’s fun to do. It’s also just… It’s educational for yourself. Whenever you have to explain something to someone else…

Shaun Hildner: Right. Right.

Jason Fried: You learn something and it’s useful.

Shaun Hildner: Well, it seems much more difficult, at least, to me, to find these byproducts in the software world than, let’s say, you’re a lumber mill and you can see the physical byproducts everywhere. Do you have any insight into how you search for and find those byproducts in a non-tangible environment, like software?

Jason Fried: Well, I think, the first thing to recognize is that there’s almost certainly something there. God, Rails is a great example of this, right? Maybe David could talk about that, but Rails is really a byproduct of building Basecamp and look what that byproduct has done. Now, it’s not every day, you’re building a new programming framework.

Shaun Hildner: Right.

Jason Fried: By building something else, but there’s something and, at the very least, your experience is part of it. You get that every time.

Shaun Hildner: That’s free.

Jason Fried: How can you not? So it’s maybe nice to look there. It’s close at hand and you have it. Maybe it’s not valuable. Maybe it is, but it exists and then, it could be design approaches. It could be a framework for, a CSS framework of some sort. It could be a new novel way to design something, which you can then, share with others and write up your story about.

Shaun Hildner: Yeah.

Jason Fried: I remember when we first did Basecamp, we had this really novel feature, which still exists all over the web called the Yellow Fade Technique, which was whenever something changed on the page, this is in the early days of Ajax. So you could update something on the page without reloading the page, which was a novel, very novel idea in the early days of web design and the thing is, is that people didn’t expect that. Most people expected the page to reload. So they expected to see something different when the page reload, but when you didn’t have to reload the page and you just changed an item, like adding a new to-do or checking a to-do off, you had to highlight the fact that something happened.

Shaun Hildner: Right. Right.

Jason Fried: So we would highlight this, we’d blink this, the change, yellow, and fade it out to nothing, basically. That was something that we did and, “Okay, this is a cool technique, this is really useful. Let’s write this up on our blog.” And it became something that pretty much every other product used and many of them still do. We didn’t sell it, but we did it. There was something there. We codified it by writing it up and sharing it and explaining why it’s valuable. And then, that helped make other people’s products better that were unrelated to ours.

Shaun Hildner: Yeah. I think this will tie into Rails pretty well. It’s not always about selling to make money and, as David was saying, a lot of this comes back into the later chapter of everything is marketing. That these byproducts also help the main business, but, David, do you want to talk about the creation of Rails and what you did with that?

David Heinemeier Hansson: Yeah. I think that is a great way of framing it. You’re selling your brand here, you’re selling some goodwill or you’re buying some goodwill with these things you’re putting out in the world. What I often don’t get is, why would we not do it?

Shaun Hildner: Right.

David Heinemeier Hansson: Right? All this stuff is there. It’s just laying around. What do we get from keeping it secret? For example, Rails. I’d build all this stuff out that we needed to build Basecamp and I was like, “So let’s say we don’t open source it. What do we get? Is this some secret business advantage that’ll give us this huge, unique leverage that will then, put all competitors out of business because they don’t have it? Maybe a little self grandizing, if I thought that was true,” right? There were just other alternatives. This was a better way to do it. I believed very strongly in it in all sorts of ways, but it wasn’t like we had discovered some secret formula.

Shaun Hildner: Right.

David Heinemeier Hansson: That was just going to completely annihilate the competition because they didn’t have access to it or that it was something we really wanted to patent. Part of this is, I think, this whole idea of selling you byproducts both, whether you sell it for money or you sell it for brand awareness or whatever, comes, to me, naturally, as a participant in the open source community. We share the cool stuff we find. We share the cool stuff we build and the world is better when that’s how we approach work because I looked at all the things that I had gotten out of that. Right? Everyone else had shared all the open source that we couldn’t have built Basecamp without open source. There’s just no way.

Shaun Hildner: Yeah.

David Heinemeier Hansson: There’s no way that one individual, on the technical side, working at a small company that didn’t have massive funds could have built SaaS without open source databases, without open source web servers, without open source programming languages. If we had to pay licensees for all this stuff, it would just never have happened. We would never have gotten off the ground. So there’s that sense of it, but I think you also got to be careful not stretching the term sell too much. Sometimes it’s just sell. “Hey, you have something that’s valuable.” And in fact, this idea of, for example, our experiences, almost have a chance of having more of an impact because we have the confidence to sell it as a product. It’s the same thing where a company knows what to do, but they have to buy a consultant to tell them what to do because that gives them the permission to do the thing they wanted to do all along. Right?

Shaun Hildner: Right.

David Heinemeier Hansson: It has some gravitas, a price gives something gravitas. This isn’t just free shit. There’s also something to that and we have all these other things, but I thought there’s an aesthetic that I really like about, do you know what? This is coherent body of work, if you take the workshops. The eight hours of material we put in there, they were fucking worth something. There are a bunch of people, and I know this because I’ve heard from them, who walked away from those workshops, who had legitimately learned something that made it more likely that their business would succeed, that they would grow their business, that they would do something else where I’m like, “Let’s have a fair transaction here.” Right? Let’s have a fair transaction that we have some valuable experiences. We’re putting some work into presenting those in a structured way that you can turn it into something that makes a difference in your business and you’re going to pay us for that.

Shaun Hildner: Yeah.

David Heinemeier Hansson: And that’s how that should be, and that’s fair, and it’s better on both ends. It’s better even for the person buying it in certain instances that this is not free because it creates this obligation that I actually should pay attention. I should listen. I should give it a go because otherwise I’ve wasted my money and I don’t want to do that. So…

Shaun Hildner: Sure.

David Heinemeier Hansson: I’m in.

Shaun Hildner: Sure. Well, perfect. I think that’s a pretty good place to stop. We do have another listener question if you want to tackle that. This one was sent in by Abner.

Speaker 4: Hi. I just wanted to ask about some of the principles or heuristics you might apply when pricing your products. Also, does this fall under the bucket of making the call quickly in order to unlock more progress or just deciding what your product costs? One of those rare exceptions that deserve extra deliberation? Thank you. Big fan of the podcast.

Jason Fried: Very timely question.

Shaun Hildner: I know we were just talking about pricing last week too.

Jason Fried: We’ve been talking about pricing, David, and I, and Elaine, and a few other people here at 37signals have been talking about pricing now, for a few months because we have some new ideas. So Basecamp has, basically, been priced the same way for a number of years here, which is one plan, 100 bucks a month, unlimited users, unlimited projects, the whole thing, and we are ready to try something else and so we’re trying to figure out how to do that. What is the thing? What is the other thing? How do we test it? Do we test it? Who do we test it on? There’s a lot of questions. I think pricing is probably one of those things that does demand more…

Jason Fried: Well, I guess it depends, I should say, it depends on the state of the business and the scale of your customer base. It depends on a lot of things. If you’re just brand new, I would just go with something and if you’re just still small and it’s not really going to affect that many people, I would keep going with things. I wouldn’t overthink some of this stuff, but at our scale now, we have to. We have thousands and thousands of people signing up every single week for Basecamp. We have tens of thousands of paying customers. We have the existing base, we’ve got new people. We’ve got people who don’t know us at all. Tomorrow will be the first day they’ve heard of us. There will be others who’ve heard of us for three months and have been considering and contemplating and they have a price in mind in their own head and there’s a lot to it. So I do think it has to do with timing, and scale, and also the cost of change.

Jason Fried: So if we wanted to go to, let’s say, a per seat model, Basecamp is not built that way. Basecamp is currently built with unlimited users. So if we want to test per seat, it’s not as simple as just putting a new price up on the website and changing some stuff in the back end. It’s revamping the product in some fundamental ways.

Shaun Hildner: Right. Right.

Jason Fried: So, there’s a lot to it. I guess, my instinct, though, in general, is I’d rather just try something than sit on it for too long and not really know if it works or not. The only way you’re going to actually know is by trying it. I don’t think that you can really ask people if they’d be willing to pay X for Y. The only way to know for sure is to make them pay X for Y and see if they do it.

Shaun Hildner: And see if they sign up.

Jason Fried: So that’s my quick take.

Shaun Hildner: Right. Right.

David Heinemeier Hansson: I’d say one heuristic we used in the early days, in particular, was this, would I pay for it? Would I pull out my credit card if someone else was offering this product? And, obviously, your biased, this is your own baby, to some extent, but we’ve had products or pricing schemes for products that failed the test. We used to have a separate product. Well, the product still exists, but we don’t sell it anymore called Campfire.

Shaun Hildner: Right.

David Heinemeier Hansson: Which was basically Slack, 10 years before Slack, and the original pricing model we had in mind for that was a per room model where we pay a small sum, I think five bucks or something, to start a single chat room and we thought of it, “Hey, if you have a client, this would be a limited time chat room you’d have, and you’d pay it on a single basis.” And we got fairly far along with that idea, until, I guess, we just thought about, “Actually, would I put my credit card out to buy a piece of software for five bucks as a one off like this? And we’re like, no, it wouldn’t. Okay. We can’t sell it.”

Shaun Hildner: Yeah.

David Heinemeier Hansson: If we don’t want to buy it ourselves, we can’t sell it. So use that as that first gauge and trust that initial gut reaction that you have that thing, and then, you want to rationalize it for why what you’ve thought about actually works, but your gut will tell you whether that’s true or not. And then, as Jason says, particularly early on, it’s pretty easy to test. This is not a permanent decision.

Shaun Hildner: Right.

David Heinemeier Hansson: It becomes harder to change once you have, as we do, literally, 20 years of legacy and a gazillion customers and then, there are more mechanics to it, but even then, it doesn’t have to be that impossible. We had a phase, I think, shortly after becoming Basecamp in 2014, where we went a year and a half and I think we tested maybe 12 different price points.

Shaun Hildner: Right.

David Heinemeier Hansson: All sorts of different combinations. We were adding plans. We were removing plans, all sorts of stuff to find the optimal place to be and what was interesting with that was those initial prices we had based just on our gut, right? “Eh, would we pay? Does this seem reasonable? Does this seem fair?” They were actually pretty good in the sense that there was a substantial amount of price elasticity.

David Heinemeier Hansson: If we were changing the prices, we’d see a change in inside numbers on where you go, “Huh? I thought it would’ve been easier.” Right? This was one of the things. We’ve never tested these prices before and we walk in and we do a bunch of tests and I’m just expecting, here’s a free 20% increase on the business. Right? It should be easy, right? Like low hanging fruit. And after I think, nine months or a year something, we were like, “Huh, damn it. This wasn’t as easy as we thought.” But then, later, when we went to the single price, we did make a huge leap. We did, again, test it before we announced it and so forth and that, at least, at the time, and at the moment, it was quite clear. Okay. That worked. Going to a single price that was essentially higher, at least, at the moment, we made more money overall. But hey, you get to change your mind. Particularly early on. How many customers do you have? Do you have a thousand customers? Do you have 10,000 customers? Oh, man. Life is easy.

Shaun Hildner: Right. Right.

David Heinemeier Hansson: When that’s your scale, you really get to just change the speed boat any minute you care for.

Shaun Hildner: Well, perfect. Well, thank you, Abner. If anyone else out there has any questions for David or Jason, leave us a voicemail at 708-628-7850 or record a voice memo on your phone and email it to hello@rework.fm. And that will do it for this week’s episode. Next week, we’re talking about when to launch and spoiler alert, it is early. And I hope to talk to both of you about that next week. For now, I want to say thank you, David Heinemeier Hansson.

David Heinemeier Hansson: Thanks, Shaun.

Shaun Hildner: And thank you for joining me, Jason Fried.

Jason Fried: Thank you, Shaun.

Shaun Hildner: We’ll see you next week.

Shaun Hildner: REWORK is a production of 37signals. Our theme music is by Clip art. We’re on the web@rework.fm where you can find show notes and transcripts for this and every episode of REWORK. We’re also on Twitter at REWORK Podcast. If you’re following along with the book, next week, we’ll be discussing the chapter, Launch Now. And if you like the show, I’d really appreciate it if you would leave us a review on Apple Podcast, Spotify, Overcast, or wherever you’re listening to this.

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