Why we shut down a product that was $75,000/year profitable

http://wildbit.com/blog/2012/01/26/why-we-shut-down-a-product-that-was-75000year-profitable/

by alexknowshtml • 14 years ago

227 77 14 years ago

wgx• 14 years ago

Reminds me that there's a good failure and a bad failure. A good failure is over and you move on, hopefully with some learned lessons. While a bad failure is doing just well enough to be kept 'ticking over', and you're stuck working on something you don't really believe in.

bluedevil2k• 14 years ago

After reading the article I have to question whether it really was profitable. I think one of the mistakes that coders (and most business owners) make is to value a profit solely on the accounting values: (income from the application) - (direct expenses of the application).

However, the true way to value profitability is to take a more financial perspective (financial being different than accounting). A financial perspective would value the opportunity cost of working on this application compared to working on another application. If the team spent 10 hours a week on the application, and those 10 hours a week could grow their other products by more than $75,000 a year, then of course the application isn't profitable. It's actually losing money.

Another way to look at its profitability is to look at it from an operational standpoint. The employees on the team would be consider a fixed cost (yes, they could hire more people, but that just changes the fixed cost). The limited resource for this particular fixed cost is time, and from their article I can assume that their time was maximized (working as many hours a week as they wanted to). Operational theory says when a fixed cost is at its maximum utilization, higher marginal profitability items should be prioritized. Basically, they are better off working on other items if they don't want to work more hours.

brador2• 14 years ago

I agree on the point of questioning it's true profitability figure.

If it was profiting @ 75K a year, thats half a designer, half a marketer and half a programmer for a year. Hire them in, and let them do what they like with it for 6 months. Get interns and let them have a play with it if you want to give some kids a chance.

It's usually a bad idea to shut down a profit center, unless it truly is unsustainable. @75K this was doing well and IMO should not have been shut down.

sunahsuh• 14 years ago

Cut those employee time figures by half -- FT employees cost a company about twice as much as the base salary. And even then, your designer and marketer figures are way low, even in a city like Philadelphia.

rhizome4• 14 years ago

You're valuing a designer, marketer and programmer at $50K/yr each?

alexknowshtml5• 14 years ago

Natalie, who wrote the article, asked me to share this:

"Thanks for commenting. You are spot on, we weren't profitable in many other ways. The time we were spending on Newsberry could, and does, bring more profitability on our other products. In our opinion at Wildbit, half of an anything is not worth something. We don't build half-projects, and we don't put interns to work on them. But for many, it's hard to turn away $75/year."

googletron2• 14 years ago

I am not sure I understand, exactly what you are saying here. I am sure you guys could have devoted a day a week to find out what was lacking in Newsberry and make it better. Creating value rather than just destroying it. You said you were a company that prides itself on design, detail and quality, so why not make an existing profitable application better and reap the benefits from that effort.

Totally doesn't make any sense. Idealist for sure.

lbotos• 14 years ago

Do you know if there is any plan to open source the code?

SilasX• 14 years ago

So, someone who doesn't understand how to speak about profit correctly describues what happened under an eye-catching, surprising headline that turns out to be completely inaccurate and unsurprising.

Great story, guys. Let's see more of these.

mapster• 14 years ago

For a small firm, cutting excess baggage and focusing on star products may be better for profits and moral. On the other hand, if the culture is that of a tenacious startup, showing a fighting attitude may be a great way to lead.

badclient3• 14 years ago

It's called a catchy headline.

vacri• 14 years ago

I used to work for a company that did about $35M/year turnover, had cash flow problems, and the CEO was yanking money for himself wherever he could, so we had endless 'we need to tighten our belts' speeches. The Service Manager left, tired of being a punching bag, and he wasn't replaced because 'we don't have the money' (CEO's pet project had nine developers on it...). The reasoning was that he doesn't do much more than a support engineer, and we're handling the load fine. The braindead reasoning, that is. It was the Service Manager who organised and chased up the support contracts, worth over $600k in our neck of the woods. We were a medical device company, so we had to keep supporting our gear, and we had customers ringing up begging to pay contracts because they didn't want to be left out in the cold, but there was no-one to prepare them.

Eventually, a year later, the overtaxed sales staff were punted the job. The sales guys were fantastic at sales and very personable, but there's a direct conflict of interest between sales and support contracts, especially when they don't understand the cost of supplying it.

All because the only things the CEO could see were his pet project, the projected sales figure, and any possible way to vacuum money into his pocket (he owned 2/3rds the company, so its long term health was actually in his interest...)

jroseattle• 14 years ago

Sounds like a very well-reasoned decision, one I would agree with if in the same situation.

I'd call the entire premise a success (not Newsberry per se, but in light of other product development.) Great recognition of where the product was going and where limited resources should be directed.

danko• 14 years ago

This is a classic microeconomics case study in opportunity cost and externalities. From an accounting perspective, yes, money was coming in that exceeded expenses in labor and overhead. But the opportunity cost of the effort to support it -- as well as the negative externalities caused by the distraction effect (as well as the negative impact it may have on their brand) -- means that the $75K figure is more of a canard.

If I was a Microecon professor with a 101 class coming up, I know I'd have this article spiked and ready to use for an upcoming semester.

googletron2• 14 years ago

If I was Marketing professor...

meric• 14 years ago

Finance professor: In finance you calculate "Net Present Values" of project and you take every project with an NPV > 0, if they aren't mutually exclusive.

In this case it is arguably a scale problem. You have the company being only able to concentrate on one thing at a time, and even though the product is profitable with NPV > 0, there are better projects out there to take with an even bigger NPV, even if the rate of return might be reduced.

It's kind of like you have a block of land, do you want to setup a park that charges money to enter or build a skyscraper? The park has a 200% rate of return and the skyscraper only 15%.

mgkimsal3• 14 years ago

I rather question the customer service aspect of all this.

I'm not sure I'd dig my electric company cutting off my electric service just because they felt they could be more profitable somewhere else and didn't "believe" in my service anymore. Service that I've paid for, come to rely on, and have integrated in to my business.

Selling this or partnering with another company to transition accounts over to them would have been better. Maybe they did that and didn't mention it in the article (or I missed it).

Yeah, I get it. You're entrepreneurs and want to "have passion" about what you do. But.. WTF - people are paying you for something that they obviously want, and you just shut the accounts down - with or without notice, I don't really care. How do I feel now about postmark? Will you still have passion for it in 15 months, or will you decide beanstalk is more profitable, and shutdown postmark? regardless of what is said now, making decision like this is emotional (read the language of the post) - emotions will change next year.

"Selling would have involved a lot of effort and time, and we just needed to focus on our products that were growing. " Don't you think the existing paying customer deserved that bit of respect for you to put the effort in to selling, and ensuring their continued success as well?

Puzzling a best - disconcerting to say the least.

EDIT: http://help.newsberry.com/kb/subscribers/transferring-subscr...

There's a help link to transition to campaign monitor. Fine that's there, but the language of the post still seemed to ignore the needs of the existing users, and focused their decision solely on the feelings of the people running the show. Let's hope they always feel positive about postmark, otherwise you'll be seeing 'transition from postmark to xxxxx' in their help pages in the next year or two.

cnagele• 14 years ago

Hi there. Chris here from Wildbit. I want to make sure I clarify some points.

A big reason we waited so long to shut it down was leaving our customers stranded. Even at such low revenue, we owed everything to them for allowing us to get our first product off of the ground and finding value in our service for so many years. It was a VERY difficult decision.

We did not make a move until we had a very good transition process for all of our customers. We set up a partnership with Campaign Monitor so each customer could easily migrate their lists and avoid any downtime in sending emails. Sure, it is a pain to export and import lists, but there are many good options out there such as Campaign Monitor. If your electric company shut off your service you would surely be screwed, not really the same case here.

Regarding Postmark, this should make you feel even more confident about it. We've seen amazing growth and our team is so passionate about Postmark that we decided it was worth giving up profits on Newsberry to make it even better. That says a lot about our commitment to our other products and our focus as a team.

In the history of Wildbit there were many times when we could have just added a few employees to keep profits going in one area while we worked on something else. A perfect example is when we decided to drop consulting to focus on products. We could have kept it going along side of products, but focus is everything in business if you want to create something that people really love and enjoy to use.

alexknowshtml5• 14 years ago

In addition to Chris's point, when we reached out to our customers about the decision, we gave them time to transition, and assistance in the transition plan.

I didn't personally speak to every customer, but many of the customers were understanding and in some cases, very supportive of the decision. The produce hadn't gotten new features or much more than maintenance in over a year. They appreciated our honesty and perhaps more importantly, our empathy for the situation we ultimately created for them.

mgkimsal3• 14 years ago

thank you for the clarifications. those weren't as evident in my reading of the original post.

i understand this was no easy decision, but I do feel the original post was far more about your emotional decisions behind it, and not enough about the existing paying customer perspective.

thank you again.

mvkel• 14 years ago

Profitable or no, profit is really irrelevant in this situation. If my company is making $100K/year and I only spend $25K on myself and I'm the sole employee, then technically my company is "profitable," but it's essentially invisible in the market.

This is what drives me nuts about the "I bootstrapped my company to profitability and success!" blog posts, because in most instances, the owner is making $50K/year and can't afford to hire anyone else.

I'd be interested in seeing what their top line numbers looked like, as that'd give an indicator of their overall market penetration, and true success.

This is why companies that do $750MM in revenue per year, but report an annual loss are still hugely successful, because $750MM is a ton of money!

chaostheory• 14 years ago

Why not just sell it instead or am I missing something? The post was very vague on this point.

alexknowshtml5• 14 years ago

We will elaborate on why we did not sell in another post - it's a good question, with an important set of reasons. Thanks for the push.

ThaddeusQuay23• 14 years ago

Hello from Philadelphia! I live and work quite near you, in center city. My economics and motives are likely rather different from yours, and/or from what you are used to seeing in most other people. Let me know the next time you feel like throwing away a project which might, in the right hands, still be viable. One man's trash is another man's treasure.

NOTE TO SELF: New startup idea: Create a Craigslist for no-longer-wanted, about-to-be-defunct startups. Woot!

orenmazor2• 14 years ago

flippa.com is basically that, sort of.

ThaddeusQuay23• 14 years ago

Thanks! At first glance, it seems useful.

NOTE TO SELF: Come up with another startup idea! :(

slig2• 14 years ago

Flippa signal to noise is pretty low. Maybe something more "curated" and targeted directly to HN would be better.

plusbryan• 14 years ago

Something doesn't add up here. It's like they bought a house, started renting it, and when being a landlord got boring, burned it down.

When you start a service and sign on customers, you take on a responsibility to keep that service going. Even if that means selling it or passing it on when you can't carry the torch yourself.

badclient3• 14 years ago

Even if that means selling it or passing it on when you can't carry the torch yourself.

Isn't that what they are doing with their CampaignMonitor partnership?

unreal372• 14 years ago

I disagree. You don't "take on a responsibility to keep that service going", Google can shut down Wave. Apple can shut down Ping. IBM can stop selling computers. Oracle can stop creating OpenSolaris. Companies (and individuals) have the right to make long-term decisions about what they want to do day-to-day.

Seems this company did more for their customers than most do. They didn't just shut the doors one day. They didn't lock in the user data and make it impossible to get. They made one of the toughest decisions to make - shutting a mildly profitable service. It's easier to shut it down if it's losing money.

paulhauggis• 14 years ago

You have a responsibility to let your customers know in advance that you will be shutting down, but not to keep the service going.

You have a responsibility to your employees and anyone else that works for the company to do not harm their livelihood. Running a service that continues to waste money can eventually put the company out of business.

gearoidoc3• 14 years ago

I'm all for making well designed, useful products. But refusing to (at least) sell the product to another company because you weren't sure they "would do do right by our customers and the industry" just seems dumb to me.

alexknowshtml5• 14 years ago

See: http://news.ycombinator.com/item?id=3514845

gearoidoc3• 14 years ago

Cool, looking forward to reading it :-)

unreal372• 14 years ago

Why would they ruin their reputation by selling their email marketing company to a spammer, scammer or worse? They would have to be very careful when choosing the buyer - might be more hassle than its worth.

Also, they have a product called Postmark in the same space, Why create a competitor for yourself?

It's their decision to sell or not. They did right by their existing customers in first making an honest go of the business, then cutting the price when that didn't work, and then getting a transition plan for closing it when the lower price brought too many low quality (ie: borderline spammer) customers.

You can have an opinion if that's right or not, but ultimately its their decision.

gearoidoc3• 14 years ago

Obviously its their decision but its a good discussion point all the same :-)

I understand that it's out of their hands once they sell it but if somebody made a good offer to buy the piece of tech then I (emphasis on the "I") would accept. The actions of the buyer doesn't dent their reputation IMHO as its no longer their product.

rob• 14 years ago

Can this company even be trusted now? Are they going to shut down Beanstalk and Postmask when they get bored of those services, even if they are profitable? This is absurd.

zoltarSpeaks• 14 years ago

I hadn't considered it from this point of view. Although a tad extreme, as they did mention partnering with Campaign Monitor to aid the move for customers, I can imagine I might have been a bit miffed to see a service I regularly use be shut down.

It would be interesting to here some ex-customer perspectives on this.

steve89182• 14 years ago

This is why at some point in a company's growth, you have to take the tech guys out of the business positions and stick someone who really knows business in charge.

One of my former coworkers helped build a ridiculous iPhone ringtone app a few years ago that STILL generates positive cashflow, and profited several 100k. This was done strictly through marketing. There are plenty of ways to grow a product, but these guys didn't have the know-how or wherewithal to do it for an already profitable product.

A real business person would have taken that $75k/yr and figured out a way to grow it, through marketing, by pounding the pavement, etc. Most startups are cash flow negative, and will die in a year and yet this company generating profits and weren't able to make it grow? They gave up way too easily, and like people said, it's because they got bored of it. That reeks of arrogance, sorry to say, being bored of $75k/yr.

Hopefully your current products are profitable, so that this isn't a lesson that comes back to haunt you later on. But as other people said, I also hope this doesn't mean that your current customers have to look forward to their product being closed down prematurely because your company got bored of it as well.

mgkimsal3• 14 years ago

Well, I think it's primarily a business decision.

"We can devote $x resources on XYZ and make $75k profit, and spend more time and money to figure out how to grow it, or we can spend that $x resources on ABC, make more than $75k from that resource expenditure, and not have to invest more time/money to figure out how to grow ABC because it's already growing (either because we figured it out or we'll figure it out along the way)."

Yes there are plenty of ways to grow a product, but how much time/energy do you justify on learning/testing when you've already got other products that are more profitable and growing?

That said, the original post still focused too much on the feelings of the devs/peeps involved and didn't seem to address things from their customers' perspective. They addressed that in another reply to my earlier post, but it still set a bad tone to me off the bat.

rhizome4• 14 years ago

"Constant growth" is abject MBA-blather. It's $75K/yr, just let it ride and collect the free money.

steve89182• 14 years ago

Maybe they are making a lot of money to the point where they don't need it the extra cash. I don't know who these guys are, so maybe they're doing really well, and if so good for them.

But balking at spending effort to maintain a $75k/yr business doesn't seem "hungry" enough to me. They tried to killing off the business and dropped their price, and instead they doubled the number of users. What??? How much more of a clue do they need that they really have a viable product here?

Any businessperson worth their salt would take this and start figuring out a way to build on it. What about get an MBA intern from Wharton and give them the project of figuring out how to grow the business? Hire a real entrepreneur and tell them if they can grow the business, you'd split the profits 50/50 with them.

I mean, come on. There's a real solid base there of people who were willing to pay for their service. The BEST solution was to shut it down? I can't believe it.

ef4• 14 years ago

The most charitable explanation for this seems to be that they don't want to damage their brand by having a less-than-perfect product. Fine. So "spin it off", give it a new name, and then ignore it while it continues to generate revenue for years and years.

They're dramatically underestimating how much the average user dislikes change. It doesn't matter if Campaign Monitor is better -- some of your users would have gladly stuck with the old way simply because it's the old way, and they were probably pissed they had to learn something new.

Letting the product coast isn't cheating your users. It's simply offering them one more option.

ahoyhere9• 14 years ago

Background: I'm friends with the owners of Wildbit, and have watched the journey they took that led to shutting down Newsberry. Several times, over a couple bottles of wine, my husband and I advised them to "just shut it down"! Because my husband & I run a very similar business, and we understand what it's like.

Here's the thing about the comments on this article, here on HN: of the people saying it was a mistake, that the article was misleading, etc, etc: How many of them have a profitable business with a team of any size, and multiple products?

That's the hidden problem with HN: with a few notable exceptions, everybody here is an Monday morning quarterback.

There is NOTHING more draining than to keep a product running "because it's just profitable enough." Or worse, because you feel guilty about shutting it down, because you feel like you're going to let down your customers.

There's nothing more divisive than a redheaded stepchild product.

There's nothing more wasteful than a distraction to you & your team.

Running 2 products is not simply double the work than running 1. Running 3 products is not simply 50% more than running 2.

When one runs a successful business oneself, one knows this implicitly.

But when you haven't, then you are likely to look at this kind of story and go "WTF? They just threw away $75k/year? But they could have spent 1 day a week on fixing it and making it more profitable! They could have hired a part-time designer!"

But this is just a lament wrapped up in logical, impartial language - but still a lament, which is really saying "WTF? I could use $75k/year! How could they possibly throw that away? WASTEFUL. SHAMEFUL."

Which is, really, totally understandable. Until you run a business of this scale, it's hard to imagine how $75k/yr in profit could be a millstone around your neck instead of something to celebrate. However, that does not good business advice make, and one must always consider the source & experience of the person dispensing it.

chc• 14 years ago

That was much more explicitly my lament: Why wouldn't you sell it instead? For example, that's what Brent Simmons did with MarsEdit, and it turned out to be a pretty successful foundation for Red Sweater Software.

But you're right that I don't run a business with >$100k in profits, so I suppose I very well might just not get it.

ahoyhere9• 14 years ago

They addressed that specific question in the essay. Did you miss it, maybe?

zizee4• 14 years ago

A lot of good points here.

Perhaps I should grow a thicker skin, but as a father of two redhead children I found the use of the expression "redhead stepchild" offensive. Mostly because I'd hate them to read something like that and think that there is something wrong with them.

I know it's meant to be a funny expression, and it's cool to make fun of redheads and all (isn't it great to find a minority that is ok to publicly ridicule without having to think about issues like racism), but perhaps the joke is getting not funny anymore...

or maybe I need to have a coffee and lighten up?

ahoyhere9• 14 years ago

You need to have a coffee and lighten up. Nobody is making fun of redheads.

1. Lots of people think redheads are sexy.

2. The implication of "redheaded stepchild" is that "it's obviously not your kid" or possibly even a bastard.

3. I'm fat, and a Rails developer, and I don't get my knickers in a twist every time somebody makes the "fat models" metaphor about good MVC design.

No offense, but your sensitivity to your kids' redheadedness is far more likely to make them think it's a bad thing than some random colloquial phrase.

brownie• 14 years ago

"That's the hidden problem with HN: with a few notable exceptions, everybody here is an Monday morning quarterback."

If you're unwilling to receive feedback (be it right or wrong), why write the article in the first place?

ahoyhere9• 14 years ago

First: Who said they are unwilling to receive feedback? Nobody here from Wildbit is going "ohnoes how dare you question us wahhh."

Wildbit already made the decision. It's already happening. They've been working on it for months and months. I don't think they care what random people on the internet have to say, either good or ill.

Why write, then? To draw back the curtain a little on their business, and no doubt also for some exposure. Which has totally worked for them.

I am writing for the benefit of the other people reading, who would only otherwise see the "zomg waste!" responses and not understand where those reactions are coming from… e.g. a place verrry different from the place where the people live who made the decision. Unlike the vast majority of the commenters, my husband and I run a product business very much like Wildbit's, just a little bit younger. And we know them. So I want to challenge more HNers to think beyond the obvious, safe opinion ("they shouldn't have shut it down! money!") and understand what it's really like, what they're missing from their imagined scenario.

And with that said, I'd like to invite you to consider the meaning of "feedback." Is anyone ever excited to get "feedback"? Do people do things, and write, in order to "get feedback"? That is a rather sad, limited view of human endeavor.

HN is a kind of echo chamber, with most people expressing the same (tired, accepted, safe) opinions & receiving plaudits and upvotes in return. That sounds more like the second definition of "feedback" to me -- the return of a fraction of the output signal.

zizee4• 14 years ago

I wonder if wildbit considered selling the product to someone who could give it some love?

Perhaps it could have been similar to this recent story: http://www.softwarebyrob.com/2012/01/25/the-inside-story-of-...

Why we shut down a product that was $75,000/year profitable

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