Bootstrapping Using Services: James Kane, CEO of RWS (Part 5)

Sramana Mitra: How did revenue ramp during this two-year period?

James Kane: We went from about $500,000 to a little under $3 million.

Sramana Mitra: That brings us to what? 2008?

James Kane: Yes, roughly speaking – about when the housing crash started.

Sramana Mitra: How did that impact your business?

James Kane: At that point, our customers were appliance and furniture retailers. That category of retail was hit hard. We falsely assumed that our business would be hit hard by the housing bust. During the housing bust, we started to scale back, which turned out to be the exact wrong direction to proceed in.

Sramana Mitra: Why?

James Kane: Imagine that you own an appliance store. You come under pressure because your revenues are falling. You have a marketing budget which is currently allocated between yellow page advertising, newspaper circulars, radio, TV, and online – online possibly at zero. In order to stay afloat, you will need to cut your marketing budget and also, you’ll want to reallocate it to areas that will be most efficient.

The behavior that wound up driving in our customer base is exactly what that would imply. During the housing crisis, they dramatically dropped their marketing budgets but they even more dramatically, reallocated that marketing budged to digital initiatives because the ROI was so much higher. We actually had our best sales and growth years during the housing crash timeframe.

Sramana Mitra: If you look at the number of customers, how did that number of customers grow before the housing crash and where did it go after the housing crash?

James Kane: Retail Deck has always had a very stable customer base. We stopped paying a lot of attention to it because with revenues around $70 a month and with website revenue averaging $500 to $600 a month, we refocused our energy on the website side of things. Pre-housing crash, we were at 230 clients. If you fast forward two years later, we were probably at 750.

Sramana Mitra: That’s a very big ramp. What was the average annual contract value of each customer?

James Kane: At that time, $4,200.

Sramana Mitra: Were you booking multi-year contracts?

James Kane: No, all of our services have always been booked month to month.

Sramana Mitra: They were not paying in advance for the whole year. They were basically month-to-month on the credit card payment cycles.

James Kane: Yes.

Sramana Mitra: So you didn’t get any massive cash flow advantage because of prepaid contracts. You were operating as a regular subscription business that had to keep your customers happy to get your next month’s revenue?

James Kane: Yes, with one notable exception. At that time, we charged a setup fee for our services. That setup fee typically averaged one year of service. If you were signing up for a website, the setup fee would be $4,000 and you’d be paying us $350 a month or so for service. During this growth period, we financed a lot of our growth using the setup fee.

Sramana Mitra: How much was the setup fee?

James Kane: It varied a little bit but it, essentially, amounted to one year contract value.

Sramana Mitra: You were getting a chunk of money ahead of time from each customer.

James Kane: Yes.

This segment is part 5 in the series : Bootstrapping Using Services: James Kane, CEO of RWS
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