The six principles of lifestyle businesses

Last week I covered some frequently asked questions about lifestyle businesses. Now it's time to talk about what makes a great one.

Guidelines, not principles

First, let me caveat this by saying that you will find lots of successful businesses that violate these principles. Indeed, I just met with a B2C company that makes $20+ mil/year with two employees - and they flatly contradict some of these principles. So I would treat them more as rough guidelines for when thinking through ideas for your company.

1. Recurring SAAS revenue

This is #1 because software-as-a-service revenue has the following properties:

• Reliable monthly income. SAAS offers a predictable revenue stream (hence the reason it commands such large multiples on the public market).
• High margin & no cost to sale. Important to keep costs low, especially as you scale. SAAS typically offers a 95% margin.
• No inventory. You should be drinking mojitos instead of spending time pre-purchasing and managing inventory.

2. The right price point

This may sound counter-intuitive but you don't want too many customers. This is because more customers result in more of a support burden, which result in hiring more people, which results in a crappy lifestyle business.

I recommend anywhere between a $1k and $12k annual average contract value (ACV).

Let's take three different scenarios:

1. You price your product at $5/month. You're making $70k a year, and have 1,166 customers.
2. You price your product at $300/month.  You're making $70k a year and have 20 customers.
3. You price your product at $5,800 a month. You're making $70k a year, and have 1 customer.

In scenario one, the number of customers you have is such that you'll have to have a small support team managing them. The more people you employ, the less of a lifestyle business you have (since people take management). It will also be difficult to attract so many customers without paid spend (i.e. advertising). And lastly, smaller customers are typically more of a support burden in general.

In scenario three, you only have one customer, but they have so much leverage over you that you're essentially a glorified consulting agency for them. [1]

Scenario two is the optimum for a lifestyle business.

3. Simple with no maintenance required

Your idea needs to revolve around a simple piece of value that can be communicated easily. A complex CRM syncing product isn't suitable, for example. Other businesses are not going to trust your itsy-bitsy lifestyle business for anything mission-critical. [2]

Your ideal lifestyle business should run on autopilot, requiring only a few hours of your attention each week. This is especially important when it comes to sys-ops.

A good rule of thumb is that if it can't run on Heroku, pick another idea.

4. B2B & expensable

Consumers are remarkably cheap and typically don't value their own time enough. Businesses, on the other hand, are more than happy to spend in order to make/save money. The sweet spot is having a product that appeals to most businesses but that's at a price point that is easily expensed.

5. Uncrowded market

Andrew Wilkinson has create a $100m+ machine in Tiny Capital by acquiring dozens of lifestyle companies. He specifically looks for businesses that are "like New Zealand".

What Andrew is looking for is businesses in niche markets. Dribbble (which he acquired) is a great example of this. It's a small community of designers, a job-board that makes bank, and no real competition.

Generally speaking niche markets are better for lifestyle businesses. Competition tends to commoditize prices and crush smaller players. Peter Thiel's Zero To One book is a good primer here.

6. Viral distribution

Viral distribution isn't required (especially if you only need 20 customers), but it's really going to help growth. Think about Calendly, Zoom, Intercom, Drift, Slack - all of these businesses have a viral element to their distribution.

If your business isn't inherently viral then you need to think about distribution and channels from day one. If your price point is high enough, and the deals are annual, then you might be able to do all the selling yourself with cold emailing. Otherwise you're going to have to play around with other channels:

• SEO (see Zapier for a great example of this in action).
• Instagram ads (when dialed in can work extremely well).
• Channel partnerships (the secret behind ConvertKit's success)

[1] - Having said all of that.... prices can change. Don't overthink it. It's okay to charge less and move your way up market as you add features, especially if you grandfather in existing customers.

[2] - But.... Sidekiq is a great example of evidence to the contrary, a fantastic B2B mission-critical lifestyle biz.