Why Grow? and Other Wisdom from 37Signals

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The path to profitability doesn’t need to be complicated. (Photo: El Photopakismo)

I’ve known the guys at 37Signals for a little while.

I first met Jason Fried at SXSW in 2008, and I then got to know David Heinemeier Hansson (DHH) over e-mail and in person last year. On a fundamental level, I think, our philosophies just mesh well.

Comfortably situated in Chicago outside of the “start-up” echo chamber, 37Signals is focused on getting sh*t done instead of chasing the Silicon Valley venture capital death spiral. Financing has it’s place, but it’s a means to an end and shouldn’t be confused with an end.

The end is a profitable business. Now, let’s be clear: there are ways to play the acquisition game (or even financing game) and make millions without ever turning a profit. But don’t let the media fool you–you hear of the few successes because the stories are fun to tell. The thousands of failures that die sad but unspectacular deaths don’t get on the magazine covers.

More than 3,000,000 people worldwide use 37Signals products, including me. I use one of them, Basecamp, for project management, and it rocks in its simplicity. I’m not the only one who thinks so: Basecamp generates millions of dollars in profit every year.

37Signals’ employees–fewer than 20 total–are spread across 8 cities on two continents, and no matter how many rules they break, profit seems to be the end result…

This is part of the reason I was excited to get an advanced copy of Rework, their new book, which I encourage people to think of as an Elements of Style for building profitable businesses in a web-savvy world. Each chapter is 2-5 pages long and delivers their tactics and principles fat-free, without fluff. Just like their business models.

Here are a few excerpts to whet your appetite. Profitability doesn’t need to be elusive. It’s a simple process… if you have the right recipe from the outset.

Why grow?

People ask, “How big is your company?” It’s small talk, but they’re not looking for a small answer. The bigger the number, the more impressive, professional, and powerful you sound. “Wow, nice!” they’ll say if you have a hundred-plus employees. If you’re small, you’ll get an “Oh . . . that’s nice.” The former is meant as a compliment; the latter is said just to be polite.

Why is that? What is it about growth and business? Why is expansion always the goal? What’s the attraction of big besides ego? (You’ll need a better answer than “economies of scale.”) What’s wrong with finding the right size and staying there?

Do we look at Harvard or Oxford and say, “If they’d only expand and branch out and hire thousands more professors and go global and open other campuses all over the world . . . then they’d be great schools.” Of course not. That’s not how we measure the value of these institutions. So why is it the way we measure businesses?

Maybe the right size for your company is five people. Maybe it’s forty. Maybe it’s two hundred. Or maybe it’s just you and a laptop. Don’t make assumptions about how big you should be ahead of time. Grow slow and see what feels right—premature hiring is the death of many companies. And avoid huge growth spurts too—they can cause you to skip right over your appropriate size.

Small is not just a stepping-stone. Small is a great destination in itself.

Have you ever noticed that while small businesses wish they were bigger, big businesses dream about being more agile and flexible? And remember, once you get big, it’s really hard to shrink without firing people, damaging morale, and changing the entire way you do business.

Ramping up doesn’t have to be your goal. And we’re not talking just about the number of employees you have either. It’s also true for expenses, rent, IT infrastructure, furniture, etc. These things don’t just happen to you. You decide whether or not to take them on. And if you do take them on, you’ll be taking on new headaches, too. Lock in lots of expenses and you force yourself into building a complex businesss—one that’s a lot more difficult and stressful to run.

Don’t be insecure about aiming to be a small business. Anyone who runs a business that’s sustainable and profitable, whether it’s big or small, should be proud.

Scratch your own itch

The easiest, most straightforward way to create a great product or service is to make something you want to use. That lets you design what you know—and you’ll figure out immediately whether or not what you’re making is any good.

At 37signals, we build products we need to run our own business. For example, we wanted a way to keep track of whom we talked to, what we said, and when we need to follow up next. So we created Highrise, our contact-management software. There was no need for focus groups, market studies, or middlemen. We had the itch, so we scratched it.

When you build a product or service, you make the call on hundreds of tiny decisions each day. If you’re solving someone else’s problem, you’re constantly stabbing in the dark. When you solve your own problem, the light comes on. You know exactly what the right answer is.

Inventor James Dyson scratched his own itch. While vacuuming his home, he realized his bag vacuum cleaner was constantly losing suction power—dust kept clogging the pores in the bag and blocking the airflow. It wasn’t someone else’s imaginary problem; it was a real one that he experienced firsthand. So he decided to solve the problem and came up with the world’s first cyclonic, bagless vacuum cleaner.

Vic Firth came up with the idea of making a better drumstick while playing timpani for the Boston Symphony Orchestra. The sticks he could buy commercially didn’t measure up to the job, so he began making and selling drumsticks from his basement at home. Then one day he dropped a bunch of sticks on the floor and heard all the different pitches. That’s when he began to match up sticks by moisture content, weight, density, and pitch so they were identical pairs. The result became his product’s tag line: “the perfect pair.” Today, Vic Firth’s factory turns out more than 85,000 drumsticks a day and has a 62 percent share in the drumstick market.

Track coach Bill Bowerman decided that his team needed better, lighter running shoes. So he went out to his workshop and poured rubber into the family waffle iron. That’s how Nike’s famous waffle sole was born.

These people scratched their own itch and exposed a huge market of people who needed exactly what they needed. That’s how you should do it too.

When you build what you need, you can also assess the quality of what you make quickly and directly, instead of by proxy.

Mary Kay Wagner, founder of Mary Kay Cosmetics, knew her skin-care products were great because she used them herself. She got them from a local cosmetologist who sold homemade formulas to patients, relatives, and friends. When the cosmetologist passed away, Wagner bought the formulas from the family. She didn’t need focus groups or studies to know the products were good. She just had to look at her own skin.

Best of all, this “solve your own problem” approach lets you fall in love with what you’re making. You know the problem and the value of its solution intimately. There’s no substitute for that. After all, you’ll (hopefully) be working on this for years to come. Maybe even the rest of your life. It better be something you really care about.

Tone is in your fingers

Guitar gurus say, “Tone is in your fingers.” You can buy the same guitar, effects pedals, and amplifier that Eddie Van Halen uses. But when you play that rig, it’s still going to sound like you.

Likewise, Eddie could plug into a crappy Strat/Pignose setup at a pawn shop, and you’d still be able to recognize that it’s Eddie Van Halen playing. Fancy gear can help, but the truth is your tone comes from you.

It’s tempting for people to obsess over tools instead of what they’re going to do with those tools. You know the type: Designers who use an avalanche of funky typefaces and fancy Photoshop filters but don’t have anything to say. Amateur photographers who want to debate film versus digital endlessly instead of focusing on what actually makes a photograph great.

Many amateur golfers think they need expensive clubs. But it’s the swing that matters, not the club. Give Tiger Woods a set of cheap clubs and he’ll still destroy you.

People use equipment as a crutch. They don’t want to put in the hours on the driving range so they spend a ton in the pro shop. They’re looking for a shortcut. But you just don’t need the best gear in the world to be good. And you definitely don’t need it to get started.

In business, too many people obsess over tools, software tricks, scaling issues, fancy office space, lavish furniture, and other frivolities instead of what really matters. And what really matters is how to actually get customers and make money.

You also see it in people who want to blog, podcast, or shoot videos for their business but get hung up on which tools to use. The content is what matters. You can spend tons on fancy equipment, but if you’ve got nothing to say . . . well, you’ve got nothing to say.

Use whatever you’ve got already or can afford cheaply. Then go. It’s not the gear that matters. It’s playing what you’ve got as well as you can. Your tone is in your fingers.

Say no by default

“If I’d listened to customers, I’d have given them a faster horse.”
—HENRY FORD

It’s so easy to say yes. Yes to another feature, yes to an overly optimistic deadline, yes to a mediocre design. Soon, the stack of things you’ve said yes to grows so tall you can’t even see the things you should really be doing.

Start getting into the habit of saying no—even to many of your best ideas. Use the power of no to get your priorities straight. You rarely regret saying no. But you often wind up regretting saying yes.

People avoid saying no because confrontation makes them uncomfortable. But the alternative is even worse. You drag things out, make things complicated, and work on ideas you don’t believe in.

It’s like a relationship: Breaking one up is hard to do, but staying in it just because you’re too chicken to drop the ax is even worse. Deal with the brief discomfort of confrontation up front and avoid the long-term regret.

Don’t believe that “customer is always right” stuff, either. Let’s say you’re a chef. If enough of your customers say your food is too salty or too hot, you change it. But if a few persnickety patrons tell you to add bananas to your lasagna, you’re going to turn them down, and that’s OK. Making a few vocal customers happy isn’t worth it if it ruins the product for everyone else.

ING Direct has built the fastest-growing bank in America by saying no. When customers ask for a credit card, the answer is no. When they ask for an online brokerage, the answer is no. When they ask if they can open an account with a million dollars in it, the answer is no (the bank has a strict deposit maximum). ING wants to keep things simple. That’s why the bank offers just a few savings accounts, certificates of deposit, and mutual funds—and that’s it.

Don’t be a jerk about saying no, though. Just be honest. If you’re not willing to yield to a customer request, be polite and explain why. People are surprisingly understanding when you take the time to explain your point of view. You may even win them over to your way of thinking. If not, recommend a competitor if you think there’s a better solution out there. It’s better to have people be happy using someone else’s product than disgruntled using yours.

Your goal is to make sure your product stays right for you. You’re the one who has to believe in it most. That way, you can say, “I think you’ll love it because I love it.”

###

Odds and Ends:

Rework – the first mainstream book by 37Signals
Tim Ferriss on Twitter – Follow my misadventures, experiments, cool findings, and mischief in real-time. It’s fun to watch me stumble.

Posted on: March 8, 2010.

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200 comments on “Why Grow? and Other Wisdom from 37Signals

  1. Tim, this is one of the best blog posts that I’ve ever read. Absolutely love your take on business sizes. Slow and steady growth has been proven to be a successful business model and your examples here explain exactly ehy that is.

    You are a great mentor and I really do appreciate you sharing your thoughts with us here. This will be a must read for a long time.

    Like

  2. I’m in the theatre and the notion to “scratch your own itch” came up for me just the other day (weird how things converge like this). A friend, not in the arts, asked what kind of theatre I did. I answered that I created the same kind of theatre I wanted to experience.

    I totally look forward to getting ahold of REWORK. I’m noticing again and again, lessons from entrepreneurship/ marketing/ lifestyle design often parallel wonderfully with work in the arts…

    Good post, Tim. Thanks.

    Like

  3. I think that the best business ever created to this day, prove that point. I was just listening to an interview that Andrew Warner had with Gurbaksh Chahal and it’s amazing how he build his company technically from his bedroom. He use what he had which wasn’t much and used it. I mean he didn’t even go to college or finish high school.

    We should always be scratching our own itch for sure, most companies have been build from our own issues anyways right? I don’t remember where I heard this, if you write down ten problems you run into a day one of them can be turned into a business it was something…anyway Tim great post I can’t wait for Rework tomorrow will start reading as soon as I am done with linchpin.

    Like

  4. Tim, I absolutely agree with your stance on business size. I went from factory worker/college student to fitness entrepenuer. I followed my passion(and inspiration from your book) and haven’t regretted it once!

    I run a profitable personal training and diet coaching company and I love being service based, interacting with clients, etc, but it’s getting hard to extract myself for long vacations(mini-retirements). Any advice?

    Like

  5. Tim,

    It’s great to see some cheerleaders in the small business guy’s corner. My two partners and I have successfully kept a Clothing and Apparel business based out of Long Island, NY small (in the number of employees) for over a year now. We’ve receive countless requests of aid from friends, family and outsiders but at our core we truly believe we are self-sustaining in and of ourselves.

    Two bits of advice I can provide to start up entrepreneurs would be:

    a) Take *calculated* risks. Learn to assess the situation, find the path to the best possible outcome, and pursue it. Too often in the infancy of our company we stalled on critical decisions because of fear. Trust BOTH your instincts and research, with an emphasis on research.

    b) “Don’t buy upgrades; ride up grades.” – Eddy Merckx… If you are a cyclist you’ve heard it before. It’s the principal that the human body/condition is greater than any piece of equipment available. Learn to fine tune you’re body and mind and not rely solely on technology. In my business I try to keep key items “physical.” My relationships are for the most part, face to face, my to-do lists are ALWAYS written on paper and I always get outside every day, no matter the weather (a form of meditation for me). I’m part of the generation of technology (and I even worked for a major technology consulting firm) so if I can perform some non-technology based exercises, anyone can.

    Again, this was a great post and I truly appreciate the insight you’re providing to everyone here. I will be sure to download this novel onto my Nook in the near future. Hey, I can’t get rid of ALL my technology. :)

    Ciao,
    Joseph Restivo

    Like

  6. *Any* success I’ve had in the different areas of my life can be traced back to this simple forumla:

    “Create / be the _____ you’d want to _________.”

    Develop the product you’d want to use.
    Be the friend / father / coach you’d want to have.
    Write the book you’d want to read.
    etc….

    Just another way of saying “scratch your own itch.”

    Thanks,
    -joe

    Like

  7. Tone is in your fingers. That’s one that has my name written all over it – in a bad way. I’m the gal who buys the running gear and clothes before I can even run a mile. I love the pretty accessories, sometimes more than the activity itself – and sometimes the accessories help me get started on an otherwise challenging task.

    Funny thing is, once I start developing habits and some competence, the accessories become less important. My mental gears shift, and I start engaging in the activity for the pleasure of doing it. Now, if I could just figure out a way to motivate without buying a basket-ful of trinkets, I’d save a bunch of money.

    Rework sounds like a great resource.

    Like

  8. Tim, is that why you invested on Twitter? Because they have 140 employees and are not yet profitable?

    Anyway thanks, you and 37s are a constant inspiration.

    Like

    • Hahaha… touche! No, this is a good question. Like I said, there are exceptions to this rule, but they are few and far between. I believe Twitter could be one of them, hence my investment. It’s a real inside-baseball game, and the people who are good at it — repeatedly — are very, very smart. Alas, this doesn’t mean that aiming for lack of profits is a good idea. Nor does it necessarily mean that raising a lot of money is a good idea (Webvan, anyone?).

      Good question,

      Tim

      Like

  9. Tim you should be a preacher! What a convicting message.

    An excellent reminder not to play the “keep up with the Jones” game in business. I’ll admit, I’m a little embarrassed when a clients ask where my office is located and I say, I work out of my house. I would feel much more important if I could say we have offices in New York, Seattle, and blah, blah, blah…

    “Use whatever you’ve got already or can afford cheaply. Then go. It’s not the gear that matters. It’s playing what you’ve got as well as you can. Your tone is in your fingers.”

    Tim, I would rather spend hours each week reading reviews of the latest productivity tools, than do meaningful work. Plus, I’d be much cooler if I could brag about all the new tools and toys I have to help keep me productive.

    Looking forward to reading Rework. Keep preaching!

    Wayne

    Like

  10. Thanks for the review/recommendation of 37 Signals. Our (very) small, virtual company has been looking for simple, affordable software to keep us organized and give us the ability to share our information, and this may be just what we need. 37 Signal’s philosophy is current, cool, and so relevant.

    Like

  11. Great Post! “Scratch your own itch” not “starting from scratch”. Much easier jump off point! Expanding from your existing knowledge base can be scaled much faster and less expensive cause you already know some key shortcuts.

    Like

  12. Smaller and higher profits can make you more money then you need, just dont let ego stop you.

    Every business I had that has succeeded, has solved a simple problem that I had, so that is sooo true.

    Cheers,
    Mukul

    Like