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. Great stuff. We’re trying to strike the balance of funding AND staying small (enough).

    A tip for all you software developers out there – get your clients to post their feature requests onto a Uservoice account (uservoice.com). Not only does it put some structure around the feeback process, but it shows people that they are part of a bigger picture, which is often very educational for them.

    Like

  2. Tim,
    Great post. I am Jon Keefe, CEO of a digital agency in Manchester in the UK and we came across Basecamp 2 years ago, adopted it and it changed our business. And then as you say we scratched our own itch. Basecamp did almost everything in project management that we wanted and more (there’s stuff in Basecamp we don’t really use) but when it came to getting productivity data Basecamp couldn’t deliver. Now that’s not a criticism of Basecamp as 37signals just didn’t see this a core functionality, which is fine. So we developed a bcToolkit so we could use the Basecamp API to get the reports that we wanted. Now our bcToolkit delivers productivity reports such as time used vs time estimated on projects through a simple dashboard. Cheers Jon

    Like

  3. Thanks man.

    “The Tone is in your fingers”….

    This makes me think about some friends who – although being 10, 15, or even 40 lbs overweight – have paid $100′s extra for a lighter-framed bike. Instead of dropping the love handles they’ll drop several more bills, and still not perform any better when they hit the road.

    Personalizing this, I see that there are many things I’ve tried to do or become that were basically excuses for my lack of desire and/or talent. Rather than simply trying to give myself a crutch to do something I’m not really into, I should have spent more time on the more natural areas of enjoyment and giftedness.

    Like

  4. I totally love the book REWORK! I think it’s dramatically changed my viewpoint of business. A must-read for anybody who wants to start a business. You might not agree with all of them, but you’ll get a lot out of it. It makes you think hard about whether what you’re doing is working, or if you’re just following what everyone else says.

    Like

  5. Thanks a lot for your Videos.. I really love the Random Show..
    by the way.. I first heart of Kevin Rose through your Blog.. big fan of his work now too : )

    Like

  6. Hi Tim,

    great post. I played with Basecamp but did not adopt it in the end. To me, it felt like just another inbox. It would be interesting to hear how you use Basecamp, since I know you are not a fan of duplicating and complicating things unnecessarily.

    Cheers, Dan

    Like

  7. That quote from Henry Ford is priceless.

    For the record, I’m not a huge Henry Ford fan. He had some views I consider disturbing. However, he was one amazing business man.

    From “Think and Grow Rich” apparently Andrew Carnegie had recognized his business acumen when Ford was on the way up, greasy shirts and all. Carnegie was another kick-butt business guy who built libraries in even my corner of the world, that he probably never even visited himself. Like Tim, he was a believer in education.

    Oh, and if I had to buy an American made car now? Ford, definitely.

    They didn’t take the bailout money and instead focussed on growing their business by pleasing the customer.

    Are they the best cars in the world? Maybe not, but the modern Ford company wasn’t so clueless they bankrupted themselves… I think they were the only North American car company whose market share grew last year.

    Without being bailed out by the taxpayers, too.

    Like

  8. Your observation about the irrelevance of a business’ size is something Warren Buffett talks about (for instance in The Essays of Warren Buffet: Lessons for Investors and Managers). He observes that even Fortune 500 executives are victims of this mentality with most of them knowing where they sit on Fortune’s ranking by size, but not by profitability, though profitability is clearly a better metric of success for companies at such a mature stage of growth.

    Like

  9. Great post. Small is the new big – for sure. For those with fast growing businesses who can’t avoid getting big, I recommend reading the Starbucks book called ‘Pour Your Heart Into It’. It has a lot of good ideas about how to grow while keeping your employees happy and having a vision for long lasting success.

    Like

  10. YES! I love it.
    I believe the business model of 37signals is the model of the future. It’s clean, elegant, and intelligently simple.

    Thank you Tim for introducing me to 37signals’ “Getting Real”

    Like

  11. Tim, great post. I was at SXSW recently when Jason talked us through some of the concepts of REWORK. Here are three more of the thoughts he put across.
    1/. Stategic “planning” is out and Strategic “guessing” is in – This gets across the idea that plans almost never come off and they sound so set in stone and are often expensive and time consuming. Guessing is about gut feel, heart over head, which actually more often than not works, is cheaper and quicker to implement.
    2/. Think about bi-products – This particularly struck home with me because we have a small business that is based around a bi-product of Bascamp. Its a SaaS business using the Basecamp API and adds extra productivity to Basecamp. Its called bcToolkit. 37Signals seem to like it. It’s on their website
    3/. Innovative is OK but useful is better – This sums up the 37signals mindset for me. If you just take Basecamp, it is not unique or rocket science but very useful and therefore will always be used. Simple.
    Thanks Jon

    Like

  12. Have to agree with you Tim, the 37Signals guys are top notch! Love their simple formula for making money:
    1. Good Product
    2. Price
    3. Profit

    I picked up the audio version of their book and it is excellent!!

    Like

  13. This is a very insightful post and I totally agree. Some business should stay small and everyone needs to learn how to say, “No.” Too often that gets lost and when you say, “No” it opens a different door and probably a healthier one. You have to know your limits because with out knowing them you are liable to be taken advantage of. Which is never good and it is never good to spread yourself everywhere.

    Like

  14. I really like the Scratch Your Own Itch section. I think so many people try to come up with products that they wouldn’t even necessarily use. If you find a need for a product, then you should take that need and work on developing a product you would use. Like it said in the article, if you are trying to solve someone else’s problem with a product, you are basically stabbing in the dark. But if you see a problem with a product and are working on your own solution or idea, you know exactly what needs to be done to make the product better.

    Like

  15. Dude… I am just utterly astounded by the mindset you (everything you do) have just given me.

    I first stumbled upon your book website and blog yesterday (4/21/10) as I was in search for information to help me better my understanding of business financials as I am in my quest to acquire and/or start the first of many businesses that I will be a part of …

    Tim, I was completely blown away by your attitude and disposition with life. I too see things similarly regarding our sense of purpose and how we spend our time here during our lives and the homerun for me was your “we can do/be anything” attitude and your commitment of simplicity.

    I have like so many of us have been involved in the great US rat race for almost two decades, working hard, being focused on career advancement, money and possessions (keeping up with the Jones’s), and although my situation is slightly different than yours (I have a family with an amazing, beautiful wife and two children) your vibe and energy struck me immediately and that our desire and outlook on purpose of life is very similar… I felt an immediate connection. The last time I instantly connected with someone/something like this that drove me to take immediate action (I bought your book The 4-Hour Work Week yesterday, same day) was a little over a decade ago and it was a life changer for me.

    Tim, I have experienced many significant personal/family struggles most of my life and beginning in my late teens my closest family members (mother, father, grandfathers and uncle) began passing away before I was ever ready for it. I went through a lot of personal struggles as I tried to find my way (or way out) of the negativity and dismay that these voids left me with. As I reached the point of ultimate anger, sadness and confusion, the person that finally helped me see the light and break through and back into my optimistic and positive engagement with life, was Tony Robbins. I worked very hard on understanding, accepting and retraining myself to become the optimistic/positive person that I once was and it was because of a moment like this that I am the person I am today because of the way his message and energy resonated with me.

    So, before I continue to just go on and on… I just wanted to find a way to reach out to you personally to let you know what your actions and message have just done for me. I am so pumped to read your book (I just got through your “first and foremost” FAQ and My Story last night) and I am already so stoked to get into the rest.

    Tim, my thanking you is simply not the ultimate end result I am targeting, but moreover it is my encouragement back to you to tell you that your message is being received and to continue in your purpose and quest to reach others just as you have to me. I believe without a doubt your words, wisdom and inspiration will aide me in my quest to continue down the “unconventional” path away from the 9 to 5 model and ultimately arrive at my next destination of owning all aspects of my time, money and life. In the great words of the Hawaiian’s, “Mahalo” my friend.

    In God Speed,

    Michael H

    Like

  16. Hi Tim,

    New to the website but love the post. Iv’e just started reading 4 hour work week (a bit late I know).

    One thing I must say is I agree with your philosophies. There is a saying “The lucky man has experience”.

    And I can tell that you have alot of it.

    This saying no issue has been a big issue for me. After alot of soul searching found it has alot to do with having a low self esteem and not believing in your self, and a mix of fear of rejection.

    I have found the solution is to force yourself to do the opposite of your fears, after a while you perfect the art of saying no and having confidence. That and if you realise alot of people are critisising for their own fear’s

    So you just have to rise up against your self I suppose and against the heard (running off the cliff).

    But like anything takes time to practise.

    Enough of my rants.

    Like

  17. Not sure if this is the right place to post this, but I have a question about the specifics of formulating a patentable product without having a Phd in, say, organic chemistry or much of a scientific background at all.
    In the 4 hour work week, I was impressed you were able to patent a “neuroaccelerator” for athletics without seemingly having an advanced scientific background, and were able to make use of vinpocetine and formulate it with other ingredients.
    I am interested in putting together an idea for a wood finish. How would you recommend the most cost effective way of working out the specifics to insure it would be an effective enough product yet unique enough to be patentable?
    I am thinking in the realms of using technologies that are already in use but perhaps not all in one product. More specifically, I want to use ingredients already in use by professionals, but formulate and package them for home users.

    Like

  18. Great article, I’ve been staying small for years and it means when change comes I can respond. I used to have employees and when the business went down I felt bad, letting people down etc. But now it was a blessing as I would now only ever hire in talent that I required on a per-project basis.

    As an aside Dyson didn’t invent the cyclone bagless cleaner solely in response to a domestic cleaning problem. During the production of his ballbarrow he noticed the filters in the spray room getting clogged. A friend recommended he get a “Cyclone” for filtration like a local sawmill and then realised that the solution to both domestic and industrial problems could be solved with the same solution on different scales.

    Just had the insight that scaling the solution to fit the problem is rather like business, different sized solutions to different sized problems, you just have to find the size of solution to the problem as you see it!

    Like

  19. It’s a great article. Some managers like huge businesses for their ego. In fact, the hidden champions are usually small businesses that seem unimpressive at first sight.

    Like

  20. Hi Mr. Ferriss thanks for the outstanding read in your book 4-hour work week. In your book you mentioned that you have an interest in new product development. I have for us an easy to produce consumer product with a patent pending we need to get on QVC or Wall mart ASAP. I wouldn’t waste your time If this was an average product. This will have a broad market…Ron Popeil will ask himself how come I didn’t invent this one. Drop me an email so we can get this rolling out to the stores or direct to the end user.
    drop me an email at toddfritsch@gmail.com

    Like

  21. I have just come across this site, and finding it interesting and informative.

    This is the first time that I have heard about this, and I have to say that its extremely interesting and I am going to do some more research on this.

    I so have to agree with : #
    Noelle Cottom
    April 13th, 2010
    11:18 am

    I really like the Scratch Your Own Itch section. I think so many people try to come up with products that they wouldn’t even necessarily use. If you find a need for a product, then you should take that need and work on developing a product you would use. Like it said in the article, if you are trying to solve someone else’s problem with a product, you are basically stabbing in the dark. But if you see a problem with a product and are working on your own solution or idea, you know exactly what needs to be done to make the product better.

    Her comment is so true, one has to better ones own product and make it better before we can really do that to anyone else. In this way ones business, can actually grow and prosper into something great.

    Best regards
    Natalie

    Like

  22. I know a successful inventor and he has the opposite view. He says that most inventors he knows have come up with an invention he calls ‘a hobby idea’. They are characterized by being blindly (ready unreasonably) in love with their idea.
    So they’ve got an idea ……..and no idea of the size of the market. It’s okay if there is a large market, but you have to have the skills and clear thinking to assess this before investing too much resources. Most don’t. Really, you should see how blind the behavior of many inexperienced inventors.
    His success has come by investigating shortfalls in any industry, whether he knows that industry or not. He interviews people to see what problems they’re having, and if the solution exists in their industry. If he finds a problem that is realistically solvable, then he immediately knows that there’s a market for it – and he proceeds accordingly.
    One advantage he has with looking outside his industry is that he has little emotional attachment to an idea – much easier to dismiss an unlikely effort, early.
    My point is that yes, keeping to your industry or knowledge by scratching your own itch can work, but be forewarned that it can cause the unwary to waste tremendous resources. There still has to be an element of reasoned, clinical judgment about your inventions place in the market.

    Like

  23. Tim:
    Love reading the 4HWW blog, guest author posts and your readers’ comments. I am requesting your advice, and any resources you may be aware of about deciding between franchising or licensing to grow a service based business. If each business location involves 2-3 highly trained and licensed medical professionals, and 5-6 trained support staff. Specifically, my business is a physician led wellness center, I manage the non-clinical aspects (business operations, technology, HR) for the company. We have developed our treatment protocols and integrated technology over the past 10 years, and are delivering great results in patient care.
    Thanks again for the wonderful work, any advice would be appreciated.

    Like

  24. Tim–
    Your work in general is so spot-on. This blog post about 37 Signals, plus the interview with FUBU’s founder were exceptionally practical and inspiring. You keep improving!
    Thanks,
    Elizabeth Hurwitz

    Like

  25. Tim, I’m curious… I have a software package that can increase profitability in the hospitality industry. But I worry if I don’t go the Angel/VC route… I will be so small, it won’t take much for someone bigger to eventually come along and copy the idea and scale the hell out of it.. killing my muse. What do you think? Does the small strategy not make the muse limited in it’s potential?

    Thank you for your time.

    Like

  26. i Loved Rework, might have to read it a second time. 37 Signals basically give all those other tech companies a real-world kick in the arse!

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  27. Just two days ago I was thinking about the direction of our start up and affirmed that chasing the big venture investment will not be our end. I’d rather have something elegant, effective, and profitable. I’m also passionate about reaching profitability organically, not because we have growth expectations from investors looking for a return. I don’t mean to trash VCs at all, but as you said, venture capital is not the end goal. I heard about this post on an old Random Show I was watching this morning. Good timing! Thanks Tim.

    Like