Mike McDerment didn’t know much about accounting – the nitty-gritty stuff, at least – when he started FreshBooks out of his parents’ basement.
He feels that his “inexperience” was an asset as he grew the business. It also inspired his strong views about how professional service providers should be billing for their work.
Too many, says Mike, take an approach that leaves clients unhappy and the provider losing money. He has come up with a simple – yet controversial – alternative.
We also talk about a resource he leaned on heavily when obstacles popped up as he grew his business, as well as…
Why billing hours can kill your business
The unexpected danger of having one big client (especially if they’re really big)
How to get paid the same for doing less work
Why expertise can sometimes sabotage your problem solving
Listen to Steve Gordon and Mike McDerment Now:
00:11 Today Steve speaks with Mike McDerment, co-founder and CEO of FreshBooks, the #1 could-based accounting software in the world for self-employed professionals.
01:26 Mike tells us how he went from building websites to marketing, to conversion consulting to FreshBooks.
04:30 Mike tells us about how he faced almost every challenge to be had in business!
06:41 Mike reveals that if he had had an accounting background then FreshBooks would not be the success it would be today.
10:24 A part of Mike’s success is knowing what he didn’t know and then asking for help.
18:58 Mike tells us about value based billing and gives us a short book to read.
24:30 Mike tells us how to move from hourly to value based billing.
27:12 Mike explains how if your losing money having moved to value based billing, you’re probably billing to low.
30:20 Mike explains how you become more selective in your clientele after moving to value based billing.
32:55 Mike tells us why you should use FreshBooks and how best to get in contact with him.
Mentioned in this Episode:
Transcript: Steve Gordon interviews Mike McDerment:
Welcome to The Unstoppable CEO podcast. I'm your host Steve Gordon. And today is going to be a lot of fun, particularly if you like getting paid and hopefully getting paid higher fees. We're talking today with Mike McDerment who is co-founder and CEO of FreshBooks, the world's number one accounting software in the cloud for self-employed professionals and their employees.
Prior to FreshBooks, Mike ran his own design firm and he says he accidentally saved over an invoice, realized that maybe there was an unmet need in the market, and all the way back in 2003 he started FreshBooks from his parents basement in Toronto. Since then over 10 million people have used FreshBooks to really take all the pain out of time and billing, and to look professional. I know we use it as well. It makes certainly my life easier.
And so, Mike, I want to thank you for being here. I'm looking forward to our conversation, and welcome to The Unstoppable CEO.
Steve, thanks for having me. Glad to be here.
So I'd love for you to give everybody a little bit more background. They got a little snapshot of where you've been in your entrepreneurial journey, but what really got you up to this point?
Okay. So I'm going to give a more concise version of it. We can dig into any major parts of the story here as you like. But I got my start ... I really want to track it back. I was in business school, left that program in fourth year, and I started two businesses. One of those businesses was an events business, and to promote that I event I had to build a website. Or I chose to and so I taught myself how to build websites, which is like 1999 time frame. And then a couple of years running that event, building that website, but caterer for that event needed a website. So I started building websites for other people. And then once I started building websites for myself and others, I asked the question, "Why build a website if nobody shows up?"
And so I get very interested in internet marketing. And then I asked the question, "Well, if you build a website and people show up, but they don't do what you want them to, like sign up and become a lead or purchase something, or whatever the purpose of your website is, what's the point of that?" So I started learning about that and I developed a thing I call conversion consulting, where we would work with companies, brick and mortar real estate, travel, and help them improve the performance of their web properties.
Saving Over an Invoice Started Everything
It was while I was doing that that I accidentally saved over an invoice, and I said, "You know what. This is ridiculous." I had studied accounting in school, but the software available in the early 2000s was really not built for me, it was built for accountants. So I said, "There's got to be a better way." I had been using Word and Excel. So I decided to build something to bill my clients. They liked it. And I started transitioning from a service company to building a product company.
That proved to be quite a steep learning curve. Ended up moving into my parents' basement for about three and a half years to transition from one kind of business to the other. Today we're about 300 people. Over 10 million people have used the service since we started. It's a really simple invoicing and accounting software built for just folk who ... no retail, no restaurants ... just if you get paid for your time and expertise. That's our core focus in the market. It's a lot of fun. If you invoice, you need FreshBooks is the way I think of it.
So that's the story. That's where we started. And kind of where we are now.
I think quantifying it as a steep learning curve is probably being pretty generous. I know a number of friends who have tried to make that transition from running a service business to building out a product, and I think all of them in the software area where they've almost tried to productize their service into a piece of software, it's really difficult to do. What were some of the big challenges that you had early on?
I don't even know where to begin. I think every challenge. We had every challenge. I knew something about internet marketing and website design. And that's about all I knew. I knew nothing about product management. I didn't know a lot about research but I had some natural proclivities there. But I had to develop a discipline there to really understand it better.
There were parts of marketing that didn't really exist yet, like blogging and it became a big part of how we went to market. There's kind of leading, setting a vision, trying to ultimately raise capital, building a team, hiring people, which I'd done a little of. But you almost can never be practiced enough on that. So yeah, I can go deeper on any one of those, but it was really a whole raft.
I found building a service business is nice in that it is a gratifying thing to serve others and to make an impact for them in their businesses. I loved that about it. And I still have that in my role today. But what's clear about it is you're kind of working on solving problems almost one to one. Like you speak with a client. You understand their problem. And then you go and deliver against that based on your expertise.
Building a product company, I would go ahead and say there's like seven to ten more dimensions to the problem. That's fun if you like to learn but it does make things more complex at heart.
Yeah. I can imagine. So as you're building this, the one thing I didn't hear in there was the "Yeah, I had a tremendous amount of accounting experience" that you drew on to build this. Where did that come from? It's really intriguing. I mean you built a company that does this really critical function, but that wasn't the background that you had. How did you bridge that divide?
Let me first expose to you a bias that I have, which is I think there can be a certain genius in naivety. I'll demonstrate it another way, which is we're really big on culture and customer service at FreshBooks. I have never worked for anybody else. We were able to build ... I don't know if you know the great places to work thing that Google and Facebook and everybody gets into. Culturally our company, in 20, I guess it was 15, we were the number one company under a thousand employees to work for as determined by our employees, and by data. Not just like nice words. Benchmarked against thousands of other companies. And we've been a top ten company since then, so four and seven the last couple of years.
Why do I share all this? It's like I haven't worked anywhere else. But solving this problem of building a company and a culture that scales and matters is something I've been really passionate about and had a lot of fun doing. So that's thing one.
As it pertains to I guess your question with regards to expertise in accounting. I think that same naivety has played a huge role in our success again. Because I think sometimes if you bring a really strong mental model and great amount of expertise to a problem, you will end up ... Frankly when you're thinking about serving ... So this is again different than serving in professional services where you have one client, you want to bring basically the highest level of expertise you can. The funny thing about markets is mostly if you're doing educational stuff the greatest and the largest market is for like 101 material. Not 401. Not 301, if you're thinking about the university or college courses.
It's like the 101 stuff. There's the broadest market for that. And building products is really the same thing. You want to build the simplest, easiest to use thing. And if you're an expert ... Like we have accountants today who say the FreshBooks is not accounting. Except that we're the number two provider in America by revenues for cloud based accounting software. The market would say something different and it's because we built something that was frankly so easy to use. I think if I'd had an accounting background I never would have built it the way we did. I guess that's the punchline.
We came at the problem differently and we focused on, instead of sophisticated accounting capabilities, instead ease of use and efficacy for a certain target customer. And the results have been remarkable.
Yeah, they certainly have. And I think that little bit of wisdom is I think really key. If there's anything for the listeners to write down and take away from it, it's that kind of coming, as you say, from naivety and approaching a problem with fresh eyes. It gives you an advantage. It gives you an advantage that is a little bit unique and one that maybe most people would discount. I love that. That's brilliant.
So as you've built up the business what were some of the ways that when you ran into a brick wall or a road block, the thinking that you drew on or maybe some of the practices that you drew on to push through?
The Mentors Who Will Help Grow Your Business
Yeah. So I think the way I am built as an individual I guess, or something like that, is I probably have more of the push through orientation than I do of necessarily all the tools to solve the problem. And so we encountered many problems, all of which I was wholly unqualified to solve. But I had the desire to figure it out. I will say one thing that maybe was to our advantage is we were very aware that we knew nothing. So a big part of our success, and frankly my success over the years, has been knowing that I didn't know and not being ashamed to seek out help and kind of lay myself bare.
And so I have over the years collected advisors, and that's a little saying I have is "I like to collect advisors." And I would get out into the world in my industry, like going to conferences and things like that, and I would network and I would meet people. And I would turn those people into people who would pick up the phone if I called. Or get on the phone with me if I emailed. And then I would bring them my problems. It's a funny thing about when you're honest and you bring a problem to somebody else, is human nature is largely ... If that's problem is interesting and you're a relatively whether it be kind or forthright person. People want to help.
So I think that ... and that's not a specific example. I can give you examples where that actually became a problem for me. So why don't I go there? So, I guess it's like, "Hey, know what you don't know, and find people to help you think about how to get around the obstacle." Because the will was always there to get beyond the obstacle, but the tools and the know-how, we just simply didn't possess. So we networked our way into that.
And then we also ran into other problems. I think a lot of the hardest problems are the ones that have really squishy long term outcomes. And so when you're building a business, you don't always get direct feedback. Like if you're pitching a client in a few weeks you're going to know whether they're going to do business with you or not. It's not a really long term thing. Whereas in building this product company, we were making decisions frequently that you don't really know whether it worked out for many years. Or an opportunity would be presented to you where, based on if you go through that door, there will be knock on implications that are hard to anticipate.
So I'll give you a specific example. When we were working in the basement, I got a phone call one day. And it was the head of basically, I think they might be the largest bank in America. They weren't at the time, they were like number three. Anyways, but a big bank. So they called me. Sorry, it wasn't the head of the bank. It was somebody inside the bank and said, "Listen. We're interested if you would become our online invoicing" offer. At the time just picture this, I'm sitting in my parents' basement. I'm wearing shorts and a tee shirt. It's all I can do to ensure that they don't figure that out.
So we had a phone call. We always operated with this great level of service, and people didn't really need to know whether we were in shorts or a business suit of whatever to trust to do our job well. So anyways, took the call. They wanted to book another call to follow up. We did that. Fast forward a few weeks and I'm 50 floors up in San Francisco pitching these folks on, "Hey, we should be your invoicing provider."
Fast forward a few weeks. We win the bid. And I'm sitting there and I'm saying, "Geez. I don't know if I want it." And the reason why is because if we go down the path of working with this big bank, we are setting ourselves down a path where we are beholding to one very large customer, right? And at that time we probably had like a thousand paying customers, something like that. And that would influence our product roadmap. Because they're a bank and they're slower to do stuff, we would probably slow down. But, Geez, if we got ... They'd say if we get three percent of our small business customers to use your offering you're going to have a huge business.
And so I was just presented with this choice. So what do you do? I didn't know how to answer the question. I want to my advisor, this great advisor ... I've learned a lot from him over the years. One of the things I learned is, he basically said to me, "Mike, I don't know what you should do, but I know you're going to a great decision." He taught me a valuable lesson there, which is you don't hand people the answers to these questions. Maybe you try and help them think about the potential avenues. That's what he did. And then I had to make a call. My decision was not something he told me to do. I said, "Hey, make the deal worth 10 times as much and I'll do it. Otherwise we're walking." And I said, "No, thank you." And went with somebody else.
And by the way, I think this all was like a huge ... and I'm sorry this is such a long story. I'm probably going to mess with the cadence of the show. But that was a huge turning point in our business. Because if we'd gone down that other door, we would have been in deep trouble. So what is the point? Surround yourself with people who you can reach out to, to get help. Know that you don't know and that you need help. And then I would say don't settle if you feel like an opportunity or a path ... If you don't feel good about it, like trust your instincts. I think I really didn't want the deal and that's why I said make it 10 times as much. But I had to come up with some way that I could walk away from it that I could rationalize as well.
Which brings me to a final thing, which is there's a creative solution to any problem. And I truly believe that. We've demonstrated that time and again over these years at FreshBooks.
That's brilliant. I love that story. I actually think for a lot of the folks running service businesses who are listening to this, who are often finding themselves in that situation where they've got the one big client, or they have the opportunity to get the one big client, just hearing your take on that. And also the importance of going and having those outside folks to question your answers. I think that's brilliant. I appreciate your sharing that.
So we're going to take a quick break. When we come back, we're going to talk with Mike about a whole range of things, but we're going to start off value based pricing for those of you who are looking for a different way to price your services, hopefully get paid more and get out of the hours for dollars trap. We're going to cover some of that. We're going to talk about FreshBooks and invoicing and all kinds of stuff.
So stay tuned.
Welcome back. This is Steve Gordon. I am talking with Mike McDerment, CEO of FreshBooks. Mike, let's change gears a little bit. Let's talk a little bit about pricing because for the folks who are listening who are running a professional service business and probably most of them billing by the hour. I've been there. My first business we did a lot of that and I know what a grind it is. And you actually wrote a book, a whole guide on this topic.
So I'd love for you to share with us a little bit of your thinking around getting out of that and moving more towards value based pricing.
Okay. Thanks, Steve. So I'm going to start off with something semi promotional. My only reason for starting with it is so I don't forget to mention it later because I think it'd be helpful for folks. So I wrote a book. It's called Breaking the Time Barrier. It is basically a story of how to move from billing by the hour to value based billing. We'll talk more about why you'd want to do that in a little bit. You can download it for free, okay?, on our website. So search out Breaking the Time Barrier. And it takes an hour to read. So for anyone who's not already doing value based billing, just go to your browser, do the search, spend the hour.
It's written like a fable. So please, if you can get over that format, that'll be great. Is it my favorite format? No. Is it very effective for what that book does? I believe so. It's been downloaded over a quarter million times. The purpose of the book is to help you shift your mindset, to go from a world of how you do billing and pricing and client engagements today to a future state where you can earn more money, basically have more job satisfaction, and actually be more aligned with your clients. So go do that. If not now, after I hit pause go do it.
Bill for Your Impact, Not the Hours You Work
So let's talk a little bit about value based billing and what it's about and why it's a good idea. So the intent of value based billing is to basically divorce your efforts from hours and more closely align them with the impact you deliver for your clients. Full stop. That is kind of the high level pitch. So why would you want to do that? Well, first of all divorcing how much you earn from hours, okay, that's a nice and better place to live. So that's a thing.
But there's a whole bunch of reasons why doing that is a good idea. Let's go to ... I'll start with my personal favorite. If you get down to it, I believe you need two things in business to be successful. Shared values and alignment. And if you bill your clients for time, you are not aligned. And here's why. If you charge by the hour, you are incentivized to work more slowly and charge for more hours. If you bill your client by the hour, what they want is for you to be more efficient and charge for less hours, okay? So inherent in the business model is misalignment. And by the way sometimes that can lead to mistrust. It can also lead to things like, "Okay, we're going to charge you by the hour for this project." You go and do the engagement. And then they get the bill at the end, and they're like, "What the hell's going on? How could this possibly cost so much?" And then they start not trusting you and saying you're moving too slow and all those other things.
So value based billing is a very different approach where you start the engagement in a different place. You first seek to understand what is this client trying to achieve, what is the impact if that is delivered, and am I even able to help them to that. If the answers to those things are yes, you're putting forward a proposal where whatever the impact is, your fee is some percentage of that. Some percentage that makes sense for them to proceed. And some percentage that makes sense for you to have a profitable engagement. We can get into more bits and pieces of it but I think that's a good high level introduction to the concept. How about that, Steve? Does that work?
I think that's a good frame for it. In my experience clients don't like hourly billing, simply because they don't ever really know if they're getting what they should from the engagement. You might charge someone the exact same dollar amount whether you did it hourly or through a value based model and deliver the exact same product. But at the end of the day, in my experience, the client feels a whole lot better about it if you've taken them through this value based process.
I think it is a process. It's not just like you show up and decide this is what it's going to be. I think you've got to go through a process with the client to get them to see the value and to articulate it. Oftentimes they haven't thought about that really thoroughly. I don't know how you find but I know I find in our own business when we have these conversations a lot of times these clients haven't really thought through what is it really worth, what are they trying to achieve. They don't have clarity yet. I find that just going through the conversations that you have to go through to get to that point are usually really beneficial for the client.
So if somebody is listening to this and they're going, "Oh, okay, that's great. But I'm billing all my clients right now by the hour. I've tried this once or twice before and it didn't go well." What do you tell them as a way to get started down this road? How do they have to begin to think differently about their engagements?
Yeah. So first of all, I empathize, right? Not only is it a new way of thinking and working, but you also have clients who you've trained to expect one thing from you and this could be like changing things up. So what I encourage people to do is forget about your existing clients as you're trying to figure out how to do this, and actually start with prospects. The rationale for doing that is you may lose some deals as you stub your toe and try to figure this out, but at least they have a blank slate in terms of expectations for how you bill them.
How to Start Billing for Value
So that's one approach. So start with a segment of your customers. The other thing could be is you pick one or two customers who you think they're more open minded or what have you, or trusting of you, or whatever the case may be. And as they come back to you with, whether it's next quarter or next year's project, say okay, we're starting to work a little differently here. We want to spend more time with you upfront to better understand your problems and what you're trying to achieve. So it's going to be a process change. We're going to give you a price upfront so that we're aligned, and then you're going to have cost certainty. And by the way to your point of it's a better experience for the client, cost certainty is valuable. I bet people would pay 10 or more percent on engagements with professional services firms just if they could be assured cost certainty.
And so that could be like a bit of an opening pitch. And then try to do it once or twice with some of these firms. You may get it wrong or you may misstep here but that's the learning experience, and if you're not prepared to risk that or try that you're probably not going to change and get where you want to go in life.
You know if you get past that point, the next big fear that comes up ... And I've talked some of our own clients that they need to make this shift. The next thing that I hear from them is, "Yeah, but I might lose money." How would you answer that?
It just broke up a little bit there for me. What if I lose money? Is that the question?
Yeah. A lot of times services providers will worry that if I give a fixed price then I've got to estimate it perfectly and I may end up making less per hour than if I just billed them by the hour.
Then I would say you're probably not having a big enough impact for your clients and their problems maybe aren't big enough to be my orientation. The other one would be you just hung the wrong number on it, which was a mistake on your part. And the other thing I would say is, "Okay, so what? You lost money for an engagement. What did you learn? What are you going to do differently next time." I will say just because you do value based billing I think you can still track time. You should still have some understanding of what your costs are, where your resources are deployed. You may not ever expose that to your client, but for your own internal operational excellence, go ahead and track time still.
I think nothing ventured, nothing gained. If you lose money on one engagement, is that going to kill you? And, if so, maybe now is not the time to be experimenting.
I think that first piece that you shared there around the size of the problem. I find more often than not that's the root of it. I see it happening in two ways. Number one is that when somebody is making this transition, I think oftentimes because they're not good yet at having that conversation, sort of leading that future client through how to think about value. A lot of times they end up assigning the value, the service provider ends up assigning the value themselves. They think, "Well, this is kind of what people pay for it. This is probably what it's worth. It certainly couldn't be worth five times or 10 times as much." Which I think is just something that's just in your head if you're thinking that. You'd be surprised what people will pay for it if you take them through the right process and tie it, get them to tie down what the value is to them.
So I think that's kind of a first place where you see it start to fall apart, is you don't go all the way through the process of getting the prospect to identify the value. So you make some assumptions. And then you kind of assume that well, people have paid me this much before, all I'm doing is turning this into a lump sum of what I got before. And that's not the point. In my experience that's been a big miss.
So, Mike, let's assume somebody gets through that. Now they're beginning to operate more and more from a perspective of value based billing. Now as they're trying to track that and grow that, what are some of the ways that either you've employed or you've seen them. You've now seen thousands and thousands of businesses, right?, bill in different ways. What have you learned that once somebody is billing that way they can be doing and focusing on to grow that value.
Well, I think what happens generally when people take this approach is ... I think this is common of the most valuable and expert firms that are professional service firms out there, is you start moving away from offering services to anyone to more and more specific and consistent industry segments and this kind of thing.
What You Must Do to Charge Clients More
I'll give you an example from my past. It turned out that basically 80% of our clients were in travel or real estate. There's market reasons why that was, which would include they understood the internet, they were spending more money there, they needed more help. So those are some of the factors. Another one was, after I had a client or two in that area, I could speak more cogently in their language about the kind of problems they were facing. So I didn't have customers that were competitive, but I was able to draw on the experience I learned and developed in the prior client engagements and come and apply it to the future customers.
Which is valuable because now I'm becoming not only an expert in my area of expertise, but also an expert in your industry. And so I can bring you value you're not necessarily expecting. And so what's interesting about all that is you're more attractive. People want to buy from you. You can have a bigger impact for the client and you can actually probably get the work done faster. So those three things make for increasingly profitable engagements.
Absolutely. And what I love about this approach is you mentioned get the work done faster. This is how you make more money, right? You get paid the same and you get the work done faster. There's value to speed. So I want to take a few minutes. I know we've only got a few minutes left. I want to take a few minutes and talk a little bit about the work that you're doing at FreshBooks. It's something that certainly has helped our business over the years. It's interesting. I know it'll do time tracking and all that sort of thing, but we don't bill like that. So we've never used those parts of it, but we have used it to run all of our invoicing for the projects, the clients that we work with which is all value based.
For somebody who is listening to this saying, "Yeah, I need some help on the invoicing side." Where do you guys plug in? How does it help them? And where should they go to find out more?
Wonderful, Steve. Thank you so much for asking. So the way to think about us, ridiculously easy to use invoicing and accounting software, again for folks who get paid for their time and expertise. So we offer time tracking. We offer expense tracking, and some project management. So you can have a client engagement. You can track your time on it, understand how profitable you are, if you're over budget. Get that on to an invoice. Get it in a professional way, with your logo on it, to your client. All that good stuff.
So the idea, by the way, in terms of benefits is we find that people spend about a quarter of the time they used to previously on billing their clients, and that was 16 or 20 months ... Let's say you spend 20 hours a month at your firm doing billing and you can take that down to five and you can spend those other hours generating revenue or spending time with your family. Either way those are big benefits in our books.
So that's what we do. You can learn more at FreshBooks.com. And I'll just give a plug for please don't be shy about phoning us. We love speaking with folk on the phone, probably like you do. And you're going to talk with a live person if you dial us up toll free. And that's a beautiful thing.
Yeah. Support's great. Yeah, I'll tell you when we started I didn't overwrite an invoice but I just got so frustrated updating a Word template and sending it out. I think I'd forgotten to do it one week and ended up a week behind on billing, and ended up moving to FreshBooks. We bill on an ongoing monthly basis, a fixed amount to all of our clients. And I was able to set it up and it literally would run through the duration of the engagement. And I wouldn't have to think about it anymore. You guys would send out the invoice accurately automatically every month. And then we got paid, which was really the point. So we've been a big fan for a long time. I'm glad you overwrote that invoice way back when.
Well, Mike, it's been a pleasure talking with you. Thank you for sharing your expertise. I know this has been beneficial for all of our listeners. And, again everybody, you can go find out more about FreshBooks at FreshBooks.com. You can find the Breaking the Time Barrier book there. We will link directly to both of those in the show notes if you want to find those. And, Mike, again, thanks for being on.
Thanks for having me, Steve.