Every startup needs to become profitable at some time or another. Companies willing and able to take on $25 billion in funding like Uber might be able to put off becoming profitable for a whole decade. For us bootstrapping SaaS founders, the timeline becomes a whole lot shorter.
It isn’t all bad news, though!
In this article, Ramen Club will be walking you through a topic you may or may not have heard of—ramen profitability. Ramen profitability is an approach to profit that helps founders overcome one of the greatest mental blocks they face: the fear of running out of money.
Sound interesting? Let’s discuss.
What Is Ramen Profitability?
Ramen profitability is defined as the point at which a start-up is able to generate enough revenue from its operations to cover the living expenses of its founders. If your business is earning enough monthly recurring revenue (MRR) to cover rent, utilities, and food, it's officially ramen profitable!
Why ramen, though? Let's unpack the underlying meanings.
Ramen Profitability and Long-Term Survival
Instant ramen is cheap—really cheap. It's so cheap that it has basically become a cultural stand-in for the concept of cheap food.
But a person could theoretically survive on a diet of ramen (okay, mostly ramen) for a fairly long span of time. Would it be miserable? Probably. Would you be hungry most of the time? Probably. But it's still better than the alternative!
That's the mentality that ramen profitability is all about: long-term survival. Traditional profitability means raising and spending money until you get your big payout. Ramen profitability means earning just enough to keep the business afloat and buy yourself time to scale and improve your product.
Having a sustainable business model is critical for any company, but it's especially important for early stage startups who are still trying to figure out their place in the market.
Ramen profitability is therefore seen as a key milestone for young companies, signalling that they have achieved some level of stability and sustainability without looking to outside investments.
Ramen Profitability and Low Overhead
Low overhead is another core piece of the ramen profitability puzzle. Traditional start-ups can be incredibly expensive. Modern software start-ups can be incredibly cheap—like instant ramen!
A micro-SaaS product built out of the founder's parent's living room with nothing more than a laptop has an overhead of next to nothing. Now, contrast that with the overhead required to get a computer hardware start-up off the ground. Equipment, warehousing, manufacturing, R&D—nothing about the process is cheap.
So, there's a widening gap between traditional start-ups and low overhead software startups with regard to profitability. The computer hardware start-up might need $50M in revenue to achieve profitability, while the micro-SaaS start-up only needs an MRR of $100 to meet the technical definition.
The beauty of this realization is that it allows early stage software start-ups to set far more attainable profitability goals. Rather than shooting for the moon and trying to achieve traditional profitability, they can focus on becoming ramen profitable as quickly as possible.
What are the benefits of achieving ramen profitability?
There are a few key benefits to achieving ramen profitability:
- You have more control over your business. By achieving ramen profitability, you sidestep the need for outside money. That means less equity dilution and fewer backseat drivers.
- You can focus on building a great product. With ramen profitability, you're not focused on making a quick buck. You're focused on building a product that people will love and use long-term.
- You can weather the storms. Start-ups are volatile by nature. Having a low overhead and minimal expenses means that you can weather the inevitable storms without having to worry about running out of cash.
How Do You Become Ramen Profitable?
Getting a start-up to ramen profitability involves two metrics: monthly recurring revenue (MRR) and monthly expenses (ME).
- MRR: Your MRR is a measure of how much revenue your business generates on a monthly basis from recurring sources (like subscription fees for SaaS products).
- ME: ME measures your monthly expenses—both monthly personal expenses (MPE) and monthly operating expenses (MOE). Obviously, the lower your ME, the easier it will be to reach the ramen profitability milestone.
So, the ramen profitability equation is:
MRR - (MPE + MOE) = X
If X is a positive number, you've officially achieved ramen profitability. If it's highly positive, you might be moving into the realm of traditional profitability. If it's negative, you have two options:
- Increase your MRR
- Decrease your ME
This isn't exactly revolutionary mathematics, but it's an important segue into the central topic of this section: how to achieve ramen profitability. Let's talk about both of those options in a bit more detail!
How To Increase Monthly Recurring Revenue (MRR)
In order to increase your monthly recurring revenue, you need to take a multi-faceted approach. Here are three key areas to explore (plus some actionable tips):
Customer acquisition and MRR go hand in hand. The more customers you have paying for your product or service, the higher your MRR will be.
Here are some tips for approaching customer acquisition with the goal of ramen profitability:
- Define your target market(s). Ideally, you'll have done this already. If you haven't (or if you think your definition needs an update), now's the time! Create an ideal customer profile (ICP) to use when and identify where they're engaging online (e.g., forums, blogs, social media). These platforms offer great opportunities for lead generation and targeted advertising campaigns.
- Focus on contacting high-value customers. Paul Graham dropped this piece of advice in the very same Tweet that popularized the term ramen profitability. When the goal is traditional profitability, quantity over quality is usually the name of the game. When your goal is ramen profitability, it's more important to focus on a few high-value customers. Make a list of businesses or individuals who match your ICP to a T and reach out with an offer.
- Offer up-sells and cross-sells. Use upsells and cross-sells to boost average revenue per customer (ARPC) by targeting existing customers with relevant promotions or services (e.g., upgrade to a premium plan, add-on an extra feature, etc.).
- Prioritize word-of-mouth marketing. Word-of-mouth marketing is one of the most effective tactics you can use to find new customers. If a client or customer loves your product, they're likely to tell their friends and family about it. Encourage this behavior by offering incentives for referrals.
- Join a support network. Networks are another great way to connect with potential customers. Joining a support network for founders like Ramen Club is a great way to build mutually beneficial relationships, get feedback on your product… and commiserate over your shared start-up struggles!
You can also increase your monthly recurring revenue by charging more for your product or service—but only if you don't lose too many customers in the process.
The key here is to find the right balance between price and value. You want to make sure that your product is priced at a level that reflects its true worthwhile still staying within the budget of your target customer.
Here are two strategies that might help:
- Conduct market research. Conducting market research to compare your prices with those of similar products or services will allow you to price your product more competitively. Use feature disparities and reviews to determine an attractive price.
- Create a tiered pricing model. Offer premium-level tiers and add-on services to generate additional revenue from existing customers. For example, a SaaS product might offer a higher package that includes more storage space or specialized customer account management.
In some cases, it may not even be necessary to increase prices in order to see an improvement in monthly recurring revenue. Instead, you can improve your value proposition by focusing on what sets your business apart from the competition.
One way to do this is to establish a clear and consistent brand message, which will help you build trust, loyalty, and credibility with your target market.
This can be accomplished through a variety of tactics, including:
- Start an industry blog or news site. This will help you establish yourself as a thought leader in your industry, which can make potential customers more likely to do business with you. As a rule of thumb, the less you try to sell your product the better—focus on providing value for readers.
- Engage in social media marketing. Use social media platforms (e.g., LinkedIn, Instagram, etc.) to share your brand message with a wider audience and connect with potential customers on a personal level.
- Make it easy for customers to find social proof. Testimonials, case studies, and customer reviews are all forms of social proof that can help build trust with potential customers. Be sure to make this type of content easy to find on your website or product page!
As you can see, there are many different ways to increase your monthly recurring revenue and build toward ramen profitability! The most important thing is to experiment and find what works best for your specific business model and target market(s).
Now, let's talk about expenses.
How To Decrease Your Monthly Expenses (ME)
There are two main types of expenses to consider when working toward ramen profitability: monthly personal expenses (MPE) and monthly operating expenses (MOE). While both are important, I'm going to focus on the latter in this article and leave the personal finance advice for another day.
Here are some tips for reducing your MOE:
- Lower monthly hosting costs. Migrating from self-hosted platforms like Amazon Web Services (AWS) or Rackspace Cloud Hosting to managed hosting solutions often comes with built-in support and savings on infrastructure costs.
- Build mutually beneficial partnerships. Reduce your advertising budget by partnering with businesses in your niche that have already achieved a high level of visibility (e.g., seeking out guest blogging opportunities). Once again, a support network like Ramen Club is a great place to make these connections.
- Adopt a savers' mindset. Adopting a savers' mindset means you're constantly on the lookout for ways to reduce expenses. That might mean shopping around for the lowest prices on office supplies, merchant processing fees, and other operational costs, or negotiating lower rates with vendors or service providers.
As you can see, there are many ways to decrease your monthly operating costs while improving the profitability of your business. By combining these strategies with the strategies for increasing MRR, you'll be well on your way to ramen profitability in no time!
Get Ramen Profitable
If you're thinking about starting a business, or even if you're already running one, aim for ramen profitability! It's a great way to increase your chances of success while eliminating one of the biggest mental blocks founders face: fear of running out of money.
For personalized advice about making ramen profitability a reality for your business, Ramen Club is the place to be. Our 60+ strong community of founders is full of bootstrappers just like you—ready to offer insights, advice, and support in weekly remote and IRL meetups. Plus, you'll get unlimited access to expert advice from our in-house marketing, user research, and finance mentors.
We can't wait to see you in Ramen Club!