by Grant Buckler, Senior Writer, SoftwareCEO

Mindbody Software started in 2001 in what looks like a pretty small niche: appointment scheduling for yoga and Pilates studios.

Not as small a niche as you think.

There are 70,000 yoga and Pilates studios in the United States, co-founder and CEO Rick Stollmeyer says. Add in the related health and wellness sectors Mindbody has begun serving — like skin care and dance studios — and the company has a potential market of a million businesses worldwide.

In eight years, Mindbody has grown to $8+ million in sales and 85 employees. It hit #370 on the Inc. 500 list for 2009, on the strength of eightfold growth over three years.

Also in 2009, the company took in $5.6 million in financing from private equity firm Catalyst Investors, and Stollmeyer was named Central California Small Business Person of the Year.

Along the way Mindbody brought in a new partner — New York yoga studio operator Bob Murphy — and made a successful transition from licensed to SaaS.

The past eight years have been a quite a workout.

Here are Stollmeyer's 14 tips for building a healthy business.

Healthy body, healthy business tip #1: It has to be SaaS
Mindbody didn't start with SaaS, but switched to it after a couple of years with the licensed model.

So Stollmeyer is well-placed to compare the two models and the tradeoffs of each.

Originally, the Mindbody software used database synchronization to keep scheduling, billing, and other data up to date on multiple machines. But in 2003, Stollmeyer decided to ditch that and "just run the whole thing from the cloud."

Why?

"First of all," he says, "the businesses that we serve have multiple parties involved… and these people need to be able to access the information simultaneously."

Many customers need information at more than one location, and have people working at home. A web-based approach makes that easier.

SaaS also makes upgrades much easier.

"Because we're not deploying copies of our code set, we are able to release improvements to the software almost continuously… and have a release cycle every four to six weeks."

That continuous improvement is also at the core of Mindbody's success — more about that later.

Healthy body, healthy business tip #2: Be prepared for some challenges with SaaS
But SaaS does present some challenges, he admits.

One is perception: the vague fear many people have of trusting their data to an unknown server somewhere out on the internet.

SaaS also makes upgrades much easier.

Mindbody overcame that by emphasizing how secure its systems are; much more secure, Stollmeyer argues, than most of its clients could ever have on their own.

A bigger challenge is financial.

With SaaS, you get a continuous stream of recurring revenue instead of a lump sum. That's why SaaS companies can almost never bootstrap, Stollmeyer says, and that forced Mindbody to seek outside financing to see it through the transition.

"The immediate effect was to reduce our revenue, because we weren't collecting the substantial license fees up-front," Stollmeyer says.

But the temporary pain is worth it.

"What SaaS is doing is developing a portfolio of subscribers, and subscribers are worth a heck of a lot more than someone who pays you once."

Healthy body, healthy business tip #3: If you have a customer base, private equity may be better than VC
One of the greatest dilemmas facing most entrepreneurs is whether to bring in outside investors and risk losing control, or go it alone.

At that point, the move to SaaS forced him to seek outside financing, but he was careful.

It's a tough call, except maybe for those who made a pile on a previous business and have enough cash to finance a startup on their own.

Stollmeyer took no outside money until 2005. At that point, the move to SaaS forced him to seek outside financing, but he was careful.

He started with $1 million from angel investors that year, followed by another $1.6 million in 2007 from a group of angels led by Trevor Tice, CEO of CorePower Yoga.

Then in March 2009, Mindbody got $5.6 million from the New York private equity firm Catalyst Investors.

Stollmeyer says private equity is a better fit for companies like his, that already had an established product and a customer base, and just needed money to expand.

Private equity firms are more interested in companies that can provide steady returns, he says, while VCs are often looking for fast money — "something they can flip really fast, because someone comes along and picks it up even before it has substantial revenue."

Remember, not all investors have the same goals. For a happy relationship, yours have to match theirs.

Healthy body, healthy business tip #4: Seek investors who want to collaborate, not dominate
Another reason why Stollmeyer liked Catalyst was because they didn't think they knew more about Mindbody's business than he did.

Don't be too quick to jump into bed with someone who will turn out to be a bossy partner.

"These folks impressed us with the ability to listen to us and make some very astute suggestions, and helped us refine several aspects of our business model," he says.

"But they didn't come in thinking that with a few hours of study, they could know better…

"I would advise other folks to really explore that deeply.

"A lot of good companies, I think, have been messed up by people who just think they're smarter, and haven't taken the time to really understand the fundamentals of the business."

Don't be too quick to jump into bed with someone who will turn out to be a bossy partner.

Healthy body, healthy business tip #5: Aim at a boutique market
Stollmeyer set out to develop software for the fitness industry partly because of his personal interest.

"I believe in fitness and wellness," he says. But why start with yoga and Pilates studios?

"I think this is where the world is going," Stollmeyer says. "It's going to smaller businesses that provide more personal service of higher value, and charge more money for it."

That is, boutique businesses are where the money is.

He's been proven right by the fact that larger health clubs are now opening yoga and Pilates studios on their premises and charging members additional fees to use them.

Many entrepreneurs worry too much about whether their chosen niche is broad enough.

There are about 7,000 yoga and Pilates studios in the U.S. alone, says Stollmeyer, and the world market is double that. Adding in the other types of health and wellness businesses Mindbody is now addressing brings that number to half a million potential customers in the U.S. — and double that worldwide.

Another good reason for aiming at "small" niches is that there's less competition.

When Mindbody started, there was no dominant player in software for yoga and Pilates studios. There still isn't, though Stollmeyer hopes that in a couple more years Mindbody will be that player.

And giants like Microsoft are unlikely to go after his business.

"The requirements are detailed enough that it's nearly impossible for a very large player to provide enough specific capabilities. And frankly, in the short term the revenue isn't enough to move their needle," Stollmeyer says.

Healthy body, healthy business tip #6: Narrow your sights so you can be a significant player
Stollmeyer says many entrepreneurs worry too much about whether their chosen niche is broad enough, when what they should be worrying about is whether it's narrow enough.

"You've got to define a market that you can become significant in and become the best at," he says, "and if there's little chance for either, then redefine the market.

"Keep narrowing it down until you find that segment that you can become a player in relatively quickly, and then go after that segment with everything you've got."

This a common lesson we hear from software CEOs: There's no point trying to do too much for too vast a market. It's better to be really good at one thing, and get really well-known for that.

Or look at this another way: It's better to be a big fish in a small pond.

Healthy body, healthy business tip #7: Know the related micro-verticals you can expand to
For Mindbody, narrowing down the target niche also meant starting with a very specific piece of the health and fitness market.

"I had people tell me early on, you know, 'Yoga and Pilates, that's an esoteric thing,' " he recalls.

But Stollmeyer's plan all along was to start with those segments, establish leadership, and then move into related micro-verticals like spas, dance studios, martial-arts studios, and skin-care salons.

"We became serious about the ancillary markets only a few years ago," Stollmeyer says.

On Mindbody's website, you'll find products for all these different "micro-verticals."

In fact, it's almost the same code for each business segment. Adapting to a dance studio or whatever is mainly a matter of configuration choices for a new customer when they set up the software.

So the key was to do what QuickBooks and others don't.

That's the only practical way of addressing those different segments, Stollmeyer says.

"We wanted to pick a collection of verticals that have a common theme and a manageable amount of differences, and then become the best in the world for those," Stollmeyer says.

Who says this is thinking small?

Health body, healthy business tip #8: You can't beat the big boys, so join them
Mindbody is part of the Microsoft developer network, and has partnerships with Intuit, e-mail marketing service provider Constant Contact, and others.

Its software works with Quickbooks, Salesforce.com, and other more horizontal offerings.

"Accounting software is an incredibly complex system. And if we had spent our energy on that, and not recognized the reality that 90 per cent of our clients were already using QuickBooks — if we positioned ourselves as a competitor to QuickBooks — we'd really be barking up the wrong tree."

So the key was to do what QuickBooks and others don't. What's that?

"QuickBooks doesn't know the difference between selling a 10-class yoga series, and selling a DVD," Stollmeyer says.

The DVD is a one-time transaction. The yoga series is a prepaid service that needs to be tracked and scheduled. And that's where Mindbody comes in.

"Rather than us trying to become a SalesForce.com," he says, "we'd rather just integrate and use the API, and have people… use our system for what it specializes in, which is scheduling, client account management, e-commerce."

Healthy body, healthy business tip #9: A friend may not be your best partner
Stollmeyer started Mindbody in partnership with a friend. It didn't work.

"We didn't have quite the right synergy to be successful," he says now.

You can't pick your family, but you can pick your partners…

And worse, "we didn't think through what would happen if we had a difference of opinion, or if one of us wanted to leave. That was a big mistake and almost cost the whole business."

Fortunately Bob Murphy, a New York yoga studio co-owner and early Mindbody customer, bought out the other original partner. Murphy is now CFO and chief sales and marketing officer.

Stollmeyer says he and Murphy have different skill sets. While both had sales experience, Murphy had managed a sales operation and run his own business, while Stollmeyer had an engineering background with operational experience.

And most important of all, they both accept that they don't know it all.

"There needs to be one partner who's more technically oriented, and one partner who's more business- or marketing-oriented, because both parties will have blind spots," says Stollmeyer.

"And secondly, an understanding that they have blind spots, and do not believe they have all the vision. If one partner thinks that they have it all figured out — boy, there's trouble down the road."

You can't pick your family, but you can pick your partners, so do it carefully.

Healthy body, healthy business tip #10: Don't fight in front of the kids
And when a management team has differences, it's usually best to work these out in private. Otherwise, they can split the company into factions and ultimately create a toxic workplace.

Here's an example of the right way to do it.

Despite the hassles that can arise, it's better to have a partner than to go it alone.

Stollmeyer originally thought it wouldn't work for Mindbody to sell its software through channel partners.

The software was too complex and specialized, he believed, and only salespeople who knew it really well could sell it effectively.

But Murphy thought channel sales could work, and convinced Stollmeyer to try it.

"It's been a fabulous success," Stollmeyer admits today.

That ability to cover each other's blind spots is why Stollmeyer believes that despite the hassles that can arise, it's better to have a partner than to go it alone.

And he says the key to Mindbody's success is that he and Murphy can have frank discussions privately, reach an agreement, and then present a "unified front" to employees and customers.

"It's kind of like a marriage," he says. "You don't fight in front of the kids, but you've got to be able to tell each other the truth behind closed doors."

Healthy body, healthy business tip #11: Price your software low enough to avoid cutbacks
Most Mindbody customers pay a few hundred dollars up front and a monthly recurring fee of $65 to $100, with the average around $80 a month.

Why so low? So it's an easy purchase decision for potential customers, and not a tempting target for cost-cutting.

"I didn't want our costs to show up on a P&L as anything more than one percent," says Stollmeyer, "because when you're cutting costs you're kind of looking at the percentage of revenue line.

"And it's borne out in the fact that in the recession, we've had effectively no impact on our attrition rate, except a slight increase in business failures."

Stollmeyer says Mindbody's low price has driven its rapid growth and helped keep attrition low.

Not all entrepreneurs see it the same way. If you price too low, you're leaving money on the table, and tempting prospects to wonder, "What's wrong with that software?"

So it's a fine line. You want your price to look like a good deal, but not a fire sale.

Healthy body, healthy business tip #12: Publish your customer list
Many businesses try to keep customer names and other information close to the chest, reasoning that the less competitors know about them, the better.

The downside, of course, is that hiding information from your competitors means hiding it from prospects, investors, and partners.

"We list every client on our website," Stollmeyer says. "It's almost a dare to our competitors to go market them."

Why do that? Not because Mindbody only has a few customers — it has around 6,700.

"The benefit to our potential clients of seeing the breadth and depth of our client base" is why they publish it, says Stollmeyer.

In a vertical market like Mindbody's, many people know each other. A potential customer sees someone they know on the customer list and calls up to find out how they like Mindbody.

"Our customer satisfaction is quite high," Stollmeyer says, "and that's much more valuable than the chance that a competitor could convince one of our clients to leave, which is extremely rare."

So Mindbody encourages prospective customers to skim through the customer list, and call whoever they like.

What about the risk that a prospect calls a customer who's been having problems with the software and gets a bad reference?

"If we have pockets of clients who are unhappy, we need to address that," Stollmeyer says. "I don't think you can keep unhappiness a secret in today's world."

The takeaway here: Keep your clients happy, and then publish their names. There's not much downside.

Healthy body, healthy business tip #13: Use agile development to respond quickly to customer feedback
If a customer is unhappy, Stollmeyer says, the answer is "we'll make it better."

A central part of his strategy for that is agile development, emphasizing teamwork and frequent iterations. Stollmeyer says this allows his company to take customer feedback and incorporate improvements in the very next release.

Keep your clients happy, and then publish their names.

And it's well-suited to SaaS, with its instant roll-out of any fixes or updates.

Stollmeyer won't go into much detail about Mindbody's development process, because it's "probably our most important secret sauce."

To find out more about agile development, here are two good starting points:

• the Wikipedia article on Agile development
• the Agile Manifesto.

What Stollmeyer will say is that rapid response to customer feedback starts in customer service.

"Almost every new member of our team begins in customer service and goes through a very in-depth training process of understanding our clients, and understanding our software, and how those two meet.

His approach… treats software development as a production process, rather than a ‘craft-type creative process.’

"They're the ones who on a daily basis are hearing from our clients what they like and what they don't like, and they're the ones who begin the process of agile development."

And Stollmeyer says his approach to agile development borrows from lean manufacturing, and treats software development as a production process, rather than a "craft-type creative process."

It's akin to the way Henry Ford changed auto-making from a group of craftsmen building one car at a time to a production line.

The key is that it allows Mindbody to take customer feedback and incorporate it rapidly into software updates, which it can then push out to customers fast, thanks to its SaaS delivery.

Healthy body, healthy business tip #14: To create raving fans, offer your customers concrete business advice
Personal contact with customers is a key to understanding what they need and want. When you're a small startup, that personal contact isn't hard to maintain, but as you get bigger, it gets harder.

Mindbody's solution is a training program called Mindbody University. It comes in a couple of flavors: intensive three- and four-day programs in California and New York, and customized mini-events for some larger customers.

Mindbody University combines training on the company's software with sessions on business issues like marketing and customer retention; in other words, "best business practices that we have learned over the years of running our own company and serving businesses like theirs," says Stollmeyer.

Mindbody's own staff lead 80 percent of the sessions.

Since Murphy and his wife Beverley built one of New York City's most successful yoga chains, he has lots to teach customers about marketing, pricing, managing staff, and the like.

In turn, they often create raving fans.

Sometimes the company brings in outside experts to run sessions on topics like motivating staff and retaining customers.

Customers pay around $800 per person (plus travel costs) to attend.

These sessions provide a chance for the Mindbody people to connect with some of the company's most sophisticated and committed customers. They get ideas for future versions of the software. And in turn, they often create raving fans.

"The people who come in are typically moderately enthusiastic.  And they typically leave as, 'Oh my God, you guys are the best company I've ever seen!' and they go out and tell 10 friends about us. So we actually look at Mindbody University as an element of our marketing program."

About the author: Grant Buckler is an award-winning technology journalist with 28 years' experience covering computing and communications news and trends. He has written for numerous publications and research firms in Canada and the U.S.