A lot of startups are hesitant to make their users pay early. After all, it’s the internet, right? "This is just an MVP, we need to build traction first, we're focused on growth, and …"
Let me stop you right there. You already know why you shouldn't charge users. There are plenty of reasons, but they're often just a front for ...
The real reasons most startups aren't charging users
They simply lack confidence in their product.
There's a subtle, but definite underlying fear that their whole business model isn't working out—and they'd rather keep the faith in an unverified idea than risk seeing their dream smashed into pieces.
"One of my Top 100 mistakes was not charging on Day 1. If you don't charge, you have no idea what people will actually pay for."—Jason Lemkin
(Of course, it's often not that bad. In most cases, it's possible to fix the business and transform it into something that works. But you can only do that once you put it to the ultimate test, see how it functions in the real world, and expose it to the possibility of failure.)Here’s why you should charge anyway
Let’s start with the most important reason first.
Reason #1: Insights (that actually matter)
On the way to product/market fit, startups constantly tweak, improve and optimize their product.
Most of the improvements are driven by the feedback they get from a) their market and b) their users.
If you're not charging users even very early on, you're taking an enormous gamble. You might be listening to the wrong people, and optimize for the wrong audience.
There’s a hierarchy of data value:
- Feedback from people who say they like your product.
- Feedback from people who say they will buy your product.
- Feedback from people who (actually) pay for your product.
Unless your business model is to give away your product for free to your users, you should focus in on the feedback you get from people who actually pay for your product. [Tweet this!] That’s the source of your most valuable insights.
Example: Which vertical to pursue?
Let’s say you have a product that could be valuable in many industries, and you haven’t decided which vertical to focus on first.
You might find that you have three main groups of users:
- Political campaign groups
- Small businesses
Maybe the political groups are the most enthusiastic and vocal. They give you the most love and energy. They're all excited, saying “Oh my god, this is going to change everything!”
And you’re thinking: "Wow, these guys love us! We should go after this market!"
But once you ask for money, the brands go, “Yeah, here’s my credit card”. The political campaigners? “Well, that’s too expensive, you know, our budget constraints, bla bla bla ...”
And all of a sudden the picture has changed completely. Now you're thinking "We should totally focus on brands! Because they really want to buy this, whereas the political campaigners just want to use it!"
Let the money do the talking
People will say all kinds of nice things about your startup and your product. But don’t take that at face value. Don’t base your business model on opinion polls and enthusiastic feedback.
We're not in politics, we're in business. The only vote that truly counts is what they vote for with their own money. If they’re willing to part with their cash for what you have to offer, you know they’re truly getting value out of it.
Reason #2: Find your price point
Early on is the best time to experiment with different pricing. But you can only do this if you're charging money.
Avoid market-based pricing
Many startups look at the pricing of other similar startups, and copy their pricing. Seems reasonable, but it can be very misleading strategy. By all means, research your competitors' pricing, but don't just assume that's going to be the right pricing for you.
When your product is still in its MVP stage, you should run bold experiments with pricing. Hit them with heavy numbers.
Test outrageous prices
And see what happens. You think the right price is $249? Make it $500 and see what they say!
Anticipate and be prepared for their reaction when you're doing this, but be immune to it. Approach this experiment with the following mindset: “Well, the next five are going to say no because I’m telling them a crazy number.”
Is that the reality of how people react? It might happen that you say $500 and it has zero impact on the conversation. And then you go back to your team and go: "Holy shit, we should totally charge $500, because nobody even flinched when I told them that number!"
Settle in the upper middle
If you've aggressively experimented with pricing, you'll have a spectrum of responses in between these two extremes:
- A price so low most people don’t seem to care about pricing at all. When you tell them that price, most of them won’t push back, they’ll just say “Okay, I'll buy”.
- A price so high most people won’t buy, and will complain you’re too expensive.
Your ideal price is between these two. If 10% to 20% of your prospects tell you you're too expensive, and 10% to 20% don't even blink when you mention the price, you're in the golden middle.
You want to settle in slightly above the middle, so that most people say: "Hey, that's quite a high price … but, you know what, the value I get from it is so high, I'll pay it anyway."
This is in line with Harry Beckwith's, author of Selling the Invisible, time-tested advice to raise your prices until 15% to 20% of your qualified prospects resist your pricing.
You can read more about finding the right price point for your SaaS product in this post on price sensitivity by the awesome team of PriceIntelligently.
Reason #3: Money
Call me old-fashioned, but running a business that makes money is not the worst thing in the world. Getting funded is awesome, but even in Silicon Valley, generating revenue is a good thing. Investors like it, and it can give you the freedom to choose whether you want to do the VC dance or not.
Are you charging your users?
A lot of founders delay charging users. They feel their product isn't ready yet; they don't want to alienate users, and they'd rather have 1,000 free signups than trying to sell one prospect at a time. Big user numbers, impressive growth charts—all that can help to sustain your belief in what you are doing and keep you going. But you can't build a sustainable business based on wishful thinking and vanity numbers.
Start charging money. It makes things more difficult in the short-term, but the obstacles this puts in your way are great teachers. And our free startup sales course helps you to become good at selling to businesses and enterprises quickly.
Always keep in mind that the most important people for your startup—those you should listen to most religiously—are your paying customers.