Written on 25th August, 2012 • Comments
In the last week I’ve talked with a few early stage startup founders about pricing. It seems pricing is often a large block for many. It’s understandable, since there are so many decisions to make: When do you start charging? How much do you charge? Do you have a free plan? Do you have a trial period? How many tiers do you have? If you’re like I was, it can also be very difficult to imagine anyone would pay for something you build. To add to that, pricing can feel very final, so it can be hard to take the leap and charge.
I want to share some of my thoughts around pricing based on my experience with Buffer and talking with others who have successful startups out there with pricing plans.
Why you should charge early
One of the most interesting things is that whilst pricing can be the single biggest block for startup founders, I think it can actually also be one of the most powerful things for a startup founder to do. To start charging is a leap of progress:
Paying customers are one of the best forms of validation
The eventual goal of a startup is always to make money, so why delay? No matter how much validation we get in other key metrics, revenue is clearly the one where when we see money hit the bank we have very good reason to celebrate.
Paying customers will motivate you more than anything
I remember that motivation was a real struggle in the first couple of years of trying to create a startup. It’s definitely tough when you’re working away and feel like things aren’t working, or that people aren’t noticing. Even when you’re getting signups, it can be hard to stay motivated. Since I was working on the side, seeing the first few payments come in for Buffer was a huge motivation boost. It was easy to stay focused when I had the ability to imagine the monthly revenue growing to a stage where I could drop my other work.
Revenue gives you freedom
Having paid plans for Buffer from day 1 is one of the best decisions I’ve made in my life. As a first time founder, I’ve found that it’s difficult to raise money with just an idea. You’re much better off focusing on building traction. After we reached ramen profitability, we were able to raise funding and since then it’s also given me the opportunity to travel the world.
Why pricing doesn’t have to be complicated
There are many questions around pricing, and it’s easy to think that they all need very good answers. In addition, we often fall into the trap of thinking that we can’t change our pricing once it is decided. What happens to existing customers?
There’s no need for perfect
As a result of making the decision to charge from day 1, and also to launch a truly minimal MVP, the first version had many rough edges. It didn’t do much, it had many bugs, it had paid features which hadn’t been built yet, and the upgrade process was me getting a PayPal payment and scrambling from my email to the database to upgrade them manually.
None of it mattered, though. Despite the bugs and missing features, I had my first paying customer after 3 days. I think it’s important to remember the early users are a different breed and they not only tolerate, but enjoy being part of the early stages where imperfection is prevalent.
You won’t get it right first time
“It’s unlikely that you’ve got the price right the first time regardless how much research you put into it” - Dharmesh Shah
One of the most useful concepts I’ve come across in my journey of working on startups is that a key characteristic of a founder is not for every decision to be perfect, but to make decisions quickly:
“[Entrepreneurs] know that they need to move the ball forward everyday and make decisions with incomplete information. They know that at best 70% of their decisions are going to be wrong and they find ways to correct their direction.” - Mark Suster
It’s not possible to know how users will react until you have something out there, so let’s spend less time planning and more time building and seeing what happens.
It’s easy to change your pricing
I remember I used to think that it wasn’t possible to change pricing. What happens to existing users? Won’t there be outrage? Then we came to the point with Buffer where we felt that the pricing needed to change. So, we changed the pricing. It was no big deal, in fact it was quite amazing. We followed this simple rule:
“we have a rule at HubSpot, it’s been in place for five years, we’ve changed prices, increased prices, consistently relatively for 5 years maybe twice or so a year, we continue to do that step up and there’s lots of goodness that comes out of that, but we don’t screw existing customers.” - Dharmesh Shah
The key part of what Dharmesh says here is “don’t screw existing customers”. If you stick to that, changing the pricing is easy and becomes much less of a big deal in your mind. What it means is that you do what is best for the customer. If you put the price up, keep existing customers on the original price point. We even offered the previous price to anyone who signed up before the pricing change.
The pricing you have at the start will eventually be wrong
The interesting thing we found is that the pricing actually must change at some point. It’s almost inevitable. The reason is this: you’re working away, every single day, to make the product even more awesome. If 3 or 6 months down the line, the product is not worth more, then surely something has not worked out?
In addition, your goals might change over time. At the start of Buffer, revenue was the number 1 priority. We needed revenue just so we could eat. Now, we’re lucky have a very solid model and we make more each month than we spend. We also have funding. Our 100% focus now is growth, and revenue is less of an issue. We know that if we focus on growth and we get more users with the same conversion through our funnel, that can be better than optimising revenue with our existing users. With that in mind, we simplified our pricing and now have just a single paid plan: the Awesome Plan. Our upgrades actually doubled pretty much overnight.
Every product has changed its pricing many times
The interesting thing is, the more I speak with established startups, the more I found that they’ve all changed their pricing many times. The reasons are always one or more of the above, and it has always worked out well for them. Dharmesh mentioned that HubSpot has changed it’s pricing roughly twice a year for 5 years. If that’s the case, surely we don’t need to worry so much about getting it right?
Free your mind of “pricing”. Just start charging.
With all of this in mind, I think we can agree that the pricing decision is temporary, and the best thing to do is to start charging and give yourself a chance at the amazing benefits ahead along that path.
“go ahead and act as if your decisions are temporary. Because they are. Be bold, make mistakes, learn a lesson and fix what doesn’t work. No sweat, no need to hyperventilate.” - Seth Godin
Have you started charging for your product yet? Or are you thinking about how you’ll price your product? I’d love to hear from you.
Photo credit: Teddy James