Which Pricing Model is Best for Your Startup?
The wrong pricing model can kill your startup. While it may seem insignificant at the earliest stages, pricing influences who uses your product, how they use it and more importantly, if they’ll buy it. With this much at stake, it’s worth investing time in selecting the right model. Here’s an overview of some popular options:
Freemium
Customers can sign up and use your service for free. Customers who pay receive additional premium features and functionality.
Choose if: You want to launch ASAP, without pricing in place. You can distribute your product widely. You want lots of feedback from a broad set of customers.
Avoiding Pitfalls: Unfortunately, this model results in a lot of customers who will never pay. It’s also difficult to find the correct usage limits to ensure the right customers are forced to pay. To avoid eternal free-loading, move to a hybrid model, for example Zendesk’s current system uses a time limited free trial and offers a low cost option ($5/month).
Bottom Line: Everybody Uses, Nobody Pays.
Pay as You Use
Customers can sign up for free but pay for use of the product when, and only when, they use it. All customers have access to the same features.
Choose if: Your product will engage customers consistently throughout the year. You have a simple transaction the customer can pay for e.g. process a payment or send a text. You want broad distribution but don’t have resources to support free customers.
Avoiding Pitfalls: As your customers only pay when they use the service, your monthly revenue can be highly variable. In addition, charges for each transaction commoditizes your business increasing competition and downward price pressure. Twilio offsets the issues with this model by offering discounts on guaranteed usage and locking customers in with unique features.
Bottom Line: On-demand Payment, Easily Undercut.
Enterprise
Customers sign long term contracts and do not self serve. Some customers may have different implementations than others.
Choose if: You want a small number of high value customers. You’re comfortable integrating with Enterprise systems. You want to focus on the needs of each customer individually.
Avoiding Pitfalls: The long sales cycle and reliance on networking makes this model the least favored amongst early stage founders looking for growth. Over the long term, this model will demand heavy investment in your sales team but you can start by targeting a niche where customers might be easier to close. Box reduced their sales cycle by focusing on the mid-market early before targeting Fortune 500 companies.
Bottom Line: Big Contracts, Never Signed.
Choosing the right pricing plan requires an assessment of your team’s strengths, your customers and the product you want to build. Find the strategy that is best for your startup and it will pay dividends.
This article is part of a series on Startup Growth.
How to Understand your Customers Before Launch
Your First Product Should Be Terrible
A Simple Framework for Goal Setting
Bad Ways to Set Startup Goals
Hit Goals or Your Startup Will Die
How to Get 10% Weekly Growth
Finding the Right Price for Early Customers
Which Pricing Model is Best for Your Startup?
When Should Startups Pursue Partners?
Early Traits of a $100M Company
Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.
You can reach me here: ash@sterlingroad.com
Thanks to Sean Byrnes and Kaego Rust for reading drafts of this.
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