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Lessons from the trenches of pricing

July 20, 2017Startups5m read

We’ve covered finding your idea, and driving initial traffic to your website. If everything’s going well and your startup is still alive, at some point you will need to monetise.

If you’ve taken investment and/or have a completely different business model to us, your focus might be on user growth before monetisation. We haven’t raised money—we’re ‘bootstrapping’—so our goal is to make a profit as soon as possible in order to become a sustainable business. Otherwise we won’t be a business at all!

What’s your business model?

The first step to figuring out how you will make money is to deeply understand your business model. This seems obvious, but it’s often overlooked by some founders who gravitate towards ‘building cool shit’ more than ‘shit that has a sustainable way to generate revenue.’

Building cool shit is certainly a fun part of creating a startup, but if you want to turn a profit, you’ll need to think about what problem you’re solving, your market size, what differentiates you from the competition, how willing your target audience is to spend money, your sales strategy, and how you will use customer data. The easiest way to learn what could work is by speaking to potential customers or your existing users (if you have some).

I decided early on I’d like to create an ethical company that protects customer data and doesn’t splatter advertisements everywhere. Inspired by Basecamp and Buffer, our goal would be to build a fantastic product that people are happy to pay for because they get true value. At the time I didn’t know exactly what shape that product would take, and we’re still learning. That’s not a bad thing. You won’t get it right on the first try. What is important is understanding the *problem *you’re solving, and specifically who you’re solving that problem for. How you solve it will evolve as you learn.

We have four customer personas: design researchers, academic researchers, government services researchers, and research agencies. That’s a lot of terms with the word research! Given these four groups of customers, the worldwide market size is large enough for us to pursue a high volume, low cost B2B model. With a modern, collaborative cloud product and the disruptive speed of a startup, we believe we can disrupt antiquated competitors, help automate manual research tasks, and generally make researchers feel like superheroes within their team.

One large segment of our target audience — design researchers — work in R&D departments around the world. A lot of great tools exist for the ‘D’ but not so much the ‘R’. These researchers have significant budget for tools that improve their process and save time; ultimately so they can get more done and share insights more effectively. And, as I touched on in my last article, researchers search for solutions to problems, exist in tight communities, and are tech-savvy, so finding them shouldn’t be too hard.

That’s the core of our business model. Depending on your market size and audience, you might need a high touch sales team to win over customers if they don’t look for solutions, or if your software is costs more than the what someone is willing to slap on their credit card and expense. Will you charge a subscription fee, or a once off cost? Perhaps customers don’t pay with money at all, and instead pay with their anonymised data like so many consumer social products today. What dimensions will you charge on? You could restrict access to features, the amount of users, or the usage of the product. Each have their pros and cons.

To get answers to these questions, you’ll need to do some research!

Learn from the competition

As part of competitor analysis, you should specifically investigate the pricing model of your competition. Here are a few things to take note of:

  • Is their pricing transparent, or do you need to talk to sales?
  • How complex is their pricing? e.g. do they have a single price point, or do they have multiple offerings available?
  • What dimensions do they charge on? e.g. per user, usage, etc.
  • What’s their price point? Will you be undercutting them?
  • How frequently do they charge customers?

Your potential customers will be evaluating lots of different tools to solve their problem. If there’s somewhat of a ‘standard’ way pricing is done in your industry, that will form part of their mental model. It might be advantageous for you to stick to the standard so it’s easy for your customers to compare, or you could use this as an opportunity to differentiate. For example a lot of research software is sold via annual licenses. By charging per month, we give researchers more flexibility, which is a positive for them.

Don’t directly ask users whether they would pay for your product. People aim to please whoever they’re talking with, so they will inflate their likelihood of paying if you ask outright. Instead asking directly, you could slip a pricing question into a survey worded along the lines of “at what point would x start to look expensive? Have a range of prices as answers.

Metrics like Net Promoter Score (NPS), retention, and simply raw usage give a good indication if people are getting value out of what you’ve built.

The first impression

How will people kick the tires? Most SaaS products offer a free plan limited in some way, or time-limited trial. Other products don’t offer any way to evaluate the product without talking to a salesperson.

What you do depends on your audience and their use case. We started with a usage-restricted free plan because diary studies take a while to plan, so a 7 or 30 day trial didn’t make sense. By the time the researcher gets their ducks in a row, the trial will be over.

Our product is evolving beyond diary studies into features that encourage recurring use, collaboration, and data storage. We recently changed to a single price point and a 30 day trial to reflect this. An unlimited trial allows researchers to experience the full capabilities of the product, rather than being limited in some way. We also scrapped our four plans and switched to a single price point of $99.00 USD / month for unlimited everything.

The combination of a trial period and a single price point simplifies things for our customers. They don’t have to worry about moving between tiers when they want to invite more users or use the product more. It also simplifies things for us. We don’t have to build restrictions on new features which allows us to move faster. Win win.

In saying all of that, of course our pricing will change again in the future, which brings me to my last point:

Research, try, fail, learn, repeat

Experiment with your pricing. Startups have many advantages over larger established companies, and one of them is that you can change things and experiment quickly. This goes for pricing just like anything else.

Did you enjoy this? Follow us on Medium to see when the last article in this series is published, Taking the plunge.

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