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. 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. Choose if: 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 current system uses a time limited free trial and offers a low cost option ($5/month). Avoiding Pitfalls: Zendesk’s Everybody Uses, Nobody Pays. Bottom Line: Zendesk’s pricing at the time of writing. 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. 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. Choose if: 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 . Avoiding Pitfalls: locking customers in with unique features On-demand Payment, Easily Undercut. Bottom Line: Enterprise Customers sign long term contracts and do not self serve. Some customers may have different implementations than others. 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. Choose if: 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. reduced their sales cycle by focusing on the mid-market early before targeting Fortune 500 companies. Avoiding Pitfalls: Box : Big Contracts, Never Signed. Bottom Line 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. Thanks to Sean Byrnes and Kaego Rust for reading drafts of this.
