This is Kristen O'Brien, Managing Editor at NFX, and this is the founder list. Audible versions of essays from technology's most important leaders selected by the founder community. Written by Ash Morgan, founder and CEO of Lienstack, read by NFX. What you charge for your product is simultaneously one of the most complicated and most important things to get right.
Not only does your pricing model keep you in business, It also signals your branding and positioning, and it's harder to iterate on pricing than other elements of your business. Once you set a price, coming down is usually easier than going up. Should I charge for my MVP? Most people choose to defer the pricing question because they don't think they or the product are ready. Something I hear a lot is that a minimum viable product is by definition embarrassingly minimal.
How can you possibly charge for it? A minimal product is not synonymous with a half baked or buggy product. If you follow the customer development process, your MVP should address the top three problems customers have identified as important and it should do it well. You can ensure that by dedicating 80 percent of your efforts to improving existing features versus cranking out new ones. Steve Blank, James price exploration right into the initial customer interviews.
Price, like everything else, is built on a set of hypotheses that needs to be tested early. Steve suggests you ask potential customers if they use the service for free. This is to gauge if the product's value proposition is compelling at all. You then ask if they'd use the service for x dollars a year. How do you come up with x? You can simply roll the dice and adjust along the way or use Neil Davidson's excellent guide to software pricing to start with a more educated guess.
Once your MVP is built, Steve asks you to sell it to your early customers. There is no clearer customer validation than a sale. Sean Ellis, on the other hand, argues that achieving initial user gratification product market fit is the first thing that matters and suggests keeping price out of the equation so as not to create unnecessary friction. He says, quote, I think that it is easier to evolve toward product market fit without a business model in place.
Users are free to try everything without worrying about price. As soon as you have enough users saying they would be very disappointed without your product, then it is critical to quickly implement a business model. And it'll be much easier to map the business model to user perceived value, unquote. Both Steve and Sean advocate removing price from the equation, but at different points. Steve removes price during the customer discovery process, but suggests you charge for your MVP.
Sean removes price from the MVP that suggests you charge after product market fit. I can see the merits of both approaches and wondered which was right for my product, cloud fire, photo and video sharing for busy parents. Why not use freemium? On the surface, freemium seems like the best of both worlds Pete users to try your service without worrying about price, then upsell them into the right premium plan later.
However, many people make the mistake of giving away too much under the free plan, which leads to low or no conversions. It's human nature. We all want to be liked. More important, we don't have enough information to know how to price or segment the feature set. I made this mistake with my first product box cloud, An early visionary customer called me up and said, I really like your product and wanna pay for it, but your pricing doesn't require it.
After a few more iterations of segmenting the feature set, I decided to forego the free plan and simply offered premium plans with a trial period. Sales went up and so did the quality of feedback which I attribute to the difference between feedback from customers versus users. Lincoln Murphy just published a timely white paper on the reality of freemium in SAS.
Which covers many important aspects to weigh when considering freemium, such as the concept of quid pro quo or even free users have to give something back. In services with high network effects, participation is enough, but most businesses don't have high enough network effects and wrongly chase users versus customers. What I particularly like in this paper is Lincoln's recognition that freemium is a marketing tactic, not a business model.
I strongly feel that especially for SAS products, starting with free and figuring out premium later, all too common, is backwards. If you know you're going to be charging for your product, start by validating if anyone will pay first. There's no better success metric and it leads to less waste in the long run. Focusing on the premium part of freemium first lets you really learn about your unique value proposition.
The stuff that will get you paid You can then come back and intelligently offer a free plan if you still want to, with more intelligence and the right success metrics clearly defined. Even if you think you have a one dimensional pricing plan like I did, for example, a number of projects, you'd be better served testing it with paying users. Because pricing experiments take a much bigger toll How did I put all this to test?
The biggest mind shift in following a lean startup process is going from thinking you know something to testing everything you think you know. So I followed Steve Blank's advice and built some pricing questions into my initial face to face customer interviews. Because cloud fire is a resegmented product in an existing market, potential customers referred to competitor pricing.
This had to be balanced against the perceived value of our unique value proposition, saving time with faster and easier sharing of lots of photos and videos. Through these interviews, I determined that like their sharing needs, my potential customers valued simple hassle free pricing and $49 a year for unlimited photo and video sharing was a fair price they were willing to pay. That is what I charged them once my MVP was ready. Testing price on the web.
I wanted to run the same set of pricing tests with web visitors that I did during my interviews. Short of split testing a free and paid version of the MVP, which is technically legal and unfair to paying customers, I decided to split test 3 different products with 3 different prices. $1.49 a year for unlimited photo and video sharing, 2, $24 a year for unlimited photo sharing, and 3, free for 500 photos.
All plans have a 14 day free trial with the exception of the free plan, which is free forever. Here are the variations I tested. Original, single unlimited plan. This is the simple option I discovered during customer discovery interviews. It served as the control. Variation 2, multiple plans. I segmented the product into 2 offerings, unlimited photos, and video, and unlimited photos only. I wanted to test price sensitivity and gauge interest in video sharing.
Not many people I interviewed were currently taking lots of videos, but they all wanted to be taking more. Variation 3, freemium. This has the previous two plans along with a limited free plan. Yes. This is a freemium plan. I wanted to measure if a limited free plan would disproportionately drive the right type of traffic, busy parents, in my case. Variation 4 no price during introductory period.
I added a 4th variation to test Sean Ellis' advice on removing price till product market fit, but I tested this differently. I wasn't comfortable offering the full product for a price and for free at the same time. So rather than including the page with my AB tests, I instead tested it with new parents I interviewed. The results. 1st place, the original single plan 2nd place in conversions and best overall performance. Surprisingly, the original page was the best overall performer.
2nd place, variation 3, freemium, most conversions, but 2nd place overall. Not surprisingly, the freemium variation drove the most conversions but only outperformed the original by 12% and have the lowest retention. Referral stats combined with random polling emailing, reveal the majority of the users that signed up were just curious and not parents. 3rd place, variation 2, multiple plans, lease conversions, and worst overall performer, people reacted least favorably to the 2 paid plans.
Non starter, variation 4, no price during introductory period. Parents I interviewed did not understand the introductory period without explanation and were reluctant to try the service without knowing how much the service was going to cost. Probing further, they weren't willing to invest the time building up web galleries and inviting others only to find the service might be priced out of their expectation. What I learned. It does pay to align pricing with your overall positioning.
Our unique value proposition is built around being hassle free and simple. And people seem to expect that in the pricing model as well. A lot of our existing customers were already paying for their existing sharing service, so the leap from free to paid was not a big one. While Sean suggests removing price before fit for consumer facing products, he suggests always charging for enterprise customers to gain their commitment. This is another case where pricing needs to be explicit.
Using Cindy Alvarez's model, our customers appear to be time poor, cash rich. Offering no hassle free trials was sufficient to remove the commitment risk. Moneyback guarantees might be another way to further lower this risk. The biggest lesson learned though is how accurate my initial customer interview findings were compared to all the hypotheses that followed. Pricing is more art than science, and your mileage will vary.
But whenever possible, get out of the building, talk to a customer, and consider testing price sooner rather than later. For more audio essays from the people who've booked companies like Instacart, Facebook, Trello, HubSpot, and Dropbox, visit the founder list at nfx.com, or subscribe to the nfx podcast at podcast.nfx.com, or wherever you get your podcasts.