When Should a Startup Start Charging?

September 2, 2009

I’ve recently changed my long held belief that all startups should charge immediately upon the release of a new product.  I now believe that non-enterprise targeted startups should only charge once you have achieved product/market fit.  As explained in this earlier post, I define product/market fit as at least 40% of your active users saying they would be “very disappointed” if they could no longer use your product.

The evolution in my thinking to charge only after product/market fit is based on finally working with some “normal startups.”  The first five startups I helped take to market all amazingly achieved product/market on the initial release.  For these startups it was right to encourage a quick implementation of the business model.  However, for startups that haven’t yet found product/market fit, a business model can hinder the process of figuring out how to deliver value.  Users are forced to quickly decide if the product is worth the financial investment (and we already know it’s probably not since most wouldn’t be “very disappointed” without the product – when free).

It is safest to assume you won’t have product/market fit right out of the gate.  If your initial release hits (think winning the lottery), then you can quickly implement your business model as you transition to a growth company.

If however, you are like most startups, you will spend an undefined period of time engaging users and evolving your product to better meet their needs.  When surveys tell you that you’ve reached product/market fit, the final validation is charging for your product (or a version of it).

It’s Different for Enterprise Targeted Startups

For startups targeting enterprises, it actually does make sense to charge before reaching product/market fit.  This is the best way to help the enterprise figure out how to get value from your product (somebody on the inside will be motivated to work with you to unlock value since they’ve already spent the budget).  If you haven’t charged anything, your attempts to engage the customer and find value are likely to be perceived as an aggressive sales annoyance rather than genuinely helpful.

Growing Your Startup with a Business Model

Startups often delay implementing a business model claiming “we’re focused on growth right now.” But once you’ve achieved product/market fit, most startups will grow faster with a business model (I wrote a post on this earlier).  A business model gives you rational constraints within which you can execute very aggressively – otherwise you are held back by fear that you may be wasting money on paid marketing programs.

Without a business model, you don’t know if your business is real.  Of course some prefer to hope that a business model implemented in the future might work rather than know that one implemented today doesn’t work.  If you are truly offering value (have achieved product/market fit), then there is a business model that will work.  The only way to find it is to start experimenting.

23 thoughts on “When Should a Startup Start Charging?”

  1. What if your target is small-business owners? Even down to sole proprietors?

    It seems you’d want to approach them in a similar manner to enterprise customers, and they’d also have more of a vested interest in your success.

    Does your opinion still hold in this case?

    And what about the added burden of managing two products and user bases (free & paid)? Is there a way to know if “freemium” is likely to be more trouble than its worth, especially when your customers are other businesses?

    Thanks btw, this is really stimulating stuff. Loving every bit of it. 🙂

  2. Hey Tim, great to hear I’m not the only one that finds this stuff stimulating. If you’re targeting small business owners or sole proprietors, I believe it’s better to keep your product free until you find the product/market fit. I would however recommend creating a formal beta program where the company locks in a 50% discount in exchange for certain commitments (like a 15 minute interview and monthly surveys). They should understand that they can use it for free during the beta period, but if they want to continue using it after the beta finishes, they’ll need to buy. This has been very effective for me in the past. I’ve found that Beta participants convert at a very high rate since they feel they worked for the discount and helped shape the final product.

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  4. How is it possible to achieve product/market fit when the product is free? Doesn’t the price factor directly into the question of whether or not people would be disappointed to lose it. At x price the customer can do without, but and y price the customer would definitely be sad to see it go.

  6. really nice writeup Sean. I agree that you should first find your prod/mrkt fit since before that any revenue would be purely random and would not contribute to your learning for your eventual revenue or pricing approaches.

    I do have a question on the “40% very disappointed” metric. Do you see a need for a minimum number of users? i.e. if you only have 10-users 4 of them “very disappointed” would you consider that you’ve found product/market fit? or do you think a larger number is needed to make that a statistically meaningful number?

  7. Thanks Nero. I generally look for at least 30 responses, which is where I start to see results stabilize. Of course more responses is better.

  8. Hey Arthur – I agree that price is part of the process of figuring out if you have product/market fit. I’m basically starting with the price of zero. If people aren’t that disappointed to see the product go at zero cost, then we already know that any cost above zero will very likely also result in people not being that disappointed to see the product go. Once enough people consider it a “must have” at zero cost, then the next step is to figure out a price that generates the most revenue for every thousand people that try the product. If nobody is willing to pay, then you probably had a false positive on product/market fit. The reason I like to keep the price free while trying to get the minimum viable product is that you have a lot more feedback on which to iterate. I realize this is probably one of my more controversial posts, so I appreciate the critical feedback – and actually expected a lot more of it.

  9. Great post, Sean. Can you share an example or two of startups that waited, how they went about charging users, and what happened? I’m not looking for a novella; even a short example would help me get my head around this. Thanks in advance.

  10. Thanks Sarah. I have a few companies I’ve worked with that waited to implement business models. Xobni only recently implemented V1 of their business model and Flexilis has not yet implemented their business model. Unfortunately my NDA prevents me from going into the specific details of what has happened with either company. Also at LogMeIn we had one product (targeted to small businesses) that was free during Beta. This free Beta was essential to getting the product right. Once we started charging for it, the sales conversion rate was strong. Again, I apologize for being limited on the details I can provide. On the enterprise side, I’ve been working with Socialcast. They’ve charged for a version of their product from early on and I believe this has helped us hone in on the right product and market.

  11. Sean,

    Besides sureveys, how would you suggest a startup measures their product/market fit?

    For example, I may buy something from bestbuy.com and after my purchase they ask me to fill in a survey. I may or may not do this, I assume many people don’t. Best Buy could use the transation as a metric, startups could possibly use sign ups…

    Greg

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  15. Hi Sean,

    Great blog. I really appreciate your pieces on P/M Fit and would love to know what answer options you use when using the survey question “How disappointed…”. We’ve started using it on User surveys but want to make sure that we’re asking it the right way so that we can use the 40% mark effectively.

    Thanks!

    lucy

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  18. I agree with you on charging enterprises immediately. Not only does your fee help the enterprise with value calculations, there’s also a strong sense within enterprises that value is correlated with cost — in other words, if your product is free or cheap, it’s probably not worth much, and higher priced competitors will be considered. Once an enterprise makes any kind of investment in your product, you’re likely to be kept longer due to the “sunk cost” effect. There are many other reasons, too numerous to go into here.

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  20. Sean, I’m inspired by your work on Product-Market Fit. Have adopted the tools/thinking and it’s helping my company define it’s development strategy.

    Quick Q: Are you able to share the list of 100 startups you compared to get to the 40% threshold?

    Cheers,
    Noam

  21. Hi Noam, Unfortunately I can’t share the list. But one of my requirements for working with a company is being above 40%. So if you look at my Linkedin profile, it’s safe to assume that every company listed in the last two years is above the 40%.