February 16th, 2010
This guest post is by Ash Maurya, a lean entrepreneur who runs a bootstrapped startup called CloudFire. If you like it, check out Ash’s blog and his tweets @ashmaurya. – Nivi
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’ve followed a customer development process, your MVP should address the top 3 problems customers have identified as important and it should do it well. You can ensure that by dedicating 80% of your efforts to improving existing features versus cranking out new ones.
Steve Blank bakes 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’d 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/yr. How do you come up 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:
“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 will be much easier to map the business model to user perceived value.”
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 and suggests you charge after product/market fit. I can see the merits of both approaches and wondered which was right for my product: CloudFire: Photo and Video Sharing for Busy Parents.
Why not use freemium?
On the surface, freemium seems like the best of both worlds: Get users to try your service without worrying about price, then up-sell 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 yet have enough information to know how to price or segment the feature set. I made this mistake with my first product, BoxCloud: an early visionary customer called me up and said, “I really like your product and want to pay for it but your pricing doesn’t require it.” After a few more iterations of segmenting the feature set, I decided to forgo 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.
(Hiten Shah shared a similar story with me around his experience with Crazy Egg. Even 37signals has greatly deemphasized their free plans to almost being fine print on their pricing pages.)
Lincoln Murphy just published a timely white paper on “The Reality of Freemium in SaaS” which covers many important aspects to weigh when considering Freemium, such as the concept of quid pro quo where 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 liked in this paper is Lincoln’s recongition that “Freemium is a marketing tactic, not a business model.”
I strongly feel that, especially for SaaS products, starting with free and figuring out premium later (all too common) is backwards. If you know you are going to be charging for your product, start by validating if anyone will pay first. There is 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 (e.g. number of projects), you’d be better served testing it with paying users because pricing experiments take a much bigger toll than other types of experiments.
Testing price in interviews
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 CloudFire is a re-segmented 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/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 illegal (update) and unfair to paying customers, I decided to split-test 3 different products with 3 different prices:
- $49/yr for unlimited photo and video sharing
- $24/yr for unlimited photo sharing
- 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+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 2 plans from above 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 fourth variation to test Sean Ellis’ advice on removing price till product/market fit, but I tested this differently. I was not comfortable offering the full product for a price and for free at the same time. So rather than including this page with my A/B tests, I instead tested it with new parents I interviewed.
First Place: The original single plan — second place in conversions and best overall performer. Surprisingly, the original page was the best overall performer.
Second Place: Variation 3: Freemium – most conversions but second place overall. Not surprisingly, the freemium variation drove the most conversions but only outperformed the original by 12% and had the lowest retention. Referral stats combined with random polling/emailing revealed a majority of the users that signed up were just curious (and not parents).
Third Place: Variation 2: Multiple plans – least conversions and worst overall performer. People reacted least favorably to the two 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 that 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 seemed 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. Money back 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.
What do you think? Why do you think these variations finished the way they did? What other variations would you like to see us try? How else do you think we could increase conversions? I’m looking forward to discussing your responses in the comments.