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To charge or not to charge? That’s the question for these startups

Maynard Webb offers advice to one early-stage founder on charging early-stage customers, and another who wonders whether to offer an app for free.

To charge or not to charge? That’s the question for these startups
[Image: Vector/iStock]

Editor’s Note: Each week Maynard Webb, former CEO of LiveOps and former COO of eBay, will offer candid, practical, and sometimes surprising advice to entrepreneurs and founders. To submit a question, write to Webb at dearfounder@fastcompany.com.

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Q. Should we charge our alpha customers the first year, or do we heavily discount, as these very-early-stage customers have put in a lot of effort to provide us valuable feedback and make the pilot successful? What would matter more to investors?

—Founder of a security and compliance startup

Dear Founder,

Based on your question, I think you are really asking me if you should go after customers to grab the market or just focus on short-term revenue.

What you really have to focus on, though, is getting traction. Investors fund things for all kinds of reasons. But what they care about is that people actually want your product. Build a business and products that customers love, and you’ll see that’s what matters most to investors.

So, first, make something that people want. Deliver a product, service, or technology that people will need and love. When it comes to figuring out your pricing model for alpha customers, charge enough to make sure they will dedicate time and energy to give you feedback, but give them a very big discount to reflect the risk they are taking. You don’t need to make a lot of money off your first customers. You will find greater value in having them help you engineer your product. They will also help you attract other customers. It’s human nature to wait for someone else to get in; that validation makes it a more attractive proposition. We see this all the time. You will too. Be generous with your first customers, and they will be generous with you.

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Q. I’m designing an app that should offer consumers tremendous value, but I hadn’t planned to charge them, at least initially, reasoning that consumers are used to getting info for free. My assumption was that secondary B2B sources would pay for access to those users, but those assumptions could be wrong. I worry that I’m planning to launch a business without a clear and provable revenue model, trusting that one will emerge. What can I do to address this?

—First-time founder

Dear Founder,

Even though both consumers and businesses will benefit from the information you offer and receive through your site, what you are trying to build is a consumer app. And as you point out, consumers don’t pay for apps—they don’t pay to access Facebook, or to search on Google, or to buy something on eBay. There would be a pretty high bar on your new product and fledgling brand if you were to charge people to use it. It’s really hard to get something to go viral when it comes with a fee. And you need your app to go viral.

In the beginning, invest your energies in promoting your app and getting people using it. Once you have enough people, you can offer advertising as a source of revenue. Of course, that’s what Facebook does. You can also offer more premium services that people will be willing to pay for, like LinkedIn does. But first things first—you need to get critical mass on the app. The only way to do that is to build a product people are excited about.

You need to look at all the ways you can get people hooked. You say you are creating a product that can save people a lot of money—that’s great. If it really delivers value, users will be willing to pay it forward. Instead of asking them for money to use your app, what if you instead ask them to refer others? Ask them to recommend the app to five friends. You can gamify this referral system, giving users some sort of status badge or even a reward. Explore ways to incentivize them to convince others to sign up for your service. This will drive traffic and volume.

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Be sure to find a way to keep your users coming back to your site. In order to go viral, you want to make the app an indisputable part of the user’s daily existence. Or, if it is not intended for daily use, it’s okay—it’s just harder. Successful sites that are used less frequently attract people to use the service for an important reason—think about the sites that help you find a job, lease a car, or buy a house.

Once you get adoption, you will see there are lots of models for advertising or other ways to monetize your product. You can build entire businesses on top of the app to offer a whole host of other services. First, get your product out, fill an unmet need, and get people using your app. The rest will become clear when you accomplish those goals.

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