Startup news of today is filled with stories of fast-growing companies that offer free products while racking up multibillion-dollar valuations. They’re the familiar tech companies whose apps may be on your phone. While it’s part of the startup dream, the reality is that making money from the beginning is the foundation of most successful businesses — not the high scale dream.
Still, this idea from Digital Marketing Strategist Len Markidan may require entrepreneurs to sit down: “The way that you build revenue is that you charge money. And you charge money in exchange for delivering value. And you do it from day one.”
Shocking, isn’t it?
There are a couple of realities to attend to on this topic. The first is that without a massive runway, the attitude of “build first, monetize later,” will only lead to a product, not a business. Additionally, while free things are always cool for consumers, that’s not necessarily the case for people trying to develop a product that will eventually make money.
“Free users behave very differently from users that will pay you money for things,” Markidan said. “If you build your product and get user feedback and make changes based on what free users want, you’re going to delineate from what actually is going to make your product valuable to paid users.”
Free users are looking for bargains, whereas someone who pays for a product is looking for value, Markidan said. And if the price is just outside their comfort zone, that’s only going to drive up their desire for it to perform.
With those value-seekers, “You’re going to get people who are willing to pay to have their problem solved, and that is where the golden goose is,” Markidan said.
Charging money makes the transition from a user to a customer. If thoughts of managing customers’ needs while still building a product only brings pain, think of that genuine feedback from someone who has actually given up something to obtain the product as a benefit. Along with dreams of huge early investments, the startup world also has plenty of examples of false sales leads. For instance, if a company collects 50 business cards at a conference as part of a raffle for a free laptop, Markidan says that’s only generating folks’ interest in a laptop, not your product. If a group tests a product for free beer, there’s at least an even chance they’re only responding for the beer.
“Collecting feedback from the wrong people is so dangerous, because you’re going to build the wrong product,” Markidan said.
This is where consumer-facing products can be distinctive from enterprise-minded ones, but many of the lessons ring true. Former Googler Michelle Lee developed the idea for Textizen, a platform for governments to survey residents using texting tools, following a Code for America fellowship. She could have easily built a low-cost solution and deferred sales as she built relationships with more civil servants. Instead, she grew a list of local governments that paid her and was part of an incubator cohort that tried to distill value down for a single, clear paying customer type. In July 2015, Textizen was acquired by larger services group GovDelivery.
While they didn’t write a huge check that will propel you through to an exit, these initial customers’ money was an investment of sorts in the company. Since they paid, they will want to the product to meet their needs.
And don’t be afraid to start small.
In the growing startup community in Denver, Lee Mayer started offering Havenly’s web-based interior design service by offering it to 10 friends for free.
“And what’s funny is when that happens, you get your first 10 customers and then you’re like, ‘Crap, I only know 10 people that are willing to do this for me,’” she said.Part of growing her network involved charging money. Mayer found that the customers who felt that money was well-spent told others about the product.
“You start to realize when you put out a good product, it just sort of accelerates on its own. So they tell their friends because they legitimately liked the product, and then hopefully they like you, too,” she said.
You can approach early sales efforts as a way to build a network and get feedback, not an aggressive attack.
Here’s your checklist:
The point is that this is one of the biggest challenges to early-stage companies — balancing customer and revenue growth. Make no mistake about it though: a paying customer is worth many times more than a free one.
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