To Charge or Not to Charge & Your Pricing Strategy

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This is probably the #1 dilemma startups encounter in their early stages. This is such an important strategy not only because you want to make money, but because charging adds perceived value to your product almost immediately. But on the side, in many situations, keeping your service free will help you acquire users a lot quicker. However, this first depends on what type of startup you are operating. In this article, we will help you determine whether or not you should charge, and how you should charge.

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To Charge or Not to Charge

Type of startup
1. SaaS (software as a service)

If you are operating a SaaS, then we can assume that your startup can create immediate value for the customer. You don’t depend on users to help create your content, (Unlike social networks, dating websites, eCommerce marketplaces, etc.) you create your own content, and the customers can achieve what they want with your service no matter if you have 1 user, or 1 million users. And since the operation of your service doesn’t require user-created content, user growth is not your #1 priority when you are thinking about the value of your service. However, having a lot of users definitely do give you a snowball effect of referrals, which in turn gives you more users and thus revenue.

Example: Mailchimp - They are an awesome email newsletter service where you can upload the list of your users, create beautiful email templates, and immediate send out an email campaign to everyone on your list, and later be able to get details reports on open rates, click rates, demographics, who unsubscribed, etc.

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Mailchimp – an example of a SaaS Service

Pros:
- You don’t depend on users to create content in order to make your service usable.
- You provide value on day one.
- You can charge on day one.
- You can charge by subscription/month, and not by per transaction or advertisements.

Cons:
- Need to create content yourself.
- Usually less users/traffic than community-based websites.
- Lower barrier to entry – service or content can be easily duplicated by competitors.

2. Community-Based Websites/App – Social Networks, Marketplaces, Forums, or any service where the value is user-created content

I doubt anyone would use Facebook if it didn’t have any users on it. I’m sure nobody could shop at eBay too if there weren’t millions of sellers and products on eBay. If you are operating a community-based website where the value and content of your website is created by users, then it’d make sense to keep it free and try to upsell your users on value-added services or products that they would be interested in. Or you can start charging them after you have reached critical mass to make your service more valuable. It’d be very hard to charge users to use community-based websites because if you make them pay in the beginning, then they would not be willing to join, and thus participate – which is the core of any community website.

facebook users To Charge or Not to Charge & Your Pricing Strategy

Community-based websites

However, this is not to say you should never charge for it. There are cases where dating websites kept it free in the beginning until they had a lot of singles in their database to make it attractive enough for people to use. They then started charging people for it because they already had enough users to keep the service going, and they made sure that their service helped people find dates.

Charging for dating services is very popular because it’s the best way to prevent users from spamming each other. By not making it free, dating websites filter out users who are just spamming for 1-night stands and keep the good ones that are committed to finding true love. So as you can see, you can also charge the users in your community if you have a good reason for it, and you have enough users to keep it going. In this case, charging users actually became a mandatory feature that made their platform possible, otherwise all the users would leave because they would be receiving inappropriate messages from spammers.

Therefore, charging is also a great way to filter out half-assed users and keep the ones that are serious about your service. In other words, the users that you lost after charging, could be ones who actually don’t need your service. Pricing is such a badass strategy!

Pros:
- Once users start joining, the snowball effect is obvious, so you can somewhat lay back and let the ecosystem work and grow on its own.
- Generally you have a larger user base to monetize.
- Economy of scale creates a high barrier to entry and unfair advantage.

Cons:
- Without users, the service is not usable
- Monetization choices relatively limited compared to SaaS – advertisements, virtual goods/money
- Cost of acquiring users is very high
- Some communities can be hard to manage.
- High server cost because there’s a lot more traffic.
- User loyalty is lower.

How to charge:
So, if you are operating a Saas, you can pretty much start charging with the 30-day free trial package. The users who don’t end up paying are just the curious ones who signed up to check it out, but probably really never had any use for it. So, don’t see it as you’re losing users, but as “filtering” out incompatible users. 

If you are a community-based website, there isn’t really a norm on how services should charge. There are many that have monetized on plans like 14-day or 30-day free trial with monthly subscription, no trial – charging on day one, by transactions, by advertisements, etc.

decoy pricing To Charge or Not to Charge & Your Pricing Strategy

Pricing Strategy with a “Decoy” Plan

Also, the price of your service will also affect how customers perceive value in your product. If you have a great service that competitors are charging for $99, but you are charging for $39, then customers might think you have an inferior product – even if your product is better. However, that’s not to say you need to match what your competitors are charging. The trick here is to study how your competitors are charging, and create different tiers of pricing plans where you highlight the plan you want to sell (like the one above, which even has a $199 decoy plan on the right – which is just to create comparative perception that the other plans are really cheap).

Charging and the price of your service not only adds perceived value, but it also makes customers more serious about your product since they paid for it and feel the need to make use of it. This leads them to use your product more often, which helps them realize the value that your product creates for them, thus becoming a long-term customer. This also creates enthusiasts that help you evangelize your product, which leads to more referrals and users. As you can see, pricing is actually an important product feature than just a pricing strategy.

See the links below to get more tips on how to structure your pricing strategy.

Our Pricing Strategy Tutorial:
http://startitup.co/guides/742/pricing-page-optional

Some pricing strategy articles I think are great:
KISSMetrics Pricing Strategy
http://conversionxl.com/pricing-experiments-you-might-not-know-but-can-learn-from/

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share save 171 16 To Charge or Not to Charge & Your Pricing Strategy

2 thoughts on “To Charge or Not to Charge & Your Pricing Strategy

  1. Good article. It’s worth mentioning that Mailchimp actually started out as a paid service, but moved to a freemium model once they were able to accurately understand the financial and operational impact of the strategy.

    • Thank you for the clarification. I actually did not know that! And yes, I think the freemium and 30-day trial plans have become a proven strategy for most SaaS services.

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