About several weeks ago I had the strangest discussion with a VC who I greatly admire and knows a thing or two about enterprise software. We were talking about business models and what is driving investment choices these days, when we started to talk about pricing strategies. What struck me was his comments on SaaS startups, which boiled down to this: at the seed stage, founders should not charge for their software.
I was a bit dumb founded. As an investor in B2B SaaS startups, I always viewed the ability to charge as a strong indicator of the value that the market places on a startup’s product. Thinking through the reasoning though behind not charging, I can understand where this thinking comes from. The freemium ethos that has been the mainstay of the consumer world and created some mega-sized companies has made a strong push into the SaaS world. Evernote, Dropbox, Hootsuite, and others have built fast growing businesses leveraging a combination of a strong product offering and the freemium model to now dominate their respective categories.
Maybe I am wrong. Perhaps we should just throw the product out there for free and focus purely on user acquisition and growth. Instead of sales teams, I might be better off with a team of growth hackers and employing viral marketing tactics. Could it be we have been doing it wrong all this time?
Screw that, get your dollar bills y’all just like the song says:
Cash rules everything around me
CREAM, get the money
Dollar, dollar bill y’all
If you are selling a product, it has a value. What is that value? You will never know unless you put a price on it. When you give away your product for free, you avoid that fundamental question. Sure you can get customers and sure the growth numbers may be fun to see going up and up. But if you have not established a value upfront, you could be coming to misleading conclusions as to how much the market values your product. As soon as you set a price and start charging, you might just see your impressive user base evaporate.
Businesses have an expectation of paying for services and goods. That also includes software. There may be a free trial or free part of the product, but it quickly converts to a paid model once the customer really starts using the product. Unless you are selling to the smallest of small businesses, charging even a nominal fee for your software is not breaking the bank for most businesses. In the grand scheme of things, trying a SaaS tool for $10 per month is not breaking the bank for most businesses.
Speaking of businesses and banks. If you are launching a startup, at some point you have to get it to the point where it is sustainable business. If you have limitless wads of VC cash, then maybe this is not so important. In the real world however, every SaaS startup needs revenue from customers to survive and grow. Sure, software is way cheaper to build, but the labor to build, market, and sell that software is not free, nor are the servers to run that software. Growth in user counts is great; growth in recurring revenue is way better.
We need to get off this idea that freemium is a great model for B2B SaaS startups. It is just another tool that can be used at times for certain user acquisition objectives, but you need to start charging day one. It is the paying customers that give you perspective on the value of your solution. It speaks to ROI and TCO and all those business-y terms executives like. If your product is truly beneficial and providing value, then why on earth would you give it away for free? For SaaS startups, we need to stop being scared to give a price. If you are not getting customers, the friction in growth is not because you are charging, it is because your product doesn’t solve a real problem or you are selling it wrong.
This is business, not corporate charity. Revenue is king if you hope to succeed. Grab all the dollars you can because you will need that revenue when times get tough and capital runs dry. The Wu-tang is wisdom folks, so if some investor is telling you to not charge for your product, tell them later and find yourself investors that value the creation of a real business and makes real money.
Image credit: CC by photosteve101
