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6 Steps To Choosing A Pricing Model For Your Startup

by Olga Mykhoparkina, Chief Marketing Officer at Chanty

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“How you are going to monetize your startup?”

If you are in the very beginning of a journey to your first million or just considering various business ideas, this is the crucial question you’d have to answer one day. The best startups, of course, are those who help the world become a better place, but unless your revenue exceeds your expenses and your work results in profit, you are doing charity, not running a business. Therefore, choosing a correct pricing model for your business determines the overall success of your startup in the future.

A few months ago we’ve started working on our product – Chanty business messenger. Just like every new business we have constantly faced new challenges along the way. We didn’t know how to price our product. Our SaaS startup team spent several weeks analyzing different pricing strategies. Today I’d love to share our knowledge that we’ve gained as a result of our in-depth research.

The most widely used pricing models that you’ve probably heard of are free trial and freemium.

In a free trial you offer customers the full version of the product for a limited period of time – usually from 7 to 30 days. When the trial is over, the product features are no longer available so the customers have to choose – either stop using the product or continue with a paid plan.

Freemium in its conventional form is usually a limited version of the product that is free forever. Customers can switch to premium or paid plan, which offers the software product or service with additional features or functionality. The average conversion rates of freemium into premium are as low as 1-2%. Therefore, before choosing this strategy for your startup, you should evaluate your ability to support a massive amount of free users.

However, your pricing options are not limited only by free trial or freemium. There are several other strategies that are quite popular among various SaaS products:

Free with in app-purchase model is actually a form of freemium. Thousands of apps in iTunes as well as majority of computer games are following this strategy. All the product functionality is available for free, at the same time you can receive a better user experience for an extra fee – either it’s a sticker at Viber or an extra weapon item in the World of Tanks you obtain.

Free with paid services is another form of freemium. This is the pricing model where initial product is free and what you actually monetize on are additional services for individual clients. E.g. you could develop a basic CRM system that would be free and charge for its customization according to the needs of a specific client. If you choose this pricing model you should keep in mind that it is the one that is hard to scale.

Free with ads model is popular within products targeted to B2C markets. It’s tricky as you need massive traffic to your website or users of your product in order to monetize on ads. This choice is justified when you have a highly visited media website with consistent content updates. It could also work well with a viral app (e.g. photo editors for Instagram) although you may find that the hype tends to pass quickly even for the most popular apps that went super viral.

Various combinations. It’s also possible to combine freemium and free trial. E.g. you can offer a free trial of the product and when it’s over keep the user with a freemium limited product version. LinkedIn is a good example of this combination – you can use it for free yet they let you try premium for 30 days.

Nothing is free is another option for a pricing strategy. It means you start charging for the product right away without giving anything away for free. This will help you to ensure that your customers are qualified and have an urgent need which they are willing to spend money to solve. Steve Blank promotes this framework and it has been used by a lot of startups in the Silicon Valley.

Now when you know more about different pricing options, it’s time to think of choosing one for your own business. I’ve outlined the following six questions that should help you understand which way to go with your pricing:

1. What is the pricing model of your competition?

It’s always wise to analyze your competitors and see how they’ve chosen to monetize their business. The one thing to keep in mind though is the size of your competitor. If it’s a well-known company with a big name and deep pockets, it must have resources to support a mass of free users. Therefore the better idea might be to take a look at a bootstrapped startup who is in a market for several years.

2. Does your product deliver the value right away?

The value that your product delivers could come right away or over time. If I’m looking up my competitor’s backlinks via Ahrefs, I receive value right away. That’s why they have chosen a free trial for their product. At the same time Slack had limited their users on the searchable message history because the value that users receive out of it grows with time. They went with a freemium.

3. What is the market size you are entering?

You should attract massive traffic if you are choosing to monetize via ads. Same thing goes for freemium – you will have to sign up thousands of free users before receiving your first $100 from the paid clients. Considering the low conversion rates in a freemium model I’ve mentioned earlier, this pricing model isn’t a best option for a small market. If your target audience is a narrow niche, this strategy is simply not an option.

4. Do you have enough funding?

The deeper pockets you have, the more free stuff you can offer to your customers. If money is short and times are hard, you are just out of college or pushing your startup as a side project while working on a full-time job, forget about freemium or anything free. Think of a free trial or pay-to-get-started pricing models.

5. What value can your free users bring to you?

Spending time, effort and money to support your free users should pay back with some benefits. Is it virality? Useful feedback? If you can’t think of anything that can help, don’t go for freemium even if you have all the funding in the world.

6. Is the product unique?

If you are inventing a new market with your product, there is no competition and your product delivers an impeccable value, you should definitely go with “Nothing is free” option. This way you will be able to validate your business idea and find out if solving a problem holds enough value for your customers and they are ready to pay for it.

When you answer these questions, you will have a better understanding and confidence while choosing the type of pricing strategy that will work for your business. Good luck with your startup and feel free to ask questions or share your thoughts in the comments below.

 

Olga Mykhoparkina

Olga Mykhoparkina is Chief Marketing Officer at Chanty – a simple AI powered business messenger and a single notification center aimed to increase team productivity and improve communication at work. Having a 9-year experience in digital marketing field, Olga is responsible for Chanty’s online presence strategy, managing an amazing team of 5 marketing experts and getting things done to change the way teams communicate and collaborate. Follow Olga on Twitter @olmykh or feel free to connect on LinkedIn.

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