Turning Your Users Into Paying Customers

The best feedback you're gonna get about your product is in the three seconds after you tell them the price. Yes.

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Hello, this is Michael with Harj and Brad. Welcome to Inside the Group Partners Lounge. So, as you see Group Partners, we find ourselves repeating the same advice over and over again to startups. Before COVID, we'd often gather together in the Group Partner Lounge at the YC office to try to figure out why this was the case and how we could help startups figure it out faster. But now that we're online, we're going to do it in front of all of you.

So, the topic we're talking about today is startups that for whatever reason refuse to charge their users. Let's set this up first. Brad, what's going on here?

All right, so every batch we have a lot of new startups come in. One of the most common pieces of advice that we give over and over and over again to the founders is it's time to start charging, or let's start asking for money for your product. Without fail, that can stress some people out and create friction, and some people have already been charging something; maybe they've done some pilots, some people are far from it. It's the first time they've ever thought about asking for money, but it's something every batch, without fail, we have to say over and over and over again to the startups.

Michael, Harj, why are we having to say that so often? What are some of the reasons why people have talked themselves into not charging?

I mean, I think one reason is we push people to go out and hey, like, you need to get feedback, you need to get users, you need to get real feedback. And it seems like it's easier to do that if you don't charge, because you can get people using it immediately and giving you feedback. And so I think families often just optimize for that. They're like optimizing for feedback over revenue.

Yeah, I also think that like founders have this weird sense that there's like no redos. So, you know, oftentimes they'll come up with some reason like, "Oh, well, I don't know exactly how to price my product yet," and there's no way that I can go out to the market with this price and then change it. It's like, really? Like there's no way you could do that? But in their minds, they're like, "Oh no, my customers would kill me if I went out with one price then changed the price. So I'm gonna wait until I find the right price to go out with." I think perfectionism is just a huge factor here.

And to your point, every week you can change your pricing. If you look at some of the most successful startups, they have new pricing all the time, right? They're always testing it just like they're testing the features in their app. The price that you ask for is just as dynamic oftentimes, and so you don't have to get it right from day one. In fact, it's pretty common, I think in office hours, for us to just pick a number out of thin air and say, "There's your price right there. That's what you're going to start charging tonight." And we see that look of fear on people's faces in the office hour, but it gets them out the door and gets them moving so that they can start figuring out if people will pay anything for their product, which is a really important box to check.

I remember Drew from Dropbox coming to speak at a YC dinner once, and he was asked about pricing. Like, how did you decide? I think at that time Dropbox was like $9.99 a month or something. And he kind of just smiled. He was like, "You know, I just picked a number, like a reasonable number." And he's like, "We've done the analysis and like I might have cost us hundreds of millions of dollars of revenue; we don't really know, but like it was fine. Like the point was to pick something reasonable that got them up and running and then they could do the pricing optimizations when they're worth billions of dollars."

I love that because, you know, talk about like a multi-multi-billion dollar company where the price was set because it felt right. [Laughter] Good enough for Drew, it's probably good enough for you. It let Drew keep moving, right? And let them keep moving forward with the company, and they didn't get hung up over it.

The thing I find myself repeating a lot in office hours, especially during a batch, is when the founders say, you know, "We've got to get the price perfect because we can never change it." It's like, well, think of it this way: you can always grandfather users in. You can keep whatever your current users are today on that plan and raise the prices for new users. If you're confident and if things go well, like the users you have today should hopefully represent a small fraction of the users you have in six months or a year, right?

And so it's not uncommon to actually find some of the most successful companies who have these early users that are on some ancient pricing plan from years ago. It's fine, but they don't care. Like, you know if Jude had done some sort of early pricing for the first 100 Dropbox customers, it’s making like no difference to Dropbox’s bottom line today.

In fact, I think he did; it took me a very long time to pay for Dropbox. There's probably a hundred people out there on $7.99 a month.

Yeah, I think the last one that's weird that I hear is when people are actually trying to sell products to companies, and they say some version of like, "Oh well, charging is going to make it harder for me to get the deal. Like it's hard enough to get this sale done. If I charge money, it'll be worse," which I always— like we always laugh at, because usually they're trying to sell these companies that are massive, and like spending money on software is just something they do normally every day. And they don't actually realize the anti-signal of not charging. They don't realize the company's like, "Huh, they're not charging? Is this going to work? Are they gonna be able to support us? Will they onboard us?"

And you know they could have gotten rid of all of those secret objections if they actually just put a price on it. I also think that's the way founders end up wasting potentially like years of their lives on bad ideas, is that they think they have all these customers. "Oh yeah, like Apple's a customer," and then you drill into it, like how much they pay you. It's like, "Oh, like nothing." But like Apple, like we get to talk to Apple.

And it's like, no, like you didn't. Like you have to do the actual sale. Like you have to get revenue in the bank to know that what you're working on is right. And it's like if you have zero revenue, it just hits you in the face. You know you're failing. But I think that's like one of these things where you feel like it's such an easy temptation like, "I've got customers. Well sure it's Apple, so we'll make millions of dollars from them in a few years, but for now, let's just kind of keep them using it."

Yeah, especially with big companies, right? You're trying to prove that you can change behavior at the company and that your champion, or the person that is in charge of the deal on the other side, will spend some capital—financial capital, something out of their budget—and actually put some skin in the game to use your product. And if you're just selling free pilots, you know, you're not really proving that much.

Yeah, there's this kind of core assumption that for a product that should be paid, if it's free you can still learn, and it's like it's pretty obvious you learn a lot more from people who are paying for your product than people who are using it for free. The best feedback you're gonna get about your product is in the three seconds after you tell them the price and the facial expression that they make or the tone of voice that they use. That's often the most honest reaction you're gonna get about your product.

So let's talk about the other side, though. Let's play the devil's advocate for a second. There are business models where free is a core component. Like, you know, companies we funded like GitLab—open core model. Like we want people to adopt our open source software and then we'll upsell them later. Isn't that going against what we're talking about?

So to some extent, yes. I think the difference there, though, is that there's a plan and everything is still being tracked, right? Some of the examples we talked about before where people are selling free pilots to big companies or they're just not charging for their product—they're basically kind of like giving up on the commercial side of things. But with the open core companies, they know exactly what they're trying to get. They're trying to get a certain level of adoption from developers, who they can then later sell, you know, an enterprise support plan or something like that to.

So usually the open core companies are actually very sophisticated about this and know exactly what they're looking for when they're going out there and getting these, quote-unquote, free users.

All right, well then put open core aside. What about the Slack strategy? Like almost no one I knew back in the day who was using Slack was paying, and that seemed to work out! Like, what do you think, Harj? What was the play there?

Yeah, I think Slack falls under—so the freemium business model—which I think is a completely legit good model, right? The idea is like we start out with a basic version of the product, we make it free, we get people using it. But like there are two things that are really important for the freemium model. Right? One is you have to actually have some constraint that people want to get around. Like they want more users, they want more messages, they want something that they'll be willing to pay more for, and you launch that as like the enterprise product or the upgrade product.

And the two, as a founder, you have to have the discipline to track whether your free users are converting into paid users and over what time frame, right? So like if I'm doing office hours and a founder says to me like, "We're starting with a free product, but like we expect people to upgrade within two weeks," and we're trying, like you know, "We expect they're gonna upgrade when they need like an extra seat or extra storage or something, and we're tracking that and seeing if that works." So I'm like, "Okay, cool, that sounds great."

But if a founder is like, "Hey, we're actually giving the product away for free and you know we think people will pay for it at some point, and like you know, we'll see how it goes," like that's what worries me because those banners just keep building and building and increasing the product surface area without ever charging more.

What about the land grabs, though? What about the social kind of consumery, you know, YouTube, Facebook, Twitter? Like what about those situations?

I think that those like open call where it's like there are specific cases. There are exceptions to like any rule kind of, especially when it comes to startups, right? So yeah, I think if you're a consumer business that's going to monetize via advertising and you need like a gigantic user base to generate lots of advertising revenue, then yeah, that makes sense, right? But like you have to be honest that you want—like it was like a social media, Facebook, Twitter type company, for example. I mean, like you know a lot about Airbnb. Like Airbnb, I could totally imagine sort of less confident founders being like, "Oh like we're actually building is like this social network for travel and so we shouldn't charge anything. And like in the future though, like once we've got people traveling we might..." You could imagine some founders using that argument, right?

You don't have to imagine it; that was called Couchsurfing. Like that existed when Airbnb came out.

Yeah, right. In the Airbnb story, which I've heard at YC dinners, they talk about that moment early on when they had to—right?—Brian had to pay and it felt awkward. And so a lesser founder would say, "Okay, no money on the platform because that's awkward," whereas the right move is to say, "Let's do it right. Let's figure out a really good way to handle the money because that needs to be a part of it. We need to solve the problem, and not just punt."

So we've gone through the devil's advocate position. Brad, finish this off. What's the core takeaway here for founders?

So I think it's okay to be free in certain cases where there is a structured, intentional plan and path to getting paid. Right? We talked about freemium, we talked about open core, we talked about like a large consumer ad-supported business. Sometimes you have to go get a lot of free users before you can start making a lot of money. But on the whole, the trick is to make sure that you're not charging out of fear and that you're not doing this because you're worried about some of the things that we talked about—you're worried about blowing it with your customers, you're worried about not getting a second chance to put pricing in front of them.

Because ultimately, if you don't put pricing out there and start charging, you're preventing yourself from really learning if your product is something that people want.

Well, there you go. That's the game. Great chatting, you guys. Thanks!

Thanks!

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