Over the past few years I encountered a great number of startups who come to me with a dream and an idea. They are all passionate about their vision and they are desperate to make it happen. I always admire these startups for their commitment and enthusiasm but I do not always share their optimism.
In most of these cases, they present me with an incomplete monetisation model. In fact, they have not even considered such a model. They are ready to give away their product for free, so that ‘they create brand awareness’. They think that afterwards, everybody will flock to buy it!
You cannot imagine in how many ways this is the wrong attitude. I will try to outline here most of the basic reasons for which you should actually charge for your product from Day One.
First of all, it is not the brand you startups should worry about at this stage. Their very survival is at stake. If they managed through bootstrapping and other means to create a product or service, they better make some money fast! Viability is an excellent aspiration but survival is of outmost importance. If they do not make money fast, they may not be around for the next phase of the business, which will include brand building.
Secondly, startups need to test that their customers are willing to buy the product. Downloading a free app or receiving a ‘gift’ from an aspiring startup is by no means proof that they will put their hand into their pocket when the time comes. Coughing up cash is a difficult and complicated psychological process. Unless the customer feels the pain of the unsolved problem, she or he will not concede to part with her/ his money.
Thirdly, the price needs to be tested. This is more of an art rather than science. Startups should be testing a different price at different times with different individuals. Only after several attempts, they will get a clear idea about the exact price point, at which they should be selling their product. Asking the customers how much they would like to offer, is not an option. This is a hypothetical question that will get an equally hypothetical answer. Hard facts should be the only way forward.
Last but not least is the psychological effect on the startup who is about to give out the product for free. Let’s assume that the founders have been toiling on building something for months. They have been trying to finish the coding, set up the website, prepare their social media connections, talk to potential customers, raise funding, while at the same time they were trying to make ends meet. They have been on a rollercoaster that brought them from cloud nine to the caves of hell and vice versa, over and over again. They battled against every possible obstacle until they reached this pivotal point. And when the product is ready, the give it out for free!
I can tell you that the initial relief and exhilaration is soon to be replaced with Resentment. This is an ugly feeling that creeps up into their soul gradually and steadily. Initially, they do not even notice. It is just a nag that stays at the back of their brains. After a few weeks or months, though, it takes hold and becomes a constant companion. At that point, several questions arise. ‘If I provide so much value, how come I do not get paid?’ ‘Does anyone care about my product (or my existence)?” “Is my product worth anything (or am I worth anything)?”
The value of the founder and the value of their product in some cases is inextricably linked, because of all the effort and expectations that goes into building it. The founder does not feel rejected, though. After all, rejections may bring him back to fighting mode. Instead, he feels ignored, valueless, non-existent. If the situation continues for sometime, a kind of constant depression will sink in. And that would be the end of the startup.
The only way to avoid this conundrum is to ask for payment from the beginning. I cannot even describe the elation that the founder will feel at the sight of that first pound! Go on! Try it!