Many software startup founders have a bank of early potential
customers for their product. If it’s a general purpose product
(that everyone can use), this is often friends and family. If it’s
a more specific product, its generally colleagues (prior employers, prior
co-workers, friends of friends, etc.). A common question in these
situations is if/when you should charge these “early adopters” for
using your product.
I’m not a big fan of giving away things away for free.
Its not that I’m not a nice guy (I am) nor that I don’t think
having a free edition can often have good marketing value (it can). Its
just that I think too many entrepreneurs jump immediately into have a free
version of their product available without thinking through things completely.
It’s the easy way “to get out there”. Common
rationalizations are “I’m building a user base”, “I’m
not worried about revenue right now”, “I just want to focus on
building the best product”, “I’m not in it for the money”.
And so on, and so on, and so on. If you actually believe all of
this, feel free to stop reading now. You’re basically working on a
project and not a business. That’s totally fine. The world
needs people like you. Go forth and prosper and you have my good wishes.
For the rest of you that don’t have the luxury of not
making money at your business, read on.
Lets say that you have a product that you don’t intend to give away for free. You
intend to charge money for it (someday). The question is, should you
charge the early adopters, the people you know? These are your
friends and family, co-workers and colleagues, your buddy at the gym,
classmates from school, etc. The answer, I think, is yes. Here
are my reasons:
- It’s a business. If you are running a business, you need to get
comfortable with charging fair value for your product/service. Though
there is certainly some emotional value to being able to give things away
for free to people you like, this has to be part of a larger strategy.
It will feel more like a
business to you and others if you’re actually getting money for what
you’ve built. Its very gratifying
- You want candid feedback. If you don’t
charge anything, your early customers will likely not give you the most
candid feedback. Its hard to complain about something when its free
(especially if it’s a friend). Its hard enough to get an
honest answer out of friends/family overall (there’s an emotional
cost to telling you your product sucks, is overpriced, etc.) If its
free, its even harder. If you do charge some price, you’re
likely to get much better feedback. Part of that feedback has to do with
the price. Is it fair? If it were someone else selling it,
would they have bought it? Are they unhappy with it the
product because it doesn’t give them enough for what it costs –
or are there other issues (i.e. they wouldn’t use it at any price)?
- You need the cash. As a software company, most of your costs
are front-loaded (i.e. you’ll spend much more in the early days
trying to get a product launched). Though money from friends/family and
other early adopters might not be a large amount, it sets a precedent.
- You need to learn how to charge money. Charging money makes you
develop the infrastructure to collect payments! This is probably the
biggest reason. Though its much easier today to collect payments for
your product over the web (PayPal, merchant accounts, etc.) – this is
still something that needs to be done. You’ll need to pick a
provider, get an SSL certificate. Link it all into your
website. Deal with refunds. I can’t tell you how many
software entrepreneurs don’t account for this crucial piece of software
development. They launch a beta (or production) version of their
shiny new software. It rocks! (But, they have no way to
actually charge any money – even if they wanted to). In fact,
this is one of the most important aspects of your business (the “purchasing
experience”) and too few entrepreneurs test this part of the system.
- The early data is very important. You get early visibility on
important financial metrics once you start charging money. How long
does it take for people to make a decision to buy? What percentage
of people that try your software buy your software? How do you
handle unhappy customers?
So, the point here is not that you’re a draconian
opportunist that who is looking to squeeze cash out of people you know (I don’t
like these kinds of people either). But, you’re honestly and
transparently trying to figure out whether you have created anything of value. By
giving away things for free in the early days, you are basically distorting
your reality. Reality distortion is fine if you’re Steve Jobs (who purportedly
walks around with a reality distortion field around him), but its not fine if
you’re just a simple software entrepreneur looking to start and grow a
Now, the question you’re probably asking yourself
is: what possible advantage do early adopter customers have if they have
to pay like everyone else? Aren’t they doing me a favor by trying
out my new product and giving me feedback? Isn’t that payment
enough? All exceptionally
good questions and just the kind of questions you should be asking. My
answer is this: You need to provide them “enhanced service” instead
of free software. For example, lets say you were starting a high-end
restaurant. Many (successful) restaurant owners don’t give away
meals for free (not even in the first week, and not even to friends and
acquaintances). Instead, they give special treatment. The
chef/owner greets them at the door. They get escorted to the best table
available. They get something “compliments of the house”.
There are many ways (in the software world) to show your appreciation to early
customers. The best (and often most valued) is just listening and responding to feedback.
Help them use the software. Invest time (and energy) understanding their
problems. Share your expertise (even if it doesn’t necessarily have
to do directly with your product).
If it makes you feel any better, remember that even when you
are charging money to your early adopters, you are losing money on every sale. Period.
Forget all the fancy micro-economics stuff of marginal cost being low and yada,
yada, yada. All that applies once you’re successful and have
recovered your early expense (and paid your credit card bills and talked
your spouse back off the cliff). In the meantime, even when you’re
charging money, you’re still losing money.
One closing note: There are a substantial number of
people (including me) that are dubious of early startups with free products. If
I’m going to invest any amount of time learning them and using them
(remember, nothing is ever completely free), then I need to
believe they have some chance of surviving. Otherwise, what’s the
point? So, when I see a company that has a clear way to charge money, it
gives me the warm comfies. Their probability of surviving (and hence
letting me reap my investment of time) just went up.
The point of the story: Strive very, very hard for early
revenue. Early revenue is impossible if you’re not charging early
customers. Giving things away has a dual expense: you’re not
getting cash, and you’re not learning what its like to make money and
deliver something that people will pay for. Leave the reality distortion
for the celebrities. You’ve got a business to run.
Finally, if you get lots of resistance from some of your
early customers, point them to this article. If they still don’t
get it – its possible they’re not a great customer anyways.