Medium-to-Big companies usually have multiple business models accompanied in their company, but as a startup you should focus only in one.
Marketplaces
Marketplaces usually work as winner-takes-all, so when it grows big enough they push out any competitor.
Marketplace Takeaways
They are tough to get off the ground and have a chicken and egg (Supply and demand) problem.
They get massive network effects when they work (like Airbnb and OpenSea
Transactional
Transactional businesses outperform because they’re in the flow of funds.
Get as close to the transaction as possible
Saas
Due to consistent revenue, they can predict and manage their finances more clearly.
Advertising
Very few advertising businesses become winners
Advertising businesses need organic virality to win. When that happens, they get strong network effects.
Don’t sell ads unless you will be a top 10 site on the internet.
What’s not in the top 100
- Services/consulting businesses Non-recurring revenue, scale with people, low margins
- Affiliate businesses Too far away from the transaction
- Hardware businesses Requires lots of capital, have low margins
- Businesses built on other platforms Too much platform risk
Recurring revenue
Recurring revenue consistently creates winners
- Highly predictable
- Higher LTVs (Customer lifetime value)
- Lower CACs (Customer Acquisition Costs)
Recurring revenue only works with strong retention (удержание). You need to keep deliver, otherwise customers will turn away and stop paying.
… and innovating a product also contributes.
Pricing
pricing - a tool to help you learn faster
- Who wants your products
- How much they want it
- How much value your product provides
- Which channels you can use to acquire customers
Top pricing tip insights
You should charge
The most often issue of founders. They are afraid that customers will walk away or use a competitor’s product.
With charging, you will understand:
- Are your users willing to pay?
- Which users are most willing to pay?
- How much are they willing to pay?
Where you should begin?
Don’t overthink it
Do not try to maximize pricing.
Find the right “order of magnitude”
If you’re charging 10$ while customer is ready to pay 100$, you should better change your pricing.
If you’re charging 10$ while customer is ready to pay 15-20$, that’s okay, don’t overthink it.
Pricing isn’t permanent
Price on value, not cost
Cost - your business costs. Value - what you provide to customers.
He argues that this way is ignoring the true value your company provides.
How to find your value
Talk to your users
Keep raising prices until you get pushback
Ideal price: when customers complain but they still pay
Ideal scenario is when you tell the price, they say that they have to think about it, they come a week later and they say - “Alright, you’re the best solution for it, let’s make a deal”
If you charge a low price, they will say that it’s a fine price and accept the deal immediately, then you pricing is too low.
Most startups are undercharging
Lower prices are NOT a sustainable advantage.
“Our product is the same as the large competitor, but ours is cheaper” → That’ not a way to make a winner.
In this case larger competitor will make prices even lower to push you out of the business.
However, when you charge more, you have higher margins than competitor, and then you have a bigger moat. this means that you can pay more to acquire a customers and acquire all customers before they do.
Pricing implies value
When customers are evaluating product, by price you are charging they can determine the value of the solution. If the price is lower than your competitors, then your customers that your product is less valuable than competitors and vice versa.
What if users don’t want to pay more?
It’s better to increase the pricing to get more profits, but if this won’t work then:
- You need to build more value into your product.
- You need to solve a bigger problem
- Lower your price in exchange:
- To get a first user
- A get a valuable customer with a logo (Google, Kaspi and so on)
- If you get lock-in data
- Renew at a higher price
- Pricing isn’t permanent
- Keep it simple → details below
How to raise your prices:
- Exclude existing customers
- Give advance notice
So if Netflix could increase pricing for 220 millions of users, so you can figure it out.
Keep it simple
Pricing should not create friction for customers to buy.
Story of Segment
Segment - Capture and use customer data - enterprise solution
When they started, they were not used to charge money themselves so they gave it away for free. When they were attracting investors, they thought they should charge users to show revenue for investors for 120$ a year. In response, they said :
”I hope that you will charge more than that otherwise I’m worried to keep customer data with you”. They hired sales advisor, and he said that they should charge 120,000$ per year. This is a enterprise solution or else sales advisor will quit. They talked about price and CEO got nervous and said 120,000$, and they agreed on 18,000$ a year.
Conclusion
- You should charge!
- Price on value, not cost
- Most startups are undercharging
- Pricing isn’t permanent
- Keep it simple