Pricing and Freemium models in Minimum Viable Product, Release Early, Release Often and Lean Startup

8:51 PM

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Ian Smith has put together another good set of ideas from one of the companies that I have followed for a number of years, 37 Signals.

The Smith Report » Kindle Clippings – Rework by Jason Fried & David Heinemeier Hansson

The one topic that I love to see debated and one that Ian highlights is - when do you need to be clear about your profit model:

#2 Clipping: Anyone who takes a “we’ll figure out how to profit in the future “ attitude to business is being ridiculous that’s like building a rocket ship but starting off by let’s pretend gravity doesn’t exist. A business without a path to profit isn’t a business it’s a hobby.

So I’m dead against freemium models, because for every Twitter there are a million failures. It’s true that a well financed VC backed business can ignore profits for a while to grab market share but they will have worked out a profit path in the not too distant future.


I think the debate gets a bit cloudy when married with the ideas of "release early and release often" popularized by Guy Kawasaki, "Minimum Viable Product" by Eric Ries and "lean Startup" in general. What I think startups struggle with is "when should I charge" not so much "should I charge" for my product.

I think most people start businesses with the intent that they will earn money, yes, it is probably urban legend that it is not necessary but I still think that most companies that actually get off the ground do in fact have a vision of how people will pay them for their product or services.

My advice centers around the following, at least in the startup phase:
  • Create a Minimum Viable Product to see if you can even build something that remotely meets your own expectations
  • Release Early and Release Often until you have enough feedback that lets you know the idea is not a pipe dream
  • Be a Lean Startup using the simplest method of payment until you get some momentum i.e. 2 pricing plans and email and social media for customer service until you are profitable
In principle I agree with Ian on the dangers of Freemium except in the case of something that is trying to be a platform. There would be no micro-blogging like Twitter if in fact it was not free. Now of course if you are offering products that help people harness the power of Twitter such as managing advertising for businesses then yes, freemium is not going to be the way to go, so make sure you know if you are the platform for delivery or a tool to work the platform as they may aid your decision on freemium versus paid and when and how to start the charging prooces.

Thanks,

Ed
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Ed Loessi

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2 Responses to "Pricing and Freemium models in Minimum Viable Product, Release Early, Release Often and Lean Startup"

June 26, 2010 at 11:00 AM
Ed,

Since startups struggle most with when to charge and am wondering if that shouldn't be part of continuous A/B testing.

ISVs need to create a model for value exchange even in the freemium model. Can they charge something other than money?

Regards

Ajay
Ed Loessi said :
June 27, 2010 at 1:09 PM
Ajay,

Running A/B testing on pricing is an interesting idea that I have seen floated around.

So, in essence you would have a sign up process at the early release of a product where you tested a free trial, no mention of pricing, then a free trial, where information on expected future pricing was available.

The question then would be how to test the Freemium (assumes there will never be a charge) versus the idea that one day there will be some cost?

Ed

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