When Should a Startup Start Charging?
I’ve recently changed my long held belief that all startups should charge immediately upon the release of a new product. I now believe that non-enterprise targeted startups should only charge once you have achieved product/market fit. As explained in this earlier post, I define product/market fit as at least 40% of your active users saying they would be “very disappointed” if they could no longer use your product.
The evolution in my thinking to charge only after product/market fit is based on finally working with some “normal startups.” The first five startups I helped take to market all amazingly achieved product/market on the initial release. For these startups it was right to encourage a quick implementation of the business model. However, for startups that haven’t yet found product/market fit, a business model can hinder the process of figuring out how to deliver value. Users are forced to quickly decide if the product is worth the financial investment (and we already know it’s probably not since most wouldn’t be “very disappointed” without the product — when free).
It is safest to assume you won’t have product/market fit right out of the gate. If your initial release hits (think winning the lottery), then you can quickly implement your business model as you transition to a growth company.
If however, you are like most startups, you will spend an undefined period of time engaging users and evolving your product to better meet their needs. When surveys tell you that you’ve reached product/market fit, the final validation is charging for your product (or a version of it).
It’s Different for Enterprise Targeted Startups
For startups targeting enterprises, it actually does make sense to charge before reaching product/market fit. This is the best way to help the enterprise figure out how to get value from your product (somebody on the inside will be motivated to work with you to unlock value since they’ve already spent the budget). If you haven’t charged anything, your attempts to engage the customer and find value are likely to be perceived as an aggressive sales annoyance rather than genuinely helpful.
Growing Your Startup with a Business Model
Startups often delay implementing a business model claiming “we’re focused on growth right now.” But once you’ve achieved product/market fit, most startups will grow faster with a business model (I wrote a post on this earlier). A business model gives you rational constraints within which you can execute very aggressively — otherwise you are held back by fear that you may be wasting money on paid marketing programs.
Without a business model, you don’t know if your business is real. Of course some prefer to hope that a business model implemented in the future might work rather than know that one implemented today doesn’t work. If you are truly offering value (have achieved product/market fit), then there is a business model that will work. The only way to find it is to start experimenting.