This video from Y Combinator teaches startup founders about business models and pricing strategies. It explains the nine common business models that produce billion-dollar companies and shares lessons from YC's top 100 companies, highlighting the success of SaaS, transactional, and marketplace models. The video also gives five important tips for pricing your product, emphasizing the need to charge customers and price based on value rather than cost.
Key Takeaways
1
Nearly all billion-dollar companies use one of nine proven business models, including SaaS, transactional, marketplaces, hard tech, usage-based, Enterprise, advertising, e-commerce, and bio.
2
SaaS, transactional, and marketplace business models account for 67% of the top 100 YC companies, with marketplaces being especially good at creating "winner-take-all" companies.
3
Transactional businesses often outperform because they are directly involved in the flow of money, making it easy to take a cut and become critical infrastructure.
4
Advertising and e-commerce models rarely produce big winners for startups, as advertising requires extreme organic virality to succeed.
5
Successful businesses consistently generate recurring revenue, have high customer retention, build defensible moats, are close to the transaction, and scale with software.
6
Charging for your product is crucial for learning, as it reveals if users are willing to pay, which users are most interested, and how much value they perceive.
7
Price your product based on the value it provides to your customers, not just on your operational costs.
8
Most startups, including yours, are likely undercharging for their products, and higher prices can lead to better margins and imply higher value.
9
Pricing is not permanent and can be adjusted over time as your product evolves and provides more value.
10
Keep your pricing simple and clear to avoid creating friction that might prevent customers from signing up and paying.
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foreign
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[Music]
0:09
I'm Aaron Epstein I'm a group partner
0:12
here at Y combinator and in this video
0:14
we're going to be talking about business
0:16
models and pricing there's three main
0:18
things that we're going to cover in this
0:20
video the first is the nine business
0:22
models of nearly every billion dollar
0:24
company it turns out there's just a
0:26
handful of them that build the biggest
0:28
winners next we're going to talk about
0:29
business model lessons from the YC top
0:32
100 companies list and finally we're
0:35
going to cover some startup pricing
0:36
insights that we've taken from the
0:40
thousands of companies that have gone
0:42
through YC so first let's talk about
0:44
business models that build winners if
0:47
you're not familiar a business model is
0:49
a fancy term for how you make money and
0:51
it turns out the business models are
0:52
important because we see Founders that
0:55
often get frustrated when investors
0:57
won't fund them and their business won't
0:59
grow and oftentimes they're not sure why
1:02
and usually this is because they're not
1:05
using a proven business model and
1:07
they're actually only a handful of
1:09
business models that are responsible for
1:11
nearly all billion dollar companies and
1:13
rather than trying to reinvent the wheel
1:15
you should actually just copy one of
1:17
these and here they are nearly every
1:20
billion dollar company is one of these
1:22
Nine business models there's SAS
1:24
business models which is software as a
1:27
service which is cloud-based
1:28
subscription software that customers pay
1:31
either monthly or annually in order to
1:33
access the software there's
1:35
transactional business models that
1:37
facilitate transactions and take a cut
1:40
of those transactions these are often
1:43
fintech companies and then there's
1:44
marketplaces which facilitate
1:47
transactions between buyers and sellers
1:49
these are often referred to as two-sided
1:51
marketplaces and there's also hard tech
1:53
businesses there's usage-based business
1:56
models there's Enterprise there's
1:59
advertising there's e-commerce and
2:02
there's bio and so in this video I'm
2:04
actually not going to get too deep into
2:06
the specifics of each of these business
2:08
models instead we're going to have a
2:11
business model guide that I've put
2:12
together that's going to be linked in
2:14
the description down below this guide is
2:16
going to cover the metrics that matter
2:18
most for each business model
2:20
key takeaways for each of them and other
2:23
similar companies that you can learn
2:25
from depending on which business model
2:27
you are using for your company in this
2:30
video what I want to focus on is things
2:32
that we can learn from the top 100 YC
2:34
companies the top 100 YC companies is
2:37
pulled from y combinator.com top
2:40
companies which is a list of the most
2:43
valuable companies that y combinator has
2:46
ever funded and so for the purposes of
2:48
this video I've gone through this list
2:50
and I've matched each company up with
2:54
their primary business model to try to
2:56
see what interesting insights we can get
2:59
from them now some later stage and
3:01
larger companies actually have multiple
3:03
business models however for your
3:05
purposes as an early stage startup you
3:08
should just have a single business model
3:10
that you're focused on and so here they
3:12
are these are the top 100 YC companies
3:14
organized by business model and there's
3:17
some interesting things that we see here
3:19
first is that that SAS businesses
3:21
actually make up 31 of the top 100 YC
3:25
companies transactional businesses make
3:28
up 22 percent of the top 100 YC
3:31
companies and marketplaces actually make
3:33
up 14 so just with these three business
3:37
models SAS transactional and
3:39
marketplaces it makes up 67 percent of
3:43
the top 100 YC companies on the flip
3:46
side with business models like
3:48
advertising and e-commerce they barely
3:50
register on the top 100 YC companies
3:53
list if you're familiar with startup
3:55
outcomes and Venture Capital returns you
3:59
know that there's a power law effect
4:00
which means that the biggest winners far
4:03
far outperform all other businesses by
4:06
orders of magnitude and this is true for
4:09
the YC top 100 companies list as well
4:11
turns out that 50 of the overall value
4:15
of the top 100 YC companies actually
4:17
comes from just the top ten and so it's
4:20
interesting to look at what insights we
4:22
can get from these 10 companies too and
4:25
here they are these are the top 10 YC
4:28
companies by value there's Airbnb
4:30
there's stripe there's instacart there's
4:33
coinbase there's doordash there's Reddit
4:36
there's a number of companies here that
4:39
you're probably very familiar with or
4:41
use on a regular basis and what's
4:43
especially interesting is that five of
4:46
the YC top 10 are actually marketplaces
4:49
there's Airbnb there's instacart there's
4:52
doordash there's openc and there's Fair
4:55
the interesting takeaway here is that
4:57
marketplaces are most likely to build
4:59
winner take all companies they tend to
5:02
become so big and dominant in their
5:05
industry that it doesn't leave much room
5:07
or market share for other competitors
5:09
once marketplaces actually get huge so
5:12
marketplaces are 14 of the top 100
5:15
companies but they actually create 30 of
5:18
the overall value because so many are
5:21
represented here in the top ten and
5:22
while marketplaces are really tough to
5:24
get off the ground they have a chicken
5:26
and egg problem where you can't just
5:28
build your product and then sell it to
5:30
customers you actually need to solve for
5:33
both sides of the marketplace the supply
5:35
and the demand at the same time in order
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to get customers however once they hit
5:41
the inflection point and they start to
5:43
work they get massive Network effects
5:46
where each new user of the platform
5:48
increases the value for everybody else
5:51
that's what makes them dominant winners
5:53
so you can think of companies like
5:55
Airbnb if you are looking to rent out a
5:58
place short term to stay then chances
6:00
are you would go to Airbnb because
6:02
that's where all the inventory is
6:04
similarly if you wanted to buy or sell
6:07
nfts you would probably go to openc
6:09
because that's where everyone is that's
6:12
how these become the big Winners it also
6:14
turns out that three of the YC top 10
6:16
are transactional businesses too so
6:19
these are companies like stripe coinbase
6:22
and brex and the main takeaway here is
6:25
that transactional business is far
6:27
outperform because they're directly in
6:30
the flow of funds this means that they
6:32
are the platform that money flows
6:34
through making it very easy for them to
6:37
just take their cut and so transactional
6:39
companies are 22 of the top 100 YC
6:43
companies but they actually create 29 of
6:46
the overall value and this is because
6:48
there is close to the transaction as
6:51
possible this was advice that I received
6:54
during my YC batch back in 2010
6:57
and that was to get as close to the
6:59
transaction as possible if you're a
7:01
company like stripe that literally
7:03
processes money for companies or brex
7:07
that is the corporate card that they use
7:08
to spend money then you're directly in
7:11
that flow of funds and so it's really
7:14
easy to take your cut on the opposite
7:16
extreme if you are an affiliate business
7:18
multiple things have to happen before
7:21
you ultimately get paid which means that
7:23
you are very far from the transaction
7:25
which makes those not as good of a
7:27
business for transactional businesses
7:29
because they're so close to the
7:30
transaction they often become critical
7:33
infrastructure for other companies that
7:35
they build on top of and that usually
7:37
means that they are solving a top three
7:39
problem for them so you can imagine if
7:42
you use stripe as your primary method to
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get paid from your customers the thought
7:47
of ripping that out sounds terrible you
7:50
would never want to do that and that's
7:52
why these transactional businesses
7:54
become so dominant we also see that SAS
7:56
businesses are most likely to make the
7:58
top 100 list and this is because they
8:01
have consistent Revenue so 31 of the YC
8:06
top 100 companies are actually SAS
8:08
businesses that's nearly a third and
8:11
this is because the recurring Revenue
8:12
makes them great businesses this means
8:15
that customers keep paying them every
8:18
single month or every single year until
8:20
the customer explicitly says to stop so
8:23
this has lots of benefits including the
8:26
predictable Revenue that they get which
8:28
allows them to compound and grow their
8:30
business we can also see that very few
8:33
advertising businesses become big
8:34
Winners and this may be surprising
8:36
because we're so familiar with so many
8:40
companies that have built their business
8:41
off of an advertising business model
8:43
there's Google there's Facebook there's
8:47
Twitter just to name a few but really
8:49
only three percent of the top 100 YC
8:52
companies use an advertising business
8:54
model as their primary way to make money
8:56
and that's because advertising
8:58
businesses need organic virality to win
9:01
they need to catch lightning in a bottle
9:03
and become the Hub where all users go to
9:06
to hang out or to see live streams in
9:09
the case of twitch but when that happens
9:11
they get really strong Network effects
9:14
just like marketplaces so people go to
9:17
hangout on Reddit and form communities
9:19
there because that's where everybody
9:20
else is people go to Twitch to watch
9:23
live streams because that's where all
9:25
the streamers are and so it's really
9:27
important to remember member that you
9:29
should not use ads as your primary
9:32
business model unless you expect to be a
9:35
top 10 site on the internet otherwise
9:37
it's too hard to monetize and build a
9:40
huge scale to become a massive company
9:42
so what are some overall lessons that we
9:44
can take away from this list first it's
9:47
interesting to look at what's not in the
9:48
top 100 list there are no services or
9:51
Consulting businesses there and so it
9:54
can be a good idea to start doing
9:56
services or Consulting for your
9:58
customers primarily as a way to learn
10:00
and make sure that you're building the
10:02
right product for them but Consulting
10:04
businesses suffer from having
10:05
non-recurring Revenue
10:07
scaling with people rather than software
10:10
and having very low margins as a result
10:12
so that's why these businesses are not
10:16
Venture scale similarly affiliate
10:18
businesses they tend to be too far away
10:20
from the transaction that means that you
10:22
have to acquire a customer so send them
10:25
off to another product or service hope
10:28
that they actually make a transaction on
10:30
that other product or you will get some
10:32
small commission from that 30 to 90 days
10:35
later so it's too hard to make a lot of
10:38
money at scale doing an affiliate
10:39
business similarly Hardware businesses
10:42
they require lots of capital to get off
10:44
the ground to buy physical parts and
10:47
they have low margins as a result so
10:49
that makes it really difficult to start
10:51
these businesses and also to scale them
10:53
even if they're working just requires so
10:56
much capital and then businesses that
10:58
are built on other platforms you don't
11:00
see in this list either that's because
11:02
they tend to have a lot of platform risk
11:05
if your business is built on top of
11:07
another big successful platform and your
11:10
business starts to work then it's
11:12
actually in the interest of that
11:14
platform to shut you down and capture
11:16
all of that revenue for themselves so
11:19
that's why even if these look like
11:20
they're working in the early days they
11:22
can be turned off at any moment we also
11:25
see that recurring Revenue consistently
11:27
creates winners and this is because it
11:30
is highly predictable once a customer
11:32
has committed to pay they're going to
11:34
continue paying until they explicitly
11:37
say that they want to stop paying they
11:39
also have higher customer lifetime
11:41
values versus one-off transactions and
11:44
this results in lower customer
11:45
acquisition costs so you don't have to
11:48
keep reacquiring customers over and over
11:50
if you have a one-off transactional
11:52
business then you have to invest money
11:55
in acquiring that customer the first
11:57
time and then also keep putting more
11:59
money into trying to get existing
12:02
customers to spend more with you that's
12:05
not the case with recurring Revenue
12:06
businesses but recurring Revenue only
12:09
works when you have strong retention
12:12
it's not enough for your product to
12:14
deliver value right up front and then
12:16
never again you need to keep delivering
12:19
value over and over again otherwise your
12:21
customers will churn and stop paying and
12:24
then you can't scale a leaky bucket if
12:26
you have lots of churn and to give you
12:28
an example of that if you had 95 monthly
12:31
retention for your recurring Revenue
12:33
product so that means that five percent
12:35
of your customers will churn and stop
12:38
paying you every single month and if you
12:41
started with 100 customers at the
12:43
beginning of the year then by the end of
12:45
the year you would only have 54
12:48
customers of your original 100. that
12:50
means that you would lose 46 of your
12:53
customers in just one year and you would
12:56
need to get 46 new customers just to
12:59
break even with where you started the
13:01
year and let's say for example you had
13:03
90 monthly retention instead of 95 just
13:06
a five percent difference there and that
13:09
would actually lead to only 28 customers
13:12
at the end of that first year that's a
13:15
huge difference and a huge hill to climb
13:17
so just that five percent difference in
13:20
monthly retention can actually be the
13:22
difference between life and death for a
13:24
startup we can also see that some of the
13:27
biggest winners are built with Moats
13:30
there are network effects that many
13:32
marketplaces have right where each new
13:35
user increases the value and they become
13:38
the dominant player in the market
13:40
there's also lock-in and high switching
13:42
costs we see this with transactional
13:45
businesses like stripe if you're the
13:47
primary way that people actually accept
13:50
money and process payments then chances
13:53
are they're not going to switch off of
13:55
you in SAS businesses you get the
13:57
recurring Revenue where customers keep
13:59
paying over and over again until they
14:01
say to stop
14:02
you can also get lock in by having
14:04
customer data on your platform that once
14:07
they stop paying all that customer data
14:09
goes away
14:10
and then Enterprise businesses while
14:12
they're often difficult and have long
14:14
sales Cycles to be able to sell into
14:16
large companies usually once you've sold
14:18
into the company the churn is a lot
14:21
lower technical Innovation is another
14:23
way to build really strong modes and we
14:26
see this often in hard tech and bio
14:28
companies especially so you can think of
14:30
companies like Cruise building
14:32
self-driving cars and boom which is
14:35
building supersonic Jets it takes a
14:38
really long time to even get to a
14:40
working product for these types of
14:42
businesses and So for anybody to compete
14:44
with them it takes years of difficult
14:47
technical development just to catch up
14:49
we also see that higher margins and
14:52
better Union economics can build modes
14:54
in the example of companies like
14:55
doordash and instacart they've reached
14:58
economies of scale where they're so
15:00
large now that they've been able to
15:02
drive their costs further down at this
15:04
scale and improve their margins which
15:08
new entrants are not going to be able to
15:10
compete with and finally if you get
15:12
organic distribution for your product
15:14
through virality or Word of Mouth you
15:17
can dominate your Market through that as
15:19
well
15:20
if you are able to get users for free
15:22
because other users of your product tell
15:25
new users to come join and you're
15:27
competing with a company that has to pay
15:29
to acquire their customers then you are
15:32
going to grow much faster and capture
15:35
way more of the market so to recap the
15:38
best businesses generate recurring
15:40
Revenue have high retention
15:42
build defensible moats are as close to
15:45
the transaction as possible they scale
15:48
with software not people
15:50
and they're proven and use business
15:53
models that are familiar to customers
15:55
and so it's important that you focus on
15:58
innovating on your product that's what
16:00
should be new and copying your business
16:03
model from one of these proven winners
16:06
all right now let's talk about pricing
16:08
it's important to think of pricing as a
16:11
tool to help you learn faster it can
16:13
help teach you who wants your product
16:15
how much they want it how much value
16:19
your product provides to your users and
16:22
which channels you can afford to use to
16:24
acquire your customers so to help you
16:26
get started
16:27
I've compiled five pricing insights from
16:31
the top YC companies the first is you
16:34
should charge this is actually the most
16:37
common mistake that we see Founders make
16:39
often Founders are afraid to charge for
16:42
a number of reasons they're often afraid
16:45
that their customers are going to tell
16:47
them no they're afraid that their
16:48
customers are going to walk away and
16:50
never come back and they're afraid that
16:52
their customers are actually going to go
16:53
and use their competitors product but it
16:56
turns out that charging is actually one
16:57
of the most effective ways to learn a
16:59
lot of really important things about
17:01
your business the first is are your
17:03
users even willing to pay or not this is
17:06
often binary where either they're
17:09
willing to open their wallet or they
17:11
don't even see enough value in your
17:12
product to overcome that hurdle it can
17:14
also teach you which users are most
17:17
willing to pay if you're trying to
17:19
decide whether you should go after
17:20
customer segment a or customer segment B
17:24
trying to charge and figuring out which
17:26
one is most excited to pay can give you
17:28
really good signal on Who wants your
17:30
product more it can also teach you how
17:32
much they're willing to pay by setting
17:34
higher prices you can try to figure out
17:37
how much value they see in your product
17:39
even if everyone refuses to pay that's
17:42
still valuable information for you to
17:44
get because it teaches you that you
17:46
haven't built enough value into your
17:48
product yet or you're talking to the
17:50
wrong customer segment stripe is a great
17:52
example of this in the early days
17:55
stripe wanted to test the amount of
17:57
value that they were building in their
17:59
product so while most of their
18:00
competitors were actually charging
18:02
around three percent per transaction
18:04
stripe decided to set their price at
18:07
five percent per transaction nearly
18:09
double what their competitors were
18:11
charging and the reason that they did
18:12
this is because they wanted to test how
18:14
much value their customers saw in things
18:18
like one-click sign up and being able to
18:20
get started quickly and really in-depth
18:23
detailed developer API documentation
18:26
that would help developers get started
18:28
faster and so rather than trying to
18:30
undercut the competition in order to win
18:33
customers they did the exact opposite
18:36
and set a really high bar for themselves
18:38
to prove that they had built enough
18:40
value into their product so where should
18:43
you begin
18:44
the first thing that I recommend is that
18:46
you don't overthink it if you look
18:48
online there are tons of charts and
18:50
graphs and formulas and all these
18:53
different complicated ways to maximize
18:55
your pricing and figure out the right
18:57
price to charge but really when you're
18:59
just getting started the important thing
19:01
is to just find the right order of
19:03
magnitude for your pricing and what I
19:05
mean by that is if you're charging ten
19:07
dollars for your product and your
19:09
customers are willing to pay a hundred
19:10
you should probably change your price
19:12
you're off by an order of magnitude
19:14
however if you're charging ten dollars
19:16
and your customers are willing to pay 15
19:18
or 20 don't worry about it you're in the
19:21
right ballpark which is the really
19:23
important thing and pricing isn't
19:26
permanent this is really important it
19:28
often takes years to iterate and capture
19:31
the full value of the product that
19:33
you've built from your customers and so
19:35
don't worry about capturing that full
19:37
value early on you'll have plenty of
19:39
time to maximize that the next Insight
19:42
is that you should price on value not on
19:44
cost
19:45
and so there's three important
19:47
components here the first is the cost
19:49
this is what it costs you to be able to
19:52
serve your customer the next variable is
19:54
price this is what you're charging
19:57
and then there's the perceived value
19:59
that your customers see in your product
20:01
and so Founders often start with
20:04
something called Cost Plus pricing I
20:06
would not recommend this what this
20:08
usually looks like is looking at how
20:10
much it costs you to serve a customer
20:12
and then adding an amount on top of that
20:15
say ten dollars and that's your price
20:17
but this actually ignores the full value
20:20
of what your customers see in your
20:22
product so the difference between your
20:25
cost to serve your customer and the
20:27
price that you charge that's your margin
20:30
that's how much you make on each
20:32
transaction and the difference between
20:34
the price
20:35
and the value
20:37
that your customers see in your product
20:39
that's your opportunity to be able to
20:42
raise your prices to be able to capture
20:44
more of that perceived value and now if
20:47
your cost is higher than your price
20:50
well that means that you're going to
20:51
have negative margins and you cannot
20:53
scale a business with negative margins
20:55
similarly if your price is higher than
20:58
the value that your customers see in
21:00
your product that means they're just not
21:02
going to buy from you so how do you find
21:04
your value well there's a couple
21:06
interesting ways to be able to do this
21:08
the first is talk to your users you can
21:11
ask them about the problem that you
21:13
solve and get them to articulate the
21:16
value to you and so what this often
21:18
looks like is if you reach out to a
21:20
customer and you get them on a call and
21:23
you can ask them what is the problem
21:25
that you are hoping that our product
21:27
could solve for you and they'll often
21:29
tell you and similarly if you have a
21:32
user that's signed up for your product
21:33
but is not actually paying you you can
21:36
reach out to them and talk to them and
21:38
ask them the question
21:39
what problem were you hoping that our
21:41
product could solve for you and their
21:44
response is usually going to be one of
21:46
four interesting things
21:47
the first is they're probably going to
21:50
tell you that they were hoping you could
21:51
help them make more money this is
21:53
something every company wants
21:55
or they might tell you that they were
21:57
hoping that you could help reduce costs
21:59
maybe your product saves them time or
22:03
money they might also say that they were
22:05
hoping that your product could help them
22:07
move faster maybe they have something
22:09
they were looking to launch in six
22:11
months and with your product they can
22:13
actually get it launched in a couple
22:14
weeks that sounds really valuable or
22:17
they might say that your product could
22:18
help them avoid risk if you help with
22:20
compliance or offloading something a
22:23
headache that they don't want to deal
22:24
with another way to find your value is
22:26
to keep incrementally raising prices
22:28
until you get pushback from users and
22:31
when you keep incrementally raising your
22:34
prices you will ultimately find the
22:36
ideal price which is when customers
22:39
complain but they still pay
22:41
this is actually a good thing right it
22:44
overcomes that fear of charging a high
22:47
price and customers walking away because
22:49
the ideal scenario is when you tell the
22:52
customer a price they say they have to
22:54
think about it they go back and then
22:57
they come back to you a week later and
22:59
they say all right that seems good
23:01
you're the best solution we're willing
23:02
to pay up on the other side if you were
23:04
to actually charge a lower price and
23:06
they say yeah that sounds great and
23:08
accept immediately well that probably
23:10
means that you're pricing too low and
23:12
you're leaving a lot of money on the
23:13
table which brings me to my third
23:15
Insight which is that most startups are
23:17
actually under charging you almost
23:19
certainly are
23:20
and lower prices are not a sustainable
23:23
Advantage sometimes we talk to Founders
23:26
and they say well our product is just
23:28
like our large competitor except ours is
23:31
cheaper and that actually does not sound
23:33
like a good idea that's not a way to
23:35
build a winner all that means is that
23:38
your large competitor can underprice you
23:40
even way lower than your cost because
23:43
they have way more money and they're way
23:45
larger than you until they put you out
23:47
of business so I do not recommend having
23:50
price as your only differentiator it
23:53
also turns out that when you charge more
23:54
you get higher margins and you're able
23:57
to build a bigger moat this means if you
23:59
have higher margins than your
24:01
competitors you can pay more to acquire
24:03
a customer which means you can acquire
24:05
all of the customers before they do it's
24:08
also important to remember that pricing
24:10
implies value when customers are
24:12
evaluating your product they typically
24:14
don't have a lot of signals on how
24:16
valuable your product is but the price
24:19
that you're charging is actually one of
24:21
the primary ones so if your price is
24:23
lower than your competitors then your
24:26
customers might assume that your product
24:28
is less valuable than theirs similarly
24:30
if you charge a higher price then your
24:33
customers might assume that your product
24:35
is even more valuable than your
24:36
competitors so that can work really well
24:39
and so it turns out that raising prices
24:41
is actually the easiest way to grow
24:43
Revenue if you have a thousand customers
24:46
and you want to double your Revenue well
24:48
it sounds pretty difficult to spend all
24:50
the time energy and money to go get a
24:53
thousand more customers however if
24:55
you're able to just double your price
24:57
just changing a number on the website or
25:00
changing the price that you're quoting
25:02
to customers in a sales call
25:04
and your product supports that higher
25:06
value well you've just doubled your
25:08
Revenue with almost no work at all but
25:11
what if users won't pay more this
25:14
usually means one of two things it
25:16
either means that you need to build more
25:18
value into your product right maybe the
25:21
price that you have raised it to is now
25:24
higher than the value that your
25:26
customers see or it could mean that you
25:29
need to solve a bigger problem maybe the
25:31
problem that you're solving for
25:33
customers is just a nice to have that
25:35
they would never be willing to spend a
25:37
lot of money for so in this instance it
25:40
usually means you want to move to a more
25:42
important top three problem that they
25:44
have there's a third option too which is
25:46
you could give a lower price in exchange
25:49
for one of four key things one you could
25:52
give a lower price in exchange for your
25:54
first user if you're just looking for
25:56
initial feedback and getting somebody on
25:58
the platform totally reasonable to give
26:00
a lower price for that or if you're
26:02
talking to a valuable customer that has
26:04
a recognizable logo
26:06
that can be another good scenario where
26:08
you would give a lower price you can
26:10
then use this logo that you get as
26:13
social proof to get other customers onto
26:15
your platform at your regular price also
26:18
if your product builds lock-in Say by
26:21
getting customer data on your platform
26:23
that they would lose if they leave that
26:26
can be another reason to offer a lower
26:27
price and if you're able to renew after
26:30
the first year and bump your customers
26:33
up to that higher price that can be a
26:36
good reason to get people in at the
26:37
lower price because you know you can
26:39
capture more value from them further
26:41
down the road it's also really important
26:43
to remember that pricing isn't permanent
26:45
this is another common fear that we see
26:47
from Founders where they're afraid that
26:50
they have to nail their pricing the
26:52
first time or they're going to lose
26:53
their customer and never have a chance
26:55
to get them again or sometimes Founders
26:58
are afraid that the set of customers
27:00
that they're talking to are the only
27:02
ones they're ever going to get and so
27:04
they have to close them all and if
27:06
that's the case you should probably work
27:08
on a different business but it acts is
27:10
relatively painless to be able to
27:13
increase prices on customers over time
27:15
too and there's a couple different ways
27:17
to do this you can exclude existing
27:19
customers by letting them keep their
27:22
current pricing and only raising prices
27:24
for all new customers that's one way to
27:27
do it or you could give advanced notice
27:29
that you plan to raise prices and as
27:31
long as you build in enough value into
27:33
your product to cover that price
27:35
increase you shouldn't see much churn
27:38
most people will probably be willing to
27:40
pay it if you have a sticky product
27:41
Netflix is a great example of this this
27:44
chart actually shows price increases
27:47
that Netflix has made over the last
27:49
seven or so years and it's really
27:50
interesting to see that they are not shy
27:52
about raising prices on their customers
27:54
and now Netflix has 221 million paid
27:57
subscribers and they've been able to
27:59
figure out how to raise prices because
28:01
that is the easiest way for them to grow
28:03
Revenue rather than continuing to try to
28:06
scale subscriber growth at the same rate
28:08
so if Netflix is a able to find a way to
28:11
increase their prices on 221 million
28:14
customers you should be able to figure
28:16
out how to do it on your handful of
28:18
early customers as well and the fifth
28:20
Insight is to keep it simple this is an
28:23
example of a pricing page for Quicken
28:25
and as you can see it's very complex
28:27
there's five different buy buttons
28:30
there's prices there's 349 399 599 899
28:34
there's crossed out prices there's one
28:37
dollar off with a symbol right next to
28:39
it it's really complicated to figure out
28:41
even if you want to be a Quicken
28:43
customer which plan you should go with
28:46
and so this likely results in decreased
28:49
conversion rates so it's important to
28:51
remember that when you're creating your
28:53
pricing you don't want it to create
28:55
friction that prevents customers from
28:58
signing up and paying you on the flip
29:00
side here's a great example from gitlab
29:02
they have three very clear simple plans
29:05
with clear pricing and so their pricing
29:08
and their pricing page is not going to
29:11
be the thing that adds more friction and
29:13
prevents customers from signing up and
29:15
paying them and so I'll leave you with
29:17
this story of segment which helps
29:19
companies capture and use their customer
29:21
data when they started out they were a
29:24
couple of Engineers that were not used
29:27
to paying for products themselves and so
29:29
they thought they had to give their
29:30
product away for free in order to get
29:32
anybody to use it and then they wanted
29:34
to raise money from investors so they
29:36
decided maybe we should actually charge
29:39
our customers money so we can show
29:41
Revenue growth so tail between their
29:43
legs they reached out to all their free
29:45
customers and sheepishly told them that
29:48
they were actually going to start
29:49
charging them ten dollars per month
29:51
which was a hundred and twenty dollars
29:54
per year and so they were really nervous
29:56
about telling their customers this but
29:58
surprisingly their customers started
30:00
responding to them with messages like I
30:02
hope you would charge me more than that
30:04
otherwise I'm worried about keeping my
30:06
customer data with you right the low
30:08
price was signaling to their customers
30:10
that maybe their product was invaluable
30:13
or it couldn't be trusted in the long
30:15
term and so in order to grow even more
30:18
they hired a sales advisor and that
30:21
sales advisor told them you should not
30:23
be charging a hundred twenty dollars a
30:25
year instead you should be charging a
30:28
hundred twenty thousand dollars per year
30:30
this is an Enterprise product and this
30:33
scared them to hear this it was
30:35
unfathomable to them that anybody would
30:38
ever pay a hundred twenty thousand
30:40
dollars a year for their product and so
30:41
when they were going into of their first
30:44
sales meeting with their sales advisor
30:46
the advisor told them if you don't tell
30:49
this customer that your price is a
30:51
hundred twenty thousand dollars then I
30:54
quit as your sales advisor so they went
30:56
into the meeting and at the end when it
30:58
came time to talk price and the customer
31:01
said so how much is it the CEO got
31:03
really red and he got nervous and he
31:06
said a hundred twenty thousand dollars
31:08
and the customer responded how about
31:11
twelve thousand dollars and they
31:13
ultimately ended up agreeing on eighteen
31:15
thousand dollars as their price so while
31:17
they didn't actually get the Thousand X
31:20
price increase
31:21
they were able to increase their price
31:24
150 times from 120 dollars a year all
31:28
the way up to eighteen thousand dollars
31:30
a year and it wouldn't have happened if
31:32
they didn't ask for the higher price and
31:35
so they used this philosophy to continue
31:38
growing their deal sizes all the way up
31:40
to six figures and Beyond and ultimately
31:43
led to their acquisition by twilio for
31:46
more than three billion dollars so the
31:48
story of segment hopefully is
31:49
instructive to you that they started out
31:51
giving away their product for free
31:54
ultimately ended up selling to huge
31:56
Enterprises and building a business
31:59
worth over three billion dollars so to
32:01
wrap up the five key pricing insights
32:04
the first is you should charge next is
32:07
you should price on value not on cost
32:09
the third is most startups are under
32:12
charging and you probably are too the
32:14
fourth is that pricing isn't permanent
32:16
don't have fear that you need to get it
32:18
right the first time you can change it
32:21
over time as you learn more and build
32:23
more value into your product and finally
32:26
keep it simple don't add complexity
32:29
which adds friction to customers giving
32:31
you their money
32:32
thank you
32:35
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