In a recent post, Paying Customers – What a Concept!, I proposed that many early stage companies were having to accelerate their products more than was planned on the initial roadmap in order to achieve two critical goals: (1) demonstrate that customers would actually pay for the product or service; and (2) get revenue in the door as quickly as possible to stanch monthly cash burn.
Our portfolio company, Athleon, referenced in the original post has since gone live with its all-pay platform and, thankfully, management and the board have been delighted with the response from users thus far. Granted, it’s early days but in the weeks ahead a fuller picture will emerge of how many beta customers converted to paying customers, what our overall churn numbers were, and — most importantly — what we have learned from the campaign and how best to leverage the experience into best practices for the company going forward.
I wanted to focus this post on the unique characteristics of early customers and some of the strategies that can be employed for the proper care and feeding of these critical players in a young company’s development. Over the years I have heard some in the start-up community opine that a customer is a customer, that everyone’s money is green, and that a company should not give preferential treatment to one subset of customers over another, or at the expense of another. There is some logic to this, I admit. Ideally, a great product of service is desireable across a broad segment of customers and should not require special gimmicks or premiums to appeal to that broad demographic. The slippery slope argument would follow that each premium or discount cheapens the brand and its product and results in customers becoming institutionalized to freebies and other enticements in order to stay customers. An oft-cited example of this is the 1980s airline fare wars where the big carriers became enmeshed in a disastrous race to the bottom by heavily discounting their most popular domestic routes. Once cooler heads prevailed and the airlines decided to end their Pyrrhic game of chicken they were forced to spend the next decade re-educating consumers to wean them off the artificially low pricing on the affected routes. Passengers had gotten so institutionalized to the notion of a $199 R/T New York-LA ticket that they thought anything above that price was gouging. The airlines, of course, were losing a fortune on the $199 fares.
1. Handholding is not only OK, it’s encouraged. I propose that early customers are different. They are voting with their pocketbooks on a company that is usually not particularly stable with a product that is probably somewhat undercooked. These are the pioneer customers. In addition to being able to enjoy their much-needed cash to fuel the start-up’s business, a company management can learn a lot from them. Furthermore, they are almost by definition a small (but hopefully growing) group, so maintaining contact with them and interfacing with them is typically manageable in the early going. Pestering them is not recommended, but reaching out on a regular basis is advisable if done sensibly. Early customers can often provide invaluable feedback on new features, new products, policy changes, and the like — before rolling them out. Finally, deputize at least one person on your team to manage calls and inquiries from early customers in the first few weeks after launch. There will likely be some required handholding to get betas to convert. There will also likely be some irate beta customers that just need to vent. Sometimes they can be turned around and can become a paying customer after all; sometimes not. If not, then the exchanges can often defuse the unhappy betas sufficiently enough that the risk that he or she might pollute the well can be minimized.
2. Use premiums judiciously. I find that valuable customers rarely angle for freebies to give you their business. They want your product, but perhaps they have not been sufficiently sold on its merits and why they need to pay for it. A free book, t-shirt or DVD is not the answer. Unfortunately, that seems to be the knee-jerk reaction from too many start-up teams as a way to ‘bribe’ betas into converting. Premiums like those can work, but they are rarely an elegant response and rarely result in “quality” revenue. Sell the product or service properly and there should be no need for gimmicks. If a beta who wouldn’t convert suddenly does once you throw in a free bobble head, you probably have a lousy (and one-time) customer.
3. Keep the pricing simple. Ideally, I like a really straightforward pricing model. Consumers tend to prefer it as do VCs. That said, I know there are instances where the business model is sufficiently complex that it is just not feasible. With early stage companies, often you are most concerned with getting customers to pay something — anything! — to validate the product and, by extension, the company. As such, don’t get hung up on structuring some overly sophisticated MBA-type pricing mechanism that seeks to perfectly price discriminate and revenue maximize every customer. That’s being too clever by half. The leap from non-paying beta customer converting to paying customer is challenging enough before complicating it with multiple pricing plans. There will be plenty of time for tweaking pricing plans as data rolls in.
4. Offers to early customers should never get worse; only better. One common mistake start-up teams make with pricing strategies is that they often roll out subsequent pricing plans that inadvertently penalize their earliest customers. As mentioned in #1 above, early customers took the greatest risk on the company at a time when few would and they should never be jettisoned or forced into more expensive plans due to some management errors or experience effects. They should also be granted all future premiums being rolled out to new customers. Management will certainly learn things about customer behavior and ideal pricing strategies as time goes on, but nothing ruffles the feather of a charter customer more than seeing a very attractive pricing premium being offered “for new customers only.” If it’s good enough to offer new customers, it’s just as good to offer charter customers if it’s the company’s intention that they remain customers for long.