Thursday, December 12, 2013

Does your Startup Charge too Little?

Most startups are afraid of charging real $$$$. 
You can charge $5M for a website with 7 static pages. Annually.

There is a trend I have seen with accelerator startups - charging too little. I think this comes from youth and the feeling that if X was 10 times cheaper you would buy it. In our real life, this is mostly true - if I could get a TV for $100 in stead of $1000, or buy a BMW for $2000 in stead of $50,000 wouldn't I buy it? 

But its not really true. Not even for us - you and I often pay $150 for a shoe manufactured for $5 and even if you could buy the shoe for $5, you wouldn't. This is how Nike makes money.

This is especially so for big corporations - they are looking to minimize risk to their multi-billion dollar business and by being cheap about paying $5 for storage vs $50 they don't want to incur the risk of having a million dollar loss or more. 

For example, Avon had to put its latest IT fiasco in its 8K filings to investors (see Avon Order Management System Unusable). This means real damage to their brand and investors. They are not looking for cheaper, they are looking for something that's more usable. 

For a more public version of this, just take a look at the cost of and think what you would have charged as a startup. See a difference? That's called missed opportunity.

Startups think cheaper is always better. Not true!

  • What if I charged you only for the users that actually use the product? Sounds good in theory but most CIOs and other buyers want a predictable price so they can budget for it. They don't want to pay $7.47 one month and $74.80 the next.
  • What if I gave away feature X for free? Well, most likely the corporate buyer will assume your feature X is a mediocre implementation. They have learned this the hard way and you are not going to be able to convince them otherwise in most cases unless you have really thought this through. There are many counter examples to this but be careful to not assume this.
  • What if I made my product free and charged a % of transactions? While that sounds like a steal for you - because you are a cash poor startup that wants to pay as you go and as you succeed - the bigger corporations learn that its best for them to use their cash upfront and get their marginal costs down. This means they will often rather pay a high fixed fee than % of x.

Thinking like your customer is a real listening skill that you must hone to be successful. Aaron Levie seems to get this - no wonder he's been selected entrepreneur of the year! 

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