To Charge or to Learn: Pricing and Product Market Fit

A comment I left on this venturehacks post on pricing by Ash Maurya in which he quoted Sean Ellis:

I’m trying to reconcile the differences between your POV and Sean Ellis’.

I think first off it’s important to establish the goal: To get to product market fit.

Then that means the role of pricing is to maximize learning, which is how you will get to PMF fastest.

In some cases you need to charge users to maximize learning, otherwise they won’t take your product seriously enough to use it.

In other cases you learn more by letting users have access to everything, uninhibited.

I think it’s only useful to test price to maximize learning towards finding PMF, not for the reason to see if people will pay.

If people pay before PMF they are paying for a “nice to have” product by definition and that’s not a scalable, repeatable process. Their purchase is due to extraordinary circumstances, such as a hard sell by the founder, or the user was wealthy and didn’t mind paying for it after the trial was up, but ended up not sticking with the product.

“Will you pay for this?” is really just another way of saying do I have Product Market Fit – But it’s an inferior way of measuring PMF to the question, “Would you be disappointed if you could no longer use this?”. Paying customers are one way to measure if you have PMF but it’s a layer of abstraction above what you actually want. You can try to infer from pricing whether it means you have a must have product or not, but it’s harder to determine causality up a layer of abstraction.

It’s better just to measure directly whether people would be disappointed if they could no longer use it.

I think it’s also worth noting that you may have hit Product Market fit right off the bat with Cloud Fire. If someone is really good at Customer Discovery, which you are, that’s a possible scenario.

And in which case Sean would agree that you need to implement a business model and start charging right away.

  • Pingback: Max Marmer » Blog Archive » When Advice Contradicts It Usually Doesn’t

  • Anna

    The causality of purchasing power is evidenced only in the purchase itself. The price a customer is willing to pay is independently determined, if only in part, by the individual, so the question of “nice-to-have” is also irrelevant. What you mean is, that the utility a customer derives from the purchase of a product is greater if the price they pay is lower – I am the customer, I want this product, and I am willing to pay $100 for it. If the product costs $10, then I am theoretically $90 in the black. The product would therefore be fit to a market composed of economic decision-makers willing to pay greater than or equal to $10 to purchase that product. The product will be suited to a larger market if it is priced below that threshold, introducing into the market all those economic decision-makers whose independent (although subtly dependent on observation of the decisions of other consumers) valuations of the product are less than $10 but greater than the price offered. There will always be some market for every product, even if that market consists of just 1 person; the “fit” of a product to a “market” is more usefully considered to be the price at which the body of economic decision-makers are willing to become consumers of the product – that is, the marginal threshold at which the collective of individuals is self-determined as a market that is equivalent to the target market. There is no abstraction at work but the socio-psychology of consumption, which is not practicably useful as a determinant for the profitability of entrance into a particular market via such and such variant on the common product class.

  • http://blog.startupsquare.com Tristan Kromer

    Hi Max,

    You can often measure through a level of abstraction by using a larger sample size to get a better signal to noise ratio.

    Cheers,
    Tristan

  • http://maxmarmer.com/ Max Marmer

    But most startups don't have the luxury of large sample size and the customer acquisition costs aren't worth it—nor do you want large numbers because chances are, you'll have to re-educate your users. And also price will push some people out and there's something to learn from them, as well as price coloring the expectations of people using the product.

    Other than needing price for somebody to take you seriously, which I feel like only matters for big enterprise software, I don't see how it can enhance learning about the product. It's true it doesn't get in the way of learning if your price is close to perfect. But that means there's downside will little to no upside (just the revenue).

    The only exception that comes to mind is if you have the really rare kind of business where you have a must have product and no one will pay for it. Otherwise removing price is a very useful deconstruction/simplification, pre-product market fit.

    I started the discussion here on Quora on that topic – http://www.quora.com/Is-it-possible-to-have-pro

  • http://blog.startupsquare.com Tristan Kromer

    Perhaps I am misunderstanding you. I assumed you were talking about an internet based product with a large potential user base. In this case, the acquisition costs of a sample size sufficient to test landing pages and pricing models should be very tiny and the risk of alienating a few hundred users who don't want to pay is minimal.

    (Put another way, if alienating 150 users in your first sample is going to kill your business, you're in the wrong business. If you can't afford the time to acquire 150 users for a sample, also, you're in the wrong business.)

    In any case, it is almost always possible to test a freemium model and then just give the fremium users access to the whole thing. Then you still get all the data you could possibly get from a purely free test. You don't even have to charge the people willing to pay, just see if they'll click on the button that says pay now.

    On the other hand, if you're talking about a non-internet business where the costs of customer acquisition are very high, it makes a lot more sense to test the product out for free initially. I have seen some really elegant ways of charging from day one and learning a tremendous amount. Check the #sllconf videos. I can't remember the name off hand. It was the cooking one.

    Cheers,
    Tristan

  • http://blog.startupsquare.com Tristan Kromer

    Perhaps I am misunderstanding you. I assumed you were talking about an internet based product with a large potential user base. In this case, the acquisition costs of a sample size sufficient to test landing pages and pricing models should be very tiny and the risk of alienating a few hundred users who don't want to pay is minimal.

    (Put another way, if alienating 150 users in your first sample is going to kill your business, you're in the wrong business. If you can't afford the time to acquire 150 users for a sample, also, you're in the wrong business.)

    In any case, it is almost always possible to test a freemium model and then just give the fremium users access to the whole thing. Then you still get all the data you could possibly get from a purely free test. You don't even have to charge the people willing to pay, just see if they'll click on the button that says pay now.

    On the other hand, if you're talking about a non-internet business where the costs of customer acquisition are very high, it makes a lot more sense to test the product out for free initially. I have seen some really elegant ways of charging from day one and learning a tremendous amount. Check the #sllconf videos. I can't remember the name off hand. It was the cooking one.

    Cheers,
    Tristan