Don’t Get It Twisted: Customer Development = Startup Sales

There seems to be a misconception out there in startup world. There is plenty of talk about “customer development” and Lean Startup Methodology (talking to and learning from potential customers) in the product development stage, which is great. But there is simultaneously a sense of apprehension when it comes to “monetizing”, as if it’s this mythical, frightening beast. I’ll let you in on a secret: customer development and early stage startup sales are literally the same process.

This comes back to a fundamental misunderstanding of what selling is. Way more than any slick sales pitch, it’s about matching your offering with a customer’s need. To create this match between product and need, you need to listen but you also need to expose yourself to failure by trying to sell and seeing what happens. The biggest mistake you can make is giving the impression that your product is free when it actually isn’t.

And once you do bring up price, always be ready to close the deal! Most people separate customer development from sales so that they are either only:

1) Learning during customer development conversations

2) Trying to sell while in sales calls with potential customers and not trying to learn anything

Yesware’s founder Matthew Bellows offers a warning of this exact symptom in one of his early blog posts where a potential customer was ready to buy licenses for their sales team but he was too busy thinking of potential features to notice the buyer’s intentions. Yesware has raised double digit millions and is absolutely crushing it (I love using horrible cliches) so if they can make a mistake like this, it’s very possible that you can too.

But what happens if you misread the potential customer’s intentions, try to sell them, and they reject you? You’ll hit an objection. Objections are great because you learn why the customer is saying no! If it’s something wrong with your product, you can now go fix that problem. If it’s related to your pricing, you can work on that. The real problems come when you aren’t getting any feedback on why the customer isn’t buying – it’s impossible to fix the problem when you don’t know what the problem is in the first place.

There’s another hidden advantage to having paying customers – it’s way easier to get useful feedback. At one of my previous companies, we went down the free trial route and got solid adoption from one of the core audience groups (high school counselors). The problem? They never used the product unless we told them to. We weren’t sure if it was because of our design, our product, or if we just weren’t solving a true need. You’ll never have this problem if you’re asking initial users to pay money to use your product – they’ll either not buy your product or they’ll quickly cancel if you aren’t solving their need.

Don’t overcomplicate things. If you’re doing customer development already, just add a step and try to close the sale. Worst case, you’ll learn more and if all goes well, you’ll have some revenue. And if you’re not already doing customer development and you run a startup, the time to start was yesterday 🙂

 

The Importance Of Pricing Model In Product Market Fit

Product-market fit is the holy grail for startups. Reaching product-market fit means you’re ready to scale. On the surface, it’s a pretty simple concept: you’ve built a product that solves a critical problem for your target customer and they are paying you money for you to solve their problem. That said, it’s actually quite complex to achieve product market fit. In fact, most startups never achieve product-market fit (and this is the reason why so many startups fail). Even if you have a great product that solves a critical problem, having the wrong pricing model will mean you receive all the wrong signals from potential customers. Most entrepreneurs will then continue fidgeting with their product, thinking that’s why customers aren’t buying. Here’s another thing you should tweak: your pricing model.

There are a few different pricing models your business can use (see below). None of them is superior to the other in general – it just depends on the nature of your business and the value you provide to the customer.

 

Pricing models

Subscription – time-period based fee for your product (usually monthly or annual)

Performance – broken down by key performance metrics for your industry (if you occupy a single industry) or general important metrics in your ecosystem (ex. clicks for Google Adwords, Likes for Facebook, or app installs for Facebook mobile).

One time fee – pretty self explanatory

 

The pricing model you choose matters more than you think. If you have a transactional product and sell using a subscription model, traction will be extremely difficult. Customers won’t see the value up front and retention of existing customers will be an uphill battle that you’ll ultimately lose. Transactional products (particularly marketplaces) have irregular “trigger events” which means that on a subscription model, either the customer is going to be overpaying (you’re delivering too few trigger events) or underpaying (you’re delivering too many trigger events for the price you charge). The former is a much worse problem. Losing customers, especially at the early stage when most people in the market don’t even know you exist, will absolutely kill your business.

Sometimes the pricing model is the main thing preventing you from recognizing product-market fit. We saw this first-hand last year at Mom Trusted. At Mom Trusted, we have 2 account levels, free and premium. For months, we tried to push a subscription model for our premium customers. We were able to get a handful of customers but our churn rate was high and revenue was lacking.

After some thought and coming to the realization that we were offering something transactional, we decided to experiment with a transactional pricing model. In our industry, there are 3 key metrics for our customers (child care center owners) – leads, tours, and enrollments. Transactional pricing meant charging our customers only when they received a lead, tour, or enrollment through us. Each of these 3 transactions were priced differently according to the point of the customer’s sales funnel they were delivered to.

So what were the results? After switching to a transactional model 6 months ago, we now have twenty times (20X) more signed customers than we previously did. Even better, we have barely changed the product on the customer side during that time. The only change we made was a tweak in our pricing model.

Figuring out the ideal pricing model for your company starts with truly understanding your customer, the problem you’re solving for them, and the solution you’re offering. If you’re struggling to find product-market fit, play with your pricing model a bit. The exercise of thinking about what goes into a pricing model will force you to think deeply about your target market and offering which is never a bad thing in the early stages.