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.