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One challenge every entrepreneur faces is figuring out the value of the product they are selling, and how best to price it. Some entrepreneurs may be tempted to give away their product for free at the outset (aka “freemium”). It sounds like a good idea, right? If people are using it, they will learn about your product, which might lead them to purchase it in the future. They could also tell all of their friends who will tell all of their friends and so on and so forth, and before you know it, you’ve achieved that holiest of grails – a viral hit. In many cases, that strategy makes a lot of sense, particularly if you’re selling a product directly to consumers and getting lots of users really fast is a key metric for your investors. But it’s not always a good strategy, and in our case, I decided against it.
I run an edtech company, Torsh. We are a teacher professional development platform and the person who purchases our product is usually not the person who uses it. In our case, our product is purchased by a school, university, or nonprofit organization on behalf of teachers and coaches who will use it. Teachers like many other professionals are required to participate in ongoing professional development to keep their skills sharp, and the vast majority of teachers expect that their employers will pay for it. So it was clear from the beginning that we could not sell to the end user, as there was a pre-existing pattern of the employer paying for products like ours. But why not offer it for free? Well, our first customer offered to pay to build the product and the second customer had no problem paying what we asked them to pay. Then, the lightbulb went off: Our product offered obvious value and customers were willing to pay for it, so why bother with free? The crucial first step for any entrepreneur is to figure out who you are selling to and how to monetize your product , and then be willing to adapt and use different strategies as your company grows.
Another reason we decided to sell our product instead of pursuing a freemium model is that in education as with many other fields, there is a perception that free products or services have less value. If you’re willing to give it away, it can’t be all that good. While this perception is slowing changing, it still influences the way products like ours are viewed. Moreover, charging for your product has a couple of additional benefits aside from the obvious one of getting paid. When you have someone pay for a product, they are more likely to invest time in training their team how to use it, and are more likely to mandate that the product be used regularly. If it is free, a client has no “skin in the game”, and they are less likely to do the hard work required to implement your product successfully. Not all teachers want to do the hard work to get better, and it often takes a proactive administrator to mandate use of a product like ours to drive change. If an organization has paid for our product, they are far more likely to invest the time to make sure it gets used and is successful.
Not to mention, it can be hard to later charge for a product when customers have become accustomed to getting it for free. That’s not to say you should never discount your product for customers to drive growth. Lowering prices at specific times or for specific reasons is a tried and true means of driving sales and revenue growth. We offer discounted pricing based on volume, multi-year commitments and joint marketing activities. We also offer extensive free trial periods to potential customers so they can kick the proverbial tires. It took us a while to realize that offering free trials was a really important way to eventually get a paying customer, and it is now a critical part of our sales process. A free trial is not the same as freemium and it can give a client a really good sense of what they’ll be getting once they purchase your product, thereby reducing the fear of committing to an unknown product for a significant period of time.
Recently, we implemented tiered pricing to enable customers at different price points to experience our product. For a long time we had a one size fits all plan which was not really serving us very well. As I mentioned earlier, you have to pick a pricing model when you launch your product, but you also have to pay really close attention to your customers and be willing to adjust your pricing as they give you feedback. Not all of our customers wanted all the features we were offering. They made it clear that they were willing to pay less for a more stripped down version of our product. At the same time, there were several clients who were using all of our features and should be paying more. So, with that market intel, we launched three tiers of service at different price points and we think the new plan offers a better fit for a much wider range of customers.
Every company is different and every product is different. However, what is always the same is that you will have to adapt your pricing structure as you learn more about your business and your customers. Embrace the change, as it probably means that you’re listening to your customers. We are still working on it and will continue to do so throughout the life of our product. As an entrepreneur, you will constantly be calibrating the value you provide to the price you are charging for your product or service.
