Andrey Khavryuchenko himself

When to monetize?

During BlackBox Connect program, I’ve enjoyed the lecture of Byrne Reese of ToyTalk – How to Build a Great Product

I encourage you to take a look on the presentation on the slideshare:

One thing that particlarly hit me, was his idea that you should not attempt to monetize your service too early. This contradicted alot of my experience and what Customer Development and Lean Startup practice. Or, at least it seemed to do…

I’ve followed up to get more information and here’s his response:

Just to be clear, I don’t think that creating a premium plan is a bad idea, far from it. In fact, it is a perfectly logical model for some products. I think what you have to weigh is how important are the network benefits of your service. In other words, if the value of the service you provide scales in accordance with the number of people using the service, than asking people to pay might slow adoption, and thus limit the service’s value to early adopters.

If you are thinking of a freemium model, where anyone can use the service for free, and then elect to upgrade, than you should treat that as a totally different scenario.

My question to you would then be, what would differentiate a premium and a non-premium plan? What would paying get you? And if you know the answer to that question, then have you tested those ideas in the market yet to see if they are the right levers for up-selling customers on your service? When we talk about testing our hypotheses, this is what we are talking about. Don’t take it for granted that offering someone 1MB vs 10GB of storage space (for example) is what will compel people to pay for your service. Test it first.

One last word… two things you should consider: a) the features of premium, and b) the price of premium. Chances are these might change over time as you learn. So the trick in my opinion is how you position the premium product. For example, while it is valuable to have a paid version of the product available to customers in order to test how willing people are to pay, having such a product available can potentially create challenges for yourself later on, especially for example if you learn that you initially charged too much, or too little. Customers don’t like it when they learned someone else paid less then they did, or when you suddenly increase their monthly fee. Never take lightly the responsibility of dealing with people’s money. In the end what is important is not the price, but how you manage your customer’s expectation with regards to price.

That makes sense really.

Lesson learned: If your service has strong network effects – defer monetization. If not – consider what people perceive as a value of your service.

I encourage to follow Byrne at @byrnereese and read his blog at http://www.majordojo.com