Inside the Group Partner Lounge: Turning users into paid customers

Hello. This is Michael with Harge and Brad. Welcome to inside the group partners lounge.

So as YC group partners, we find ourselves repeating the same advice,.

over and over again to startups. Before COVID, we'd often gather together in the group partner lounge at the YC office to try to figure out why this was the case and how we could help startups figure it out faster.

But now that we're online, we're gonna do it in front of all of you. So the topic we're talking about today is startups that for whatever reason refuse to charge their users. Set this up for us, Brad. What's going on here?

Alright. So every batch, we have a lot of new startups come in. And one of the most common pieces of advice that we give over and over and over again to the founders is it's time to start charging or let's let's start asking for money for your product. And without fail, that can stress some people out and create friction. And some people have already been charging something.

Maybe they've done some pilots. Some people are far from it. It's the first time they've ever thought about asking for money. But it's something every batch without fail. We have to say over and over and over again to the startups. Michael Harge, why are why are we having to say that so often? What are some of the the reasons why people have talked themselves into not charging?

I mean, I think one reason is we push people to go out and, hey. Like, you need to get feedback. You need to get users. You need to get, you know, real feedback. And it seems like it's easier to do that if you don't charge because you can, you know, get people using it immediately and giving you feedback. And so I think founders often just optimize for that.

They're, like, optimizing for feedback over revenue.

Yeah. I also think that, like, founders have this weird sense that there's, like, no redos. And so, you know, oftentimes, they'll come up with some reason where it's like, oh, well, I don't know exactly how to price my product yet. And there's there's no way that I can go out to the market with this price and then change it. It's like, really? Like, there's no way you could do that?

But, like, in their minds, they're like, oh, no. Like, my my customers would would kill me if I went out with one price then change the price. So I'm gonna wait until I find the the right price to go out with. I think perfectionism.

is just a huge factor here. And to your point, every week, you you can change your pricing. If you look at some of the most successful startups, they have new pricing all the time. Right? They're always testing it just like they're testing the features in their app. The price that you ask for is just as dynamic oftentimes. And so you don't have to get it right from day one.

In fact, you know, it's pretty common I think in office hours for us to just pick a number out of thin air and say, there's your price right there. That's what you're gonna start charging tonight. And we see that look of fear on people's faces in the office hour,.

but it gets them out the door and gets them moving so that they can start figuring out if people will pay anything for their product, which is a really important box to check. I I remember Drew from Dropbox coming to speak at a YC dinner once, and he was someone asked me about pricing. Like, how do you decide? I think at the time Dropbox was, like, $9. 99 a month or something.

So how do you decide it was $9. 99 a month? And he kind just smiled. He's like, you know, I just did a thin air, like a reasonable number. And he's like, we've done the analysis and, like, I might have cost us hundreds of millions of dollars of revenue. We don't really know, but, like, it was fine.

Like, the point was to pick something reasonable that got them up and running, and then they could do the pricing optimizations when they're, like, worth billions of dollars.

I love that because, you know, talk about, like, a multi, multibillion dollar company where the price was set because it felt right.

Good enough for Drew. It's probably good enough for you. And let Drew keep moving. Right? And let them keep moving forward with the company, and they didn't get hung up over it. The thing that I find myself repeating a lot in office hours, especially during a batch,.

is when a founder is like, you know, we've gotta get the price perfect because we can never change it. It's like, well, think of it this way. You can always grandfather users in. You can whatever your current users are today, you can always keep them on that plan and raise the prices for new users.

And if you're confident and if things go well, like, the users you have today should hopefully represent a small fraction of the users you'll have in six months or a year. Right? And so it's not uncommon to actually find some of the most successful companies who have these early users that are on some, like, ancient pricing plan from years ago. It's fine, but they don't care.

Like, you know, if if Jude had done some sort of, like, early pricing for the first hundred Dropbox customers,.

it's making, like, no difference to, like, Dropbox's bottom line today. Right? In fact, I think he did. It took me a very long time to pay for Dropbox.

Yeah. There's probably probably a hundred people out there on $7. 99 a month. I mean Yeah.

Yeah. Yeah. I think the last one that's weird that I hear is when people are actually trying to sell products to companies and they say some version of like, oh, well, charging is gonna make it harder for me to get the deal. Like, it's hard enough to get this sale done.

If I charge money, it'll be worse, which I always like we always laugh at because usually they're trying to sell these companies that are massive and, like, spending money on software is just something they do normally every day, and they don't actually realize the anti signal of not charging. Right? They don't realize the company is like, they're not charging. Is this gonna work?

Like, are they gonna be able to support us? They gonna onboard us?

And, you know, they could have gotten rid of all of those secret objections if they actually just put a price on I also think that's the way founders end up wasting potentially, like, years of their lives on bad ideas is that they think they have all these customers. Oh, yeah. Like, Apple's a customer. And then you drill into it. It's like, well, how much do they pay you?

It's like, oh, like, nothing but, like, Apple. Like, we get to talk to Apple. And it's like, no. Like, you didn't like, you have to do the actual sale. Like, you have to get revenue in the bank to know that what you're working on is right. And it's like, if you have zero revenue, it just hits you in the face. You know you're failing.

But I think that's, like, one of these things where you feel like it's such a easy temptation. Like, I've got customers. I we'll we'll I'm it's Apple. So we'll make and we'll make millions of dollars from them in a few years. But for now, let's just, like, kinda keep them using it. Yeah. And especially with big companies. Right?

You you're trying to prove that you can change behavior at the company and that your champion.

or the the person that is in charge of the deal on the other side will spend some capital, whether political capital, financial capital, something out of their budget, and actually put some skin in the game to use your product. And if you're just selling free pilots, you know, you're not really proving that much.

Yeah. There's this kind of core assumption that for a product that should be paid if it's free, you can still learn. And it's like, it's pretty obvious you learn a lot more from people who are paying for your product than people are using it for free. The best feedback you're gonna get about your product.

is in the three seconds after you tell them the price. And the the facial expression that they make or the tone of voice that they use, that's often the most honest reaction you're gonna get about your product.

So let's talk about the other side, though. Let's play the devil's advocate for a second. There are business models where free is a a core component, like, you know, companies we funded like GitLab, open core model, like, want people to adopt our open source software and then they'll we'll upsell them later. Isn't that going against what we're talking about? So to some extent, yes.

I think the difference there though is that there's a plan, and and everything is still being tracked. Right? Some of the examples we talked about before where people are selling free pilots to big companies or they're just not charging for their product, they're basically kind of like giving up on the commercial side of things.

But with the open core companies, they know exactly what they're trying to get. They're trying to get a certain level of adoption from developers who they can then later sell, you know, an enterprise support plan or something like that too.

So usually, open core companies are actually very sophisticated about this and know exactly what they're looking for when they're going out there and getting these quote unquote free users. Alright. Well then, put OpenCore aside. What about the Slack strategy? Like,.

almost no one I knew back in the day who was using Slack was paying, and that seemed to work out. Like, what do you think, Haj? What was the play there? Yeah. I think Slack falls under.

sort of the freemium business model, which I think is a completely legit good model. Right? Like, idea is, hey. Like, we start out with a basic version of the product. We make it free. We get people using it. But, like, there's two things that are really important for the freemium model. Right?

One is you have to actually have some constraint that people wanna get around. Like, they want more users. They want more messages. They want something that they'll be willing to pay more for, and you launch that as, like, the the enterprise product or the upgrade product.

And the two as a founder, you have to have the discipline to track whether your free users are converting into paid users and over what time frame. Right? So, like, if I'm doing office hours and the founder says to me, like, we're starting with the free product, but, like, we are gonna we expect people to upgrade within two weeks.

And we're like, you know, we expect they're gonna upgrade when they need, like, an extra seat or extra storage or something. And we're, like, tracking that and seeing if that works. So I'm like, okay. Cool. That sounds great. But if a founder is like, hey. We're actually giving the product away for free.

And, you know, we think people will pay for it at some point and, like, you know, we'll we'll see how it goes. Like, that's what worries me because those those founders just keep building and building and increasing the product surface area without ever charging more. What about the land grabs, though? Like, what about the the social.

kind of consumer y, you know, YouTube, Facebook, Twitter? Like, what about those situations?

I think of those, like, open call where it's like there are there there are specific cases that are exceptions to, like, any rule kind of, especially when it comes to startups. Right? So, yeah, I think it's fair. If you're a consumer business that's gonna monetize via advertising and you need, like, a gigantic user base to generate lots of advertising revenue, then, yeah, makes sense. Right?

But, like, you have to be honest that you're that that you want, like, you're also, like, a social media, Facebook, Twitter type company. For example, I mean, like, you know a lot about Airbnb.

Like, Airbnb, I could totally imagine sort of less confident founders being like, oh, like, we're actually what we're actually building is like this social network for travel, and so we shouldn't charge anything. And, like, in the future though, like, we've got people traveling, we might be but you could imagine some founders use that argument. Right? You don't have to imagine it.

That was called couch surfing. Like, that existed when Airbnb came out. Yeah. Exact product. Yeah.

Right. In the Airbnb story, which I've heard at at YC dinners, they talk about that moment early on when they had to Brian had to pay and it felt awkward. And so a lesser founder would say, okay, no money on the platform because that's awkward. Whereas the right move is to say, let's do it right.

Let's figure out a really good way to handle the money because that needs to be a part of we need to solve the problem and not just punt. So.

we've gone through the devil's advocate position. Brad, finish this off. Like, what's the core takeaway here for founders? So I I think it's okay.

to to be free in certain cases where there is a structured, intentional plan and path to getting paid. Right? We talked about freemium. We talked about OpenCore. We talked about, like, a a large consumer ad supported business. Sometimes you have to go get a lot of free users before you can start making a lot of money.

But on the whole, the the trick is to make sure that you're not charging out of out of fear and that you're not doing this because you're worried about some of the things that we talked about. You're you're worried about blowing it with your customers. You're worried about not getting a second chance to put pricing in front of them.

Because ultimately, if you don't put pricing out there and start charging, you're preventing yourself from really learning.

if your product is something that people want. There you go. That's the game. Great chatting you guys. Thanks, Heidi. Thanks.