00:09I'm Aaron Epstein I'm a group partner
00:11here at Y combinator and in this video
00:14we're going to be talking about business
00:15models and pricing there's three main
00:17things that we're going to cover in this
00:19video the first is the nine business
00:21models of nearly every billion dollar
00:24company it turns out there's just a
00:26handful of them that build the biggest
00:27winners next we're going to talk about
00:29business model lessons from the YC top
00:31100 companies list and finally we're
00:34going to cover some startup pricing
00:36insights that we've taken from the
00:39thousands of companies that have gone
00:41through YC so first let's talk about
00:44business models that build winners if
00:46you're not familiar a business model is
00:48a fancy term for how you make money and
00:51it turns out the business models are
00:52important because we see Founders that
00:54often get frustrated when investors
00:57won't fund them and their business won't
00:59grow and oftentimes they're not sure why
01:02and usually this is because they're not
01:04using a proven business model and
01:06they're actually only a handful of
01:08business models that are responsible for
01:10nearly all billion dollar companies and
01:13rather than trying to reinvent the wheel
01:14you should actually just copy one of
01:17these and here they are nearly every
01:20billion dollar company is one of these
01:22Nine business models there's SAS
01:24business models which is software as a
01:26service which is cloud-based
01:28subscription software that customers pay
01:30either monthly or annually in order to
01:33access the software there's
01:34transactional business models that
01:37facilitate transactions and take a cut
01:40of those transactions these are often
01:42fintech companies and then there's
01:44marketplaces which facilitate
01:46transactions between buyers and sellers
01:48these are often referred to as two-sided
01:51marketplaces and there's also hard tech
01:53businesses there's usage-based business
01:55models there's Enterprise there's
01:58advertising there's e-commerce and
02:01there's bio and so in this video I'm
02:04actually not going to get too deep into
02:06the specifics of each of these business
02:08models instead we're going to have a
02:10business model guide that I've put
02:12together that's going to be linked in
02:13the description down below this guide is
02:15going to cover the metrics that matter
02:17most for each business model
02:19key takeaways for each of them and other
02:23similar companies that you can learn
02:24from depending on which business model
02:26you are using for your company in this
02:29video what I want to focus on is things
02:31that we can learn from the top 100 YC
02:34companies the top 100 YC companies is
02:37pulled from y combinator.com top
02:40companies which is a list of the most
02:43valuable companies that y combinator has
02:45ever funded and so for the purposes of
02:48this video I've gone through this list
02:50and I've matched each company up with
02:53their primary business model to try to
02:56see what interesting insights we can get
02:58from them now some later stage and
03:01larger companies actually have multiple
03:03business models however for your
03:05purposes as an early stage startup you
03:08should just have a single business model
03:09that you're focused on and so here they
03:11are these are the top 100 YC companies
03:14organized by business model and there's
03:17some interesting things that we see here
03:18first is that that SAS businesses
03:21actually make up 31 of the top 100 YC
03:25companies transactional businesses make
03:27up 22 percent of the top 100 YC
03:30companies and marketplaces actually make
03:33up 14 so just with these three business
03:36models SAS transactional and
03:39marketplaces it makes up 67 percent of
03:43the top 100 YC companies on the flip
03:45side with business models like
03:47advertising and e-commerce they barely
03:50register on the top 100 YC companies
03:53list if you're familiar with startup
03:55outcomes and Venture Capital returns you
03:58know that there's a power law effect
03:59which means that the biggest winners far
04:03far outperform all other businesses by
04:06orders of magnitude and this is true for
04:09the YC top 100 companies list as well
04:11turns out that 50 of the overall value
04:14of the top 100 YC companies actually
04:17comes from just the top ten and so it's
04:20interesting to look at what insights we
04:22can get from these 10 companies too and
04:24here they are these are the top 10 YC
04:27companies by value there's Airbnb
04:30there's stripe there's instacart there's
04:33coinbase there's doordash there's Reddit
04:36there's a number of companies here that
04:39you're probably very familiar with or
04:40use on a regular basis and what's
04:43especially interesting is that five of
04:45the YC top 10 are actually marketplaces
04:48there's Airbnb there's instacart there's
04:52doordash there's openc and there's Fair
04:55the interesting takeaway here is that
04:57marketplaces are most likely to build
04:59winner take all companies they tend to
05:01become so big and dominant in their
05:04industry that it doesn't leave much room
05:07or market share for other competitors
05:09once marketplaces actually get huge so
05:12marketplaces are 14 of the top 100
05:14companies but they actually create 30 of
05:18the overall value because so many are
05:20represented here in the top ten and
05:22while marketplaces are really tough to
05:24get off the ground they have a chicken
05:25and egg problem where you can't just
05:28build your product and then sell it to
05:30customers you actually need to solve for
05:32both sides of the marketplace the supply
05:35and the demand at the same time in order
05:37to get customers however once they hit
05:40the inflection point and they start to
05:43work they get massive Network effects
05:45where each new user of the platform
05:48increases the value for everybody else
05:50that's what makes them dominant winners
05:52so you can think of companies like
05:54Airbnb if you are looking to rent out a
05:57place short term to stay then chances
06:00are you would go to Airbnb because
06:02that's where all the inventory is
06:03similarly if you wanted to buy or sell
06:06nfts you would probably go to openc
06:09because that's where everyone is that's
06:11how these become the big Winners it also
06:14turns out that three of the YC top 10
06:16are transactional businesses too so
06:19these are companies like stripe coinbase
06:21and brex and the main takeaway here is
06:24that transactional business is far
06:27outperform because they're directly in
06:29the flow of funds this means that they
06:31are the platform that money flows
06:34through making it very easy for them to
06:36just take their cut and so transactional
06:39companies are 22 of the top 100 YC
06:43companies but they actually create 29 of
06:46the overall value and this is because
06:48there is close to the transaction as
06:50possible this was advice that I received
06:53during my YC batch back in 2010
06:56and that was to get as close to the
06:58transaction as possible if you're a
07:01company like stripe that literally
07:03processes money for companies or brex
07:06that is the corporate card that they use
07:08to spend money then you're directly in
07:10that flow of funds and so it's really
07:13easy to take your cut on the opposite
07:16extreme if you are an affiliate business
07:18multiple things have to happen before
07:20you ultimately get paid which means that
07:23you are very far from the transaction
07:24which makes those not as good of a
07:26business for transactional businesses
07:29because they're so close to the
07:30transaction they often become critical
07:32infrastructure for other companies that
07:35they build on top of and that usually
07:37means that they are solving a top three
07:39problem for them so you can imagine if
07:42you use stripe as your primary method to
07:44get paid from your customers the thought
07:47of ripping that out sounds terrible you
07:50would never want to do that and that's
07:52why these transactional businesses
07:53become so dominant we also see that SAS
07:56businesses are most likely to make the
07:58top 100 list and this is because they
08:00have consistent Revenue so 31 of the YC
08:05top 100 companies are actually SAS
08:08businesses that's nearly a third and
08:10this is because the recurring Revenue
08:12makes them great businesses this means
08:15that customers keep paying them every
08:17single month or every single year until
08:20the customer explicitly says to stop so
08:23this has lots of benefits including the
08:25predictable Revenue that they get which
08:28allows them to compound and grow their
08:30business we can also see that very few
08:32advertising businesses become big
08:34Winners and this may be surprising
08:36because we're so familiar with so many
08:39companies that have built their business
08:41off of an advertising business model
08:43there's Google there's Facebook there's
08:46Twitter just to name a few but really
08:48only three percent of the top 100 YC
08:51companies use an advertising business
08:54model as their primary way to make money
08:55and that's because advertising
08:58businesses need organic virality to win
09:00they need to catch lightning in a bottle
09:02and become the Hub where all users go to
09:06to hang out or to see live streams in
09:09the case of twitch but when that happens
09:11they get really strong Network effects
09:13just like marketplaces so people go to
09:17hangout on Reddit and form communities
09:18there because that's where everybody
09:20else is people go to Twitch to watch
09:23live streams because that's where all
09:24the streamers are and so it's really
09:26important to remember member that you
09:29should not use ads as your primary
09:31business model unless you expect to be a
09:34top 10 site on the internet otherwise
09:36it's too hard to monetize and build a
09:40huge scale to become a massive company
09:41so what are some overall lessons that we
09:44can take away from this list first it's
09:46interesting to look at what's not in the
09:48top 100 list there are no services or
09:51Consulting businesses there and so it
09:53can be a good idea to start doing
09:56services or Consulting for your
09:58customers primarily as a way to learn
10:00and make sure that you're building the
10:01right product for them but Consulting
10:03businesses suffer from having
10:05non-recurring Revenue
10:06scaling with people rather than software
10:09and having very low margins as a result
10:12so that's why these businesses are not
10:15Venture scale similarly affiliate
10:17businesses they tend to be too far away
10:19from the transaction that means that you
10:22have to acquire a customer so send them
10:24off to another product or service hope
10:27that they actually make a transaction on
10:29that other product or you will get some
10:31small commission from that 30 to 90 days
10:34later so it's too hard to make a lot of
10:37money at scale doing an affiliate
10:39business similarly Hardware businesses
10:41they require lots of capital to get off
10:44the ground to buy physical parts and
10:46they have low margins as a result so
10:49that makes it really difficult to start
10:50these businesses and also to scale them
10:53even if they're working just requires so
10:55much capital and then businesses that
10:57are built on other platforms you don't
11:00see in this list either that's because
11:02they tend to have a lot of platform risk
11:04if your business is built on top of
11:07another big successful platform and your
11:10business starts to work then it's
11:11actually in the interest of that
11:13platform to shut you down and capture
11:16all of that revenue for themselves so
11:18that's why even if these look like
11:20they're working in the early days they
11:22can be turned off at any moment we also
11:24see that recurring Revenue consistently
11:26creates winners and this is because it
11:29is highly predictable once a customer
11:32has committed to pay they're going to
11:34continue paying until they explicitly
11:36say that they want to stop paying they
11:38also have higher customer lifetime
11:40values versus one-off transactions and
11:43this results in lower customer
11:45acquisition costs so you don't have to
11:47keep reacquiring customers over and over
11:49if you have a one-off transactional
11:52business then you have to invest money
11:54in acquiring that customer the first
11:56time and then also keep putting more
11:59money into trying to get existing
12:01customers to spend more with you that's
12:04not the case with recurring Revenue
12:06businesses but recurring Revenue only
12:09works when you have strong retention
12:11it's not enough for your product to
12:13deliver value right up front and then
12:16never again you need to keep delivering
12:18value over and over again otherwise your
12:21customers will churn and stop paying and
12:24then you can't scale a leaky bucket if
12:26you have lots of churn and to give you
12:27an example of that if you had 95 monthly
12:30retention for your recurring Revenue
12:32product so that means that five percent
12:35of your customers will churn and stop
12:38paying you every single month and if you
12:40started with 100 customers at the
12:42beginning of the year then by the end of
12:45the year you would only have 54
12:47customers of your original 100. that
12:50means that you would lose 46 of your
12:53customers in just one year and you would
12:55need to get 46 new customers just to
12:58break even with where you started the
13:00year and let's say for example you had
13:0290 monthly retention instead of 95 just
13:06a five percent difference there and that
13:08would actually lead to only 28 customers
13:11at the end of that first year that's a
13:14huge difference and a huge hill to climb
13:17so just that five percent difference in
13:19monthly retention can actually be the
13:22difference between life and death for a
13:24startup we can also see that some of the
13:27biggest winners are built with Moats
13:30there are network effects that many
13:32marketplaces have right where each new
13:34user increases the value and they become
13:37the dominant player in the market
13:40there's also lock-in and high switching
13:42costs we see this with transactional
13:44businesses like stripe if you're the
13:46primary way that people actually accept
13:49money and process payments then chances
13:52are they're not going to switch off of
13:54you in SAS businesses you get the
13:56recurring Revenue where customers keep
13:58paying over and over again until they
14:01you can also get lock in by having
14:04customer data on your platform that once
14:06they stop paying all that customer data
14:09and then Enterprise businesses while
14:11they're often difficult and have long
14:13sales Cycles to be able to sell into
14:15large companies usually once you've sold
14:18into the company the churn is a lot
14:20lower technical Innovation is another
14:23way to build really strong modes and we
14:26see this often in hard tech and bio
14:28companies especially so you can think of
14:30companies like Cruise building
14:32self-driving cars and boom which is
14:35building supersonic Jets it takes a
14:37really long time to even get to a
14:40working product for these types of
14:41businesses and So for anybody to compete
14:44with them it takes years of difficult
14:47technical development just to catch up
14:49we also see that higher margins and
14:51better Union economics can build modes
14:53in the example of companies like
14:55doordash and instacart they've reached
14:57economies of scale where they're so
15:00large now that they've been able to
15:02drive their costs further down at this
15:04scale and improve their margins which
15:07new entrants are not going to be able to
15:09compete with and finally if you get
15:11organic distribution for your product
15:13through virality or Word of Mouth you
15:16can dominate your Market through that as
15:19if you are able to get users for free
15:22because other users of your product tell
15:25new users to come join and you're
15:27competing with a company that has to pay
15:29to acquire their customers then you are
15:32going to grow much faster and capture
15:34way more of the market so to recap the
15:37best businesses generate recurring
15:39Revenue have high retention
15:42build defensible moats are as close to
15:45the transaction as possible they scale
15:48with software not people
15:50and they're proven and use business
15:52models that are familiar to customers
15:55and so it's important that you focus on
15:57innovating on your product that's what
16:00should be new and copying your business
16:02model from one of these proven winners
16:06all right now let's talk about pricing
16:08it's important to think of pricing as a
16:10tool to help you learn faster it can
16:13help teach you who wants your product
16:15how much they want it how much value
16:18your product provides to your users and
16:21which channels you can afford to use to
16:24acquire your customers so to help you
16:27I've compiled five pricing insights from
16:31the top YC companies the first is you
16:34should charge this is actually the most
16:36common mistake that we see Founders make
16:38often Founders are afraid to charge for
16:42a number of reasons they're often afraid
16:44that their customers are going to tell
16:46them no they're afraid that their
16:48customers are going to walk away and
16:50never come back and they're afraid that
16:51their customers are actually going to go
16:53and use their competitors product but it
16:55turns out that charging is actually one
16:57of the most effective ways to learn a
16:59lot of really important things about
17:00your business the first is are your
17:03users even willing to pay or not this is
17:06often binary where either they're
17:08willing to open their wallet or they
17:10don't even see enough value in your
17:12product to overcome that hurdle it can
17:14also teach you which users are most
17:16willing to pay if you're trying to
17:18decide whether you should go after
17:20customer segment a or customer segment B
17:23trying to charge and figuring out which
17:25one is most excited to pay can give you
17:28really good signal on Who wants your
17:29product more it can also teach you how
17:32much they're willing to pay by setting
17:34higher prices you can try to figure out
17:36how much value they see in your product
17:38even if everyone refuses to pay that's
17:42still valuable information for you to
17:44get because it teaches you that you
17:45haven't built enough value into your
17:47product yet or you're talking to the
17:49wrong customer segment stripe is a great
17:51example of this in the early days
17:54stripe wanted to test the amount of
17:56value that they were building in their
17:58product so while most of their
18:00competitors were actually charging
18:01around three percent per transaction
18:04stripe decided to set their price at
18:07five percent per transaction nearly
18:09double what their competitors were
18:10charging and the reason that they did
18:12this is because they wanted to test how
18:14much value their customers saw in things
18:17like one-click sign up and being able to
18:20get started quickly and really in-depth
18:23detailed developer API documentation
18:25that would help developers get started
18:28faster and so rather than trying to
18:30undercut the competition in order to win
18:33customers they did the exact opposite
18:35and set a really high bar for themselves
18:38to prove that they had built enough
18:40value into their product so where should
18:44the first thing that I recommend is that
18:46you don't overthink it if you look
18:48online there are tons of charts and
18:50graphs and formulas and all these
18:52different complicated ways to maximize
18:55your pricing and figure out the right
18:56price to charge but really when you're
18:58just getting started the important thing
19:00is to just find the right order of
19:02magnitude for your pricing and what I
19:04mean by that is if you're charging ten
19:07dollars for your product and your
19:08customers are willing to pay a hundred
19:10you should probably change your price
19:12you're off by an order of magnitude
19:13however if you're charging ten dollars
19:16and your customers are willing to pay 15
19:18or 20 don't worry about it you're in the
19:21right ballpark which is the really
19:23important thing and pricing isn't
19:26permanent this is really important it
19:28often takes years to iterate and capture
19:30the full value of the product that
19:32you've built from your customers and so
19:35don't worry about capturing that full
19:36value early on you'll have plenty of
19:39time to maximize that the next Insight
19:41is that you should price on value not on
19:45and so there's three important
19:46components here the first is the cost
19:49this is what it costs you to be able to
19:52serve your customer the next variable is
19:54price this is what you're charging
19:56and then there's the perceived value
19:58that your customers see in your product
20:01and so Founders often start with
20:04something called Cost Plus pricing I
20:06would not recommend this what this
20:08usually looks like is looking at how
20:10much it costs you to serve a customer
20:11and then adding an amount on top of that
20:14say ten dollars and that's your price
20:16but this actually ignores the full value
20:19of what your customers see in your
20:22product so the difference between your
20:25cost to serve your customer and the
20:27price that you charge that's your margin
20:29that's how much you make on each
20:31transaction and the difference between
20:36that your customers see in your product
20:39that's your opportunity to be able to
20:42raise your prices to be able to capture
20:44more of that perceived value and now if
20:46your cost is higher than your price
20:49well that means that you're going to
20:51have negative margins and you cannot
20:53scale a business with negative margins
20:55similarly if your price is higher than
20:58the value that your customers see in
21:00your product that means they're just not
21:02going to buy from you so how do you find
21:04your value well there's a couple
21:06interesting ways to be able to do this
21:07the first is talk to your users you can
21:11ask them about the problem that you
21:13solve and get them to articulate the
21:15value to you and so what this often
21:18looks like is if you reach out to a
21:20customer and you get them on a call and
21:22you can ask them what is the problem
21:24that you are hoping that our product
21:27could solve for you and they'll often
21:29tell you and similarly if you have a
21:31user that's signed up for your product
21:33but is not actually paying you you can
21:35reach out to them and talk to them and
21:37ask them the question
21:39what problem were you hoping that our
21:41product could solve for you and their
21:43response is usually going to be one of
21:45four interesting things
21:47the first is they're probably going to
21:49tell you that they were hoping you could
21:51help them make more money this is
21:53something every company wants
21:55or they might tell you that they were
21:56hoping that you could help reduce costs
21:59maybe your product saves them time or
22:02money they might also say that they were
22:05hoping that your product could help them
22:06move faster maybe they have something
22:09they were looking to launch in six
22:10months and with your product they can
22:12actually get it launched in a couple
22:14weeks that sounds really valuable or
22:16they might say that your product could
22:18help them avoid risk if you help with
22:20compliance or offloading something a
22:22headache that they don't want to deal
22:23with another way to find your value is
22:26to keep incrementally raising prices
22:28until you get pushback from users and
22:31when you keep incrementally raising your
22:33prices you will ultimately find the
22:36ideal price which is when customers
22:38complain but they still pay
22:41this is actually a good thing right it
22:43overcomes that fear of charging a high
22:46price and customers walking away because
22:49the ideal scenario is when you tell the
22:52customer a price they say they have to
22:54think about it they go back and then
22:57they come back to you a week later and
22:58they say all right that seems good
23:00you're the best solution we're willing
23:02to pay up on the other side if you were
23:04to actually charge a lower price and
23:06they say yeah that sounds great and
23:07accept immediately well that probably
23:09means that you're pricing too low and
23:11you're leaving a lot of money on the
23:13table which brings me to my third
23:14Insight which is that most startups are
23:17actually under charging you almost
23:20and lower prices are not a sustainable
23:23Advantage sometimes we talk to Founders
23:25and they say well our product is just
23:28like our large competitor except ours is
23:30cheaper and that actually does not sound
23:32like a good idea that's not a way to
23:35build a winner all that means is that
23:37your large competitor can underprice you
23:40even way lower than your cost because
23:42they have way more money and they're way
23:44larger than you until they put you out
23:47of business so I do not recommend having
23:50price as your only differentiator it
23:52also turns out that when you charge more
23:54you get higher margins and you're able
23:57to build a bigger moat this means if you
23:59have higher margins than your
24:00competitors you can pay more to acquire
24:03a customer which means you can acquire
24:05all of the customers before they do it's
24:08also important to remember that pricing
24:09implies value when customers are
24:12evaluating your product they typically
24:14don't have a lot of signals on how
24:16valuable your product is but the price
24:18that you're charging is actually one of
24:20the primary ones so if your price is
24:22lower than your competitors then your
24:25customers might assume that your product
24:27is less valuable than theirs similarly
24:30if you charge a higher price then your
24:33customers might assume that your product
24:34is even more valuable than your
24:36competitors so that can work really well
24:38and so it turns out that raising prices
24:40is actually the easiest way to grow
24:42Revenue if you have a thousand customers
24:45and you want to double your Revenue well
24:48it sounds pretty difficult to spend all
24:50the time energy and money to go get a
24:52thousand more customers however if
24:55you're able to just double your price
24:57just changing a number on the website or
24:59changing the price that you're quoting
25:01to customers in a sales call
25:03and your product supports that higher
25:06value well you've just doubled your
25:08Revenue with almost no work at all but
25:11what if users won't pay more this
25:13usually means one of two things it
25:15either means that you need to build more
25:18value into your product right maybe the
25:20price that you have raised it to is now
25:23higher than the value that your
25:26customers see or it could mean that you
25:28need to solve a bigger problem maybe the
25:31problem that you're solving for
25:32customers is just a nice to have that
25:35they would never be willing to spend a
25:37lot of money for so in this instance it
25:39usually means you want to move to a more
25:42important top three problem that they
25:43have there's a third option too which is
25:46you could give a lower price in exchange
25:49for one of four key things one you could
25:51give a lower price in exchange for your
25:53first user if you're just looking for
25:55initial feedback and getting somebody on
25:57the platform totally reasonable to give
25:59a lower price for that or if you're
26:01talking to a valuable customer that has
26:06that can be another good scenario where
26:08you would give a lower price you can
26:10then use this logo that you get as
26:13social proof to get other customers onto
26:15your platform at your regular price also
26:18if your product builds lock-in Say by
26:21getting customer data on your platform
26:23that they would lose if they leave that
26:25can be another reason to offer a lower
26:27price and if you're able to renew after
26:30the first year and bump your customers
26:33up to that higher price that can be a
26:35good reason to get people in at the
26:37lower price because you know you can
26:38capture more value from them further
26:40down the road it's also really important
26:42to remember that pricing isn't permanent
26:44this is another common fear that we see
26:47from Founders where they're afraid that
26:49they have to nail their pricing the
26:51first time or they're going to lose
26:53their customer and never have a chance
26:55to get them again or sometimes Founders
26:57are afraid that the set of customers
27:00that they're talking to are the only
27:02ones they're ever going to get and so
27:04they have to close them all and if
27:05that's the case you should probably work
27:07on a different business but it acts is
27:10relatively painless to be able to
27:13increase prices on customers over time
27:15too and there's a couple different ways
27:16to do this you can exclude existing
27:19customers by letting them keep their
27:21current pricing and only raising prices
27:24for all new customers that's one way to
27:26do it or you could give advanced notice
27:28that you plan to raise prices and as
27:31long as you build in enough value into
27:33your product to cover that price
27:35increase you shouldn't see much churn
27:37most people will probably be willing to
27:39pay it if you have a sticky product
27:41Netflix is a great example of this this
27:43chart actually shows price increases
27:46that Netflix has made over the last
27:48seven or so years and it's really
27:50interesting to see that they are not shy
27:51about raising prices on their customers
27:54and now Netflix has 221 million paid
27:57subscribers and they've been able to
27:59figure out how to raise prices because
28:01that is the easiest way for them to grow
28:03Revenue rather than continuing to try to
28:05scale subscriber growth at the same rate
28:08so if Netflix is a able to find a way to
28:11increase their prices on 221 million
28:14customers you should be able to figure
28:16out how to do it on your handful of
28:18early customers as well and the fifth
28:20Insight is to keep it simple this is an
28:22example of a pricing page for Quicken
28:25and as you can see it's very complex
28:27there's five different buy buttons
28:29there's prices there's 349 399 599 899
28:34there's crossed out prices there's one
28:37dollar off with a symbol right next to
28:39it it's really complicated to figure out
28:41even if you want to be a Quicken
28:43customer which plan you should go with
28:45and so this likely results in decreased
28:48conversion rates so it's important to
28:51remember that when you're creating your
28:52pricing you don't want it to create
28:54friction that prevents customers from
28:57signing up and paying you on the flip
28:59side here's a great example from gitlab
29:02they have three very clear simple plans
29:05with clear pricing and so their pricing
29:08and their pricing page is not going to
29:10be the thing that adds more friction and
29:13prevents customers from signing up and
29:15paying them and so I'll leave you with
29:16this story of segment which helps
29:19companies capture and use their customer
29:21data when they started out they were a
29:24couple of Engineers that were not used
29:26to paying for products themselves and so
29:28they thought they had to give their
29:30product away for free in order to get
29:32anybody to use it and then they wanted
29:33to raise money from investors so they
29:36decided maybe we should actually charge
29:38our customers money so we can show
29:40Revenue growth so tail between their
29:43legs they reached out to all their free
29:45customers and sheepishly told them that
29:48they were actually going to start
29:49charging them ten dollars per month
29:51which was a hundred and twenty dollars
29:53per year and so they were really nervous
29:55about telling their customers this but
29:57surprisingly their customers started
29:59responding to them with messages like I
30:02hope you would charge me more than that
30:03otherwise I'm worried about keeping my
30:05customer data with you right the low
30:08price was signaling to their customers
30:10that maybe their product was invaluable
30:12or it couldn't be trusted in the long
30:15term and so in order to grow even more
30:17they hired a sales advisor and that
30:21sales advisor told them you should not
30:23be charging a hundred twenty dollars a
30:25year instead you should be charging a
30:27hundred twenty thousand dollars per year
30:29this is an Enterprise product and this
30:33scared them to hear this it was
30:35unfathomable to them that anybody would
30:37ever pay a hundred twenty thousand
30:39dollars a year for their product and so
30:41when they were going into of their first
30:43sales meeting with their sales advisor
30:45the advisor told them if you don't tell
30:48this customer that your price is a
30:51hundred twenty thousand dollars then I
30:53quit as your sales advisor so they went
30:55into the meeting and at the end when it
30:58came time to talk price and the customer
31:00said so how much is it the CEO got
31:02really red and he got nervous and he
31:06said a hundred twenty thousand dollars
31:08and the customer responded how about
31:10twelve thousand dollars and they
31:12ultimately ended up agreeing on eighteen
31:14thousand dollars as their price so while
31:16they didn't actually get the Thousand X
31:21they were able to increase their price
31:23150 times from 120 dollars a year all
31:28the way up to eighteen thousand dollars
31:30a year and it wouldn't have happened if
31:32they didn't ask for the higher price and
31:34so they used this philosophy to continue
31:37growing their deal sizes all the way up
31:40to six figures and Beyond and ultimately
31:42led to their acquisition by twilio for
31:45more than three billion dollars so the
31:47story of segment hopefully is
31:49instructive to you that they started out
31:51giving away their product for free
31:53ultimately ended up selling to huge
31:56Enterprises and building a business
31:58worth over three billion dollars so to
32:01wrap up the five key pricing insights
32:03the first is you should charge next is
32:06you should price on value not on cost
32:09the third is most startups are under
32:11charging and you probably are too the
32:14fourth is that pricing isn't permanent
32:16don't have fear that you need to get it
32:18right the first time you can change it
32:20over time as you learn more and build
32:22more value into your product and finally
32:25keep it simple don't add complexity
32:28which adds friction to customers giving
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