- The video discusses the common advice given to startups to start charging for their product.
- Founders often avoid charging in order to prioritize feedback and optimization over revenue.
- Perfectionism and fear of changing prices are common reasons for not charging.
- The video emphasizes that pricing can be dynamic and can be changed over time.
- It is suggested that founders can grandfather in current users and raise prices for new users.
- The video highlights the importance of having revenue to validate the viability of a startup.
- The best feedback about a product often comes from people's reactions to the price.
- The freemium business model, like Slack's, is seen as a legitimate strategy, but it requires tracking conversions from free to paid users.

- The speaker is concerned about founders who give their product away for free without a clear plan to monetize it.
- They acknowledge that there are exceptions, such as social media platforms that rely on advertising revenue.
- The example of Airbnb is mentioned, where the founders initially felt awkward charging for their service but eventually realized the importance of monetization.
- The core takeaway for founders is to have a structured plan for getting paid and not to charge out of fear, as it is important to learn if people actually want their product.

Step inside the Group Partner Lounge to hear Y Combinator Group Partners Harj Taggar, Michael Seibel and Brad Flora discuss when you should start charging your users and some exceptions when you shouldn't.

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Chapters (Powered by https://bit.ly/chapterme-yc) - 
00:00 - Introduction
01:30 - Why are people not charging?
02:47 - Successful startups are always testing
04:21 - Advice on pricing plans
05:24 - Anti-signal of not charging big companies
07:13 - Assumption - Learn from people using for free
07:44 - Devil's advocate - Open core model
08:54 - Slack strategy
10:19 - Consumer business
11:57 - Takeaway

The best feedback you're going to get about your product is in the 3 seconds after you tell them the price.

Hello, this is Michael with Harge & 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.

All right, so every batch, we have a lot of new startups come in.

And 1 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 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.

And 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 reasons why people have talked themselves into not charging?

I mean, I think 1 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 real feedback.

And it seems like it's easier to do that if you don't charge, because you can get people using it immediately and giving you feedback.

And so I think founders often just optimize for that.

They're optimizing for feedback over revenue.

Yeah, I also think that founders have this weird sense that there's no re-dos.

And so oftentimes, they'll come up with some reason.

Well, it's like, oh, well, I don't know exactly how to price my product yet.

And there's no way that I can go out to the market with this price and then change it.

But like in their minds, they're like, oh, no, like my customers would kill me if I went out with 1 price and then change the price.

So I'm gonna wait until I find the right price to go out with.

I think perfectionism is just a huge factor here.

And to your point, every week You can change your pricing.

If you look at some of the most successful startups, they have new pricing all the time.

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 1.

In fact, 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 remember Drew from Dropbox coming to speak at a YC dinner once, and someone asked him about pricing.

I think at the time, Dropbox was like 9.99 a month or something.

He's like, how do you decide it was 9.99 a month?

And he kind of just smiled and he's like, you know, I just picked it out of thin air, like a reasonable number.

And he's like, we've done the analysis and like, I might've 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, multi-billion dollar company where the price was set because, it felt right.

Good enough for Drew, it's probably good enough for you.

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's like, you know, we've got to get the price perfect because we can never change it.

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 6 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.

Like, you know, if Drew 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?

It took me a very long time to pay for Dropbox.

Yeah, there's probably 100 people out there on $7.99 a month.

I think the last 1 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.

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.

They don't realize the company's like, huh, they're not charging.

They could have gotten rid of all of those secret objections if they actually just put a price on it.

I also think that's the way founders end up wasting potentially years of their lives on bad ideas is that they think they have all these customers.

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 0 revenue, it just hits you in the face, you know you're failing.

But I think that's like 1 of these things where you feel like it's such a easy temptation.

Like I've got customers, it's Apple, so we'll make millions of dollars from them in a few years, but for now, let's just like kind of keep them using it.

Yeah, And especially with big companies, right?

You're trying to prove that you can change behavior at the company and that your champion or the person that is in charge of the deal on the other side will spend some capital, political capital, financial capital, something out of their budget and actually put some skin in

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 who are using it for free.

The best feedback you're gonna get about your product is in the 3 seconds after you tell them the price.

And 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 core component, like you know, companies we funded, like GitLab, open core model, like we 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?

I think the difference there though is that there's a plan.

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 an enterprise support plan or something like that to.

So usually the 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.

All right, well then put OpenCore aside, what about the Slack strategy?

Like almost no 1 I knew back in the day who was using Slack was paying and that seemed to work out.

Harjit Patel Yeah, I think Slack falls under the freemium business model, which I think is a completely legit good model.

The idea is we start out with a basic version of the product, we make it free, we get people using it.

But there's 2 things that are really important for the freemium model.

1 is you have to actually have some constraint that people want to get around.

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 the enterprise product or the upgrade product.

And the 2, 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.

So if I'm doing office hours and a founder says to me, look, we're starting with a free product, but we expect people to upgrade within 2 weeks, and we expect they're gonna upgrade when they need an extra seat or extra storage or something.

And we're 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 see how it goes.

Because those, those founders just keep building and building and increasing the product surface area without ever charging more.

Like what about the social kind of consumery, you know, YouTube, Facebook, Twitter, like what about those situations?

I think that those like open call, where it's like there are specific cases that are exceptions to like any rule, especially when it comes to startups.

So yeah, I think if you're a consumer business that's going to monetize via advertising, and you need a gigantic user base to generate lots of advertising revenue, then yeah, it makes sense.

You have to be honest that you're a social media, Facebook, Twitter type company.

For example, Michael, you know a lot about Airbnb.

Airbnb, I could totally imagine less confident founders being like, oh, what we're actually building is this social network for travel.

And in the future, though, once we've got people traveling, you could imagine some founders using that argument, right?

In the Airbnb story, which I've heard 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 it.

We need to solve the problem and not just punt.

So we've gone through the devil's advocate position.

Like what's the core takeaway here for founders?

So I think it's okay 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 open core, we talked about like 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 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 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.


Speaker 0: The best feedback you're going to get about your product is in the 3 seconds after you tell them the price.

Speaker 1: Yes. Hello, this is Michael with Harge & Brad. Welcome to Inside the Group Partners Lounge.

Speaker 2: So as YC Group Partners, we find ourselves repeating the same advice over and over again to startups.

Speaker 0: 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.

Speaker 1: 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?

Speaker 0: All right, so every batch, we have a lot of new startups come in. And 1 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 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. And 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 reasons why people have talked themselves into not charging?

Speaker 2: I mean, I think 1 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 real feedback. And it seems like it's easier to do that if you don't charge, because you can get people using it immediately and giving you feedback. And so I think founders often just optimize for that. They're optimizing for feedback over revenue.

Speaker 1: Yeah, I also think that founders have this weird sense that there's no re-dos. And so oftentimes, they'll come up with some reason. Well, it's like, oh, well, I don't know exactly how to price my product yet. And 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 customers would kill me if I went out with 1 price and then change the price. So I'm gonna wait until I find the right price to go out with.

Speaker 0: I think perfectionism is just a huge factor here. And to your point, every week 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 1. In fact, 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.

Speaker 2: I remember Drew from Dropbox coming to speak at a YC dinner once, and someone asked him about pricing. I think at the time, Dropbox was like 9.99 a month or something. He's like, how do you decide it was 9.99 a month? And he kind of just smiled and he's like, you know, I just picked it out of thin air, like a reasonable number. And he's like, we've done the analysis and like, I might've 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.

Speaker 1: I love that because, you know, talk about like a multi, multi-billion dollar company where the price was set because, it felt right. Yeah. Good enough for Drew, it's probably good enough for you.

Speaker 0: It let Drew keep moving, right?

Speaker 2: It let

Speaker 0: them keep moving forward with the company and they didn't get hung up over it.

Speaker 2: The thing that I find myself repeating a lot in office hours, especially during a batch, is when a founder's like, you know, we've got to 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. 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 6 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 Drew 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?

Speaker 1: In fact, I think he did. It took me a very long time to pay for Dropbox.

Speaker 2: Yeah, there's probably 100 people out there on $7.99 a month.

Speaker 1: I think the last 1 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. They don't realize the company's like, huh, they're not charging.

Is this going to work? Are they going to be able to support us? Are they going to be able to onboard us? They could have gotten rid of all of those secret objections if they actually just put a price on it.

Speaker 2: I also think that's the way founders end up wasting potentially 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 0 revenue, it just hits you in the face, you know you're failing. But I think that's like 1 of these things where you feel like it's such a easy temptation. Like I've got customers, it's Apple, so we'll make millions of dollars from them in a few years, but for now, let's just like kind of keep them using it.

Speaker 0: Yeah, And especially with big companies, right? You're trying to prove that you can change behavior at the company and that your champion or the person that is in charge of the deal on the other side will spend some capital, political capital, financial capital, something out of their budget and actually put some skin in

Speaker 1: 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 who are using it for free.

Speaker 0: The best feedback you're gonna get about your product is in the 3 seconds after you tell them the price. And 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.

Speaker 1: 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 core component, like you know, companies we funded, like GitLab, open core model, like we 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?

Speaker 0: So to some extent, yes. I think the difference there though is that there's a plan. 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 an enterprise support plan or something like that to. So usually the 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.

Speaker 1: All right, well then put OpenCore aside, what about the Slack strategy? Like almost no 1 I knew back in the day who was using Slack was paying and that seemed to work out. Like What do you think, Harj? What was the play there?

Speaker 2: Harjit Patel Yeah, I think Slack falls under the freemium business model, which I think is a completely legit good model. The idea is we start out with a basic version of the product, we make it free, we get people using it. But there's 2 things that are really important for the freemium model. 1 is you have to actually have some constraint that people want to get around. 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 the enterprise product or the upgrade product.

And the 2, 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. So if I'm doing office hours and a founder says to me, look, we're starting with a free product, but we expect people to upgrade within 2 weeks, and we expect they're gonna upgrade when they need an extra seat or extra storage or something. And we're 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 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.

Speaker 1: What about the land grabs though? Like what about the social kind of consumery, you know, YouTube, Facebook, Twitter, like what about those situations?

Speaker 2: I think that those like open call, where it's like there are specific cases that are exceptions to like any rule, especially when it comes to startups. So yeah, I think if you're a consumer business that's going to monetize via advertising, and you need a gigantic user base to generate lots of advertising revenue, then yeah, it makes sense. You have to be honest that you're a social media, Facebook, Twitter type company. For example, Michael, you know a lot about Airbnb. Airbnb, I could totally imagine less confident founders being like, oh, what we're actually building is this social network for travel.

And so we shouldn't charge anything. And in the future, though, once we've got people traveling, you could imagine some founders using that argument, right?

Speaker 1: You don't have to imagine it. That was called couch surfing. Like that existed when Airbnb came out. It was the exact product. Yeah.

Speaker 0: In the Airbnb story, which I've heard 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 it. We need to solve the problem and not just punt.

Speaker 1: So we've gone through the devil's advocate position. Brad, finish this off. Like what's the core takeaway here for founders?

Speaker 0: So I think it's okay 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 open core, we talked about like 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 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 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.

Speaker 1: Well there you go, that's the game. Great chatting You

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Turning Your Users Into Paying Customers