Pricing: What to charge for

Depending on your business model, what you charge for might be very clear.

• If you sell physical goods, you generally charge for each item you sell. Allbirds charges for shoes; Ikea charges for furniture.
• If you earn revenue through ads (e.g., social media platforms), you probably charge for how many times an ad is clicked or viewed.

But for other business model types—including SaaS and marketplaces—knowing what to charge for can be thornier. Consider a fitness app that offers on-the-go workouts. They could charge for:

• Weekly/monthly/annual usage
• Number of workouts started
• Number of workouts completed
• Number of minutes spent working out
• Specific training programs
• Access to various features and tools, like an activity log or meal plans
• Personalized fitness needs

Any of those are viable options. Which is right?

Value metrics

The answer is the fitness app’s value metric. A value metric indicates how much value your buyers get out of your product. The more they pay, the more value they get.

Here are some value metrics used by popular companies. These are what they charge for. They might charge per metric or per batches of metrics—for instance, Airbnb charges per night booked, whereas Wistia charges one rate for up to 10 videos/podcasts, and another for up to 100.

Your value metric is the most important thing to get right about pricing. The reason is that when you align your pricing with your product’s value, users will stick around. They came to your product because of the value it offers, and they’ll stay if they’re paying for what they’re getting out of it.

Companies that use value metrics typically grow at twice the rate of companies with flat fees or strictly feature-based tiered pricing, with half the churn and twice the expansion revenue.

You might find that charging per value metric won’t work for your company. Value-based pricing requires a lot of data, which new startups don’t have. We recommend finding your value metric anyway. If nothing else, knowing your value metric will reaffirm your product’s core value and job-to-be-done.

Project: Find your value metric

As we mentioned earlier, you’ll be putting together a survey or interview template in this module’s project. Once you’ve collected data from your survey/interviews, you’ll add it to the personas you created in the Market and Customer Research module.

Use this template to track your project for this module. We’ve gone ahead and populated it with fake info from an imaginary language-learning app. Make a copy, delete the dummy text, and add your own as you go through these project steps.

Step 1: Write down your job-to-be-done

Back in the Market and Customer Research module, you considered your startup’s job-to-be-done (JTBD). What job are users “hiring” your product to do? Revisit the answer to that question, and add it to your project doc.

Examples of JTBDs, using the companies in the table above:

• Wistia: grow your business through videos/podcasts
• SendGrid: grow your business’s email marketing
• Airbnb: connect travelers with rental hosts
• HubSpot: build and improve customer relationships
• Grubhub: connect restaurants with people who want to order in
• Zendesk: streamline customer service

You can see how their JTBDs relate to their value metrics.

Step 2: Convert your JTBD into a metric or proxies

Sometimes your value metric will be clear based on your JTBD. If your JTBD is “deliver coffee every month,” your value metric is “coffee bags.”

But most startups will need to find stand-ins for their value metric.

Most of the value metrics in the above table are actually stand-ins for true value metrics. Wistia’s JTBD, for example, is business growth through videos and podcasting. Their ultimate value metric is something pertaining to growth, like the number of new signups a business gets from using Wistia for marketing. But that would be incredibly difficult to charge for, so instead, they charge for videos and podcasts. Presumably, more videos/podcasts mean more growth.

Come up with a list of up to 10 proxies. We’ve included examples in the project doc for our fake language-learning app. Add your own to your copy of the doc.

Then answer these questions for each proxy.

If the answer to any of the above questions is "no," cut that proxy.

The proxies that are still contenders will make it onto your customer survey/interview template. We’ll go over how to add them later in this module, when we discuss prepping and shipping your survey.