# Inside the Group Partner Lounge: Turning users into paid customers

**Author:** Harj Taggar, Michael Seibel, Brad Flora
**Type:** Video
**URL:** https://www.ycombinator.com/library/J3-inside-the-group-partner-lounge-turning-users-into-paid-customers
**YouTube ID:** 9pQJXR0Tcos

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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.

## Transcript

the best feedback you're gonna get about your product is in the three seconds after you tell them the price yes [Music] hello this is michael with harj and brad welcome to inside the group partners lounge so as you see 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 going to 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 first brad what's going on here all right 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 uh 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 um 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 families often just optimize for that they're like optimizing for feedback over um 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 what'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 you're like oh no like my customers would kill me if i went out with one price then changed 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 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 i

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 going to 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 he was if someone asked me about pricing like how did you decide i think that time dropbox was like 9.99 a month or

something like how did you decide it was like 99 a month you kind of just smiled he's like you know i just picked earth in there 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-multi-billion dollar company where the price was set because

it felt right [Laughter] good enough for drew it's probably good enough for you it 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 i find myself repeating a lot in office hours especially during a badge is when the founders 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 you can whatever your current uses 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 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 jude had done some sort of like early pricing for the first 100 dog boss 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 there's probably probably a hundred people out there on 7.99 a month 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 going to 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's like huh they're not charging is this going to work like are they gonna be able to support us they will onboard us and you know 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 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 like how much

they pay you it's like oh like nothing but like apple like we get to talk to apple um 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 um but i think that's like one of these things where you feel like it's such a fan of easy temptation like i've got customers well what i'm sure it's apple so we'll make 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 especially with big companies right 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 um what 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 then 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 core component like you know companies we funded like gitlab open core model like we want people to um 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 um 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 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 open core 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 heart what was the play there yeah i think slack falls under so the freemium business model which i think is a completely legit good model right like the idea is like we start out with a basic version of the product we make it free we get people using it um

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 want to 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 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 a founder says to me like we're

starting with a free product but like we are gonna we expect people to upgrade within two weeks and we're trying 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 see how it goes like that's what worries me because those those banners just keep building and building and increasing the product surface area without ever

charging more what about the land wraps though like what about the 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 there there are specific cases there are exceptions to like any rule kind of especially when it comes to startups right so yeah i think it's if you're a consumer business that's going to monetize via advertising and you need like a gigantic user base to generate lots of advertising revenue

then yeah make sense right but like you have to be honest that you're that that you want like it was like a social media facebook twitter type company um 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 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 once we've got people traveling we might you could imagine some founders using that argument right you don't have to imagine

it that was called couchsurfing like that existed when airbnb came out yeah right in the airbnb story which i've heard at yc dinners they talk about that moment early on when they had to right 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 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 open core we talked about um like a large consumer ad supported business sometimes you have to go get a lot of free users uh 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 um 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 well there you go that's the game

great chatting you guys thanks thanks [Music] you
