Example 2: Pricing
Another obvious mistake was my failure to sign customers into contracts and generate recurring revenue.
When I started SimpleData I knew that month-to-month pricing was the fastest way to acquire new customers. I heeded the advice of VC Tom Tunguz, who says that startups should start with month-to-month contracts in order to learn. He argues that churn isn’t a bad thing early on because it is the best feedback a company can receive on whether or not it has product-market fit. I failed to listen to the second part of that advice, however.
He said that as a company grows it should transition to longer term contracts and eventually begin collecting money upfront. It can start as small as 3 month contracts, then go to 6 month, then annual contracts. Collecting money upfront can progress incrementally too. You can start small with 25% upfront, then 50%, and then ideally collect 100% of an annual contract upfront.
But no one likes contracts and I don’t like conflict, so I didn’t ever transition to long term contracts. Again my lower brain (fear and the desire to be liked) took control and I decided to stick with month-to-month contracts. Then my upper brain came up with convincing arguments and justified this decision by saying I had created a “customer-friendly” pricing model.
If I had the courage to change our pricing model I would have either increased the percentage of recurring revenue or I would have been forced to re-examine our product offering and seek customer feedback.