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E292: The Importance of Designing Your Business Model Before Building Your Software

by Sean Boyce

In this episode, Sean emphasizes the significance of implementing a SaaS business model from the start. Understanding human psychology and pricing strategies is essential for success in selling software products. Without a solid business model, sustaining operations and securing funding become challenging. Sean highlights the difficulties faced by products that begin as free and later attempt to convert to paid, using examples such as Wikipedia and ad blockers. He advocates for starting with a paid model as a validation test, while cautioning against relying solely on a free tier.

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Key Points

  • Strategic pricing and a well-designed business model are crucial for the success of a SaaS business
  • Human psychology plays a significant role in pricing and customers’ willingness to pay.
  • Products that start as free face difficulties in converting to a paid model or securing funding.
  • Wikipedia’s community-funded project struggles with consistent funding due to the perception of being a free resource.
  • It is harder to transition from free to paid than to start with a paid model from the beginning.
  • Offering a free trial instead of a free tier can limit downside risk and provide valuable insights into conversion rates.
  • Starting with a pricing strategy and validating the ability to charge for a product early on avoids future challenges.
  • “I didn’t really fully understand how people think about pricing and there’s actually a lot of psychology and pricing in terms of what we’ll pay for or what we won’t.”
  • “If you start with a product that’s expected to always be free, your ability to convert that into a paid Product is limited.”
  • “From a pricing strategy and a human psychology perspective, I think more than likely why they need to do that so frequently and why it’s probably so difficult is because of this human psychology in pricing.”
  • “Going the other direction is so much harder than if you start paid outta the gate.”
  • “Most of the people that I’ve worked with in B2B SaaS fashion that have attempted a strategy like that have not been very successful with it.”
  • “Have a pricing strategy outta the gate, validate whether or not you can charge for your product right away, and that will make a lot of these problems essentially be something that you’re realistically never going to have to deal with.”