Tell me, if you want your business to make $10,000 per month, what would you prefer?
10 users paying you $1000 per month
1000 users paying you $10 per month
100 users paying you $100 per month
Most people will prefer the 3rd option.
The first option means you’re too reliant on a few clients, even if one churns, you lose 10 % of your business.
And the 2nd option is just so hard to pull off.
Getting 1000 paying customers for any product or service is extremely challenging 🤷
That’s why pricing is so tricky, especially when starting out.
Today I’ll discuss the loss leader pricing framework, how I have applied it to my products, and how you can apply it in your business.
This will take you 4 minutes to read, here’s what to expect -
Flaws in common pricing advice
Loss Leader pricing
2 ways you can apply it
How I’m using it
Learn from Elon Musk 😆
Action Plan 💪
Super Links - Useful links you don’t want to miss
Now, let’s dive deeper -
🙄 What’s wrong with common wisdom
The most common pricing advice for indie hackers and creators just starting out is to charge more for their products.
So that you can make decent revenue with fewer customers.
That’s sage wisdom.
But it fails when you actually start applying it in your business.
Because when starting out, in most cases you don’t know the true value proposition of your product. Which core pain point are you solving for the user? And how much are they willing to pay for it?
You discover it along the way, as a few people use your product, give you feedback, and a few people churn away.
But if you charge too much right from the beginning you would never get enough customers to try out your product.
You will never have enough data to make any decisions.
It’s also why I don’t like when people say price according to the value you provide not how much a product costs you.
But that’s surface level advice that you can’t do anything with.
Because again, you don’t know the true “value” your product brings to the customer.
That’s why I like the loss leader pricing framework. It’s way more practical than just saying “charge more” or “price by value”
📈 Loss Leader Pricing
As the name suggests, the idea is to charge way less for your products or services in the early days and get customers into the door.
Bear losses upfront and get the business started.
In the initial days 10 customers paying $10 a month is way better than 0 customers paying $100 a month.
When you have a new product, you only have information about yourself and your product. You have no information about your customers.
And the best way to get information is to get customers.
Real people (strangers) paying for something you created is the best form of validation you can get.
Even if it’s just a tiny amount.
You can learn from their behavior, improve the product and then charge more when the product is more polished and your positioning is well defined.
There are 2 of ways to do loss leader pricing -
Offer a life time deal. If you’re a SaaS product, then doing LTDs is how you can get initial validation and users. Sure you will have to serve a few people forever and without recurring revenue, but think of this as an investment in your business. It’s way easier to sell someone a life time deal than it is to sell them a subscription. Especially if you want to leverage a marketplace like AppSumo.
Offer a low cost starter plan. This applies to SaaS as well as info products.Offer a no-brainer entry product just to get people in the door. And then you can upsell them a higher priced product once you’ve built some trust with the audience. This also aligns well with the value ladder framework that we’ve discussed before. A low cost product is a great first rung of the value ladder.
In both these cases you know that you’re making a loss with every sale, but that’s okay, because the lessons you learn from paying customers is what will allow you to charge way more in the future.
As your product gets better, it gets social proof and validation from early users, you can test different price points and models in the future.
But I’ve still managed to get a fair number of customers every cohort.
When I was starting I knew that I was charging too less, but I wasn’t sure exactly what “value” I’ll be able to add to people through the program and the community. I had a very raw idea of what I wanted to do.
Over time the program has evolved and matured based on user feedback.
Now I can literally see the value it adds to people.
This has given me immense confidence to raise prices. Now it’s no more “loss making”
But I’m still running experiments in other aspects.
Right now, I’m not charging members anything for the Slack community. I’m sort of giving them a lifetime deal - Pay for the program, get the community free for life.
Eventually I want to charge a recurring fee for the community as well. But right now I don’t know exactly how I can provide the most value to them through the community.
Again, I’m leading with losses here, as I gather feedback and polish the product, I will start charging and then raise prices going forward.
Nobody told me to go with this strategy last year when I was starting out. I’ve just stumbled upon this by trial and error.
I’m sharing because this might help someone taking their first step.
✋ Free doesn’t work
One caveat that needs to be talked about here is that free users don’t mean much. You might be tempted to give away your product for free instead of pricing it low.
But that doesn’t work.
Paying for something is a way of signaling intent.
It’s a sign that the customer has skin in the game. You want more of those kinds of customers.
You shouldn’t give too much weight (and stop chasing) free users.
Get them to pay first, then listen. Be like Elon -
💪 Action Plan
So all of this means nothing if you don’t apply what we just discussed here.
Think about what loss leading product or service can you offer to people?
If your full product is high priced, is there a smaller version you can do for a “no-brainer” price?
Brainstorm the low price point.
Reach out to a few potential customers.
Talk to them what they think of the price?
Pitch it as an early bird discount.
Try and get them to pay.
Learn from them, improve and raise prices for future customers.
This is the only way you can “validate” your product in the early days.
Eternally Curious. Writing, Learning, Building in Public. Writing about Ideas + Inspiration + Insights for creators, solopreneurs and indie hackers | Simple tips and frameworks to help you build a sustainable solo business