Thoughts in Time

I believe that fundamentally, the startup process is, as Steve Blank would say, “the search for a profitable business model.” You start with a vision of a product to solve a problem. You try to validate hypothesis about the problem, your product, the market, the competition, etc. You also try to learn what the right price is. If your price is wrong you could be quite a ways from finding a PROFITABLE business model .

On a day when Spirit Airlines announced that it will now charge a carry on bag fee, and having experienced the death by a thousand cuts fees of Euro airlines like Ryan Air, I thought that it might be fun to share some of my thoughts on product pricing.

Steve shares a great way of doing this in “The Four Steps to Epiphany.” When he’s with a potential customer, he’ll ask them to imagine that the product is FREE and to talk about how they would use it. Then, he’ll share that, in fact, it’s not free. It costs $1MM. He says that this generates a strong reaction that often leads to great information about pricing. For instance, someone might say, “Steve, you’re crazy. I would use that for $250k, but $1MM is just too much.” Now, your startup might not be selling enterprise software with a yearly licensing rate in the hundreds of thousands, but this model of revealing pricing is quite powerful. Here’s why:

1. Imagining how someone would use a product that has no cost frees them to explore how it could create value without worrying about downside. This will reveal to you where they see benefits. You can ask probing questions about why they would use it in certain ways and what those benefits would be. This reveals the business value, and will help confirm some of your product / benefit market hypotheses.

2. Asking them how they would use it if it was VERY EXPENSIVE helps quantify the pain of the problems that they’ve just imagined solving. If they’ve just imagined all these wonderful ways to use your product, but aren’t willing to pay anything, those wonderful ways are frivolous and not important. You might want to reexamine if there is actually any pain there.

3. This questioning sequence / mechanism will lead to beta customers who are willing to pay more. There’s a powerful psychological force underpinning this. You’ve given something to them through the visioning process and are taking it away, so you have set this up as a loss from a set point. They will be more willing to pay to keep what they had envisioned than if you did this the other way around….

Popular wisdom is that it is much easier to cut the price than it is to increase it. This might be true of a product in the market, but when trying to figure out your pricing, you want to do the opposite. It will give you powerful insight into the value you are creating for customers.

AIRLINE PRICING vs. Startup Pricing
Barry Schwartz was a professor of mine when I was completing the UPenn Master in Applied Positive Psychology degree program. Barry wrote The Paradox of Choice, and is a popular speaker. One thing that Barry points out is that bundled pricing is inherently preferred by consumers, even if they pay more. This is because there is pain each time we pay out…and we remember that pain! Our remembered experience is much worse. So when you buy a cheap Spirit Air ticket and subsequently pay for checked bags, credit card fee, airport check-in fee, carry on bag fee, bathroom fee, and in flight oxygen fee (ok - I doubt they’ll get there) you remember each of those charges and when asked about your experience you are going to give a much more negative review than had you actually paid slightly more, but paid only once.

Most startups don’t have this issue. Why? Because they don’t have a smorgasbord of product features available. The freemium model could devolve into this as a company grows, but most companies who have been successful with a freemium model seem to have done so by keeping the pricing plans simple (no more than 3 paid options). Since too many choices can paralyze users into inaction (due to something called anticipatory regret) less options are better in general.

So, as a startup, what are some other things that you want to take into consideration with your pricing strategy.

1. Keep it simple - Don’t make your pricing one other thing to understand about the business before a customer will buy.
2. Base it on the pain your are reducing for customers - what is their ROI? - If they’re saving huge amounts, you want to capture some of this economic value, and customers will be willing to pay.
3. More choice = more indecision - Even if you keep it simple, having too many choices will lead to decision paralysis. Keep it simple…and short.
4. Understand the alternatives… including “do nothing”
- Starting to use your product has costs - even if it’s free. It’s the cost of not doing what they were doing before. Make sure you understand the hard and soft costs of abandoning the status quo…or using a substitute.

More in depth pricing strategy - what does google do?
If you want to go further, I would encourage you to also think strategically about what your pricing will enable. Is it a core part of your business strategy? If you’re trying to enter an existing market with a low cost product, then PRICING IS YOUR BUSINESS. This is akin to finding a market where you can make $1 where previous incumbents had to make $100. Jingle networks is a classic case study.

With Higher One, we had two pricing decisions. One was an upstream one. We had to decide how much we would charge universities for our service. Since revenue would also derive from downstream pricing (how much we would charge for banking and payments services), we ultimately decided to set a very low cost for universities, leading to an extremely high return on investment for them when they adopted our service. Although it was still a slow sales cycle, this pricing gave us a large advantage versus software solution based firms who had to earn off of the software package and didn’t have the downstream revenue generator. It enabled the business to create a very defensible business model. There is a great article that speaks about this concept and how it applies to google’s current pricing strategy with their various business efforts. I would encourage you to read it here. (thanks to @GusFuldner for tweeting this)

I connected with an entrepreneur the other day who is in the midst of fundraising for her company. She’s having a particularly difficult time because her business focused on the Russian market. She was feeling disheartened as she had reached out to a number of people and hadn’t had any strong bites. I shared some info about Higher One’s initial fundraising that hopefully helped inspire her to keep pushing.

When we started Higher One, (which incidentally has just filed it’s S-1), it was March, 2000. The dot-com bubble was bursting and funding was hard to come by. We were focused on finding angel investors. Our first check was for $10,000 from a family member, and we worked hard to scrape our first round together in dribs and drabs. Later, Miles and I would review the folders of potential investors we had talked to. By our count, we had connected to over 200 potential angels! By the time we finished fundraising for Higher One, I would estimate that we had met with over 350 potential funders (now including VC’s, etc). Given that Higher One had less than 40 investors, you can tell our hit rate wasn’t high and the majority of people said no.

Since it’s likely that you’re going to hear NO a lot when fundraising, what are some key ideas that you can keep in mind to give you the best chance of success? I think you’d do well to keep in mind the “Four P’s of fundraising.”

People:Fundamentally, fundraising is a sales process. It’s about portraying the investment opportunity in a way that other individuals will see the same opportunity you will. It’s also about connections. When you meet with a potential investor, if they aren’t interested, ask if they might know other investors who might be. Don’t be shy. You never know which connection is going to lead you to your lead investor. If you have a choice of investors, ask them to be specific about how they could add value.

Positivity: When raising money, you will hear NO. Most likely, if this is your first time, you will hear NO a lot. I’m not saying “think positive and you’ll succeed.” I’m saying that if you don’t come across as believing in your product and market opportunity, how will your investors? Revel in the progress you make. Celebrate milestones, key learnings, etc. Each of this will help you remain positive that someone will say YES, and they will be lucky they did.

Persistance: When an investor says no, usually it is not a “NOT EVER” but rather a “No for now.” Listen to feedback. Ask at what point they would be interested in an investment. Don’t be shy to come back when you reach that point. With Higher One, our first institutional investor had turned us down twice before agreeing to invest. He later told us that he figured that we had come back twice having done what we said we would do. If we continued, he’d do well. This brings us to the last “P”.

Performance This “P” could also be “Progress”. Nothing helps you raise more money than showing progress against milestones. If you first call on an investor and share that you plan to have a beta customer in the next 30 days, and 20 days later you can tell her about your newly signed beta customer, she will be much more inclined to invest. Have a list of milestones (some of these can be key learning milestones) in your pitch. Show progress and keep potential investors updated as you knock these milestones down.

Lightyear Capital Makes Significant Investment in Higher One Holdings, Inc. - MarketWatch

Exciting…. When this deal funds, it’ll be my 1st liquidity event (partial - but hey, it’s still a liquidity event) . Really excited that we were able to build Higher One to the point where an investor such as Lightyear wanted to become involved. Early investors were able to realize more than 20X on their investment and better yet, this deal provided everyone involved with the opportunity for some diversification, while also being able to choose to maintain ownership and participate in the upside as the company continues to grow and increase operating leverage. Congrats to everyone at Higher One. I look forward to seeing the continued growth in the coming years!

15 Additional Colleges and Universities Implement Higher Ones OneDisburse Refund Management

Been really busy and travelling a lot, so haven’t blogged in a while (Kellee’s been giving me a hard time about that)… so here’s a link to an update on Higher one.  They keep rolling along.  Some updates on Pikum and life in London coming soon (excluding rants about IKEA).

Entrepreneur magazines Hot 100 Company Rankings - Higher One

Great to see that Higher One has gotten onto another hot company ranking list… this time - the #12 fastest growing private company in the U.S. according to Entrepreneur magazine. Recently, the company signed it’s 100th university client. Glad to see that things continue to go so well. The great thing about Higher One is that because it’s business serves colleges and students, it’s actually counter cyclical, meaning that if the U.S. does head into a recession, the business should do better, rather than worse.

The business is also growing inorganically, having just purchased EduCard and setup a major partnership with Evisions (http://www.higherone.com/media/2008/acquire_educard.shtml). This will make it easier for 900 Evisions clients to get up and running with Higher One. It’s pretty amazing that something that Miles, Mark, and I founded in 2000 now serves 5% of US college students and has managed over $4 Billion in payments.

02/04/2008 INNOVATOR OF THE YEAR Higher One - Business New Haven

Didn’t even know we were being considered . It is nice to see this article about Higher One and great quotes from Miles, Dean, and Mark as well as from David Cromwell and Joe Mullinix, both of whom were instrumental in providing guidance to us in the earliest stages of the business (David continues to do so as a board member).

I was on the west coast in the US then back to London and haven’t had a chance to post much - although I’ve got a bunch of topics I’ve got that I want to write about…. in the meantime, I thought I would share a link to this press release which shows the success Higher One had last year.  I’m sure the team there will continue to have simliar success this year and into the future.  Also nice that the business has grown to the point where the team can attract great advisors like Bank of America securities to work with on new growth opportunities.

Here’s the release: Higher One Achieves Record Growth for Fifth Consecutive Year

If you’re a student who goes to a Higher One client school, you can open a checking account, have money in it, and be using your MasterCard Debit Card in say 3 to 5 minutes.  Now, we were pretty innovative about how we use online databases, etc. to do CIP documentation.  So, I didn’t expect to be able to do something similar here in the UK.  However, I did expect to be able to go to a branch and get a “current account” (as demand deposit type accounts are called here) in one stop.  Also, I wasn’t going in as a customer off the street to Barclays, I was referred to their premier group, by the premier group at bank of america.  I was able to work with someone at the branch to fill out all the know your customer forms they needed. I had to give copies of my passport, drivers license, sign about 10 times, and after all that I was told that since I wanted it to be a join account, I had to get the same stuff from Kellee.

Monday - the day we got in (afer I didn’t sleep at all on the flight), I took Kel over the branch and after waiting 15 minutes so we could see the same bank employee (I asked another one quickly to help and it was clear that she wouldn not figure it out quickly).  Kellee got everything signed and verified…and …we were told that 5-10 business days from now we would have an account…oh yeah, and for tax planning reasons I’m going to have to go through this again to get accounts for my trust.  wow - I hope that this isn’t the speed with which everything move here!

Today I went by Higher One to wrap up some last small details and to clean out my desk. I have really enjoyed my time building Higher One with Miles, Mark, Casey, Dean, Rob, and the rest of the team. We have been lucky to also have a great group of investors who believed in “3 college kids starting an online bank for students in March of 2000.”…I am really proud of the team we built in the marketing group too and know that Lisa, Don, Shannon, Kelley, Katie, David, Andrea, and Brad are going to continue the great work that I was able to help them start on with Higher One.  I will miss everyone and thank them for continuing to consider me part of the Higher One family as it continues to grow!  Of course, with an ending comes a beginning and I’m super excited about Friendent and moving to London. I’m off to London again tomorrow - I’ll be meeting more of the Pikum team there for a couple meetings.   I also may stay my first night at my new digs (on an air mattress no less!).

I’ve been traveling non stop (London, New Haven, London, New Haven, Virginia…) so although there’s been a lot I’ve written about on the way, I hadn’t had a chance to post it… So I’ll be posting a number of entries from the last 3 weeks. Lots going on as we get closer to our move and as I have been finishing up at Higher One and ramping up with Friendent (now Pikum - more on that in another post). Exciting times. Hope that everyone who reads this is enjoying the holiday season with friends and family and best wishes to all for the new year.