I’m getting pretty frustrated with startups making things way more complex than they need to be. You wouldn’t believe how often I see pitch decks from companies that have more pricing tiers and business models than their customers would. It’s a terrible idea for several reasons, but in the context of a pitch deck, premature complexity is a huge red flag to investors.
It appears that the allure of complex pricing models and business strategies often proves too tempting to resist. Indeed, who wouldn’t be enticed by the prospect of variable pricing, tiered packages, or the alluringly intricate matrix of options that promise to maximize revenue from every conceivable customer segment? It’s a business school student’s dream.
But with every new idea and pricing tier comes exponential complexity. Customer service, accounting, product development and even the sales process and landing pages all become way more complicated than they need to be.
If you have more than one business model, you don’t have a business model
There is a time and place for complexity, and for early-stage startups, that time is usually not “now.” A growing company that’s introducing complex pricing too early might find itself bogged down in administrative overhead, struggling with sales friction, and potentially deterring potential customers with a convoluted pricing structure.
In a world where algorithms can predict our preferences and future purchasing behavior, simplicity might seem like an outdated notion. On the surface, it may seem tempting, even logical, to dive headfirst into intricate pricing models that take full advantage of the sophistication technology offers today.
But when we peel back the layers, we find a different story.
Startups, by nature, are incredibly fragile entities. They may be born out of bold ideas and ambitious dreams, but they are also inherently vulnerable. They operate on shoestring budgets, have limited human resources, and are always in a race against time. It’s like running a marathon at a sprinter’s pace. In such a high-pressure environment, the administrative overhead of managing complex pricing models can be a significant burden.
Let’s say we have a startup employing a tiered pricing model with different features and benefits at each level. It might seem like a smart avenue to maximize revenue, but it can quickly become a logistical nightmare. Keeping track of who has access to what, managing upgrades and downgrades, and ensuring customers are billed correctly can take up a considerable amount of time and effort. That energy could be better spent elsewhere, like improving the product or acquiring new customers.
Moreover, complex pricing models can add friction to the sales process. A startup should aim to minimize obstacles and make purchasing its product or service as straightforward as possible. Every additional step and complication in the pricing structure is another hurdle a potential customer must overcome. It’s like trying to navigate a maze with no clear path to the exit.
Consider an online retailer that offers multiple shipping options, each with its own cost and delivery timeline. While this gives customers a choice, it can be overwhelming and lead to carts being abandoned. It’s a lose-lose situation: The customer leaves unsatisfied, and the retailer loses a potential sale.
Another problem with complex pricing models is the message they send to potential customers. In an era when transparency and trust are more important than ever, a complicated, opaque pricing strategy can be off-putting. It might lead customers to think that the company is more interested in extracting maximum revenue than providing a clear and fair deal.
To investors, the complexity of multiple business models can be problematic as well. Yes, you can make money off subscriptions, product sales, licensing, white-labeled products, and a bunch of other ways, but the truth is, each revenue stream adds complexity and defocuses your product efforts.
For larger businesses, the game might be “Don’t keep all your eggs in one basket.” For startups, it’s the other way around: Pick the best basket you have, keep all your eggs there, and keep a very close eye on that basket. In fewer words: Focus, focus, focus.
That’s not to say complex pricing models don’t have their place. As a company grows, diversifies and understands its customer base better, a more nuanced pricing strategy can be both feasible and advantageous. It’s about recognizing when the time is right to make the transition.
Initially, a startup’s focus should be on growth, customer acquisition and understanding the market. A simple, straightforward pricing model helps you do that without distractions. For example, a flat-rate pricing model is easy to understand and manage. It’s transparent, fair and lets the startup focus on what really matters: Creating a product or service that customers love and are willing to pay for.
Yes, you may leave some money on the table, but who cares? Anything that gets in the way of your learning is bad news at this early stage.
Startups would do well to resist complexity until they are truly ready for it. Until then, simplicity is king.
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