For most software entrepreneurs the beta phase is full of excitement and potential. A chance to battle test their concept, work out bugs, and most importantly, garner a few referenceable users to pave the way for post-launch success. These opportunities are why software companies often heavily discount, or even give away, their beta software.
While this approach to beta pricing is common and, on its surface, completely rational, there are hidden downsides. For one, it establishes an extremely low expectation of value for the software in the beta participant’s mind, which can be difficult to change. It can also affect the software company’s own internal perceptions and hinder early selling efforts.
But another potential consequence of this beta pricing strategy is a dangerous “chasing your own tail” scenario that can seriously delay your launch and raise development costs.
Epiphany at Rock Bottom Brewery
When undervaluing your solution, it is easy to fall into the trap that the beta participants are doing you a huge favor by gracing your software with their presence.
In my first entrepreneurial gig, an enterprise software solution for the construction industry, my business partner and I fell into this trap after getting some key prospects to agree to be beta users – for free. We thought we had it made as these well-known players were sure to love, endorse, and ultimately buy our solution.
We flushed out some bugs of course, as well as some UX enhancements, but our beta users also generated a looonnngg list of feature requests. We would need an army of programmers, and many months, to convert these beta participants to paying customers. My dream of building a scalable software company was turning into a reality of running a custom development shop, where you hope to get paid when you finish, but have no guarantee.
Unfortunately, my partner and I didn’t have the budget for more development. We had already depleted our savings and maxed out our debt. So when both our credit cards were declined at—of all places—a Rock Bottom Brewery in Charlotte, we knew we had to do something different.
Just Get Your Software Out There
We had no choice but to try to sell what we had created. We couldn’t rely on customers who might only pay us after we delivered the new “critical” features.
We immediately stopped using the term “beta” and started selling our software to companies that would pay for the capabilities we already had under the hood. The first few companies said no, but soon after companies began saying yes. Within six months, we had several new customers and several hundred thousand dollars in much-needed working capital (i.e. sales). Instead of giving away beta software for free, or at a heavily discounted price, we had sold our first paid betas.
Those early sales fueled our development efforts and helped us close critical gaps in the software. We then started charging customers for additional capabilities they wanted to accelerate on our product roadmap.
We had accidentally uncovered the secrets to a successful beta.
“The purpose of beta isn’t to test your software. Rather, it is to help your company generate early sales and prove market fit.”
Secrets of Successful Betas
This lesson—to accelerate efforts to sell an early form of a solution—was a game-changer. While the initial companies in our beta turned out to be interested in proven solutions, there is almost always a set of early adopters who focus on critical capabilities. We needed to identify and connect with those prospects right away.
If you’re faced with a similar situation, I’ve thought through many painful experiences to create this checklist to help you avoid costly beta pricing traps:
A successful beta phase should:
- Prove market fit: Whether you did the “build it and they will come” approach, or you started with brochureware, a successful beta should leave your team convinced there is a viable need in the marketplace that your solutions can successfully address.
- Generate revenues: Remember that customers, by definition, are users who pay you money. And paying customers are better references for you in the long run because they can more concretely speak to the value and return on investment they have received from using your software. One of the best ways to prove market fit is to successfully extract revenues from the market segment you are targeting. The beta phase should help your company generate early sales. These early sales will give your team the confidence, energy, and staying power you need for the long haul.
- Fuel the product road map: It is much better to have a few beta customers paying top dollar than many beta customers paying hardly anything. When you fix on a few key paying customers, you have a better chance of dealing with companies that have similar needs, enabling you to focus product management on overlapping and critical capabilities that need to be met to make those customers raving fans. In addition, some of the critical capabilities will allow you to command more revenue later in the form of higher price points for the software. They will also help you provide future upgrade opportunities for customers.
- Crystalize the value you provide: At the end of the beta, you should deeply reflect on two major components. First, what made people write you the check? What were they hoping to accomplish? Second, what did they accomplish with your software? What measurable results did they experience? A successful beta encompasses a qualitative research component to answer these questions.
What Makes a Strong Beta Customer?
Choosing the right beta customers is an important step toward a successful beta phase. A definition for a strong beta customer is a company that is willing to pay to become a customer for an early version of your product. An even stronger candidate is one who will pay a premium to gain critical capabilities in advance of when the product is commercially available to the general market.
“A definition for a strong beta customer is a prospect that is willing to pay to become a customer for an early version of your product.”
Often, early adopter companies fit these definitions. These are typically curious, adventurous consumers who think about opportunities more than problems, want to be ahead of the curve, and will spread the word to others about the pros and/or cons of what they have purchased. If you get things right with early adopters, you’ll likely be off to a good start.
Other strong beta customers are companies with urgent needs to fix pressing problems that your software addresses. Your conversations with these candidates about their needs will be invaluable to you as you roll out to a larger market.
If you’re wondering how you can run a successful beta program, then having strong beta customers can contribute mightily to a successful beta phase and will be among your company’s greatest assets as you grow.