“Would you give our startup a discount because we’re a startup?”
I’ve been asked versions of this question too many times to count. I used to give startups discounted rates on services. That changed for reasons that are a decent lesson in pricing structure and market positioning. This article is based on the below video.
I liked the idea of working with startups. Potential rapid growth is exciting. Shaping something meaningful without the bureaucracy of larger organizations is appealing. But giving a discount to startups was always about the emotions and wasn’t rational.
Push ROI now prices startup projects at the same rate as any other client. But when priced rationally, delivering consulting or services for startups should cost more than normal rates. Here are four reasons why.
More Risk
Most startups will fail, and most don’t have enough assets to get a judgment against. This means the risk of going unpaid is very high. It also means if a startup breaches a contract, it’s likely not worth suing over. Effectively allowing the startup to walk away from a contract at any point without real legal consequence.
More Work
Asking an executive at a makeup company or a local plumber about profit margin, pricing or target market will lead to answers based on experience and data. Asking an early-stage startup founder will lead to a lot of typically unvalidated assumptions.
Shocking to some founders, but market research, pricing, and product market fit are part of marketing. So unvalidated assumptions about those critical marketing functions will either generate work to validate or handicap marketing.
More Arguments
The more a business is based on assumptions, the more likely arguments about data will lead to shrill emotional discussions. A founder who thinks their addressable market is 40M people each willing to pay $40 a month tends to argue when proper market research shows the market size is 20M and people are only willing to pay $30.
Compared to large companies, and small but established businesses startups argue a lot. I’ve never had an established company that contractually agreed to grant access to their website decide they were no longer willing to do that; startups seem to live for this fight.
Less Upside
Most startups fail, but some create a ton of upside for owners. While most investors I’ve spoken to (including every institutional investor) have no qualms about compensating a service provider with equity, most founders react to the idea like you suggested summoning a demon to be CEO. So for service providers, extreme success and total failure of the startup make no difference apart from the portfolio.
If a startup fails, the service provider loses the account. If the startup gets acquired, the service provider loses the account. If the startup gets on track to IPO, the investors will all likely start replacing founders with more “proven experience” having executives. The more experienced folks bring their Rolodex of vendors, and the service provider loses the account.
On a resume or in an agency deck, failed pre-seed startups all look similar. Most startups will fail, and most will do so in uninteresting ways. I worked with a startup that could have sold to a larger firm very early. But rather than taking the small lottery win, the founders kept playing, and the would-be company was crushed within two years. No one got money, and no one got a good case study; it’s just a failed startup.
TLDR
To recap, the vendor has very little potential upside if a startup does well. Startups typically involve more work than established companies. Most startups are more argumentative than other companies. Startups present a high risk of not paying. On top of all that, if the startup fails, it’s not a good portfolio piece. So why would a startup be given a discount?
Mason Pelt is the founder of Push ROI. First published in PushROI.com on September 19, 2022. Header Photo by Med Badr Chemmaoui on Unsplash
