Venture capitalist Paul Graham expressed an under-appreciated nugget of wisdom in his article on mistakes that kill startups.  Unlike “winning an Olympic gold medal, where the problem is well defined”, building a successful company is actually “more like science, where you need to follow the trail wherever it leads.”

Therefore, Graham concludes that the worst person to run a startup is someone who “has some great idea they know everyone is going to love, and that’s what they’re going to build, no matter what.” But while plenty has been written about successful startups in general, little has been said about companies that thrived by changing their strategies instead of clinging to those they started with.

Below, Chargify examines six companies whose flexibility took them to new heights.

PayPal

PayPal, believe it or not, was not founded to be the online payment service that it is today. In her book Founders at Work, Jessica Livingston interviews PayPal founder Max Levchin. During the interview, Levchin reveals that PayPal was originally envisioned as a cryptography company, and then later as a means of transmitting money via PDAs. Only after several years of trial and error (and overcoming user fraud that almost destroyed the company) did PayPal find its sweet spot as the default online payment system of millions.

A frequent complaint about web startups is that despite being cool or popular, they lack a clear business model. One textbook example was YouTube. The service had millions of adoring users, but financially speaking, YouTube ran at a loss until Google bought them out in 2006 for $1.65 billion. For a time, the default business model for high-traffic but unprofitable websites was displaying ads. But since effective advertising depends on more than just mass exposure (like targeting) it is not always an effective business model.

A better answer for many has been the “freemium” model, where a company offers its core product or service for free and charges for advanced or special features. Rumors have cropped up in recent years that web giants like Twitter and Facebook, for example, are considering freemium strategies. Below, we’ll profile seven companies that have already mastered the freemium model, and how they did it.

Skype

Web-based telephony company Skype provides an excellent example.

The team here at Chargify has been hard at work on a bunch of new features. We just flipped the switch on two of these: Prorated Upgrades/Downgrades and Metered Components.

Metered Components

Metered Components give Sellers the ability to charge for a product on a per-usage basis. For example, a cell phone provider could charge $1 for each text message that was sent, or a Web Hosting company could charge for storage by the number of gigabytes used. Creating metered components is quick and easy. Simply give the component a name, specify the unit used to measure it, and give it a per unit price. Usage of metered components is tallied throughout the billing cycle and the charge is seamlessly integrated as a line item on the Customer’s next invoice.

For more information on how to create Metered Components, and how to record usage via the API, see:

This is a guest-post from Sean Harper, co-founder of TransFS.  He is a zealot about making sure business owners get a fair shake from their financial services providers.

1. Know what your requirements are and find a processor that has lots of experience with those requirements.
The worst credit card processing outcomes occur when the business owner doesn’t screen the processors that don’t have experience fulfilling that requirement. Fortunately, there are lots of processors that are experienced dealing with SaaS and web services companies and providing the gateway (auth.net or otherwise) that they need.

Lincoln Murphy of Sixteen Ventures presents an in-depth look at the Freemium model in SaaS companies.

What is Freemium, you ask?

Well, Freemium is defined by wikipedia as “a business model that works by offering basic Web services, or a basic downloadable digital product, for free, while charging a premium for advanced or special features.”

In his book he defines Freemium as “A marketing tactic where a Software-as-a-Service (SaaS) vendor has both a free and paid version of their product.”

Some of the areas Lincoln Murphy’s book addresses are:

• Freemium is Not a Business Model
• An Understanding of Free
• Freemium Success Requires Internal Reflection