How to Price Your B2B Product: YC partner shares it all
Avoid engaging in a price war
Pricing your product or service can be one of the most daunting tasks for a startup founder. Fair pricing can not only secure a deal but also ensure long-term profitability and customer satisfaction.
Here are key recommendations by YC Group Partner Tom Blomfield on pricing strategies
Understand the Value Equation
Start by identifying the value your product delivers to your customer. This value could be in the form of cost savings, time savings, or revenue increase. Collaborate with key decision-makers in the customer's organization to derive these values accurately.
This "value equation" acts as a tool for your customer to justify the acquisition to their financial departments. Once this is nailed down, price your product at approximately one-third of this derived value.
Consider Cost, But Don't Start With It
While it's crucial to know what it costs to deliver your service, never use cost as your starting point for pricing. Value-based pricing ensures sustainability and growth.
Costs should only be a flooring measure, ensuring you're never pricing below your base cost unless you have a plan to lower these costs significantly over time.
Competition Isn't Just About Price
When direct competition tries to undercut your prices, avoid engaging in a price war. Instead, set your product apart through unique features or superior value propositions. A head-to-head pricing battle in a commoditized market often leads to diminished margins and sustainability issues.
Pricing Models Matter
Your pricing models—whether monthly flat fees, usage-based pricing, or monthly commitments—should align with industry norms and customer expectations. Complex pricing can derail a sales process. Simple, clear, and committed recurring revenue models are usually more stable and investor-friendly than pure usage-based pricing.
Flexible Pilot Projects
Short pilot projects with clear success metrics derived from the value equation can lead to quicker customer buy-in. If confident in your product, push for a yearly contract with a money-back guarantee option instead of a prolonged free trial.
Be Transparent and Honest
While it might be tempting to appear larger by inflating team sizes on websites or LinkedIn, transparency works better. Highlight your strengths as a smaller, agile company, such as dedicated 24/7 founder-level support, which larger competitors may not offer.
Consistently Reassess Pricing
Start with a competitive but fair price. With each new deal, increase the price incrementally by about 50%. When rejections based solely on pricing reach around 25%, you've likely hit the sweet spot for your market value.
Data-Driven Decision-Making
Regularly collect data on how customers use your product and derive insights to adjust your pricing strategy. For example, moving from usage-based to recurring monthly commitments, based on observed customer behavior, can provide revenue stability.
Offer Value-Added Features for Enterprise Plans
Tiered pricing structures should reflect additional value for enterprise customers, such as compliance reports or specific geography data storage, ensuring you can charge up to 10 times more without disproportionate effort.
Sales Channels and Pricing Strategy
The pricing level directly affects your sales model. For example, higher-priced contracts justify hiring dedicated sales teams, whereas lower-priced ones may necessitate a call-center style customer service approach.
Appropriate Risk Taking
Understanding your customers' approval thresholds can streamline pilot pricing and faster buy-ins. For example, pricing pilot projects just below the threshold a manager can approve can expedite initial acceptance and full-scale deployment.
Growing Over Time
Accept that the first few sales will be the hardest. Use these initial sales to refine your product and customer approach. Incremental price increases and product improvements go hand in hand, making it easier to onboard larger clients over time.
Notable Quotes / Bite-sized Insights
"Value-based pricing ensures sustainability and growth. Costs should only be a flooring measure, ensuring you're never pricing below your base cost."
"Avoid engaging in a price war. Instead, differentiate your product through unique features or superior value propositions."
"Simple, clear, and committed recurring revenue models are usually more stable and investor-friendly than pure usage-based pricing."
"The first two or three sales are normally the absolute hardest you'll ever have to do. Accept it, close those deals, and use them to learn and grow."
By integrating these insights into your pricing strategy, you can better navigate the complexities of setting a fair price while ensuring your startup's long-term success.