How To Price For B2B | Startup School

Summary

Tom, a partner at Y Combinator, discusses how founders can effectively price their products. He emphasizes the value equation, suggesting pricing at 25-50% of the value delivered to the customer. He advises against starting with costs and warns of the risks in competitive pricing wars. Tom highlights the importance of understanding industry standards, keeping pricing simple, and leveraging committed recurring revenue. He also suggests strategies for free trials, initial pricing, and differentiating products. Ultimately, he encourages experimentation and adjusting prices as the product and company grow.

Takeaways

• 📈 The value equation is the most important element in pricing, requiring founders to calculate the value their product delivers to the customer and price at about a third of that value.
• 💡 Pricing should be based on the value delivered rather than personal discomfort with high numbers, as the perceived value to the customer justifies the price.
• 💼 Understanding the cost of providing the service ensures that the pricing covers expenses and maintains a healthy margin, aiming for 80-90% gross margin.
• 🛢️ Competition should be considered in pricing, but engaging in a price war is not advisable; instead, differentiate the product based on functionality or value.
• 🔄 Pricing should be dynamic, adjusting based on customer feedback and market conditions, and not be set in stone.
• 📊 The value equation also provides success metrics for pilot projects, allowing founders to measure the effectiveness of their product and adjust pricing if necessary.
• 💹 Consideration of customer's payment habits and industry norms can inform the pricing structure, making it more palatable to the customer.
• 🔑 Simplicity in pricing is crucial, as over-complicating can kill the sales process; committed recurring revenue is generally preferable to usage-based pricing.
• 🏢 For enterprise customers, 'contact sales' is often the best approach as the value equation will differ significantly between customers.
• 🔑 Startups should leverage their strengths, such as direct access to founders, rather than pretending to be larger than they are.
• 🚀 Experimentation with pricing is encouraged, especially in the early stages, to find the right balance as the product and market evolve.

Q & A

What is the most common question Tom addresses in the script?

The most common question Tom addresses is how to price a product or service for startups, particularly when they have not previously worked in a large company and lack calibration on industry pricing standards.

What is the 'value equation' mentioned by Tom?

The 'value equation' is a method where the founder sits down with a customer champion to determine and document the expected value the product will deliver to their company, such as cost savings, time savings, or increased revenue.

Why is it important to have the customer challenge the value equation?

Having the customer challenge the value equation ensures that the assumptions are correct and that the value proposition is realistic and measurable. It also provides a tool for the customer to justify the purchase to their superiors or CFO.

What is the typical percentage of the value delivered that Tom suggests charging as a price?

Tom suggests pricing somewhere between 25 and 50% of the value delivered, allowing the customer to keep roughly two-thirds of the value while the company retains about one-third.

How does the value equation help in setting success metrics for a pilot project?

The value equation helps in setting success metrics by providing clear goals that the product needs to meet during a pilot project. For example, if the product is expected to reduce queries by 20%, this becomes the metric to measure success.

What role does cost play in the pricing strategy according to Tom?

Cost plays a significant role in the pricing strategy as it should never be the starting point but rather a floor to ensure that the company is not underpricing its product. It's important to ensure that the price covers costs and still provides a healthy margin.

What is the risk of pricing a product at or below cost?

Pricing a product at or below cost is not sustainable in the long term. It might be a strategy used to gain market share temporarily, but it requires a clear plan to reduce costs dramatically in the future to avoid financial losses.

How does competition affect the pricing strategy?

Competition can affect the pricing strategy by forcing a company to consider the prices of similar products in the market. However, engaging in a price war is not advisable; instead, differentiating the product based on functionality or value is recommended.

What are some techniques Tom suggests for determining the price or pricing structure?

Tom suggests techniques such as understanding how customers are used to paying for similar products, keeping pricing simple, preferring committed recurring revenue over usage-based pricing, and considering the customer's signing authority for pilot pricing.

What is Tom's advice on whether to publish prices on a website or have a contact sales approach for enterprise pricing?

Tom advises against publishing enterprise prices on a website due to the variability in the value equation for each customer. Instead, he suggests having cheaper plans for individuals and startups and gating enterprise features behind a 'contact sales' option to price differently for enterprise customers.

How does Tom recommend startups approach the challenge of appearing credible and capable?

Tom recommends that startups play to their strengths, such as being more agile and responsive, rather than trying to appear larger than they are. He advises against inflating the company's size as it can lead to unrealistic expectations and disappointment.

What is Tom's final advice on pricing for startups that are unsure?

Tom's final advice is to pick a number similar to other software that customers buy, and then increase that number by 50% for every new customer until the startup starts losing more than 25% of potential deals based solely on price, indicating they are in the right pricing range.