How To Price For B2B | Startup School

What is the Value Equation?

The value equation is a method to determine a fair price for your product by quantifying the value it provides to your customers. This approach ensures both you and your customers benefit, making pricing feel more justified and transparent.

How to Calculate the Value Equation:

1. Identify the Champion: Find the person within the customer's organization who strongly supports your product.
2. Value Discussion: Sit down with this champion and outline the expected benefits of your product.
3. Detail Potential Gains: Document whether your product will save them time, reduce costs, or increase revenue.
4. Quantify the Benefits: For example, a tool that saves $2 million in costs.
5. Validate Assumptions: Have the champion challenge and verify these expectations.

Crucial Points to Remember:

• Value Over Comfort: Founders may feel uneasy pricing high, but the value provided justifies the number.
• Savings and Revenue: Companies mainly care about time saving, cost reduction, or revenue increase.
• Success Metrics: Use the value equation to set clear success metrics for pilot testing.

By using the value equation, you ensure pricing is based on tangible benefit and provide a strong justification for your customers.

How Should You Consider Costs in Pricing?

When pricing your B2B product, it's crucial to understand that cost should only serve as a floor, not the starting point. Starting with cost-plus pricing often leads to undervaluing your software, which can severely impact your business's sustainability.

Why Cost Should Be a Floor:

• Value-Based Pricing: Begin with the value your product delivers rather than how much it costs to produce.
• Higher Margins: Ensures that you can achieve high profit margins, ideally around 80% or more.

Ensuring Pricing Covers Costs and Provides Sustainable Margin:

1. Calculate Total Costs: Include all relevant costs such as OpenAI fees, AWS fees, and operational costs.
2. Establish Minimum Price: Use these costs to set a baseline price to ensure you are never selling at a loss.
3. Value Adjustments: Align the final price with the value-based pricing derived from the value equation. This will often be significantly higher than your cost.
4. Avoid Credits Confusion: Treat any startup credits from services like AWS as cash costs to avoid skewing your margin projections.

By following these steps, you create a pricing model that ensures healthy profit margins while delivering substantial value to your customers. For deeper insights, it's beneficial to understand why charging early for your product is crucial.

How to Handle Competition in Pricing?

Engaging in a price war carries significant risks. When companies continuously undercut each other, it leads to a race to the bottom, eroding profits and potentially damaging business sustainability.

Risks of a Price War:

• Reduced Margins: Constantly lowering prices cuts into your profit margins.
• Devalued Market: Perpetual price drops can make customers expect low prices, devaluing the entire market.
• Unsustainable Business: You may be forced to sell below cost, which is not viable long-term.

Strategies to Differentiate Your Product:

1. Feature Superiority:

   • Highlight unique features that competitors lack.
   • Focus on functionality that addresses specific customer needs.

2. Value Proposition:

   • Emphasize the overall value your product delivers.
   • Showcase how your product can save time, reduce costs, or increase revenue more effectively than competitors.

3. Target Niche Markets:

   • Find and dominate a specific niche within your industry.
   • Tailor your product to meet the unique requirements of this segment.

4. Customer Experience:

   • Provide exceptional customer support.
   • Offer added services such as personalized onboarding or dedicated account managers.

By focusing on these areas, you can create a distinct identity for your product, making it incomparable to others based on price alone. This approach not only avoids destructive pricing wars but also builds a stronger, more loyal customer base.

What Pricing Structures Should You Consider?

Choosing the right pricing structure for your B2B product is vital. Different models can significantly impact your revenue and attractiveness to customers.

Monthly Flat Fees

Pros:

• Predictable revenue
• Easy for customers to budget

Cons:

• May not reflect actual usage
• Risk of underpricing for heavy users

Per Seat Pricing

Pros:

• Scales with the size of the customer
• Encourages wider adoption within organizations

Cons:

• Complicated if users fluctuate
• Can be a barrier for small teams

Usage-Based Pricing

Pros:

• Aligns cost with actual usage
• Fair for both low and high volume users

Cons:

• Revenue can be inconsistent
• May be harder to predict budgets

Recurring Revenue Models

Pros:

• Offers stability in revenue
• Attractive to investors

Cons:

• Requires long-term commitment from customers
• Complex to implement and manage

Choosing the best model depends on your product and customer preferences. For instance, large enterprises might prefer usage-based pricing to align costs with actual needs. Smaller companies might favor per seat pricing for its simplicity.

For more insights on how charging early for your product can influence your pricing strategy, feel free to explore more resources.

Should You Offer Free Trials or Pilots?

Offering free trials or pilots can be an effective strategy to attract and convert customers. However, it's essential to use them wisely.

Effectiveness of Free Trials or Pilots

Free trials and pilots allow potential customers to experience your product's value firsthand. It reduces the perceived risk for the customer and can speed up the decision-making process. By using the product, customers can see its benefits in their unique environment.

When to Use Them:

• Launching a new product
• Entering a new market
• Convincing skeptical customers

Benefits of Shorter Pilots with Clear Success Criteria

1. Commitment: Short pilots encourage quicker buy-in from customers.
2. Focus: Clear success criteria keep pilots on track.
3. Feedback: Quicker feedback allows for rapid iteration and improvement.

How to Structure Shorter Pilots:

• Set a Time Frame: Ideally, two to four weeks.
• Define Success Metrics: Use your value equation to establish clear, measurable outcomes.
• Monitor and Adjust: Regular check-ins ensure goals are being met and allow for modifications.

By keeping pilots concise and goal-oriented, you ensure customers quickly see the product's value, making them more likely to commit to a purchase.

How to Publish Your Pricing?

Deciding whether to publish your prices on your website or to use a 'contact sales' approach is crucial. Each method has its benefits and drawbacks.

Publishing Prices:

Pros:

• Transparency: Builds trust with potential customers who prefer upfront pricing.
• Ease of Access: Allows customers to make quicker purchasing decisions without waiting for sales interaction.
• Simplicity: Reduces friction for customers who just want to buy without sales negotiations.

Cons:

• One-size-fits-all: May not accurately reflect the value for diverse customers, leading to potential underpricing or overpricing.
• Flexible Needs: Could miss out on upselling opportunities by not tailoring the offer to specific customer requirements.

Contact Sales Approach:

Pros:

• Customization: Tailors pricing based on the customer's specific needs and expected value.
• Higher Sales: Offers room for negotiation and value-based pricing, potentially increasing profit margins.
• Relationship Building: Allows for deeper customer engagement, understanding their needs and selling additional features.

Cons:

• Time-Consuming: Requires more effort and time from both sales teams and customers.
• Barrier to Entry: Some customers might avoid engaging with sales, preferring simpler purchasing steps.

Deciding Factors:

• Customer Base: For enterprise or high-value products, a contact sales approach often works best. For lower-cost, standardized products, publishing prices might be more effective.
• Sales Strategy: Consider the complexity of your product and the typical sales cycle. Customizable solutions usually benefit from a contact sales model.

Evaluate your target audience and product complexity to choose the optimal pricing publication strategy.

How to Use Pricing Strategy to Dictate Sales Channels?

Your pricing strategy can significantly shape your sales channels. Pricing levels influence how to compensate your sales team and structure efforts to optimize success.

Relationship Between Pricing Levels and Sales Team Compensation:

• High-Value Contracts:

  • These justify employing a dedicated sales team.
  • A common rule: sales reps should generate about five times their total compensation in new annual recurring revenue (ARR).

• Mid-Tier Pricing:

  • Suitable for inside sales teams.
  • Reps close deals quickly and handle multiple contracts.

• Low-Value Contracts:

  • Best managed by lower-cost, higher-volume sales operations.
  • Focus on quick transactions, often via online platforms.

Structuring Your Sales Efforts:

1. High-Value Products:

   • Employ experienced account executives.
   • Provide substantial incentives for closing large contracts.

2. Mid-Tier Products:

   • Utilize inside sales teams for efficiency.
   • Focus on closing multiple deals each month.

3. Low-Value Products:

   • Implement automated or call-center based sales.
   • Prioritize ease of purchase and speed.

Using the right pricing strategy ensures alignment with your sales channels, adapting efforts to maximize efficiency and revenue.