As the Paris startup scene is heating up, I’ve had more opportunities to discuss with young entrepreneurs on many subjects and one of the recurring topics for B2B Tech startups is « what should we charge? ».
This is a tricky question especially for people who started their company right after college and who’s notions of « money changing hands » tend to relate to buying a burger rather than an enterprise procurement drill.
As I discussed with many of hem, here’s a laundry list of things to keep in mind when putting together a price list and building a business plan. Of course there are specialists with more sophisticated methodologies out there and I may simply be stating the obvious starting with the cheap piece of conventional wisdom: « Charge what the market can bear »!
A viable business
Unit Price * Market Size * Reasonable Market Share = Revenue Potential
Depending on what you sell, the Unit can be a user seat, an software instance or simply an average deal size. It is also important to have a realistic idea of addressable market volumes and a reasonable target for a market share (20% if you plan on being a leader). Sometimes market size is easy to challenge: If you sell to Tier1 Telco companies, the math is fairly easy and you’d be hard pressed to claim more than 200 addressable customers worldwide!
Depending on your ambitions and/or what you told the investors, the foreseen Revenue Potential needs to be credible. The joke in the early 2000s was « let’s give it away for free and make it up in volumes! ». Sure some B2C companies have reached insane valuations simply on their number of not-yet-paying users but B2B is usually about delivering value that customers are willing to pay for.
Your sales people need to make decent money
Like it or not, you will be competing for talented sales force and the number one consideration for any good sales person is « Dineros ». Make sure that they have a good shot at a competitive package on an annual quota of 1 to 1.5 M$ with realistic number of customers and deal sizes.
Start high but avoid the insult zone
Needless to say that you need to demonstrate the value of your technology by highlighting the cost savings, risk lowering or additional revenue generated for your customers. However, the price tag by itself conveys information about the perceived importance of the solution. If you sell a miracle cybersecurity solution meant to protect a high volume e-commerce site for 99$ a month, it may not pass the smell test!
Also, even if nobody will confess to it, decision makers tend to measure their professional worth by the budgets they manage and if your solution’s budget line is too small, it may not be felt as worthy of their attention!
Having said that, there’s no glory in shamelessly over pricing your wares with the risk of getting an explicit or implicit « Get outa here! »
Give a price only when value is clearly understood
I’m just stating one of the basics of numerous sales methods (Customer Centric Selling, Solution Selling …) but if you’re selling highly innovative non-obvious technology, it is important that you hold off answering the « How much? » question until the mental construct in the prospect’s mind is solid enough to support the numbers. Sure the question by itself may indicate a desire to wrap-up the conversation but it is worth deflecting if the timing is not right. You can give a straight answer, if the conversation and preceding questions indicate a clear understanding of what value you’re bringing to the table in concrete and relevant terms. Sometimes, that can only be established through a Proof Of Concept or other forms of experimentation.
Early adopters discount: good brand but limited revenue potential
When you’re in the early stages, it is necessary to claim good brands as customers and give an opportunity for « Me too » type of buying decisions. However, it is important to pick an early adopting customer with positive characteristics and reputation of thought leadership. At the same time, if you fail to extract the right level of revenues from a customer with high spending power, it creates a data point with a risk of becoming the norm rather than an early stage aberration. For example, luxury brands can easily be aspirational without having a large economic footprint. They usually are recognised as best partitioners in marketing and quality in manufacturing but you’d be surprised how small are some of the companies behind well known brands!
How does your price compare to other component of the ecosystem
I’m leaving aside the simple competitive pricing issue here (in which case you’d be playing a simpler « mine is better and/or cheaper » game) but it is important to understand how your product would fit in a global Bill Of Materials. For example, even if you make an existing system or application better or faster, it is usually unacceptable that your product is more expensive than the system or application itself! However, if your product keeps an existing system from being pronounced dead, you can be aggressive in trying to reroute some of its ongoing costs to you.
CAPEX or OPEX
It is usually important to understand how your customers manages the budget spent on products and services like yours. Conventional wisdom calls for subscription-based services to be considered OPEX (Operational Expenditure) and any perpetual licenses to be viewed as CAPEX (Capital Expenditure) but I have seen exceptions that allow for more creative pricing!
Again, no silver bullets here but simple considerations to keep in mind when dealing with a topic usually handled like a hot potato and thrown back and forth between Product Management, Product Marketing and Sales Management!