YC
How To Price For B2B | Startup School
@ Y Combinator
07/26/24
Takeaways
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Tom Blomfield
07/26/24
@ Y Combinator
The value equation involves discussing with your customer what value your product will bring, such as cost savings or increased revenue, and documenting these expectations.
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Tom Blomfield
07/26/24
@ Y Combinator
Aim to charge between 25% and 50% of the value you deliver, allowing the customer to retain a significant portion of the savings while ensuring a fair return for your service.
TB
Tom Blomfield
07/26/24
@ Y Combinator
When pricing your product, focus on the value it delivers to the customer rather than just the cost of providing the service.
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Tom Blomfield
07/26/24
@ Y Combinator
It's crucial to never start pricing based on costs; instead, use the value equation as a foundation and let costs serve as a minimum threshold for pricing.
TB
Tom Blomfield
07/26/24
@ Y Combinator
If your calculated value share is less than your costs, you need to either demonstrate more value, adjust your offering, or reconsider your business model.
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Tom Blomfield
07/26/24
@ Y Combinator
Software businesses should target high margins, ideally around 80% to 90%, to ensure sustainability and profitability.
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Tom Blomfield
07/26/24
@ Y Combinator
Treat credits from services like AWS or OpenAI as real costs, as relying on them indefinitely can distort your financial projections and margins.
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Tom Blomfield
07/26/24
@ Y Combinator
Pricing below cost can be a risky strategy for gaining market share, often leading to unsustainable business practices. You might want to price a little lower now because your margins are going to improve with time, but it's a risky maneuver, and I advise startups to maintain an 80 to 90% gross margin.
TB
Tom Blomfield
07/26/24
@ Y Combinator
When facing competition, if a direct competitor enters the market and underprices you, engaging in a price war is not a winning strategy; instead, differentiate your product based on functionality or value.
TB
Tom Blomfield
07/26/24
@ Y Combinator
In industries with extreme competition, like the airline industry, where products are essentially commodities, margins can be driven down to unsustainable levels, leading to a brutal business environment.
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Tom Blomfield
07/26/24
@ Y Combinator
To determine pricing, explore how your target customers pay for similar software products, whether it's a flat fee, per usage, or other structures, and align your pricing strategy accordingly.
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Tom Blomfield
07/26/24
@ Y Combinator
It's important to keep pricing simple; complicating pricing structures can kill the sales process, and committed recurring revenue is preferable to usage-based pricing, especially during economic downturns.
TB
Tom Blomfield
07/26/24
@ Y Combinator
Aim for monthly or annual recurring revenue to protect your revenue during downturns, as it provides stability until contract renewal discussions.
TB
Tom Blomfield
07/26/24
@ Y Combinator
Start with usage-based pricing for new customers, then transition them to a minimum monthly commitment with volume discounts based on their average usage.
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Tom Blomfield
07/26/24
@ Y Combinator
Ask your Champion what amount they can sign off without additional approvals; this can guide your pilot pricing to ensure a quick sales process.
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Tom Blomfield
07/26/24
@ Y Combinator
For Enterprise pricing, avoid publishing fixed prices on your website; instead, use a contact sales approach to tailor pricing based on the specific value for each customer.
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Tom Blomfield
07/26/24
@ Y Combinator
Typically, companies offer one or two cheaper plans for individuals or small teams, while reserving core functionalities for Enterprise plans, which can be priced significantly higher due to added compliance and legal requirements.
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Tom Blomfield
07/26/24
@ Y Combinator
Your pricing strategy dictates your sales channels, so ensure there's enough money in each contract to compensate your sales team effectively.
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Tom Blomfield
07/26/24
@ Y Combinator
A good rule of thumb is to maintain a 5:1 ratio between new signed Annual Recurring Revenue (ARR) and total compensation for a salesperson, including commission.
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Tom Blomfield
07/26/24
@ Y Combinator
If you pay a salesperson $100,000 a year, you should expect them to close about $500,000 of new ARR annually.
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Tom Blomfield
07/26/24
@ Y Combinator
When considering contract sizes, if you have $500,000 contracts, your account executives will be closing fewer deals, while $25,000 contracts require them to close more frequently to meet targets.
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Tom Blomfield
07/26/24
@ Y Combinator
Offering long free trials or pilots can be counterproductive, as customers may not fully commit to using the product. Keep trials short with clear success criteria.
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Tom Blomfield
07/26/24
@ Y Combinator
If you're confident in your product, encourage customers to sign up for an annual contract with a 30 or 60-day money-back guarantee, making it a recurring revenue stream from the start.
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Tom Blomfield
07/26/24
@ Y Combinator
As a small startup, it's better to highlight your strengths, like direct access to founders, rather than trying to appear larger than you are.
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Tom Blomfield
07/26/24
@ Y Combinator
If you're unsure how to price, start with a number similar to other software your customers buy, then increase it by 50% for each new customer until you find the right balance.
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Tom Blomfield
07/26/24
@ Y Combinator
The first few sales are often the hardest, so focus on closing those deals to establish a customer base, and remember you can always increase prices later as your product improves.
TB
Tom Blomfield
07/26/24
@ Y Combinator
Three key parts to pricing are: 1) Understand the value equation and price at about a third of the value delivered, 2) Consider your costs to avoid pricing below them, and 3) Differentiate your product to avoid price wars with competitors.