Yousuf Khan
I’ve met hundreds of founders over the years, and most, particularly early-stage founders, share one common go-to-market gripe: Pricing.
For enterprise software, traditional pricing methods like per-seat models are often easier to figure out for products that are hyperspecific, especially those used by people in essentially the same way, such as Zoom or Slack. However, it’s a different ballgame for startups that offer services or products that are more complex.
Most startups struggle with a per-seat model because their products, unlike Zoom and Slack, are used in a litany of ways. Salesforce, for example, employs regular seat licenses and admin licenses — customers can opt for lower pricing for solutions that have low-usage parts — while other products are priced based on negotiation as part of annual renewals.
Early pricing discussions should center around the buyer’s perspective and the value the product creates for them. It’s important for founders to think about the output and the outcome, and a number they can reasonably defend to customers moving forward. Of course, self-evaluation is hard, especially when you’re asking someone else to pay you for something you’ve created.
This process will take time, so here are three tips to smoothen the ride.
Pricing is a journey
Pricing is not a fixed exercise. The enterprise software business involves a lot of intangible aspects, and a software product’s perceived value, quality, and user experience can be highly variable.
The pricing journey is long and, despite what some founders might think, jumping headfirst into customer acquisition isn’t the first stop. Instead, step one is making sure you have a fully fledged product.
If you’re a late-seed or Series A company, you’re focused on landing those first 10-20 customers and racking up some wins to showcase in your investor and board deck. But when you grow your organization to the point where the CEO isn’t the only person selling, you’ll want to have your go-to-market position figured out.
Many startups fall into the trap of thinking: “We need to figure out what pricing looks like, so let’s ask 50 hypothetical customers how much they would pay for a solution like ours.” I don’t agree with this approach, because the product hasn’t been finalized yet. You haven’t figured out product-market fit or product messaging and you want to spend a lot of time and energy on pricing? Sure, revenue is important, but you should focus on finding the path to accruing revenue versus finding a strict pricing model.
Many established companies still fiddle with their pricing despite being around for a while. A number of data infrastructure companies I’ve spoken to are trying to price new products while pricing existing products that bring in hundreds of millions of dollars in revenue. I’ve also advised multibillion-dollar SaaS companies that know that CIOs and CTOs think with their pocketbooks, and these companies account for such in their pricing models — but only because they have fully developed their products.
Software startups rewrite their pricing all the time. Customers expect this. Before dusting off your abacus and crunching the numbers, get your product ducks in a row.
Keep it simple
Adding an extra layer to your pricing mechanism complicates the entire sales process. It’s all about understanding the buyer’s journey. This is not a scenario where you merely sell to a CIO who agrees to a price and everyone is home free. The procurement process isn’t a snap of the fingers; conversations need to happen. The CIO must double back with the IT department or whichever team would use your product as well as with financial business partners.
You may have a strong champion in a CIO you’re selling to or a very friendly person handling procurement, but it won’t matter if the pricing can’t be easily explained and understood. Complicated or unclear pricing adds more friction, and sales cycles slow down because people can’t compute the fundamentals and what they’d be paying moving forward. Is the cost calculated on a per-user basis? Does the number of employees play a role? Things can get clunky fast.
For example, if a customer employs 3,000 people, but only 1,000 would use the product, why would they pay for those 2,000 non-users? Yes, you can go back and say that your product is scaled for 3,000 employees, but this can make renewal conversations difficult later on. People are more sensitive about costs than ever before, which is another reason to simplify pricing as much as possible.
I recommend developing a small, medium and large pricing model, wherein the price reflects the size of the company it is serving. The bigger the customer (especially one located in multiple geographies), the more complex the environment, the more resources needed to support and deploy the product, the higher the price.
If you go this route, you can approach the CIO of a large enterprise and reasonably explain that it’ll take more effort to build a solution for them, and they’ll understand. Asking a price of $200,000 or $300,000, because you believe that you’ve built a product of value is fine if you’ve simplified the pricing structure and justified it accordingly. For startups trying to lasso their first 10 customers, remember that you don’t have a fully fledged product yet. CIOs will anticipate a fixed sum the first year, followed by some incremental add-ons the next.
Again, the small-medium-large model is the easiest to follow and negotiate down the line. Otherwise, confusion ensues, sales cycles extend, people get exhausted and annoyed, and deals are lost.
Focus on value
The most important aspect of pricing is the value you’re delivering. When positioning your product, it helps to have something that actually works, as you can’t demonstrate value with a broken product. The product can be great at getting a customer from zero to one, but that’s not what customers are expecting.
Customers want a product that will last a long time, something that integrates into their environment, is secure, has customer success around it, is well supported and has reference customers, among other things. Essentially, they want two questions answered: Are you solving a business problem? Am I getting good value out of this product?
Don’t make the value question trickier than it needs to be. Think about cost differential and reduction. Budget and resource concerns aside, what would it cost the customer to build what you’ve built? Can you beat that price by 50%-70%? When assigning a price, consider the customer’s internal costs: The build, security, maintenance, support, deployment, education and operation.
If they push back on the price, emphasize how your product would save them time and resources. The CIO you’re selling to likely isn’t in the business of building enterprise software, and they’d rather focus on their own products and market. I have a hack that I call “the intern rule.” Does your product cost less than having a full-time intern doing the same thing? If so, you’ve added value right off the bat.
Take long-term value into account as well: Will your product add value over time and continually with new features, support, customer success and integrations? AI is built on the promise of continual improvement, and customers anticipate models to get better over time, because otherwise, the solution is not adding the expected value.
I recently spoke with a technology leader from a major telecom provider that had a serious fraud detection problem costing tens of millions of dollars. The company spent a few million dollars on an AI-based cybersecurity solution and saved nearly $10 million in the first year alone. The models improved, along with support, success and security, and the subscription cost increased as fraud detection became less frequent.
Outline this type of cost analysis with a customer to ensure your subscription price increases with the value of the solution.
The final word
When you and your team are deep in the throes of pricing, remember that even companies like AWS have to rethink their price book every few years. So don’t aim for perfection up front — aim for simplicity instead. It’s likely the early iterations of your product will be missing functionality that more established competitors already offer. You can’t combine that with a complex purchasing experience. Plus, complex pricing extends your sales cycle at a time when momentum is critical.
How are you communicating the short- and long-term value of your product? With regard to the latter, think about your product as a platform even if you don’t think you’re building a platform. Products built for the long haul are continuously being integrated and improved, and customers will be fine with a commensurate bump in subscription price as more features and functionality are rolled out.
Finally, because pricing is a long, arduous road, establish a feedback loop with your customers to learn about the value you add or where you can add more. This will help you determine how to evolve your pricing model over time.
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