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How To Price For B2B | Startup School
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If you're a startup founder, how much should you charge for your product or service? It's a simple question that can make many lock up. What number should you pick? In this episode of Startup School, YC Group Partner Tom Blomfield guides you on how to come up with a price and then justify that number to customers. Apply to Y Combinator: https://yc.link/SUS-apply Work at a startup: https://yc.link/SUS-jobs Chapters (Powered by https://bit.ly/chapterme-yc) - 00:00 - Intro 01:19 - The Value Equation 04:28 - Cost 06:26 - Competition 10:08 - Pricing 13:42 - Free trials 16:42 - Recap 17:30 - Outro
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The Pricing Dilemma
Tom Blomfield addresses a common challenge faced by startup founders: determining the right price for their product. He discusses the discomfort many founders feel when quoting prices, especially when transitioning from a low-cost mindset to justifying higher prices to potential customers.
"hi there my name is Tom and I'm a partner here at y combinator today I'm going to be talking about one of the most common questions I get from Founders which is how to price so the Founder's been work..."
Understanding the Value Equation
Blomfield introduces the 'value equation' as a crucial tool for pricing. He explains how founders should collaborate with their customers to outline the expected value their product delivers, emphasizing cost savings, time efficiency, and revenue increases. This foundational understanding helps justify pricing to stakeholders.
"three core elements here and by far the most important is what I call the value equation so this is the idea that you sit down uh with your with your Champion that's the person at the customer that's ..."
Cost Considerations in Pricing
In this segment, Blomfield discusses the importance of understanding costs when setting prices. He warns against starting with cost-based pricing, advocating instead for a value-driven approach. He highlights the need for sustainable margins and the risks of pricing below costs.
"of pricing and by far it's the most important if you just stop with that value equation honestly you'll get 80 or 90% of of the pricing spawn on but there are a couple of other elements it's usually u..."
Navigating Competition
Blomfield explores how to handle competition in pricing strategies. He cautions against engaging in price wars and emphasizes the importance of differentiating products based on unique value propositions rather than competing solely on price.
"third element in pricing is competition so you've done your value equation you've calculated about a third of that you've checked that your costs are way way below that so you're sustaining a sort of ..."
Choosing the Right Pricing Structure
This segment focuses on selecting an appropriate pricing structure based on industry standards. Blomfield advises startups to consider how similar products are priced and to keep pricing simple to avoid complicating the sales process.
"to ask uh your Champion is how and what do they pay for other similar software products for example are they used to paying a monthly flat fee or per sey pricing or usage bands or credits I would real..."
Sales Strategy and Pricing
Blomfield discusses how pricing impacts sales strategies, including the compensation structure for sales teams. He explains the importance of ensuring that pricing allows for sustainable sales efforts and the implications of different contract sizes on sales tactics.
"this on the internet and often software developers say I just want to see the price I just want to click a button and put my credit card into bio I hate talking to sales why do I have to talk to sales..."
The Role of Free Trials
In this segment, Blomfield examines the effectiveness of free trials and pilot programs. He suggests keeping trials short with clear success criteria and discusses the benefits of offering annual contracts with money-back guarantees to secure recurring revenue.
"example if you you pay a salesperson $100,000 a year in annual compensation including their base salary plus uh any sales commission so 100,000 total compensation you might reasonably expect that sale..."
Final Thoughts on Pricing
Blomfield concludes with practical advice for founders struggling with pricing. He encourages them to start with a competitive number, gradually increase it based on customer feedback, and focus on closing initial deals to build momentum for future pricing adjustments.
"another question I get is we just a two or three person startup should we uh you know um put up more people on our website or uh sign more people up to our LinkedIn company account to act like we're a..."