How to Price an Early Stage B2B Software Product

Talk to customers, but don't ask what they'd pay. Keep it simple and understand how they buy. (#70)

Recently, I was speaking with a few early-stage founders about pricing. The common questions are:

How should I price my product? Should I try and pre-sell it before it’s built? Do I give early adopters a discount?

Let’s break this down…

1. At the outset, pricing is binary

At the earliest stages, your price doesn’t matter. As your startup evolves and scales you’re going to change pricing a lot.

If a customer is willing to pay $1, it’s significantly better than $0. That’s what I mean by “pricing is binary”. Convincing people to pay for anything is a big deal, the amount itself is not super important. Charging people money early on isn’t a sign that you have a functioning business model with strong economics, it’s a sign that people want your solution (i.e. you’re using price as a validation of desirability).

A few key points:

→ Most startups undercharge.

Why?

• They’re scared their MVP isn’t feature-rich enough to compete with others (totally fair, but speaks to a lack of differentiation—if competitor differentiation isn’t obvious enough to customers, it won’t matter what you charge, they won’t buy or use your solution).

• They believe “inexpensive” is a core part of the value proposition (this is dangerous; being labeled the “cheap solution” isn’t necessarily a good thing).

• They don’t want to come across as big shots (totally fair, you don’t have a brand yet, and may lack market credibility, but be aware of how price affects how you’re perceived).

My advice to more established startups (product in-market with customers & $250k-$1M ARR) is simple: double the price. Most founders panic when I say that, but aren’t sure what will happen if they try. You know what usually happens? 2x revenue per customer. 🤣

→ Don’t ask investors what the price should be.

They don’t know (even if they think they do). Early stage investors should be excited that anyone is willing to pay anything—that’s a strong signal. Price optimization doesn’t matter early on (this is also why, in part, business model math at this stage is so rough).

→ While $1 > $0, you should figure out the “right” price.

Although pricing early on is binary, I’m not suggesting you charge a buck. Go through the exercise of trying to validate the right price because you’ll learn a lot from the effort. You can test pricing (and “grandfather” early adopters).

2. Don’t ask people what they’ll pay

“How much would you pay for this solution?” is a bad question. It puts people on the spot and doesn’t give them anything to react to. If they give you a number, you won’t know why, and asking, “Why would you pay that?” is awkward.

Instead, ask questions such as: “What are you currently spending to solve this problem?” or, “How would you evaluate the ROI of this solution?”

That second question focuses more on value creation than locking in a specific price. Understanding how customers determine value will help you figure out pricing.

Try and sell the solution before you build it. This helps validate the MVP feature set, value proposition and price. Try and secure LOIs (letters of intent), which is a good signal, although not all of them will convert to paying customers. Offer discounts to early adopters, but make sure they know (and react to) the full price.

3. Understand your value proposition

If you can’t articulate a clear value proposition that resonates with customers, you’ll never figure out pricing.

Value-based pricing is a strategy where you set the price based on how much your target customers believe it’s worth. (You can read more here and here.)

Your customers don’t care about your costs. So costs + margin doesn’t work. And customers simply will not buy unless the value is obvious and matters to them.

In fact, before you figure out the price, you have to figure out where your solution sits in a long list of their priorities. If you’re solving a “nice-to-have” problem that’s not burning a hole in your customers’ brains, they’ll want to pay less (if anything at all). That’s why, early on, pricing is binary. Customers have to:

• feel the pain of the problem acutely;

• want/need a solution; and,

• believe you can solve it (i.e. your value proposition resonates).

4. People use comparisons / anchors to decide what they’ll pay

People use a few different things to compare or anchor pricing:

• Competition. This is the easiest thing to compare to. Most startups will aim to be a bit less expensive than competition, although there are exceptions. Customers will compare your business model to competitors as well. If everyone else sells monthly user licenses and you’re going completely usage-based, customers will pay attention to that (they may like it or not).

• Similar software (solving different problems). Customers may anchor your pricing to other software they’ve purchased. “We pay $100/user/month for our CRM, and it does a lot more than this solution…” If you know what else they use, it may be helpful in defining your pricing.

• ROI equations. Customers may do quick back-of-the-napkin math on expected time savings, revenue generation, etc. (i.e. high-level value propositions) to determine their ROI and use that to decide if your price is reasonable. This is tough for early-stage startups without a lot of proof points.

• How your price scales. Customers look at how pricing scales from a small (pilot) implementation to the entire company. For small businesses this isn’t a concern, but for big enterprise clients this is definitely an issue. $100/user/month for 5 users may be OK, but for 50,000 users it’s going to be a problem (you’d offer a volume discount of course, but early on you probably won’t even know what that should be).

Your job is to figure out what people are anchoring your pricing against. You do so by talking to them. You have to learn:

• How they perceive your product and the value it’ll create.

• How they make purchasing decisions (see below).

• How they compare your product to competitors (or other “similar” products).

5. You have to understand how companies budget and buy things

In 2007 I co-founded Standout Jobs, a recruitment software company. (You can read the extensive and painful postmortem in two parts: I and II.) Our product allowed companies to build better career sites with engaging content meant to show off their employer brands. We charged a monthly subscription, because career sites should always be available, and companies should always be recruiting (even if they didn’t have specific job postings).

A lot of employers loved the product and agreed with how recruiting should be done: consistently, while promoting an employer’s brand, developing talent networks, leveraging social media, etc. But two things happened:

1. No one actually used the solution (again, you can read the postmortem)

2. No one wanted to pay a monthly fee (even before they realized they’d never use it anyway!)

Why didn’t people want to pay monthly? HR departments weren’t used to paying monthly for software (remember this was 10+ years ago). They might have had an applicant tracking system (ATS) that they paid for monthly, but they bucketed our solution in as a recruitment marketing tool, anchoring us against job boards (even if we were meant to be the destination for job board traffic).

“When a new job requisition happens, we get a budget for marketing it. We place our bets on job boards and the applicant traffic flows in. We don’t really have a software budget for something like Standout Jobs. Do we really need to pay every month for a career site if we don’t have open jobs? Should we take some of the job board budget and allocate it to you?”

Ah fuck. We were now neck-deep in the crazy that is budgeting (and HR was not getting more budget).

If you don’t deeply understand your customer and how they budget you’re doomed.

Let me give you another example. I was working with a very large enterprise CPG company helping them partner with startups. We secured a meeting for one of the startups with one of the company’s biggest brands. The startup presented the solution to the brand’s head of marketing and it was well received. Unfortunately, when asked about the price, the startup—assuming the brand’s budget was essentially infinite (because the company is massive)—pitched a price that was 5x more than what they normally charge. The head of marketing responded by telling the startup, “That’s 3x our entire I.T. budget for the year.”

End scene.

The startup had nowhere to go from there. They were so off the mark on price that even offering a discount wouldn’t make a difference. The startup had completely misread the situation and misunderstood how big companies actually budget. (Btw, we warned them about this, but they didn’t listen. 🤷🏻‍♂️)

Nothing matters more than knowing your ideal client profile (ICP), what they’re prioritizing, how they buy and how they budget / spend money.

A few key things to consider:

• If you have a long sales cycle, you can’t charge a low amount. Although early you can worry less about the fundamental economics (CAC, Payback Period, LTV, profitability, etc.), eventually these things matter. You can’t take 6 months to close a $500 deal—you’ll never have a viable business.

• If your go-to-market strategy requires salespeople, it impacts the price. You can’t have people doing outbound sales with a $500 product. You can’t have people doing demos and multiple sales calls with leads (even if the leads are generated from marketing / inbound) for an inexpensive product. It’s tough to justify salespeople (of any kind) for under $5,000/year ACV (Annual Contract Value) although it’s possible.

• If your product requires multiple customer stakeholders to get involved in the sales process, you can’t charge too little (b/c this will naturally increase the length of the sales cycle). Now you need to understand the supporters and detractors in any deal, which gets very complex (and frustrating).

• Despite all the challenges faced with enterprise-type sales, don’t shy away from them if there’s a market. A lot of startups target small businesses because they assume it’s easier to sell, or they’ll go free trial / freemium in an attempt to have the product do the selling on its own. Both of these strategies can work, but they’re not slam dunks. If the demand is from the enterprise, you have to figure that out.

6. Free trials, reverse trials, freemium…?

Most B2B SaaS businesses offer something for free. It may be a free trial or free version or both. I shared this image of Jira’s pricing in my post, Deconstructing & Mapping B2B SaaS Business Models:

Jira offers a free version and free trials (and an enterprise “contact sales” option). This is a common pattern for B2B startups.

Regardless of the approach you take, I recommend gauging customers’ willingness to pay first. Can you validate they’ll pay before you implement a free trial or freemium option?

Some worthwhile reading on this topic:

• When to Use a Reverse Trial - Rick Koleta

• Freemium vs. trial - Lenny Rachitsky (requires subscription)

• Freemium vs. Free Trial? A decision framework to help you decide - Wes Bush

As your business evolves, you’ll likely test each of these in some way. Early on, don’t overthink it. Validate people will pay first, and then figure out the right go-to-market strategy for driving customer acquisition.

• If you launch with a free trial, generate decent fanfare, but don’t convert anyone, you’re in trouble. 😰

• If you validate people will pay first, then decide a free trial is the best way to drive adoption, with confidence people will convert, you’ve got a chance. 😉

What about non-recurring, service revenue?

Founders often cringe at the thought of generating non-recurring revenue, because it doesn’t scale (and investors won’t like it). I get it, but early on this is shortsighted.

If you can get people to pay you for implementation, onboarding/training, support, etc. you should. Product customization is different (and needs to be thought about carefully). Honestly, any revenue in the early days is better than no revenue. And service revenue is still a signal of willingness to pay. It’s also an opportunity to learn and get paid while doing so.

As your startup scales, you don’t want non-recurring revenue to be a big percentage, but don’t shy away from it. In 2023, Salesforce had $2.33 billion in professional services revenue, representing 7.5% of its total revenue. That’s not a huge percentage, but it’s still $2.33 billion dollars!

I think of service revenue in the same category as pilot revenue. Often for enterprise software, you’ll be asked by clients to run a pilot first. Get them to pay for it. As Jason Lemkin from SaaStr wrote, “If you don’t charge, it’s not a pilot. It’s an extended demo.”

7. Don’t overcomplicate

Early on, keep pricing simple. During a customer interview, you might only present one price. Then test different prices with different customers.

Customer, “How much?”

Founder, “$50,000 per year.”

Customer, “Are you insane? I’d only pay $25,000.”

Founder, “$25,000 it is.” (You probably wouldn’t say this, but you can use it as a data point for the next customer interview.)

At launch you may have the standard 3 (or 4) price plans, but this assumes you’ve figured out how to price different product tiers. Or you’ll have one monthly fee + usage-based pricing on top of that (which creates variability and helps you figure out if you can increase contract values).

Tyler Gaffney, previously FirstRound Capital’s Sales Expert in Residence, sums it up nicely:

“…many startups’ early pricing pitfalls are rooted in trying to innovate too much on pricing structure. In competitive markets, customers are used to buying in a certain way, such as a monthly fee or per transaction. Anything far afield, such as charging per API call, can be a high barrier for customers to understand and adapt,” says Gaffney. “Similarly, there can be too many complexities around pricing itself. For example, one company Entrepid worked with wanted to charge companies on a per-location basis, but the industry was accustomed to being charged per employee. Many prospects just couldn't wrap their heads around it, and would back into the numbers anyway.”

Early on, your job isn’t to maximize revenue per customer or design the perfect pricing model—it’s to get anyone to pay anything for what you’re selling.

• Ideally the “anyone” becomes a clear and precise ICP, so you can repeatably find and convert them.

• Ideally the “pay anything” becomes a profitable price point that expands naturally as product usage/stickiness increases.

• But at the start, use basic methods (customer interviews, competitor pricing, price anchoring) to figure out what to charge.

Pricing can get complex. It’ll change over time. Your entire business model may change as you grow. There are a number of detailed strategies for evaluating pricing, and I’ve included a few resources below:

• The Ultimate Guide to Pricing Strategies & Models - Allie Decker (Hubspot)

• The Ultimate B2B SaaS Pricing Guide for early-stage startups - Alexander Estner

• SaaS Pricing Strategies that Work - Amanda Beaty (SaaStr)

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