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B2B Pricing is one of the most mysterious and ambiguous issues in a B2B Software mid market company. It has no obvious owner, there’s no clear playbook, and you don’t have a lot of data to rely on. On the other hand, pricing is also one of the most important things in a growing company. It affects demand, competitive strategy, and your profitability.
Sale-Led B2B Pricing is becoming more and more complex, due to competitive pressure, the ongoing downmarket and the introduction of usage based pricing. For example, more customers are demanding bespoke price points or a pay-as-you-go usage pricing scheme.
We see a growing frustration by Software executives who are looking for more content and structure. This is why we decided to have this webinar and put some of our thoughts in writing. We both discuss Pricing with B2B Software companies - Marcos at Pricing I/O is guiding companies on how to structure B2B pricing, and Roi at Received is helping companies configure pricing logic and automate the consequent billing and revenue recognition.
In this blog we will present a recap of the discussion we had during the webinar (recording below), augmented with additional thoughts we didn’t have time to address.
B2B Pricing has these extra complexity layers that come when you sell to an organization: risk, reward, and willingness to change. In a B2B sale the stakes are much higher - you make a promise to deliver on a problem for a group of people, and that curve is much longer and riskier.
Most B2B companies are not that good at buying software, as the old saying goes "B2B software is sold, not bought”.
Think about it as a complexity range - self-serve for simple, and sales-led for complex.
Self-Serve is usually straightforward. I want to buy a domain, I do the purchase experience myself on Wix or GoDaddy.
With Sales Led, you don’t necessarily know what is the solution for your problem, you need guidance and education to get a to a stage where you decide what is the solution for you. Think of the difference between hiring someone to mow your lawn and choosing a landscaper. Sales-Led captures nuances, from problem to solution, price is just a component of the whole equation. Oftentimes it's a higher stakes deal, and Self-Serve wouldn't fit that.
Pricing will be super hard if you don’t know what value you’re pricing for. Make sure that you’re as clear as you can get about the problem you're solving, your Customer and Buyer personas, and the value you provide. Also consider your growth in the next 3 years - what will you build? Where will growth come from? Are you gonna go downmarket or upmarket? After doing this exercise, you have a better understanding of current and future customers, and the value proposition. THAT is what you price for.
Make sure that you’re as clear as you can get about the problem you're solving, your Customer and Buyer personas, and the value you provide.
Understanding Customers’ motivation is the foundation. You start with the discovery call to reveal the problem and untapped value, through questions like: ‘what made you look for a solution today? What are you using today? How much does that cost you?’ Peel the onion until you get to where the value is sitting. In that process, you can start to extract some ranges and numbers.
The common wisdom in Software is to price for value. Cost doesn't really matter in Software, but you need to understand fix and variable cost. Competitive pricing can be risky as it can lead to a price war and profit erosion. Value is ideal since you have differentiation, and that will continue to evolve as you grow, so your opportunity for an upside is bigger.
Being more aggressive with your pricing is tricky. Early adopters will not adopt your product because you're cheap. Also, you don’t want to be overly cheap, it’s hard to come back from that. Especially if you think you’ll be the premium product, within the realm of alternatives, price within a 20% range from competition, maybe giving early adopters a heavy discount, within the 40% range.
Competitive based Pricing can work when you still don’t know your value. In other words, don’t price to value, if you don’t know your value. Never guess. If you are pretty similar to a competitor, use competitor based pricing. Most companies do this, starting with a competitor's price point, and adding or subtracting 10-20%. This is appropriate for a new company or product. Once you start to differentiate - price to value you bring to market.
If you don’t know your value - never guess, go for competitive based pricing.
You can take a percentage off performance, when you can concretely tie your product to the incremental performance. It works well when you help customers access or gain additional revenue, leads, collections, for example. It will not make sense when you don’t help lift revenue, customers will push back. It will feel like a tax and they will want to get rid of your product.
There are 4 elements to Value based pricing: a) Revenue Generation - I’m helping you make more money, b) Cost Savings - I saving you money. This is where the bar is very high since, software is bought to save time, that’s the basis to exist, c) Avoidance - avoid penalties, agency fee, some expense that is not in the blood stream now.
After you calculated the value created, now you need to discount the lift - installation, onboarding, man hours - the cost that goes into adopting your software. There is an Exchange Rate that customers are expecting to see. That exchange rate is Price/Value that is a norm in the market. They can be using that money to hire an employee, so the exchange rate that they are expecting is pretty high. The exchange rate range that customers are looking for in B2B Sales in the 1:7 to 1:20 range. The bigger the Customer is, the lower the exchange rate can be - Enterprise can go down to 1:7, while SMBs demand as much as 1:20 exchange rate.
That exchange rate is Price/Value that is a norm in the market. The bigger the Customer is, the lower the exchange rate can be.
You need to calculate that value across a 3 year period. Often - the first year is an adjustment, 2nd year picking up, and year 3 is where the value shines. The value period depends on the size of Customer and complexity of the product. You can dial it back for 2 years for a mid-market.
In this first part of our webinar recap, we've delved into the complexities of pricing in the B2B software industry, exploring the differences between B2B and B2C pricing, the importance of understanding value, and various pricing theories.
But, as they say, the plot thickens, and there's more to uncover in part two of our journey.
In the next part, we'll dive deeper into sales-led and custom pricing strategies, pricing transparency, common pricing challenges and valuable insights to help you navigate the intricate landscape of B2B pricing.