Great pricing models make prioritisation easy
When a startup and its customers have the same goals, product development and sales teams can become singularly focused on delivering value to customers. Great pricing models enable this alignment of goals.
Products should be priced based on the value they deliver to customers. Value-based pricing ensures that a startup will make more money when it delivers more value. Therefore, a startup is incentivised to constantly strive to deliver more value to customers. Most business-to-business software products deliver value to customers by increasing revenue or reducing operating costs for their customers. These startups should charge based on the revenue and cost savings they deliver.
For example, a point-of-sale solution for hospitality businesses captures payments to deliver revenue. It can also streamline the customer service experience to reduce operating costs, leading to additional revenue because it enables more customers to be served.
Value-based pricing for this point-of-sale product would align software fees with the amount of revenue and cost savings delivered by the product. This aligns your startup’s goals with your customers’ goals: product development efforts that increase customer revenue will automatically increase the revenue for your startup. The same goes for reducing operating costs.
Prioritisation is an unwinnable game when the initiatives that will best benefit your customers differ from those that will best benefit your startup. If you build what customers want without delivering positive outcomes for your own business, your business is at risk. If you build exclusively to benefit your startup, you may achieve results in the short term, but eventually, customers will lose faith in you and leave. Bad pricing models are often the cause of this incongruence.
For example, a startup that charges customers for individual features is incentivised to build and sell features. On the surface, this looks like aligned incentives. Customers want features. By building and selling new features, startups can make more money. Everybody wins, right? Unfortunately, this view is detached from reality.
Product development teams that constantly build new features and products end up with broad, feature-rich, but mediocre and difficult-to-maintain products. Furthermore, additional features aren’t always what customers need (even if they tell you otherwise). Similarly, sales teams that can only deliver by selling more features to each customer inevitably end up selling unneeded features. This isn’t good for customers.
The goal should be to deliver value by solving real problems. New features might be nice, and they might even be delightful, but they aren’t guaranteed to deliver outcomes to the businesses a startup supports.
How to price your product
Most B2B software products deliver value to customers by increasing revenue or reducing operating costs for their customers. Some do both. The best way to price your product is to first quantify the impact it has on these outcomes and then capture some of the value you are creating by pricing accordingly.
If your product primarily generates revenue for its users, it is critical to measure and attribute this revenue. Metrics like conversion rates play into this measurement. By measuring the revenue you are bringing in for your customers, you can authoritatively justify the value you are creating for them. This allows you to align pricing with value (you could charge a percentage of revenue you generate). It also makes it easier to sell your product by using real metrics and case studies within your sales conversations.
It is more challenging to measure your impact on operating costs. One way is to estimate the number of hours saved. This can be done through information gathering during the sales process (ask your customers how much time they are spending on relevant tasks) and try to measure these same numbers within your product. Compare before-and-after results to calculate savings. Another way is through productivity metrics, like how many operations a user can complete over a given time period. For example, an email help desk software might measure how many support cases are completed each day. Over time, they should aim to improve the productivity of support teams and measure the impact their product development efforts have on these productivity numbers. Savings should be articulated in hours saved. You can also estimate actual cost savings by considering the cost of the hours you are saving (i.e., look at the salaries of the people you are making more productive).
For something that startups pay little attention to, pricing greatly impacts business outcomes like growth, revenue, profitability, and viability. Second-order consequences like incentives are just as important. Companies that have failed to align their interests with the interests of their customers struggle to deliver value while improving their business. Startups with fantastic goal alignment with their customers find it comparatively easy to prioritise work.
29 January, 2023
Subscribe for updates
Subscribe for weekly advice covering product strategy, development operations, building teams and more.
Privacy and terms
I care about privacy as much as you do. I will only use your email address to send you this newsletter or to reach out to you directly, and you can unsubscribe at any time. I will not share, sell, or rent your email address to any third party, though I do store it the software I use to dispatch emails.
The information provided on this blog is for informational purposes only and should not be considered investment advice. The content on this blog is not a substitute for professional financial advice. The views and opinions expressed on this blog are solely those of the author and do not necessarily reflect the views of other organizations. The author makes no representations as to the accuracy, completeness, currentness, suitability, or validity of any information on this blog and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its use. The author may hold positions in the companies or products discussed on this blog. Always conduct your own research and consult a financial advisor before making any investment decisions.