Pricing

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Updated August 22, 2022
Founding Sales

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Pricing is a funny thing. It could be considered part of your narrative, or it could be considered part of your sales materials. In a way, it’s the conclusion of the narrative arc for your solution: “And because of all this, you should pay us this for the right to access our solution.” While pricing is something that is likely to change—usually going up as you gain more functionality, or getting more nuanced as you segment your solution—it’s definitely something that you’ll want to have nailed down, at least in an initial version, when you start having sales conversations.

importantFirst, I think it’s important to charge, even at the outset. If you don’t charge, people won’t take you seriously or think hard about whether your solution provides them value. They also likely won’t use the solution. It’s no skin off their backs, and they’re not paying for it, so why should they invest time in it? This isn’t to say that you have to charge an arm and a leg or that you can’t do a freemium approach, where there is a free initial period or volume of usage. And it doesn’t mean that you can’t have a set of lighthouse customers early on that pay for their license fees with engaged, ongoing, validated feedback. But you definitely should charge for your solution. Founders frequently kick the can down the road on this issue because they don’t want to hear someone say no to them. But you’re not doing yourself a favor by avoiding that moment. So figure out an initial price point, and then ask for it. Your solution provides real value to the customer (if it doesn’t, bigger problem), and your engineers need to eat. So charge.

I like to approach pricing in an iterative capacity, biasing toward giving away more value than is captured—at least to start. The goal here is that, early on, you want to get customers in the product, using it and testing your value promises; if your solution is priced to perfection, it will likely hurt your close rates and make acquiring those customers more challenging at the margin. This doesn’t mean that you’ll stick with lowish pricing forever. Rather, as you progress, with each incremental conversation, you’ll be getting more information about how the market reacts to your pricing. If you present your product for ~$100 per seat per month, and no one bats an eye, well, maybe next time make it ~$150! At TalentBin we started out asking for ~$99 a month just to test the water, then moved that to ~$199, ~$299, ~$399, and then ~$499 a month, with an annual contract, paid up front. But we pushed this up over time (not to mention, the product was getting better by leaps as we went).

Once you start to raise prices, don’t worry about those early customers that you have at 20% or 50% of your eventual pricing; there are tens of thousands of other customers in the world that will pay full price. Just grandfather those existing folks in and thank them for their early votes of confidence. No reason to punish them for being early believers. In fact, this can be a means by which to get people to jump and buy now: “Well, it’s five hundred a month right now, but as we add functionality, that may go up. Of course, if you buy now, you would be grandfathered in at that price.”

Approaches to Pricing

In terms of taking early shots at pricing, there are a couple of ways to think about it. It’s more art than science early on, and you’ll typically blend a number of data points together. But these approaches can help you get started.

Existing Solutions Comparison

Since your solution is likely addressing an existing pain point in the market, a great place to look for guideposts on pricing is existing products.

exampleWith TalentBin, we found strong comparators in the form of resume search databases like Dice.com’s resume search, or quasi-social-network profile-search and CRM tools like LinkedIn Recruiter. Both are priced on a per-seat basis, with certain usage limits (profile views and message sends). As such, it was easy to position TalentBin on a per-seat basis for recruiters, because they were used to that. Even better, because LinkedIn charges up front for their annual contracts, that was the default in the minds of the customer base and something that we could take advantage of in our pricing.

By looking at existing solutions, you can also understand what the current market is used to paying for a set amount of value.

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exampleTo go back to TalentBin, when we started out, a seat of LinkedIn Recruiter was ~$8K a year for a technical recruiter focused on engineering hiring (~$5K for an agency recruiter); the product gave a certain amount of search recall for certain types of talent (“Ruby engineer in Dallas, Texas” might bring back 4K results) and allowed 100 InMail outreach messages a month. TalentBin, on the other hand, would give a recruiter a range of 2–5x the search recall, including candidates’ direct email addresses, and unlimited outreach volume.

So one could argue that for a recruiter focused purely on technical recruiting, TalentBin might be worth much more than LinkedIn Recruiter. Of course, TalentBin was just a small upstart when we were having our initial sales conversations, so this is an example of optimizing to provide more value to the customer than you take. Our pricing ended up being ~$6K per seat per year for most of the time before we were acquired. In this case, the goal was to get the prospect thinking, “Wow, this smokes LinkedIn Recruiter for tech hiring, and it’s 25% cheaper? I’ll give it a shot.”

Another compelling reason to look at how existing solutions are priced is that there is likely a rationale behind those pricing decisions, which you may not have figured out yet. Your solution is likely a better way of doing things via some sort of technical innovation; trying to do pricing innovation at the same time is often a distraction—one innovation at a time, please.

Take a second to think about what the comparators in the market might be for your solution and their pricing. If you don’t know, go figure it out and use it to inform your thinking.

ROI and Value Pricing

Another, more advanced, way to do pricing is ROI pricing—determining the amount of value you expect to provide for the prospect and setting your price to capture some of that value. That’s not to say that pricing would change on a customer-by-customer basis necessarily (that adds unnecessary complication). But it means that you would be aiming to provide a certain amount of value above and beyond the cost of your solution.

exampleA great example of this is HIRABL, a company that makes recruiting agency revenue-acceleration tools. One of the things they do is help recruiting agencies identify missed fees, where a client does not report that they hired a candidate submitted by the agency. Remember, agency fees are usually 10–25% of a candidate’s first-year salary, and as such can be between ~$10K and ~$30K. Based on their massive dataset of submission data crossed with missed fee identification and missed fee capture, HIRABL knows that across the board there’s typically one recoverable missed fee per 500 candidate submissions. Because of this, they are able to price their solution based on the number of submissions that they will be monitoring for a recruiting agency, using an average fee of ~$15,000 and that 1 in 500 ratio, and have a very high confidence that their customers will get a 10x return on their investment. If HIRABL is charging ~$20K to a recruiting agency for a year of monitoring, they know that the agency will recover around ~$200K of fees over the term of the contract. Some agencies may make out like gangbusters and get a 15x ROI on the solution, and others might only get 6x. Later we’ll talk about recording these instances of captured value, but the idea here is to peg pricing in a way that correlates price with value.

exampleYou might be wondering, “Well, if you’re going to do pricing directionally based on value capture, why not charge specifically based on the actual value captured?” In the case of HIRABL, why not charge a percentage of actually recovered fees? While compelling in principle, the challenge there comes in reporting—in instrumenting the actual value that was captured. And while you can architect your product to record ROI signifiers (by marking a fee as recovered), this creates a situation where not only is the onus of usage taken off the shoulders of the customer, but there is also an incentive to hide captured value. Better to keep it simple and charge a known price, based on a defensible ROI model.

This sort of pricing can be challenging if you’re too early to have a solid ROI case. First, this shows you how important it is to understand the dollars-and-cents value that you are providing to the customer and to think about how you can actually prove the ROI case. (Can you do your own experiments at scale to see how your solution raises or lowers a key metric associated with a known value?) Second, this is why it may be most effective to use a mix of approaches—like blending pricing from existing solutions and your ROI proof understanding. If you know that your job-posting solution doubles the number of qualified applicants that show up for an engineering role based on your own experiments, maybe you charge 150% of the price of that other solution.

Value Alignment and Thresholding

Another approach to pricing is an extension of this ROI-based mindset—aligning your pricing to the value provided to the prospect. This might be something like the model that Dropbox or Box use, where the more storage you use, the more it costs. Or you might approach it like Marketo, Eloqua, Act-On, or HubSpot, where the more contacts you are drip marketing to, the more the solution costs. This structure has the advantage of allowing a customer to start small (either with a small portion of their total demand, or because their total demand just isn’t that large) and then grow—ensuring that the price you capture from them grows in step with the value they’re deriving from the solution.

This is especially important if you’re using a trial or freemium approach to selling your solution (more on trials and pilots later). You want to make sure that you can turn on the pricing at the point that the customer has gotten definite value. Yesware offers a free version of their product that allows users to track outbound emails. If you track above a certain number, though, they prevent you from tracking more that month. The idea is that if you’re tracking a high number of outbound emails, you’re likely a sales or recruiting professional and getting definite value from these tracking events. LinkedIn does something similar; if you use your free account to do more than a certain number of searches or view more than a certain number of profiles, they will prompt you to pay.

With your solution, can you align value and threshold in a way that eases your entry into organizations, while at the same time positioning you well for growth?

Beware Pricing to Perfection

cautionWe touched on this above, but you want to be careful about pricing to perfection. Watch out for charging such a high price that all the stars have to align for the prospect to get a sufficient amount of value out of your solution to be satisfied—or, before then, for the prospect to even believe that they could get the requisite value. On the one hand, you don’t want to give your product away, but pricing too high will work against you in a number of ways.

First, it will hurt your win rates. A prospect can totally be on board with the pain you’re solving and believe that you will solve it for them, but if you are charging so much that they don’t believe that the ratio of pain solved to money paid is in balance, they won’t buy. You’ll see this in scenarios where the prospect has nodded in agreement with all of your pitches, only to seriously blanch when you get to a pricing conversation. It’s a balance. You don’t want prospects to say, “Oh, that’s easy, sure” when you tell them pricing, because then you’re leaving money on the table. But if you’re charging through the nose, and your win rates are suffering, reconsider. This is why it’s often good to start low and raise pricing until you get to the point where you see it becoming a serious drag on closing conversations.

examplePricing too high also hurts your churn rate. If customers aren’t getting sufficient value from your solution compared to the price, at the end of their term (whether a year or a month), they simply won’t renew. So the onus is definitely on you to make sure they are using the product and also deriving sufficient value from it—like HIRABL making sure that their clients are collecting missed fees that have been identified. (We’ll talk about this more in the chapter on implementation and customer success.)

But if you’ve priced to perfection, it will put substantial pressure on your product and your customer success apparatus to make sure value is delivered, lest the account churn out. You can often see this proved out with low-priced products like Reputation.com that try to hook customers at ~$9.99 a month. Then they make it just difficult enough to cancel that it’s never worth ~$9.99 of your time to try to do so, even though most users get zero value from it. Most of the people reading this will have enterprise and B2B solutions that actually provide value, but this example proves the point that the value provided and the price charged need to be in alignment, or else you’ll see serious churn.

Wait to Start Segmenting

This is where founders can get into trouble. Like indexing off of mature companies’ sales collateral, there’s an impulse to index off of Box’s, Slack’s, or Salesforce’s pricing pages. You see that they all have three options—and one marked “Most Popular!”—and feel that you need to have that too. Resist the urge. They’ve been doing this for years. They know which segments of customers care about which features and usage volumes. And they likely have a number of customer segments. You, on the other hand, probably don’t have either.

First, you need to be focused on your ideal customer profile right now (which we’ll discuss at length in Early Prospecting. You won’t want to be engaging in sales conversations with accounts that are substantially different from one another. So even if you knew the features and usage patterns that could be used to price discriminate, you don’t need to be talking about different prospect profiles to begin with. Second, you probably have no idea which features matter for which customer segments. Deal with it down the road! Not right now. Segmenting your solution can be a great approach later on to extract better pricing out of higher-end clients who are price insensitive. But early on, it’s usually a distraction.

Pricing is an iterative process where you learn more about what parts of your product matter, and how much, over time. Like other sales materials, you don’t want to view it as done, nor feel that it needs to be perfect before you start using it. But you do need to have it.

Putting Your Narrative Together

You don’t have to take these constituent parts and write them into a page-long meditation, put it on a shelf, and never touch it again or have a holistic messaging document that you deliver verbatim. But it’s good to have a concept of what the narrative looks like, summed up, all together. Again, the narrative actually exists separate from whatever medium you end up collateralizing it in, whether slides, video, messaging, and so on. Whatever collateral you use, though, you need to be able to tell a coherent story.

Test yourself by experimenting with an elevator pitch, or how you might explain your story to someone you met at a cocktail party who has intimacy with the space you’re working in. This won’t be a full treatise, but rather the first skeleton of your story. Then, based on your interaction with the listener, as they ask more questions here or there, you can expand—because you’re deeply familiar with the details that underlie the cursory overview.

Another great exercise is to try writing it down to see if you can incorporate all of the pieces we’ve covered. So what would this look like? Let’s consider a couple approaches.

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