Pricing strategy is number one on Amadeus investor Nick Kingsbury’s list of tips for startup success.
A successful software entrepreneur himself, Nick explains how, in B2B sales, you can get the ratio right between the time and resources your company puts into securing a sale versus the value of that sale. The “pit of death” is when your cost of sales effort is in danger of eclipsing the value that deal brings in.
Watch the video and check out Nick’s Q&A below for more.
What do you mean by a pricing pit of death?
We are thinking B2B sales here. For a low value purchase (say less than £5000 commitment) the customer can risk making a mistake; the value is low enough that if it does not work out it can be quietly forgotten and written off to experience. If the sale is for £10,000+ then the customer will need to be more cautious; its less easy to write off. If your product is not very easy to understand they will need your time to explain it, maybe with a demo. By the time you have had a few meetings and put in a proposal, your cost in sales effort is in danger of eclipsing the value a £10,000 deal brings in. This is the “pit of death”!
To escape this either price higher so you can afford to spend the time or, if the product can be sold with a very light touch, make it less than £5000.
Please explain the chart.
The X axis is the sale price to the customer in total and, if for a subscription, one year of revenue. The Y axis is the profitability of the deal and, as the sale value creeps up towards £10,000, the profitability is negative, i.e., it costs you more to sell the deal than the return. When the sale value goes above £20,000 there is a return to profitability. This is clearly illustrative not an exact science!
What types of products does this apply to; what scenario are you thinking of here?
It could be business applications targeting a specific vertical market or horizontal software propositions, which could include many cyber security or infrastructure technologies.
Are there exceptions?
If the product is really easy to understand then you may be able to avoid the pit, for example sales force automation, CRM or simple endpoint anti-virus software. Most people you are selling to will understand the capability and so do not need to spend so much of your time getting up to speed.
What about online self-service purchasing?
Yes, that can help, though you will need to spend investment building the on-boarding process and self-help videos etc to make it truly self-service.