Getting the price right for your new B2B product or service is a massively important part of startup success or failure.
There are three parts to consider.
• What’s your end goal?
• Look at how customers view value
• Configuring the pricing strategy
If you’re an entrepreneur, hear Amadeus tech investor Nick Kingsbury’s advice on how to tackle this issue in this video and accompanying Q&A.
What kind of businesses are you thinking of for this type of approach?
Classically B2B software companies but this advice can apply to many other types of business. When was the last time you actually bought music that you owned?
Increasingly, it can apply to hardware plays as well – consider renting the product, making your profit from consumables or metering usage. (See my hardware video for more).
What value progression should you aim for with a customer?
The chart is just an example, the time frame and the increments are illustrative, but the key point is how the revenue compounds. The first chart shows one customer that buys a little extra every couple of months or so – maybe more users or add-on functionality.
The next one shows additional customers kicking in each month, following a similar revenue progression with the green line showing the total. Cool!
The customer should be susceptible to this approach as the ratio between the value they demand and the price changes over time. See the chart. In effect, they price in the risk of dealing with a supplier they don’t know or trust yet.
How can I get to this outcome?
First, recognise that getting your pricing right is a journey; don’t expect to nail it at a point in time. Make sure you give yourself options to change – that the price is time-limited and that you define what is included. The customer shouldn’t expect that wonderful innovation you just built to be folded into the existing product for no extra charge.
Second, it is always easier to reduce the price than increase it, so err on the side of a high price even if you give early customers a discount.
Third, consider the Freemium model. Provide the product free for a period before customers pay or have a free “lite” version with serious users paying to upgrade. You do need to understand the cost to you of those free customers, both in selling and in post-sale support; if it’s a complex product you can end up doing much work for no return.
Finally, for certain products there is always the option of algorithm-based price optimisation or dynamic pricing, an art perfected by budget airlines. A couple of start-ups have tech in this area, e.g., PACE for hotel room pricing and Blackcurve for online sales for businesses with large inventories.