“Get To Your First Million” is a mini-series of consultations with Aaron Ross, CEO of Predictable Revenue Inc., former sales director at Salesforce.com, and author of the best-selling book, Predictable Revenue: Turn Your Business Into A Sales Machine With The $100 Million Best Practices Of Salesforce.com
This is the second installment to a 4 part mini series by Aaron Ross on how to get to your first million as a startup. We are once again honored to have Aaron contribute to our Sales4Startups community, enjoy!
“What kinds of pricing or packaging options generate the most revenue?”
While some people have done it, it’s hard (and rare) to build a big business solely out of small customers and deals – the basic math is challenging.
Let’s say your company has three pricing tiers:
1) $50 a month for individuals
2) A medium tier that’s a few hundred to $1000 a month
3) A high-end enterprise level priced at $10,000+ a month
A single $10,000 a month deal (or $20,000, or $100,000) is worth a lot of $50-a-month deals! Yeah, they will need extra services and attention, but so what?
I’ve often seen that, with clients or in my own consulting business, it can take as much time and effort for a customer to decide on a $250,000 deal as a $2,500 or $25,000 deal.
Where Early-Stage Companies Miss Out
Where I think most early-stage companies go wrong, is by a) under-pricing themselves or not having a high-enough priced top-tier package, or b) not being serious about landing big deals. There are a lot of reasons for this, including a lack of confidence about value or pricing, having no idea about how business sales work (which creates a fear of doing it), a desire to avoid “selling,” and a desire to build a pure self-service/self-selling company.
The Hard Reality Of Funnel Math
The disappointing reality for most first-time entrepreneurs is that a lot fewer visitors to your website convert into active users than expected, and a lot fewer active users convert to paying customers than expected.
Let’s say you’re a software company. If 5% of your website visitors become active users of a free entry product (not just downloaders or registrants), and 2% become paying customers, that means 1 out of 1000 visitors turns into a paying customer. If your product is $10 a month, you need 10 million website visitors to generate your first million in revenue!
Then, adding insult to injury, your attrition for little deals ends up being brutal. It’s common for early companies serving small customers to lose 5% of your customers per month (a 5% churn) through cancellations, expired credit cards and such – which means you need to increase your customers by 60% a year (and another 6 million visitors) just to stay even.
Small Customers’ Value Isn’t In The Revenue
Small customers are valuable, too, beyond any revenue they bring in. They can be champions for your company; they can refer others to your business. They’ll often give you useful product feedback, they’re willing to develop add-on ideas, code, features, and content for you. Small customers can be enjoyable to work with, satisfying to help, and they may seed larger deals.
Just be careful expecting small customers to drive a lot of revenue for you in b2b.
Why Have A High Price / Enterprise Option?
Now, for lead generation, you need some free, easy or affordable ways for prospective customers to kick the tires and get to know you. This could be a free or cheap product, a free trial, or free content.
It’s a lot easier to double revenue by doubling your price or deal size than by doubling your customer base (especially if you’re in professional services, when your product is related to your time!).
And for many of you, your free or cheap offerings are purely lead generation for bigger deals and higher prices.
(This is why I dropped the price of the Kindle version of Predictable Revenue from $10 to $0.99 to make it a no-brainer to buy. Losing a few thousand dollars in book sales is worth it if it triples my audience.)
To build a $1 million business, you need 10,000 $100 customers (ouch!) or just 10 $100,000 customers. By the way, your attrition will usually be lower and customer success rates higher with the high-end customers, because they’re more financially stable, committed, and have resources.
Now, this isn’t a choice between business models, because for most of you the best path is to have both options: a) a low-end, mostly for lead generation and to pay the bills, and b) medium and/or high-end packages to drive the bulk of your revenue.
If you have 10,000 $100 customers = $1 million in revenue. But if only 1% (100) of them end up being “Ideal High-End Customers” who are paying $10,000…you’ve now doubled your revenue to $2 million.
A high-priced offering, priced higher than you’re comfortable with, can not only drive a lot more revenue from fewer customers, it can increase your perceived value in pricing negotiations. If your top offering is $10,000 per month, it sounds a lot cheaper when they ask about your medium offering, which is $1,000 a month. (The psychological principle is called anchoring.)
If you have a $20 a month product, and a team or corporation wants to buy it in bulk, you should create a $40 a month corporate version with extra features or services ( = extra value). It also gives you more room to negotiate pricing and give them a deal they’re excited about.
Fears In Selling Big Deals
I know a lot of fears often come up with early entrepreneurs around “selling” or hiring salespeople, or selling big deals. “Are we worth it?” “Can we do it?” “I don’t want to push anyone.” “I just want people to come and buy.”
Being able to sell bigger deals can be essential to your success — whatever your concerns are, keep that in mind.
Selling can be noble; you can make a big difference to your people and your customers. Realize that most companies need help making good decisions and in buying, in which you or your salespeople can be a big help.
The best salespeople and teams aren’t pushy, greedy, annoying or manipulative – they are honest, sincere, passionate about their product, and expert in teaching customers how to make good decisions.
The Bottom Line
Value your small and free customers, but don’t expect a lot of revenue from them. Make sure you also have a high-priced tier (or tiers), or packages design for large bulk sales, designed for “ideal” companies who need what you have and who have the money to pay for it – preferably cash up front! Don’t be afraid to “sell” – know that companies need your help making decisions and buying, and you or your salespeople should be helpful experts in this. Be bold in your pricing, think “10x” (See this related Predictable Revenue article: “10x”.)
First Million #1 -
For those of you interested in learning more about how Aaron did what he did at Salesforce.com and how you can apply the same methods to your company, I highly recommend reading his book:
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