“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 third installment to a 4 part mini series by Aaron Ross on how to get to your first million as a startup. We are honored to have Aaron contribute to our Sales4Startups community, we hope you enjoy it as much as we have!
How should you price your products — especially your enterprise level?
Getting your pricing right is often – or always – confusing and frustrating. Many companies end up missing out on a lot of revenue by under-pricing.
Here are a couple of approaches you can use when pricing…
It’s easier to get started with “bottoms-up”, comparative pricing.
I mean, all you have to do is take a look at what people are paying for anything similar to what you’re offering; this gives you a useful baseline for expectations.
For example, most B2B software-as-a-service companies charge between $20 and $60 a month per general user. After seeing lots of services priced this way, buyers naturally expect similar services to charge similar amounts. You can charge more, but you’ll need a solid justification for it (I’ll get to that).
Come up with a few products or packages, guesstimate the prices, and bounce them off of live prospects. There’s no secret formula or 7-step magic system for this — just make it up as you go along, try things to see what works. (Shhh – here’s a secret – this is a key to success in life too!) It won’t take long to get the data you need, or to get a feel for what’s working and what needs adjusting.
OK – so that’t not much of a new idea. Now for the one that most companies miss…
A bolder move: “top-down”, value-based pricing.
If you have a good feeling for the impact your product or service can have on customers, try pricing them backwards: first set the price, then figure out who’ll need & value it enough to pay your price. In this scenario, your costs shouldn’t matter. If you can tell something is worth $1,000,000 to an ideal buyer, what does it matter if your costs are $100,000 or $10,000? Charge $1,000,000!
Focus on your ideal customers and prospects. Maybe anyone can use what you’ve got, but who would find it especially valuable? Who needs it? What is the impact you can help create? What is the dollar value you can justify because of that impact?
These ideas can apply to your $50 general users (perhaps you should rethink that and charge $125?) and your $150,000 enterprise customers (perhaps you should really charge $750,000?).
Now, this only works when you’re different or unique enough and people believe your value and the expected results. That is, just because you claim “x, y and z” doesn’t mean people will believe your claims.
Another side benefit of this: when you imagine setting a high price, it forces you to imagine how you’d deliver enough value to customers to justify it!
For many of you, especially if you’re too early to have much of a customer based, this “backwards” / value-based pricing is still useful even as a thought exercise that challenges how you think about your customers and your value to them.
Simplicity > Perfection
High-end pricing and deals can get complex. Keep pricing as simple as you can. While a complicated pricing structure may ‘perfectly’ capture revenue – at least in theory – but in reality, complex pricing makes it hard for customers to buy.
(This is similar to having rocket-science compensation plans for salespeople that work perfectly in a spreadsheet or on a whiteboard, but in practical reality just confuse people and create frustration. “Perfection” isn’t possible or worth it.)
When you need to decide between simpler pricing and ‘perfect’ pricing, go simple, and accept that some people will just get a great deal from it, but you’ll make it up with more wins.
Don’t let fear keep you stagnant
It’s hard getting your pricing ‘right’ – you have to keep learning what results your customers get out of your product, and trying out new pricing ideas with prospects. You’ll rarely lose a deal over it.
Much worse being afraid to try new pricing ideas with customers – and thus not learning anything or evolving!
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: