As a startup mentor, one of the most frequent questions I get asked is: "How should my B2B startup price its product or service?" The basic principle is straightforward: create value that users recognize, and then set your price lower than that perceived value.
However, the questions that truly puzzle founders are, "How much lower?" and "How do I even know how much value I'm providing?" In the early stages, the focus should be on continuously increasing the value you deliver to your users. This means that initially, it's perfectly fine to have a very low price point.
The key is to use "pricing deadlines" to create opportunities for future price increases. For example, you could say, "This quote is valid for three months," or "This contract is for an initial term of three months." By doing this, regardless of your initial price, as the value you provide grows and users become more invested, gradually raising your prices will feel natural and justified.
The reason many founders struggle with pricing is that they are unsure about the actual value they're currently offering. They also wonder if their price should be as close to that value as possible.
To help simplify this, here are two frameworks that B2B founders can easily use to understand and implement their pricing strategy:
Framework 1: Use the PPPP Framework(I coined the terms) to Identify and Quantify Customer Value
This framework guides you through four key aspects to deeply understand your customers, allowing you to calculate the value they perceive and that can be quantified:
P: Position: Who is your customer? Which individuals within the company are the decision-makers, users, and buyers? Understanding the perspectives of each role is crucial.
P: Problem: What is the clear problem scenario and the need scenario that your potential customers are facing? What are they trying to achieve?
P: Present: How are they currently solving this problem? What resources – time, money, personnel – are they investing in their existing solutions?
P: Product: How does your product or service solve their problem? Compared to their current solutions, what costs will they save (cost reduction), and what benefits or efficiencies will they gain (value creation)?
By answering these four "P" questions, you can synthesize a quantifiable value, encompassing both cost savings and increased benefits, and translate it into a financial figure.
If the answers to these questions are unclear, your immediate priority is to thoroughly understand your customers. Conduct research and have conversations until you have clear answers.
Before you have this clarity, you can follow the basic pricing principles: price a little lower, set time limits on your quotes, and contract durations, while consistently working to increase customer value, thus paving the way for future price increases.
Framework 2: Set Your Price Range Based on Quantified Value
Once you have determined the quantifiable value that customers gain from using your product (let's say it's $100), a reasonable pricing range for your product could be between 1/4 and 1/3 of that value, i.e., $25 to $33. There are two main reasons for this:
Customer Satisfaction: Your product's price is significantly lower than the value they perceive (their willingness to pay), which will make customers feel they are getting a great deal and will encourage purchasing decisions.
Return on Investment (ROI): When businesses make decisions, ROI is a critical factor. If a customer invests $25 in your product and receives a $100 return, the ROI will be very attractive (Return = $100, Investment = $25, ROI = 400%). This compelling ROI can significantly speed up the decision-making process and make it easier for customers to approve your solution.
In conclusion, a B2B startup's pricing strategy should be centered around understanding and quantifying customer value. By deeply analyzing your customers' needs and current situations, you can more accurately assess the tangible value your product or service offers.
In the early stages, a flexible pricing approach and a continuous focus on increasing customer value are paramount. As your understanding of customer value deepens and your product and service evolve, gradually adjusting your prices will be key to achieving sustainable growth.