Figuring out your pricing for the first time?
You might’ve already scanned the competition, but now you’re wondering what else you can do.
Having been in your shoes countless times, I’ve come up with a series of questions that’ll help any software founder get started.
You’ll still need to validate the pricing strategy, but it will definitely make you feel more confident when quoting those first customers.
The Figure
When setting your price for the first time, the trick is to determine an aspirational contract size for yourself.
How much revenue do you want to generate from your Ideal Customer Profile (ICP) per year?
Once we figure that out, we can reverse-engineer this number into intelligent packaging strategies and price points.
Here are 5 ways to help you narrow down that figure:
1 Competition
What are existing solutions charging? What are the costs of alternatives–including inertia? Do you want to compete with these options based on price, or quality?
2 Business Case
Can you quantify the economic value you create? How much do you save? How much revenue do you help generate? Start by capturing 10–20% of that value. Charging 10–20K for a 100K saving isn’t crazy.
3 Mental Framing
What bucket does your buyer put you in? Are you a nice-to-have or critical infrastructure? Do they compare you with Dropbox or Salesforce? Do they think of you in terms of top-line revenue or cost savings? Any existing budgets that could be allocated to your product?
4 Go-to-Market Motion
Your go-to-market sets your pricing floor.
Product-led growth → €50+ per account per year
Marketing-led growth → €500+ per account per year
Sales-led growth → €5,000+ per account per year
Don’t try to run sales on €50 deals. And don’t expect to close €5K contracts with a self-serve funnel.
5 Funding Model
Bootstrapped? Price to survive. VC-backed? Consider subsidising to capture more market share. Ask yourself: would halving your price double your growth? If not, don’t do it.
Going through these five topics should help you determine a range for your aspirational contract size.
Reverse Engineering
Now that you have a price in mind that your ICP should pay, we can reverse engineer this into the right packaging.
Packaging: Jobs-to-be-done
Buyers generally do not have budgets for features and software. They attain internal budgets to solve problems or jobs-to-be-done (JTBD). If you’re unfamiliar with this concept, I urge you to buy Clayton Christensen’s book ‘Competing Against Luck’.
The question you should ask yourself: what is the very first JTBD (or problem) I solve for all my customers? What’s the sequential JTBD for 60–40% of my customers? And what’s the final JTBD I solve for <30% of my customers?
The key to expanding your customers is packaging that follows a natural sequence rather than one based on customer size or feature sets.
For example, Hubspot starts by centralising all your customer data. Next, you can run marketing campaigns. And finally, you can build dashboards to report to management.
Any problems you solve that aren’t necessarily sequential might serve better as add-ons.
Pricing Variables
Once you’ve designed your packaging, you need to decide what you charge the customer for. Is it access to the platform? Number of users? The actual usage? Or go as far as outcomes?
This is actually not as complicated as you might think. All you have to ask yourself is this: what sets your most successful users apart from the rest? Is it the number of people on the platform? Is it a certain activity? Is there a consistent outcome they pursue?
If there are two drivers, this is a good reason to opt for hybrid pricing.
Example
Let’s say you’re working at OpenAI and you’re responsible for Enterprise Sales. Value is obviously created whenever users get answers. However, that’s not all. The quality of the answers improves over time as the users feed more context into the LLM.
You can decide to charge customers based on the number of queries (usage) AND introduce a platform fee (annual flat-fee) for the “private” LLM.
Price Points
If you’ve executed all the steps above in the right order, the price points should now be relatively easy.
You know how much your ICP should be paying. You know what plan they’re most likely to purchase. You know what variable they’ll be paying for. Divide your contract size by the estimated number of users/usage/outcomes and you’ll have your price points.
While this might come across as an oversimplification, this is the actual tried-and-true process we follow with our clients at RevFixr.
Good luck! And please don’t hesitate to reach out if you want me to take a look at your pricing.
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