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Original video link:

https://www.youtube.com/watch?v=4hjiRmgmHiU

https://www.youtube.com/watch?v=0fKYVl12VTA

Text: Web3 Sky City·City Lord

Preface:

YC has a wonderful series of videos on the Startup School, where YC partners talk about the pitfalls and pain points of the startup period. Each episode is less than 20 minutes long, but every word is informative. I think two of the recent episodes are particularly good and need to be sorted out and shared with everyone.

These two issues respectively talk about how to conduct enterprise-level sales and how to price B2B products. They are both very interesting and provide AI startup teams facing enterprise customers with a concise introduction to enterprise sales and B2B product pricing strategies. As far as the city lord knows, this is indeed a valuable system information, which is worth reading for all teams that have just entered the B2B field.

Share with you the main content of the two lectures, as well as the full text + video.

Bilibili: [Fine School] Corporate Sales for Startups | YC Startup School 2024.7 Chinese-English [Chinese-English] - Bilibili

https://b23.tv/EHc2R6P

In the "Enterprise Sales" talk, Y Combinator team partner Pete Koomen shared the key steps for startups to successfully close their first enterprise customer transactions. As the co-founder and CTO of Optimizely, Pete took a deep dive into the complete sales process from prospecting to final implementation, drawing on his own entrepreneurial experience. This talk provides practical tactical advice for founders with a technical background and reveals counterintuitive lessons in enterprise sales to help startups succeed in a highly competitive market.

As Pete said, although sales may not be the most familiar area for technical founders, it is a skill that can be learned. By mastering the core skills of customer prospecting, cold outreach, product demonstration, pricing negotiation and final closing, founders can gradually build strong sales capabilities to drive the company's continued growth.

Sales is an irreplaceable skill for founders：

Startup founders, especially those with a technical background, must personally participate in sales. Sales before product-market fit (PMF) is essentially a startup that requires founders to personally explore the market, build customer relationships, and conduct repeated trials. Sales at this stage are completely different from sales after PMF, and require more foresight from the founders and close interaction with customers.

Exploration and Hypothesis：

The sales process starts with customer prospecting. Founders should identify potential customers based on their hypotheses, clarify their problems and the value that the product can bring to them. Pete recommends using tools such as Apollo and LinkedIn Sales Navigator to mine potential customers and narrow down the scope of target customers through industry lists and filtering criteria.

Outreach Strategies and Avoiding Anti-Patterns：

The goal of outreach is to get the attention of potential customers and arrange meetings. Pete emphasized that cold outreach should avoid templates and should be handwritten emails, keeping them short, clear and personalized. He also pointed out that founders should avoid wasting time with unsuitable customers, especially when selling problem solutions for large enterprises in startups, and should focus on dialogues with customers who have budgets and decision-making power.

Initial call and qualification review：

The focus of the initial call is not to sell the product, but to assess the customer's needs, budget and decision-making power. Asking questions to understand the customer's problems and purchasing process will help avoid wasting time on unsuitable customers. The key at this stage is to listen to the customer's needs and make sure they really need your product.

Product Demonstration and Personalization：

Product demonstrations should revolve around customer problems and tell how the product can solve these problems. Pete suggested that the demonstration be viewed as a script, showing the value of the product through storytelling rather than simply showing the features. He emphasized the personalization of the demonstration and suggested using the customer's actual data and scenarios in the demonstration to make it easier for customers to understand the actual application of the product.

Pricing and transaction strategy：

Pricing is the most challenging part of the sales process. Pete recommends that founders collect data through conversations with customers, such as budgets and competitor pricing, and gradually form a pricing strategy. He also points out that pricing should be set boldly and the market reaction should be tested even if it is uncomfortable. Not only may a high price push customers to take the product more seriously, it can also help founders focus on customers who really need solutions.

Transaction and procurement process management：

Closing a deal is not just about reaching an agreement, but also about dealing with the formal procurement process of a large company. Pete recommends that founders understand the client’s signing process before the procurement process begins and simplify legal documents to speed up the deal. He reminds founders to maintain continuous communication with clients and use clients as internal support to drive the procurement process smoothly.

Implementation and Customer Success：

The final implementation phase is critical. Pete warns founders not to push implementation work onto their customers, but to proactively manage the project to ensure successful adoption. By developing a detailed implementation plan with their customers and managing it as a high-priority internal project, founders can ensure successful adoption and increase renewal rates.

B station transmission: [Fine proofreading] B2B product pricing strategy guide | YC Startup School 2024.8 [Chinese and English] - Bilibili]

https://b23.tv/Us9cBh2

In the "B2B Product Pricing Strategy" lecture, Tom, a partner of Y Combinator, discussed in detail the core strategies and practical operation guidelines for B2B product pricing. For startups, determining product pricing is often a challenging process. Founders need to balance the value, cost and market competition of the product, while considering how to make customers feel that the price is reasonable and ensure the profitability of the company.

Tom uses practical examples and concrete steps to help founders understand how to set prices based on the value equation, avoid common pricing mistakes, and effectively deal with competition. He also emphasizes the importance of keeping pricing simple, and advises startups to test market reactions in a flexible and gradual manner and continuously optimize pricing strategies:

Value equation-based pricing strategy:

Pricing should be based on the actual value the product creates for customers. Tom recommends that founders work with backers to analyze the value of the product in detail, such as cost savings, time savings, or increased revenue. Based on this data, founders can set pricing at 25% to 50% of the value customers get from the product. This approach not only provides customers with a reasonable ROI, but also ensures that the price is persuasive and supports successful validation of the pilot project.

Consider costs and maintain high profit margins：

Tom stressed that pricing should not be based on cost, but should start from the value equation. However, founders must ensure that the price is high enough to maintain a reasonable profit margin, otherwise the business will be unsustainable. He also warned against relying on initial credit lines to ignore the true costs, and advised startups to be vigilant to prevent future difficulties caused by rising costs.

Dealing with competition and avoiding price wars：

When facing market competition, Tom advises founders to avoid getting involved in price wars and instead enhance the competitiveness of their products through differentiation. By demonstrating the uniqueness of their products in functional or industry segments, founders can avoid getting caught in a race to the bottom and ensure that they maintain profit margins in a fierce market environment.

Choosing a pricing structure and matching it with sales channels：

Understand the payment habits of customers and industry standards, choose a suitable pricing structure (such as a fixed monthly fee or per seat pricing), and keep the pricing simple. In addition, the pricing strategy will determine the choice of sales channels. Founders need to ensure that the profit of each contract is enough to cover the cost of the sales team and consider the performance goals of sales representatives.

Pilot Programs and Free Trials Strategies：

For pilot projects, Tom recommends setting a short trial period and measuring the effect with clear success criteria. In contrast, a more effective strategy may be to directly promote annual contracts and provide a money-back guarantee to reduce customer hesitation and convert them into recurring revenue.

Pricing Adjustment and Market Testing：

In the early stages, founders can test the market reaction by gradually increasing the price and evaluate the rationality of the pricing when the closing rate drops by more than 25%. Pricing should be adjusted dynamically with product improvements and market feedback to ensure that the company can achieve maximum market potential at different stages of development.

Advantages for startups：

Startups should not pretend to be a large company, but should use their flexibility and personalized service to attract customers. By connecting directly with founders and getting responsive support, startups can provide unique value that large companies cannot provide.

==Full article: Enterprise Sales for Startups==

My name is Pete Koomen, I'm a YC team partner and a YC alumnus. I'm the co-founder and CTO of Optimizely's Winter 2010 class. In this talk, I'll walk through the process of closing my first enterprise customer deals by focusing on the sequential steps in the sales funnel. These steps include prospecting, outreach, qualification, pricing, closing, and implementation.

I’ll try to provide a ton of tactical advice and counter-intuitive lessons I learned while learning how to sell at Optimizely. I’ll focus on enterprise sales for software startups, but this talk is still broadly useful for any founder just getting started in sales, regardless of the size of your customers or the product you sell.

Why am I giving this talk? First, I know there's a need for this. Sales is a top concern for most of the founders I've worked with at YC. Second, I know from experience that sales is a learnable skill. My co-founder Dan and I both come from technical backgrounds. We knew how to build a product, but we didn't know how to get people to use it. We figured it out through trial and error. That's the first big lesson I'm going to teach you today.

If you are the founder of an early stage startup and you are building a product that you want other businesses to buy, then you have the ability to sell it. That’s the good news. The bad news is that you may be the only one who has the ability to sell your product. That is, if you can’t sell your product yourself initially, then you probably won’t be able to hire someone else to do it for you.

Now, if you’re like us, you might be thinking, there are a lot of talented salespeople out there. Wouldn’t it be faster to hire one than to try it yourself? After all, that’s probably what you would have done in another role like a designer, lawyer, or accountant. The problem is that sales before you find product-market fit is very different from sales after you find product-market fit. Sales before PMF is fundamentally entrepreneurial. It requires vision and trust in your customers, as well as lots of experimentation and tight feedback loops with the people building the product. That’s the role of the founder.

So does this mean that if you are a team of technical founders building a product, you should go get a business co-founder to do sales? You probably don’t need a business co-founder to do sales either. I’ve worked with many technical founders who later discovered that they were really good at sales. In some cases, it was very surprising to them.

So why? If you are a technical founder building a product, you have several advantages that will give you a big advantage in sales. First, you are an expert, both in the problem you are solving and the product you are building. Second, you have conviction. You sincerely believe that your product will solve your customers' problems. Expertise and conviction are very important in sales. This is especially surprising to those who mistakenly believe that sales is a dark art full of psychological tricks. Sales is not about conning people. Sales is fundamentally about helping people solve problems, and engineers are great at this. Anyway, now that I hope to convince you that you have what it takes to sell your product, let's talk about how to do it. We will go through the steps in a typical sales funnel together.

First, start with prospecting. Prospecting means finding potential customers. The output of this step is a list of companies that you think might need your product, and specific people who you think might buy it. There are a lot of tools for prospecting, but before you get started, you need a hypothesis. A sales hypothesis goes something like this: Customer X has Y problem, and our product will help them solve it. A good hypothesis makes prospecting easy by making it clear who you should be talking to.

For example, at Optimizely, our initial hypothesis was this: Marketers at small and medium-sized tech, media, and e-commerce companies want to run AB tests on their websites, but they can't because off-the-shelf experimentation tools require users to write code. Optimizely will enable them to run AB tests without writing code. Once you have a clear hypothesis like this, you can start prospecting.

First, identify companies that could be impacted by the problem you’re solving. One way to do this is to buy an industry list of all the companies in a particular industry, then use some filtering criteria to filter through those companies and narrow down your target list. For example, at Optimizely, we use a tool called BuiltWith to identify if a prospect is using analytics tools and JavaScript frameworks, as these indicate a company is relatively mature and cares about their website.

Once you have a list of companies, you need to find the right people at those companies and their contact information. There are tools that make this easier. This video was recorded during the Winter 24 batch, and many founders in the current batch are using Apollo and LinkedIn Sales Navigator.

Now that you have a list of prospects, i.e. specific people who might buy products from the company you sell to, you need to get their attention. This step is called outreach. The goal of outreach is usually to schedule meetings with your prospects. Most founders think of cold outreach as the primary mechanism for achieving this goal, but the easiest way to meet with a prospect is to have them contact you. Even if you plan to use a sales-led approach, you should still make every effort to generate inbound demand.

Publish early and often. Create technical content, such as videos and blog posts, that prospects can find when they’re looking for solutions to their problems. Build self-help demos that people can share. Find online forums that your customers frequent and establish yourself as an expert by answering questions. There’s more than one way to do this, but the better you are at grabbing your customers’ attention and getting them to contact you, the more efficient your sales process will be.

By the way, if your clients attend industry conferences, you should too. Find a way to get a list of attendees ahead of time and schedule plenty of meetings in advance. Once you’ve identified a specific prospect you want to speak with, try to get a warm introduction first if you can. Look for mutual contacts on LinkedIn and ask for an introduction. Sending cold emails is often the least efficient way to get a prospect’s attention, but it can still be effective if you approach it the right way. Start by handwriting each email. Make your emails short and to the point, and make the request clear. You should also make it clear why you’re contacting each recipient specifically. Email has built-in spam filters, and if your email looks like it was sent to thousands of people, it will be deleted.

On that last point, here’s a helpful rule of thumb to keep in mind about cold emailing: only send emails that you yourself would be excited to read. If you’re not excited about receiving an email that you’re about to send, your prospects probably won’t be either.

Before we go any further, I want to take a moment to talk about a specific anti-pattern I see in a lot of YC founders. Many founders will start out talking to anyone who will pick up the phone. The problem with this approach is that it selects the people who are easiest to talk to, rather than the people who will make good customers. So if you're not disciplined, you'll end up wasting all your time chasing bad customers who are easy to talk to.

I see YC founders make this mistake all the time, and I understand it. When you’re starting a company, it’s hard to get people to notice you. Cold emailing is a frustrating chore. As a result, you’ll be tempted to chase after people who will talk to you, even if they’ll never buy your product. The reason this mistake is so dangerous is that talking to bad customers can give you a false sense of progress, but you’re not. You’ll get a lot of great product feedback from people who think they’re doing you a favor, but because you’re not actually talking to people who need your product, that feedback will be useless at best and counterproductive at worst.

In practice, I see founders make this mistake in two ways. First, trying to sell enterprise software to startups. If your product solves a problem that companies will only encounter when they grow, like a human resources information system, then trying to sell it to startups is a waste of time. But founders still do it all the time because other startups are easier to communicate with than busy executives at large companies.

The second is to try to promote a product from the bottom up that needs to be adopted from the top down. This is a bit technical, let me give you an example. Imagine you are building productivity software like Notion. Your product can be adopted from the bottom up, meaning that a single employee or team can start using it independently without coordinating with anyone else within the company. In this case, it is perfectly fine to talk to individual contributors or their direct managers.

But what if you’re building billing software for a large hospital? In order for a hospital to start using your product, you’re going to need a lot of different teams to coordinate with each other. So you’ll probably need the CIO to sign off on your security and compliance. You’ll need their software team to integrate your product with their internal systems. You’ll need doctors to enter billing codes after each appointment. You’ll need their operations team to manage collections and so on. Talking to individual doctors is useless in this case. You’ll need to talk to senior leaders like the CFO or CIO to seal the deal.

Now, there's a tendency in YC to say that you should sell to companies that will buy quickly even if they're not good customers. This is a misconception. You should try to find companies that will buy quickly, but you shouldn't spend your time trying to sell to companies that don't actually need your product or won't be good customers. You need to find people who have the problem you're solving and have the budget and decision-making power to buy your product. We'll spend more time on this later.

Let's go back to our sales funnel. You have successfully gotten your prospect to answer the phone. Your job on the first call is not to sell your product, that comes later. On the first call, we are simply trying to do two things. First, we are trying to qualify our prospect by figuring out if they have the problem we are trying to solve and if they have the budget and decision-making authority to buy the product. Second, we are trying to schedule a follow-up call for a product demonstration.

Many founders face adversity by jumping right into a sales pitch on the first call. These founders make one of the biggest mistakes in founder sales, not asking enough questions. They make this mistake because they misunderstand how sales works. They think of the company they’re trying to sell to as one big monolithic entity, believe the sales process is adversarial, and that their job is to come up with the perfect sales pitch to break down the target’s defenses. But with the exception of some used car dealers, that’s not how sales work in the real world.

In the real world, you’re almost always selling to individuals, not to a giant monolithic entity. This is great news because people are easier to understand than organizations. This turns out to be very important. In the real world, sales is not confrontational. Sales is about deeply understanding a customer’s problem and helping them solve it. Good salespeople spend most of their time listening because it’s the best way to understand someone’s problem. They ask a variety of questions.

For example, what made you decide to take this call? Tell me about the problem. How long have you had the disease? How severe is the disease? Who else is affected? How can you quantify the impact? Why haven't you solved the problem yet? How much budget have you set aside to solve this problem? How does your organization purchase software? Who makes the purchase decision? Who else needs to be involved in this decision?

Sometimes, when you ask questions like this, you’ll find out that your prospect doesn’t actually have the problem you’re trying to solve. Or they do have that problem, but they don’t really care about buying the solution. Or they don’t have any budget or any other reason why they wouldn’t actually be a good customer for you. If you do this, that’s great. You’ve saved yourself and your prospect a ton of time and can focus your energy on other prospects who are more likely to buy.

On the other hand, if your prospect does have a problem you can solve, you’re in luck. You’ve earned your chance to show them how your product works. The next step is a demo. Most founders think of demos as an opportunity to show off their product. In my experience, thinking this way is a surefire way to give your demo a bad time. That’s because your job in a demo is not to show off your product, but to convince your audience that you can help them solve their problem. A helpful trick I’ve learned is to think of your demo as the script for a great movie. A great script always starts with a recap of who the main character is, your user, and the problem she’s trying to solve. This is your chance to show how well you listened on your first call. If your audience trusts that you understand their company and their problem, they’ll take you seriously when you talk about how you can solve it.

When you're ready to present your product, don't take your audience on a feature journey, walking from screen to screen to show them all the things your product can do. Instead, tell a story that shows exactly how your protagonist solved her problem. That's the point. Great presentations are actually like good stories. They have a flow, where each step leads to the next, and there's a clear reason for each feature you show. They often have one or more magical moments where you surprise your audience with how simple or delightful something is.

Great demos are also personalized to the audience. This is where you use all the information you gathered during the first call. Tailor the demo to their company. Use their logo, their website, their clients, the names of people on their team. The more you can do to help them visualize how your product will work in their company, the better.

I’ll give you an example from the early days of Optimizely. When Dan and I started building, we booked demos with all of our competitors. They each used a dummy website to show what it was like to do AB testing with their product. We thought that was really lame. So we spent weeks building a feature that allowed us to easily demo our product on a customer’s website instead of a dummy site. I knew it was all worth it when I saw marketers’ eyes light up and see us change something on their landing page that would have taken them months to create on their own.

So if you do this well, your prospect and their team will walk away from this meeting convinced that you can solve their problem. If that's the case, it's time to talk about pricing. I get a lot of questions from founders asking them how they price their products. The truth is, there's no simple formula for doing this. If there's no formula, how do you pick a number? Well, luckily for you, there are questions you can ask early in the process that will make your job easier.

How much does this problem cost your company? How many people are responsible for maintaining your internal solution? What is your budget to solve this problem? How much do you spend on my competitors? It’s okay to wait until you’ve had a chance to ask these questions before sharing your pricing. In fact, if your product requires a lot of work or customization to implement, you probably shouldn’t quote until you know exactly what your customers need.

Regardless, even if you ask all of these questions up front, the reality is that pricing requires a lot of guesswork in the beginning. My advice to startups is to view every pricing conversation you have as an opportunity to run an experiment, where you can test price points and then learn from how potential customers react to them. In the early days of Optimizely, we released self-service pricing for customers who just wanted to swipe a credit card for the basic version of our product, as well as an Enterprise plan that required you to make the sale. We didn’t publish pricing for the Enterprise plan, which gave us the flexibility to try different prices each time.

The most common pricing mistake founders make is charging too little for their product, or even offering it for free in exchange for product feedback. They do this because they are afraid of charging too much and thinking that it will scare away customers. However, one of the most surprising things I’ve learned is that when customers really want your product, it’s very hard to scare them away by overcharging.

For example, I remember a sales call where my co-founder Dan mustered up the courage to quote a potential customer $10,000 per month for our software. The prospect eventually lowered the price to $2,000 per month and bought it. Our initial offer was 5 times what they were willing to pay, but they still bought it. In fact, a higher price can help you figure out if the customer really needs your product.

It’s no secret that the Collison brothers charged higher fees than their competitors when Stripe started. The fact that they were able to sell their product regardless was a strong testament to their success and helped them focus on the customers who needed their solution most. The high price made customers more serious.

This brings me to another important point about pricing. Remember that the most important pricing conversations will take place without you being present. Your prospect will need to convince others in the organization that your product is worth the price you're asking. You can make their job easier by providing them with a slideshow or PDF one-pager that explains your pricing approach. It's usually a good idea to include an overview of the product and the benefits of using it, in case your prospect needs to talk to someone who isn't familiar with the product.

Regardless, don’t spend too much time thinking about pricing at first. Pick a number, preferably one that makes you a little uncomfortable, and pay attention to how your prospect reacts. It’s okay to have them negotiate a price reduction with you. Remember, during your first few sales, you’re optimizing for learning, not for unit economics.

Now that you’ve agreed on a price, it’s time to close the deal. Closing a deal isn’t a one-time conversation. A lot of things need to happen between the time a customer decides they need your product and the time they actually buy it. Large companies, especially those in highly regulated industries, have formal purchasing processes that often include security and privacy reviews, legal reviews, and sign-offs from compliance teams. Smaller companies aren’t as formal, but you should at least expect them to go through a redline process with their legal team.

The biggest mistake I see founders make at this stage is being surprised to find out that the deal they thought was done is actually not done at all and may have required weeks or months of additional back and forth, or even fallen through completely. Now, the way to avoid being surprised is again, to ask a lot of questions. Asking your prospect upfront how they can purchase the software and who needs to sign will give you a clear idea of ​​what hurdles you must overcome to get a signature.

You should do everything you can at this stage to get the procurement process done quickly. Ask explicitly if there are steps like filling out a security questionnaire that you can start ahead of time and do at the same time. And simplify your legal documents as much as possible. I recommend starting with the open source template released by YC Company Common Paper. If you can, leave the timeline and scope of work out of the legal contract and instead put them in an order form or shared project tracking document. Most importantly, remember that your prospect (who has become your advocate at this point) is your greatest ally. You should be in constant communication with them, and when you need help solving something, you should ask them first. Remember, they can’t solve their problems until you complete the procurement. Therefore, they have a huge incentive to help you achieve your goals.

Now you have a signature, congratulations. Now it’s time for your customers to actually start using your product. This is implementation, and the last step we’re going to talk about today. I’m going to start with this.

The biggest mistake founders make is to assume that implementation is the customer’s job. At Optimizely, we’ve made this mistake more than once. In fact, we’ve closed six-figure deals with customers who were excited about our product, and then discovered a year later when it was time for them to renew that they hadn’t run a single AB test with Optimizely. This was confusing at first. Why would a customer who was willing to pay so much for a product simply not use it?

In this case, the immediate cause was that the marketing team that bought our software couldn’t convince the software engineering team to help them install it on their website. But the real cause was that we didn’t do our job. We thought our customers were buying a product, so we sold them one and left the rest to them. In reality, our customers were buying a solution to a problem. All the work required to go from product to solution was our responsibility.

We learned to start asking marketing leaders early in the sales process about the work required to implement Optimizely. We started working with marketing and engineering leaders on detailed implementation plans before we signed a contract. In fact, if we couldn’t do this, we wouldn’t have signed a contract at all. The trick we learned was to treat customer implementations as a high priority project within our company through project management. So we created a shared roadmap. We made sure each task owner had regular check-in meetings to hold everyone on our side accountable for completing tasks. Your sales funnel is only truly closed when your customers are habitually using your product. When you reach this point, congratulations, and hopefully you have a customer for life.

Okay, we covered a lot today, from prospecting to the first call, delivering a great demo, pricing, closing, and finally managing implementation. Of course, there’s a lot more to learn about sales, and the best founders learn as much as they can about the topic. If you want to dive in, I recommend Peter Kazansky’s book, Starting Sales. It’s a fantastic resource. But like most things in starting a company, the best way to learn is to get out there and do it yourself. So if you remember only one thing, it’s to just start. You’ll make mistakes, but try enough and you’ll find your way and sales will come naturally. Soon enough, you’ll find yourself gaining a new superpower. You’ll find it useful not only in attracting customers and revenue, but also in raising money and hiring. Soon, you’ll be the one giving this advice to new founders.

==Full Text: B2B Product Pricing Strategy Guide==

Hi, my name is Tom and I'm a partner at Y Combinator. Today I'm going to talk about one of the most common questions I get asked by founders, which is how to set your price.

When founders are doing outbound sales, they usually contact a prospect and end up having a very successful sales call. The prospect is very interested in the product and asks us about the price. At this point, we often freeze and don’t know how to price.

If you haven’t worked at a large company, you probably don’t have a good gauge of what prices these companies tend to pay for software. You probably think back to the last time you bought software, like a subscription to GitHub or ChatGPT, and chose a very low price of $19 per month or $49 per month. For founders who have spent two or three months building a product, asking for tens or even hundreds of thousands of dollars in funding can make them feel so uncomfortable that they can hardly say that price with a straight face.

Today I’m going to talk about how to set a price and justify that price to your customers.

There are three core elements here, the most important of which is what I call the value equation. The idea is that you sit down with your champion, that person who is that customer who really likes your product and maybe thinks it will solve one of their biggest problems. You write down with this champion what they expect your product to do for them, what value it will bring to their company. It could be cost savings, time savings, or increased revenue. You have to write it down step by step, and then have the customer question it, prod it, and make sure the assumptions are correct. Because ultimately, this is the tool that that person has to justify to their boss or the CFO to buy this contract.

We can illustrate this with a simple example. Let's say you're selling a customer service tool to a large company with 100 customer support agents. Each customer support agent is paid $50,000 per year, and each employee has another $50,000 in additional expenses, perhaps for offices, overhead, health insurance, etc. So the full cost per customer support agent is $100,000, and they have 100 agents, for a total customer service cost of $10 million.

Let’s say we tell this client that we have a new AI customer service tool that can reduce 20% of inquiries or 20% of the total time spent by this customer service team. This represents a potential cost savings of $2 million. Typically, companies care about saving time (i.e., cost), directly reducing costs, or increasing revenue.

Once you've determined the value you provide, pricing is pretty straightforward. I usually pick somewhere between 25% and 50% of the value you provide. They keep about two-thirds and you keep about one-third.

In the previous example, the savings are $2 million, they keep $1.3 million, and you charge them $700,000, something like that. That's a good deal for both parties. This person can take it to their CFO and show a very good return on investment.

The great thing about this value equation is it also gives you the success metrics that you need to prove in a pilot. You can go to a customer and say, let's pilot this tool with a subset of the team for a month. Maybe let's pilot it with 10 agents and see if it actually reduces queries, and then let's measure it. As long as it reduces queries by 20% or saves the agents at least 20% of their time, we know that this value equation holds. If the metrics come out slightly different, maybe it's only 15% or it's really good and saves 25%, you can even adjust the pricing based on that. But the value equation tells you the success metrics that you need to prove in the pilot.

This is the first part of pricing and by far the most important. If you just stay on the value equation, honestly, you'll get 80% or 90% of the way there with pricing. But there are usually several other factors to consider.

The first of these is cost. How much does it cost you to provide this service to your customers? It is important that you never start with cost. Some people like to do cost plus margin pricing, but they always end up underpricing their software. Cost should always be a flaw.

So you do the value equation, take a third, and it comes out to $700,000. Maybe your costs are mostly OpenAI fees or something like that, and AWS fees, which are about $200,000. So $700,000 is your contract value, $200,000 is your costs, and you're successful. But if you've come up with a value equation and your share is only $150,000 and your costs are $200,000, you're not in a good business. You have to price below cost, and that's not sustainable. So you either have to figure out a way to demonstrate more value or change what you're building. Eventually, you'll be out of the business entirely. Realistically, you should be aiming for 80% or 90% software margins.

A quick note on credits. AWS, Microsoft, OpenAI folks give a lot of credits to startups, and you should treat those as cash costs. Don't think you'll have unlimited credits forever, that will totally screw up your margins. There are occasional situations where you want to price at cost or even below cost, but that's a very, very risky move. Typically, founders use this approach when they want to grab market share in an arms race, a land grab situation. It's very, very risky. You're really betting that costs will drop dramatically in the future. That said, companies like OpenAI and Anthropic are really driving costs down dramatically as they've been doing large language models (LLMs). So maybe one could argue that you might want to price a little bit lower now because you know your margins will improve over time. But honestly, that's a very risky move. I recommend startups really work to maintain 80% or 90% gross margins.

So the third element of pricing is competition. You have your value equation, you've calculated a third of it, and you've checked that your costs are well below that number. So you're maintaining an 80% or 90% margin, and you're in good shape. But you have a direct competitor who just entered the market with software that's comparable to yours, and they decide to cut the price in half. What do you do? It's really, really tricky.

The first instinct of founders is often to start a price war. So take the price your competitors offer and then undersell them. The problem is they'll do the same thing and undersell you, and then you'll undersell them again. It's just a race to the bottom. So competing on price alone is not actually a winning strategy. You don't want to get into a head-to-head bidding war with a commodity product. Instead, what you want to do is differentiate your product based on features or value. It can't be an apples-to-apples comparison. Your product needs to be differentiating.

If there is intense competition in an industry for a commodity product, then the product is basically the same and all the profits are squeezed out. Take the airline industry, for example, it is basically a commodity, sitting on a plane and flying across the country. The average net profit margin in the airline industry is 2.7%. It is a brutal business environment and airlines are constantly on the verge of bankruptcy because they are constantly trying to differentiate.

Now that we've discussed the three main elements, starting with the value equation, taking into account costs and competition, we'll discuss other techniques for determining price and even pricing structure. Another question you want to ask your backers is how and in what ways do they pay for other similar software products? For example, are they used to paying a monthly fixed fee? Or is it per-seat pricing? Or credits?

I would really explore the industry you're selling to, understand what they're used to paying and how they're used to pricing, and then choose a pricing strategy that they're used to. People are often wary of completely unlimited usage-based pricing, so you might want to put a cap on that. You'll do better if you can reflect how they're used to paying for other software.

However, when you choose pricing, the most important thing is to keep it simple. Overly complex pricing will kill the sales process. Generally speaking, committed recurring revenue, i.e. monthly recurring revenue or annual recurring revenue, is preferable to usage-based pricing. This is because during a recession or slowdown, your revenue is protected at least until the contract expires, and then you can discuss with the customer whether it is worth renewing. Whereas with pure usage-based revenue, your revenue may drop in a bad month, and investors are very cautious about this. So, aim for MRR or even ARR if you can. One way to do this is to start with usage-based pricing for new customers, run the contract for a month or two, see their usage, and then offer to move them to a minimum monthly commitment through volume discounts. You can see that they use $15,000 per month on average, and if they commit to a 12-month contract, offer them a fixed fee of $12,000 per month that covers all of their usage.

Another approach is to ask your backers how much they are able to sign personally without additional approval from the CFO or legal team. So they might have signing authority up to $15,000. This is a good hint that you should keep the pilot price around $14,999 just to get it moving quickly.

Next, I want to talk about whether you should publish your prices on your website or contact sales to work out enterprise pricing. There is strong feeling on the Internet about this, and software developers often say they just want to see the price, click a button and enter their credit card information into the system. They hate talking to salespeople and question why they have to talk to salespeople at all.

The problem is that the value equation is going to be different for every enterprise customer. That’s why most enterprise plans say contact sales. If you pick a price at random and put it on your website as an enterprise contract, you’re definitely going to waste money. You’ll overprice a large group of customers who don’t get much value from it, and therefore lose them completely. And you’ll underprice the ones who do get more value from it.

Therefore, companies usually offer one or two cheaper plans, perhaps an individual plan and a small team or startup plan, which include most of the basic features, but exclude the core features that enterprises really want. You can check the pricing pages of other SaaS companies to see what they include behind their enterprise plans. Usually it's things like SOC 2 audit reports, single sign-on, audit logs, compliance reports, or data saved in certain geographic locations, which individuals and small companies don't really care about, but enterprises think are absolutely important and can't survive without them.

This way, you can set different prices for small customers and enterprise customers. Sometimes, the price for enterprise customers for these additional compliance, legal, data privacy, etc. features can be as high as 10 times.

The next thing we'll discuss is understanding that your pricing strategy determines your sales pipeline. In other words, at this pricing level, is there enough money in each contract to compensate the sales team or account executive? A good rule of thumb is to have a ratio of about 5 to 1 between new ARR signed and the salesperson's total compensation (including commissions). For example, if you pay your salesperson $100,000 per year, including their base salary plus any sales commissions, that's $100,000 in total compensation, you can reasonably expect to generate $500,000 in new ARR per year. $500,000 in new ARR (annual recurring revenue) can be split in a variety of ways. Is it a single contract of $500,000? In this case, each account executive is essentially "hunting whales" and they try to close a contract every few months, perhaps only working on four to six contracts at a time.

Or 20 times the $25,000 contract? That is, at about $2,000 per month for a $25,000 annual contract, the account manager would need to close slightly less than two contracts per month to get to 20 per year to get to $500,000. This approach is still feasible.

Or are you asking them to close $500,000 annual contracts per year? That last example, a $1,000 annual contract is about $83 per month. Your sales reps have to close 42 deals per month, which is almost two per workday. This isn't really an account manager or outbound sales team, at best you might have an inside sales call center. They basically pick up the phone when someone wants to buy something, enter the information into a computer system and answer questions. They're no longer out hunting whales, they're out harvesting wheat fields.

The next topic I want to discuss is whether you should offer a free trial or pilot. Generally speaking, offering very long free trials or pilots is counterproductive because the customer isn't actually buying the product. So what you want to do is keep these pilots or proofs of concepts very short, maybe a few weeks, maybe four weeks, and have very clear success criteria based on the value equation that we talked about earlier.

If you're really confident, a better approach would be to push customers to sign annual contracts from the beginning, but offer a 30- or 60-day money-back guarantee and an opt-out from the start. If the product doesn't meet their needs, they can get their money back without question, but by default it becomes a recurring contract that you can count as recurring revenue right away.

Another question I get is, we're just a two or three person startup. Should we get more people to our website or get more people to sign up for our LinkedIn company account to pretend we're a much larger company to try to attract customers? Generally, this is not a good idea. You should play to your startup's strengths and tell customers they can get the founders' phone number and we're on call 24/7 to help with issues. You definitely won't get that from companies like Salesforce or Oracle. So play to your startup's strengths.

In summary, if you really don't know how to price, and you've tried the value equation and it's not working, honestly, pick a number that's similar to other software your customers buy. Every time you pitch a new customer, raise that number by 50%. Start at 10,000, they say yes, then you get 15 customers, and the next one, maybe you get 22,000. When you're losing more than 25% of potential deals because of price, you're probably in the right range.

You don’t need to win every deal. If every deal closes right away, then your pricing is almost certainly too low. Remember, those first 5-10 customers you sign will be a very small portion of your revenue for the next five years if your company is successful. So it’s more important to start signing and get deals rolling. You can always increase prices as your product improves. You can add new modules and put them behind a paywall or upsell customers. So it’s a big mistake to optimize pricing too early. Pick a number, try to sell it, and keep experimenting as you go.

As your company grows, it becomes easier to close customers and raise prices because your ability to sell is likely to get stronger over time. Your homepage will display a badge of approval from all the happy customers who have used your product. Unless you are doing something wrong, your product should improve dramatically over time. The first two or three sales are usually the hardest you will ever make. So just close them.

To summarize, there are three very important parts to any pricing:

First is the value equation. Write it down, have your advocates challenge it, and then price it at about one-third of the value you provide. So the customer keeps two-thirds of the value, and you keep one-third.

Second, consider costs. Unless you have a very good plan to significantly reduce costs in the short to medium term, make sure you don't price your product at or below costs.

Third, if there is competition in the space, you may end up in a price war where no one benefits. So, instead of going head-to-head with your competitors, try to differentiate your product by choosing a niche, focusing on certain integrations or certain industries, and show how your product is so much better than the competition that it is truly unmatched.

So that's how pricing works. Thanks for listening.