The next in our series “Skinned knees—what an MBA didn't teach you for rebel sales in a software startup”, where we discuss the challenge of finding the right price.
One of the challenges of a new company with a new product is pricing the product. Every software startup struggles with this. It is almost impossible to make the correct decision for all time.
Warren Buffet says, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
In all my years at this, pricing is never an operation to be taken lightly. Defining pricing means asking yourself and your founders questions about your product’s value. In some cases, you may be asking questions about your company’s value. In all cases, let the conversation flow because you need it to happen before stepping in that metaphorical boxing ring. Pull your team together and ask:
- Should the product be free (like many of the Google products or Facebook) and the goal of the company is to use that free product is to gain a relationship with its users to sell other products?
- Should the product be so expensive that the company only needs to sell a couple every year to make its sales goals?
- Should the product be one upfront payment with maintenance payments that enable enhancements to the product?
- Should the product be an annual (or monthly) subscription fee?
- What is the price point that we should choose for the product? If it is a new product, it is likely that it doesn’t have all of the features and therefore benefits that it will have after many more releases.
- Should we price the product at its ultimate value when all of the features are built? This means we will sell through the natural objection that the price is higher than its current value, but it will become more valuable over time.
- Or, should we price the product at a lower value and then increase the price over time as the new features start to add more value? This, of course, forces difficult conversations for price increases.
There are no easy answers to all of these questions. But then again, is there a best way to take a right hook? Certainly, there are ways to deflect and lessen the blow. At the end of the day, you still got hit. After a prospect conversation on pricing, if you are still standing, think deeply about what you heard because that is golden feedback before the next bell rings.
You Will Take A Right Hook, for now
My best advice is flexibility. Market forces are constantly changing. Assume that your price and revenue model are as good as possible with the information you have at this time. As a young company, you probably haven’t taken a right hook jarring you to your core. That’s OK, and maybe you’ve been lucky - for now.
No answer on pricing or packaging needs to be permanent. No decision can be forever in a new software company. Many famous soldiers, including Dwight Eisenhower, have said essentially the same thing. Ike said, “Plans are worthless, but planning is everything.” More recently, Michael Tyson modernized this by saying that all plans fail once you get hit in the mouth.
Go out and get hit in the mouth a few times by prospects, then make a new plan. Such is the reality of your pricing. Your pricing schemes and revenue models do not mean anything until you sit in front of a prospect. Did the prospect say, “Yes” immediately? Then you may have left money on the table based on your current value and your future value. Did the prospect say, “Yes” until they heard the price? That could mean a reasonable benefit/cost relationship someday, but maybe you need a few more features to justify that price.
Focus On The Footwork
A fundamental in boxing is being light your feet with great footwork for agility. Standing like a log, I can guarantee you will be hit with hooks if not a rapid flurry of jabs. And over time, your competition will wear you down with better pricing models. Get on your toes, take a few hits but miss the knockout punch.
If you don’t have bruises on your face, convince your leadership team to increase your price. If you are bruised and battered like you went ten rounds with Mike Tyson and have no sales, it may be time to lower your price, or really lean on your product team to add more value to the product. We all know that “No!” actually means “Not yet!” The challenge is how many rejections do you receive and how hard is it to get to “Yes!”
Your subsequent moves are essential. Did you raise the price for the next prospect after too many quick deals? Did you discount the list price to address a prospect’s hesitancy? Did you permanently cut the price by lowering your list price in the hopes that future features will allow you to increase the price? You have to document and learn from every interaction; otherwise, you will never respect the jabs and hooks from prospects that tell the truth with their wallet.
Or, if you are struggling with sales maybe it isn’t the fault of the product or the pricing, it may be time to rethink your sales team or their training, but that is a subject for a future posting in this series. Subscribe to this series, and we will cover that subject soon.