2. Doing Value-Based Pricing for Long-Term Retention
- Kuldeep Dhankar Co-founder, Last9.io
Let’s assume you have closed the customer. Everyone’s happy — your investors and customers, and everything’s done. But when you go back and examine, you learn that you had to spend two rupees to buy one. Suddenly, the excitement drops. Founders start saying the logo will get us more later.
The point is that people think they can buy leverage. But with bad pricing and a bad deal, you cannot. You don’t have leverage from a bad customer anyway.
You might say that an endorsement from that customer will get you more customers, and yes, social proof contributes a lot to getting you deals. But your value proposition makes a bigger contribution. Nobody buys a B2B product just because someone else has bought it.
The pricing thing is straightforward. You need to hold a very firm position and be willing to say no very clearly below that. Let Mr. Market tell you what the outcome of that is. If it is unsustainable, the market will tell you. This doesn’t mean you lower pricing; it means we need to increase the value.
You should test your pricing with an 80% gross margin. Test it. If you're not able to close consistently, reduce it, or rather, create more value.
My recommendation is to not lower your gross margin unless you strongly believe that the only reason they’re not buying is that you’re too small a company and your price is too high.
In those cases, you can use tactics to protect your rate. Say it’s a $100,000 contract. Give the last six months free, but ask for the payment for the first six months upfront.
Do paid pilots — raise a $0 invoice if you have to, but get people using your product and tell them that you will charge them from the month after. Note that pilots have to be paid; POCs are always free.
Use this 80% gross margin to test your price and make it palatable. Sometimes, it needs to be sugar-coated, so do all of that, but don’t just assume that you cannot charge as high as you’d like or that the customer will say no because you think your price is too high. Iterate and learn from the customers.
One thing that helped us in this was making sure that it was always clear how the pricing was impacting the customer. We tried very hard to articulate the dollar value of the impact we were creating. We made sure that customers could always feel control over the billing metric.
Another thing I can tell you is never offer your pricing to an L3 or quote your price to an L1. L1 doesn’t care, and L3 will always think it’s expensive.
A good rule of thumb is never to offer people a price more than 1.5 times what you think their salary is, which is why you want to avoid going to an L3 with a $100,000 contract.
If you go to a Marketing Manager and they hear your pricing, they will fall off the chair. However, the same guy’s Director of Marketing will know that it still does not add up to what he spends on his 5‑member team.
Every strong L1 has strong L2s who do one specific thing. One person will be handling retention, one will be handling acquisition, and one will be managing the performance marketing. You want to go to the L2.