The Complete Startup Playbook for B2B Pricing

My name is Macy Mills and I'm a business development partner at a 16z speedrun. I've worked in B2B sales, revenue and partnerships for over a decade. I like to come up with new ways to scale revenue. In this video we will explore various B2B business models, common pricing mistakes, and strategies for setting the right price point. Let's dive in In a world where PLG or product led growth continues to gain momentum, the lines begin to blur between B2B and B2C. Understanding the distinction for your business is crucial for startups because it will affect decisions such as product development and pricing strategy. One of the ways that I like to differentiate between B2B PLG versus B2C is actually the collaboration piece of it. If you're building a B2B PLG product and you're asking yourself is this actually a B2C product? It's a fair question. One key differentiator in my mind is that B2B products often foster collaboration. That means that I can jump into the product and have value while working with somebody else. A good example of collaboration in a B2B PLG app is Slack Notion or even Miro and Figma. A helpful rule of thumb is that if a product is generating less than $10,000 ACV or annual contract value, you may be in the B2C business. However, this is not a strict rule as there are always exceptions in different industries. One other distinction worth mentioning is PLG versus Tops down sales. Tops down sales is the traditional sales motion. You're picking up the phone, you're creating leads, you're falling through a sales funnel until you close deals. PLG is more organic and to be honest, I've always personally loved making money while you sleep. But it can take months or more likely years to build a successful PLG product. A lot of startups think you have to pick one or the other Am I product led growth? Do I focus on organic virality or am I a tops down sales motion? In reality, you can have both motions running simultaneously and that gives you the most opportunity for growth on both sides of the market. Understanding your customer and effective selling strategies is crucial to driving success for your business. Now let's dive into some various business models. There are several business models to structure your B2B pricing. The right one depends on your product, your costs, and your ICP or ideal customer profile. Different business models work for different needs, so it's all about finding the right fit for you and your audience. Here are the four most common B2B business models. Number one, usage or consumption based pricing. Usage or consumption based pricing is basically pay as you go. You charge the customer based on how much they consume. This has become popular with cloud providers such as aws, GCP and Microsoft Azure, but it's gaining momentum as a business model because of AI costs. If your product is tied to an API or cloud services or probably more AI products, your cost is going to increase exponentially as users tend to use your product more. An easy way to get around that is with usage or consumption based pricing where you charge the user based on API calls or credits or tokens, for example. So imagine you're playing a video game and the backend servers are connecting you to one other player. There's only two players in this game, so you can imagine that the compute cost isn't that high. Now open that game up to thousands or even millions of players. At the same time, you can imagine the back end cost for scaling something of that magnitude is much higher. This is how usage based pricing tends to make more money over time and scales as their customers scale. This allows you to balance your cost of the infrastructure with what you're charging and the revenue that you're getting from customers. AI has a huge infrastructure and compute cost and hopefully in the future we'll see some of those costs going down, not up. However, it's driving an increase of consumption based pricing for products that were maybe previously subscription based pricing. If you're building an AI product, you know that your AI infrastructure costs are now starting to compete with your cloud costs for taking up the most of your margin. That's something that you need to take into consideration when you're setting up your business model. Number two, subscription or user based pricing. This is the SaaS Classic. Monthly or annual recurring subscriptions drive predictability for not only you, but also your customers. While user based pricing and subscriptions are technically not synonyms, I believe they go hand in hand. Lots of subscription based pricing have a number of users that you're allowed to use or even price by the number of users. Where most of user based pricing is actually subscription as well. A couple of examples for subscription based pricing where it is a pay per user is actually slack. Slack requires you to pay per user on a subscription basis. Where companies such as Asana and Salesforce offer a tiered system where you're able to have a certain number of users per tier. In my opinion, it's hard to offer unlimited amount of users because you're capping your ability to upsell customers in the future. If you Give them unlimited users. They may not need to come back to you to buy more seats or to upgrade their tier to the next level that allows them to have more users. Number three Project Based Pricing this is pricing based on a specific project or a specific amount of time that you'll be working with a customer. This is quite common when it comes to consultancy or services or professional support on a one off basis. Typically these are a design partnership where they're working with a customer on specific features for the platform that they're working on, perhaps apps moving features up on their roadmap or giving them specific features for their use case. Now this can be great because you'll show a revenue bump pretty early on in the customer life cycle. However, it can also be challenging because some of these customers can become extremely needy and you're not having a repeatable play that you can go out and do again and again. So I always urge founders to switch over from project based pricing or services based pricing as quickly as possible to start something that's a bit more scalable and a bit more predictable for them to talk to their investors about. Number four site based pricing. This pricing is typically based on being locked to a specific location or a specific office of a company's and so for example, the product is only available for folks that work in the San Francisco office. This used to be a lot more common in software products for businesses. However, as the workforce becomes more distributed and remote working becomes the norm, site based pricing continues to lose popularity and it's not something that I typically recommend for our founders. It's common to see a blend of these different business models and for example, I think blending number one usage or consumption based pricing with number two subscription or user based pricing is a really good option, especially for AI startups. This allows you to get some of the predictability that you'll find from subscription based pricing with some of the upside that you'll find with usage or consumption based pricing. Now you'll have to do all of the spreadsheets to figure out what the exact numbers are that work for you and your user base and your ideal customer profile. However, I tend to think of those two as good ingredients to start to make a really good business model recipe. One other thing to note is a common pricing strategy across all the different business models is tiering. Tiering allows you to drive different users and different ICPs into different tiers based on what products or services they specific specifically need. Most commonly, tiers are decided by feature differentiation. So imagine you have three different tiers on the page, a starter pack, a company pack, and an enterprise pack, and each of those may have a certain number of users included within the tier. That way you're still pricing based on a tier, but you're giving a certain amount of users per tier. However, this is not the only way to do tiering, and we'll discuss that more in the next section. Foreign let's first talk about what not to do when it comes to B2B pricing and business models. Because, let's be honest, missteps here are common. Number one, don't sell yourself short. I've worked with countless founders that have closed their first deal at a hundred dollars, two hundred dollars, one thousand dollars and while all of that is exciting to get your first check, your software is worth so much more. It's okay to price low on your first few deals and but you don't want to build a habit out of it. You can start to feel comfortable in these low price points. Wow. I closed that deal in a very short amount of time. I'm closing it faster than my other founder friends. That can be great. But again, don't sell yourself short. You have the opportunity to price based on what the market will pay, and so keep testing and validating. Each time a customer says yes to a price is a confirmation that your pricing is either correct or maybe even too low. Until you start hearing no consistently from your customers, you're still pricing too low. Number two, don't ignore market research and customer feedback. You should still be looking into the market at your closest comp to see how your competitors, or even semi competitors, are pricing their products. What's even more important than market research at this crucial early stage of your startup is customer feedback. Pay close attention to what they're saying and what they're not saying. If your customer isn't asking you questions about implementation or setup success, how seriously are they really taking your product? Even if you don't have an exact competitor, there's someone who's selling to your ideal customer profile and even working in the same area as you are. Number three, don't overcomplicate your pricing. Simplicity and transparency are key. Your customers are just like you. They want something that's as easy to understand as possible. The more factors that you involve, the more complicated you make it, the more difficult it will be to get the customer to say yes. Try to break it down as simple as you can so that you can get that customer to yes as quickly as possible. You're going to have to do a lot of back end spreadsheeting no matter what you decide on and so fall back there to figure out those margin or revenue questions and leave the consumer facing part to be as simple as possible. Number four Pricing Tiers Based on self Declared Data When I'm talking to founders, I generally advise to not price your product based on anything that's self declared or hard to track. I had this experience firsthand which is why I often give this advice. In a previous role I was selling a product which we'll call Wet Brush. I knew that I had to pick up the phone and talk to every single customer to find out what's their project budget, how many platforms do they plan to launch on, and many other details. I had to know all of these details before I could even give them a price point. If you're building tiers based on these self declared things, you're actually leaving the onus on the customer to figure out how much they owe you. Your project budget is sometimes dynamic. I don't know about you, but I've gone off budget on a couple of projects in my time and I think that's pretty common. And so what happens if the budget changes and then suddenly you have to go back to the customer and charge them less or more? This leads to the next big pricing mistake. Number five don't set up pricing that uses compliance as a sales play. So if you're setting up these arbitrary tiers, which I told you not to in the last tip, I mean, come on, really, you'll basically again be always chasing customers to ensure that their data is accurate. This drives the motivation on the salespeople to try to easily cash their commission check with compliance deals. It's also not the nicest way to start a conversation. Hey, your data's wrong. You lied to me. You owe me more money. Wouldn't you rather your salespeople were spending their time selling to new customers or upselling your current customers rather than running around trying to get customers into compliance because you chose self proclaimed data as a tier. Now that we've covered all the things not to do, here's how to price like a Pro and drive B2B growth. I truly believe that pricing is not one size fits all. I spend my time working with founders of Speedrun, helping them decide all the little details when it comes to the price point and the business models that they're going to take their product to market with. There's a lot of content out there that tells you exactly how to price down to a science, but in reality, pricing is an Art and a science. And without knowing all of the details of your ideal customer profile, your cost structure, and what goals you're trying to achieve with your company, it's difficult to give you an exact model that's going to drive the most exponential growth for your business. Now, while I can't do that with all of you, I do have a few universal tips that we can discuss discuss today. Number one, don't discourage adoption through your pricing model. Think about pricing as an invitation, not a barrier. You want to lower the barrier to entry so that it's easy for new users to adopt your product. Me saying that might make you think that you should avoid user based pricing. That's not what I'm saying. User based pricing may still make sense for your product. Think about a way to make your pricing as approachable as possible and make it easy for customers to to say yes. One frictionless way to lower the barrier to entry is by offering free or low cost plans to get people onto your platform. Once customers see the value, upselling should become easier. There's also a concept of a reverse trial where you start by giving the user all of the things that you have to offer and then take them away after a certain amount of time. Now this can sound rude, but it's truly not because you're giving them the opportunity to see see all the features that your product has to offer and then allowing them to make the decision for themselves which feature set is most important. Number two Discount for commitment One way to encourage adoption is to offer a 10 or 20% discount if the user will commit to a year instead of, let's say, a month. As a user, I'm excited about that $200 savings. As the business owner, you should be excited about the revenue predictability. You can offer a similar type of discount for consumption based pricing. The way that this typically works is that you offer a certain amount of tokens or credits up front. The more the customer will commit to you, the cheaper the tokens will be on a per unit basis. This is a great way to again drive more predictability for your business while offering a discount to your users. Number 3 Simplify and Scale with Tiered pricing. If you've ever bought a product before, you've probably seen tierbase pricing. The most common use case of this is in the subscription or user based pricing where the more you pay, the more features you get. One thing I urge founders to consider is not having too many tiers in order to drive confusion with users and offer too many options. If you have more than three maximum four tiers, you're probably overdoing it. One way to consider your tier based system is to consider your icp. Do you have the right pricing for each ideal customer profile? Maybe you're thinking about a hobbyist all the way up to an enterprise that may have thousands of users using your tool. Think about how to simplify as much as possible while giving yourself a path for upsell and expansion revenue in terms of picking the right actual price point, test it out. You won't know how much customers are willing to pay until you throw some numbers at them and get their reaction. As your product matures and you add more features as well as getting more feedback, your ICP may completely change. And that's okay as long as you're following it through the process and understanding exactly who it is at every point in time. You'll be able to test your pricing with that audience to ensure that you're striking the right price point. Therefore, I tend to think of value based pricing as a strategy. Not only that, but a strategy that I would look to incorporate later on in your life cycle. If you're a pre seed founder, you're so early within your product maturity you don't have case studies to build from. You don't have those numbers that will help drive that sale and the next one after that. Now, you might not hear this from other podcasts, videos, et cetera, but I feel confident that without value based pricing, you'll still be able to get to a business model that's scalable and successful for your business. Okay, so you've decided your business model. You figured out your pricing. You're either on the phone or you put some pricing on your website, which can be really exciting but also scary. And you're trying to figure out if it's truly working. Let's talk about some ways that you can measure the success of your new pricing and business model. What early metrics will your investors care about to see if it's working or not? Number 1 Number of paying customers. You're out here. You pick the price you're you're selling and you've closed your first customer. Congratulations. That's a huge moment. You know, it's even more exciting and scary is going from one to five customers and five to 30 customers. Tracking how quickly you are accruing new customers is also crucial as this can show your investors how quickly you're scaling. It's always a good thing if your customer acquisition rate is increasing. And remember, it's not just quantity here, but it's also quality going Back to those ICPs are the customers that you're closing that are paying you and hopefully a scalable, predictable way. Are those truly your icps? Are those the customers that you're hoping to close over and over again that are going to take you from 30 customers to 1,000 customers and even more, ensuring you're understanding that quality versus just quantity is another key to success. Number two ARR or ACV ARR stands for annual Recurring revenue. An ACV stands stands for Annual contract value. These are both great metrics to track how well your pricing is working. ARR tends to make the most sense when you're looking at those subscription based or user based models that we talked about. While annual contract value might make more sense if you're looking at some of the more bespoke business models, especially at the beginning of your company life cycle. Overall, any form of traction showing an increase of revenue on a month to month or quarter to quarter basis is going to be great news for you and your investors. Number three Length of Sales Cycle Determine how long it's taking you to get to close one. This will help you determine if you're pricing correctly, keep a track on it over time and ensure that it's getting shorter, not longer. If you are at the pre seed or seed stage, I imagine you're doing mostly founder led sales. Ensure that the length of the sales cycle is based on your pricing and business model and not external factors such as a conference that you went to that slowed you down. This is the part where you have to be really honest with yourself. Are you following up in a timely manner? Is this behind because I went on a family vacation? Probably not because you're a founder and you probably don't get family vacations. But like just saying a little bit later on when you have more data behind you. Two other metrics that I encourage you to think about are churn rate and net revenue retention. With churn rate you're finding out are customers leaving your product or are they renewing now? In most PLG motions you can expect a 25% churn rate without being concerned. That may have something to do with the value equation and the fact that the customers aren't seeing the value that they're putting in. When it comes to the cost, churn is going to be something that investors are going to look closely at. Ensure that you're tracking it and also doing exit interviews with customers who decided to not work with your product any longer. This will help you better assess in the future how to get your retention rates up and your churn rates down Down Net Revenue Retention Net revenue retention measures the percentage of recurring revenue from your current users, whether they've downgraded, upgraded or expanded, not counting for new revenue from brand new users. It's a health metric that allows you to see what's going on with a specific cohort of users. It reflects how well the company is retaining and expanding its current user base. Monitor this monthly and quarterly to start until you can get to an annual net revenue retention rate. Let's do an easy NRR formula. Let's say your per customer per month price of Your product is $1,000 and you have five customers at the beginning of the month. So your starting revenue at the beginning of the month is $5,000. Let's say that one customer upgrades their plan, spending an additional $500. However, the second customer churns so you've lost $1,000. The third one downgrades, reducing their plan, lowering their spend by $300. The two remaining customers continue paying $1,000 each. Let's break that down. You started with $5,000. You got $500 in upsell revenue, $300 in downgrade revenue, and minus $1,000 from your churned customer. So the total end of your month revenue is $4,200. Net revenue retention formula is revenue at the end of the period. So $4200 divided by the revenue at the start of the period or $5,000 times that by 100 and you get your net revenue retention over the period, which is 84%. 84%. NRR means that the company has retained 84% of its starting revenue for that month after accounting for those upsells, downgrades, and churns that we discussed. Let me give you some benchmarks for NRR. Outstanding NRR is greater than 120%. That means that most of your customers are probably upselling or expanding. An average NRR is 90% to 99%. You're technically losing money on a cohort basis, but if your new customer revenue is high enough to sustain this, it could be okay. Less than 90% typically means that you have a churn problem or an expansion problem where too many users are churning or you're not expanding enough. Pricing isn't just a number, it's a strategy. Start with a model that makes the most sense to you. Be flexible, to iterate as you grow, and avoid the common mistakes that we talked about today. What kinds of challenges are you facing with scaling your business? Drop us a comment below and we'll do our best to answer in a future video. Welcome to Speedrun. Founders like you, you, you. I'm talking to you. And you. I'm also talking to you since joining you. Good over there. Are you. Are you regretting this yet? Well, thanks so much for sticking around with me. I have to get back to solving more problems, such as the cold start problem. I've always wanted to say like and subscribe. Do you swipe up now? 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