This series on mastering ‘B2B Sales for Startup Founders’ is authored by Himanshu Goel who has 30+ years of experience in creating & executing businesses, pricing options, and sales strategy for Motorola, IBM, Microsoft & Cisco. Himanshu is also an active angel investor on the LetsVenture platform and a mentor to startups. His latest adventure was a self-driving expedition to the Mt. Everest Base camp!
In Part 1, we addressed how you can arrive at your sales strategy & build your sales team!
In Part 2, we got into B2B Marketing and explored why sales & marketing can’t be divorced from each other!
In Part 3, we looked at how you can build a solid sales pipeline and manage it.
In Part 4, we talk about pricing options in the B2B ecosystem.
Pricing options in the B2B eco-system
Unlike in the B2C space, it is a lot of fun developing pricing in a B2B setting. Why do I say so? Because businesses are open to many models and the underlying idea should be to keep the model simple and allowing the customer to adopt it easily. By this I mean, it should be outcome-based, less risky, mouldable into the customer’s internal process and must show your skin in the game!
Some of the models that I feel are suitable for B2B start-ups to follow are:
- Product or service price
This is the most commonly used. It’s the price per product or service.
Example – Supply of Laptops in an all Capex model followed by fixed per year annual maintenance contract (AMC)
- Monthly/annual fixed fee
This is simply a product or a service priced at fixed rupees per month for all you can eat.
Example – Facilities management service or an email service per user or the AMC in the above example.
Benefit – This model has a great advantage with respect to predictable, low dispute, long term deal.
Caution – Contract should have the flexibility to charge for volume beyond envisaged to ensure in an unlikely situation of extraordinary volume there is no bleed.
- Revenue share
Two organizations come together to offer a product or a service jointly and share the spoils.
Example – Most “value-added services” from telecom operators.
Benefit – You capture % of upside there happens to be one but at the cost of catching the downside too.
Caution – Any time spent on white-boarding in this situation to evaluate “what if” scenarios and tweaking the model will help the longevity of the relationship.
- Gain share
Example: A consulting company A analyses the cost of operations of organization B and suggests transformation which reduces the cost by saying X rupees. Organization B shares say Y% of X with A.
Benefit – This is quite a high-risk high reward type model wherein any gains will lead to highly profitable revenue.
a) This model should have a bare minimum fixed fee to take care of the “costs” while the profits will come from sharing the gain. The fixed fee also forces the customer to co-operate and take you seriously.
b) Also, no more than 10-20% of the total revenue should be based on this model since the outcome & revenue is unpredictable.
- Per transaction
This is when a service is offered typically from a cloud and each transaction is priced.
Example – Internet payment gateways charging ‘convenience fee’ on a per transaction basis.
Benefit – If the customer has growth business then this will be a great model as it is highly likely that there would be a major upside.
Caution – This could be an overhead on the charging and billing systems so this should be deployed only if there is a huge benefit in doing so.
- Independent elements clubbed to form a ‘service”
This is a model wherein many products & services come together as a “solution” and the outcome is priced based on capacity.
Example – Telecom equipment vendor offers a voice or data capacity on a $ per Erlang or $ per MB.
Benefit – This model provides a lot of comfort to the customer as
a) Complexity is hidden from the customers.
b) The customer is protected from any additional expense on account of any element’s estimate going haywire.
Caution – A deep “what if” analytics to understand scenarios which can cause major project cost overruns or quality degradation and build enough cushion to take care of those.
- Outcome-based pricing
A typical cloud-based model
Example – Cloud Storage priced on a per GB or TB.
Benefit – Same as in the above pricing model.
Caution – One should consider a ‘sign up’ fee or ‘annual subscription fee’ to take care of the fixed costs.
- On-demand models
Example: Most shared workspaces are using this in their pricing models i.e., hire a conference room by the hour when needed.
Benefit & Caution – same as above
I have won many deals by leveraging different pricing models. A great example is when in the early 2000s a telecom operator was buying a voice mail system for its landline network for 5 states and was about to place an order for millions of mailboxes. I won the deal by proposing a model wherein he could create as many mailboxes he wanted and pay us for the bandwidth or traffic capacity connected to the system. Given that nobody leaves voice mails in India, this was a great proposition.
I recently invested in a B2B tech start-up which was doing a great job but has hit crossroads – they had the option of either offering a “service” based on their technology to “user companies” or offering their technology to existing service providers who were working with these “user companies”. Keeping both options open is just fine until one makes up their mind. My advice to them now is to offer their software technology to service providers but “as a service on per transaction” basis and not by way of the software license. This helps them to:
- Capture the value in proportion to the benefit their customer will get
- The operations cost will reduce dramatically
- The number of customers to manage will reduce too
- Scale very fast from a few thousand transactions per month to millions per month
- Strategic exit options by software major will become a real possibility
- Spending a year or two working with end-users directly helps them to learn the business in-depth and get leverage in negotiating the “per transaction” price with service providers
(PS: A great book on B2B Business is “B4B: How Technology and Big Data Are Reinventing the Customer-Supplier Relationship” by JB Wood, Todd Hewlin, Thomas Lah.)
Each model has pros & cons with respect to risk, longevity, increase or decrease in revenue based on value delivered. So as the start-up grows, the model will also define how the revenue will be recognized in the balance sheet and at some point in time, revenue recognition norms like IFRS, Sarbanes’s Oxley laws should be considered too. It still hurts when I recollect how we secured a $70 million deal in my early sales days and got the credit for only $6 million due to revenue recognition norms. The pricing model also has an impact on the sales incentive policy and reseller margins.
That’s it in Part 4 – if you have any questions, our comments section is open. Also, watch out for our webinar with Himanshu, that’s coming soon!
In Part 5 of this B2B Sales Playbook for Startups, we will be focusing on ‘creating and structuring legal contracts’