Determining your pricing for mid market and enterprise customers in the early days of a SaaS company is really hard and the right answer is different for everyone. Just over the last couple of weeks I have spoken to multiple early stage founders who shared stories of pricing issues. One founder said after a deal closed, the customer told him they would have paid double. Unfortunately, this happens a lot. Below are a few simple tips to help think about pricing early on before you gain the knowledge and confidence around pricing that comes from selling to lots of customers.
- Use your sales process & cycle to gut check your pricing and average deal size. You typically want to see a fully ramped AE booking at least 4X their fully burdened cost in ARR in a year. If an AE costs $150K all in, ideally they can book at least $600K in new ARR in a year. Given your sales process, cycle and velocity, how many deals do you think a fully ramped AE should be able to close in a month? How many are you closing as a CEO? If one a week seems reasonable, then ideally your pricing aligns with that and your ACV is at least $12K. If two a month is more realistic, your ACV needs to be more like $24K. You get the point. It’s a simplistic way to look at it but gives you a way to gut check your pricing early on.
- Anchor high and when they inevitably push back on price, ask for something else. If an early customer asks for pricing, start higher than you were initially thinking and when they inevitably negotiate you down on price, use that as an opportunity to ask for other things in exchange for the discount on price. That could be a longer term contract, more money up front, a case study, a testimonial; whatever is most valuable to you at this stage of your business and from that customer. It sounds simple but a lot of founders don’t do it because they don’t want to risk losing the deal. You won’t lose the deal over it. It actually sets the tone of the relationship, so the customer doesn’t think they can walk all over you in negotiations down the road. John Barrows, a sales consultant to many leading SaaS companies, has written and talked a lot about the rule of reciprocity and I couldn’t agree more.
- Your prospects will give you clues, just ask the right questions and listen closely. Prospects often give clues on willingness to pay during your conversations and you can help by drawing out information on how the buyer is thinking about your product. Are they comparing it to other products they currently use or are evaluating? If so, how are those products priced? Do they talk about the impact they think your product can have on their business or KPIs? Pay close attention to these data points and use that to help come up with the pricing you eventually propose to them.
Want more pricing tips? Jason has written about the importance of context when thinking about pricing and challenges founders to identify their largest contract and double pricing for the next customer in this post.