Dan Martell - December 04, 2017


How To Evaluate The Right B2B Pricing Model For Your Software Startup

Hosted by
Dan Martell
Episode #4 - How To Get Into The Cryptocurrency Industry w⧸ Ameer Rosic ( BlockGeeks.com) The 5 Pages You Need For Your Startup's Marketing Website

Episode Stats


Length

9 minutes

Words per minute

193.14

Word count

1,867

Sentence count

88


Summary

Summaries generated with gmurro/bart-large-finetuned-filtered-spotify-podcast-summ .

If you ve ever wondered how to create the right pricing structure for your software product, maybe you ve been trying to do some tests around pricing, and you re feeling like the way you re delivering your product is just not resonating with your customers, and it takes too much time and energy to get them deployed and it s costing you a lot of money, I wanna show you a simple process that s gonna guide you into a way of creating a revenue model that s actually pretty clear, concise and simple to execute on.

Transcript

Transcript generated with Whisper (turbo).
Hosts, guests, and mentioned names generated with spaCy (en_core_web_sm), reconciled against Wikidata.
00:00:00.400 Man, this one's gonna be dense.
00:00:10.780 Avoid the startup graveyard using the
00:00:14.340 software sales matrix.
00:00:16.240 I'm going to encourage you to get a piece of paper
00:00:19.480 and a pen.
00:00:20.320 I'm gonna walk you through this verbally.
00:00:22.020 It's gonna come through but here's the challenge.
00:00:24.100 If you've ever wondered how do you create
00:00:27.460 the right pricing structure for your business,
00:00:29.860 Maybe you have a software product and you've been like
00:00:31.660 trying to do some tests around pricing or you feel like
00:00:35.140 you know the way you're delivering the product
00:00:37.040 it's just not resonating with your customers
00:00:39.100 and it takes too much time and energy to get them deployed
00:00:42.100 and it's costing you a lot of money.
00:00:43.900 I wanna show you a simple process that are really a matrix
00:00:47.580 that's gonna allow you to guide yourself into a way
00:00:51.140 of creating a revenue model that's actually pretty clear,
00:00:55.220 concise and simple to execute on.
00:00:58.280 You know, I was super fortunate back in like 2010,
00:01:02.360 we had just gotten to, I think, around 30,000 a month
00:01:06.940 in reoccurring revenue for our product Flowtown.
00:01:09.100 We had raised 750,000 in venture capital
00:01:12.500 and one day Dharmesh, the CTO from HubSpot,
00:01:16.040 decided to stop by our office to talk to us.
00:01:18.460 And at the time, I think we only had two salespeople
00:01:21.380 and we were really trying to grow the business
00:01:23.860 and even though we had a very strong
00:01:25.620 inbound organic acquisition channel using our blog.
00:01:29.060 We were getting about, I think,
00:01:30.320 quarter million unique visitors a month.
00:01:32.240 A lot of energy, a lot of effort,
00:01:34.080 12 months of focus, blog, traffic.
00:01:38.580 We realized that some of the cost acquired
00:01:41.300 of the customer was inflated because of our sales process.
00:01:44.540 And we were really adamant of creating some level
00:01:47.540 of human touch with people that came into the product.
00:01:50.580 And we were talking to Dharmesh about our pricing structure
00:01:53.860 and he said, you know what?
00:01:54.820 The truth is, is for most products, ballpark,
00:01:57.920 you know, plus or minus 20%,
00:01:59.660 unless you charge $200 a month for your product,
00:02:02.760 you really can't support an inside sales process.
00:02:05.640 And I was like, interesting.
00:02:08.240 And I started kind of doing the math in my head
00:02:09.940 in regards to our costs and, you know,
00:02:12.700 onboarding a customer and the amount of people
00:02:14.440 we had to get on a phone call to bring them over the hump.
00:02:16.480 And then looking at our pricing,
00:02:18.000 which started at $20 a month subscription,
00:02:21.540 I realized that the way we wanted to deliver the value
00:02:24.580 to our customers and the price point we were at
00:02:27.240 and the complexity of onboarding the product
00:02:29.280 wasn't gonna support that model.
00:02:31.420 And it was through that discussion
00:02:32.660 that we finally decided to move up market
00:02:35.200 and change the way we messaged the product
00:02:37.460 and positioned it so that we could justify
00:02:40.600 the increase in price.
00:02:41.760 And what I wanna share with you guys today
00:02:43.300 is the matrix that you wanna use.
00:02:46.340 And on the bottom you have your x-axis.
00:02:48.340 On this side you have your y.
00:02:50.440 The x-axis is complexity, okay?
00:02:52.840 From low to high.
00:02:53.980 and it's really around cost of acquiring a customer
00:02:56.580 and TCS, which is total cost of the service.
00:02:59.720 So how much does it cost you to acquire a customer
00:03:02.180 and how much does it cost you to deliver
00:03:03.580 the value to the customer?
00:03:05.020 Low to high, that's one axis.
00:03:07.300 The Y axis is price, low to high.
00:03:10.100 Do you have a low-priced product?
00:03:11.400 Do you have a high-priced product?
00:03:12.640 What I'm gonna show you is the three types
00:03:15.140 of B2B SaaS models that people use in the price points
00:03:18.640 and the different levels that you can incorporate,
00:03:21.080 your support, your sales, and your marketing,
00:03:23.340 and then how to avoid the startup graveyard
00:03:26.520 which is this quadrant,
00:03:28.380 the high complexity and low price, okay?
00:03:31.420 So the first one is self-serve.
00:03:33.560 Self-serve means typically an annual contract value,
00:03:36.720 so if you take the monthly times 12,
00:03:38.380 your value per year for the product is under $2,000 a year.
00:03:43.580 And for products that have a low ACV,
00:03:46.680 when it comes to supporting the product,
00:03:50.120 usually it's a self-serve model.
00:03:52.020 When it comes to marketing, marketing is just anything
00:03:54.760 that brings awareness to the product.
00:03:57.020 And when it comes to sales, there really is no sales.
00:03:59.800 You have inbound marketing at best, you have press,
00:04:03.760 other ways to just bring awareness to your product.
00:04:06.000 Maybe you have a super low price point and low tier
00:04:08.460 to get people in and you kind of move them up.
00:04:09.980 But still, the average annual contract value is below $2,000.
00:04:14.080 And your support is online hosted help desk
00:04:17.280 where people can self-serve.
00:04:18.480 Maybe you do some email training and you have ways
00:04:21.740 to integrate contextual help,
00:04:23.040 but there really isn't a 1-800 number to call.
00:04:26.040 Maybe you do some light email support.
00:04:28.120 So that is the self-serve model
00:04:29.740 and that's on low price, low complexity.
00:04:32.040 So people can get in there for a low price
00:04:34.220 and use the product, so that works.
00:04:35.920 The next level up is your transactional model.
00:04:38.920 The transactional model is revenues on a yearly basis,
00:04:42.720 the annual contract value between $2,000 and $5,000
00:04:45.960 for your product.
00:04:46.900 So that's when you get into the $200 a month
00:04:49.300 and up for your product and the customers,
00:04:51.820 but it's a higher end business that's willing to invest there.
00:04:55.680 But the good news is when you start doing that,
00:04:57.280 all of a sudden your support starts looking more like,
00:05:01.240 you know, you have an SLA,
00:05:02.300 you have a service level agreement,
00:05:03.400 so you offer some level of uptime,
00:05:05.080 you might have some training as well.
00:05:07.180 Your marketing is focused on generating qualified leads,
00:05:10.980 so it's not just about awareness,
00:05:12.280 it's about saying,
00:05:13.360 how do I get a marketing qualified lead, an MQL?
00:05:17.420 From a sales point of view,
00:05:18.420 you can now afford to invest, and this is super fun,
00:05:21.560 on inside sales reps.
00:05:22.920 So this is potentially SDRs doing outbound awareness
00:05:27.220 and opportunity sourcing, kicking that over
00:05:29.460 to a product specialist to do demos,
00:05:31.100 or it could be just all of the leads coming in,
00:05:33.960 filtering and qualifying them and kicking up
00:05:35.880 the larger accounts to doing a demo
00:05:37.980 and having inside sales rep.
00:05:39.540 So that model allows you to scale faster,
00:05:41.680 but you need to make sure your annual contract value
00:05:43.740 is between two and 5,000, right?
00:05:46.120 So that's the transactional business model.
00:05:48.760 Then finally, the larger one in top right corner,
00:05:51.220 which is high complexity and high price, high value,
00:05:54.060 is your enterprise.
00:05:55.320 And at the enterprise level, you're really 5,000 plus.
00:05:57.940 You know, and I've seen people come out of the gate with
00:05:59.800 10,000 a month MRR prices, so that's like 60,000 ACV,
00:06:04.740 100,000 ACV, quarter million ACV.
00:06:07.380 I mean, at the high end, it has a different level
00:06:09.580 of complexity, but the good news is you can invest in it.
00:06:13.180 So all of a sudden now, you know,
00:06:14.780 the marketing is really focused on brand,
00:06:17.380 it's focused on trust, it's focused on ROI calculators
00:06:20.520 so that you can really get the customer a sense of
00:06:22.660 if I invest at that level,
00:06:24.360 I'm gonna get an ROI in the near term.
00:06:27.100 When you think about support, it's high touch, right?
00:06:29.860 It's on-site support.
00:06:31.500 It's making sure that the customers that are investing,
00:06:34.040 you know, these larger companies,
00:06:35.460 maybe Fortune 2000 companies or SM, or mid-level businesses,
00:06:39.940 that they feel like you've got their back,
00:06:42.380 that you're gonna walk them through
00:06:43.640 and onboard the product and deploy it and make sure that if
00:06:46.040 they need training, you offer that service.
00:06:48.140 And from a sales point of view, I mean, now you're talking
00:06:50.940 territory managers, right, where you actually have people
00:06:53.380 assigned to a territory, they have accounts,
00:06:55.680 they manage those accounts.
00:06:56.880 You even have sales engineers, so engineers that are able to
00:07:00.000 come in, do product demos, integrated demos with the
00:07:03.160 customer's data because when they're writing that size of a
00:07:05.820 check to your start-up, they want to make sure that the
00:07:08.360 product's going to work for them.
00:07:09.540 So you've got the self-serve, you've got the transactional,
00:07:12.200 So self-serve's low price, low complexity.
00:07:14.900 Transactional's higher price, low complexity to sign up.
00:07:17.540 And then you have the enterprise which is higher price,
00:07:19.500 higher complexity in regards to cost to acquire a customer
00:07:22.140 or total cost for the service.
00:07:25.240 Where you don't want to be is called the startup graveyard
00:07:28.580 where you have high complexity and low price.
00:07:31.460 And I've seen this many times with products
00:07:33.720 in the financial space or maybe it's in the analysis
00:07:37.820 or whatever, the requirement to set up the product
00:07:40.800 is a major commitment for a company.
00:07:42.700 If they can't come in and go click, click, start,
00:07:45.540 and you're asking them to have a team meeting
00:07:48.540 and there's security that's gonna get involved
00:07:50.540 and whatever it is to actually get to a point
00:07:53.980 where you're solving a problem, if you don't price it right,
00:07:56.280 you won't be able to get the customer activated.
00:07:59.660 And what you wanna do to get out of that graveyard
00:08:02.620 is kind of focus on three different core amplifiers.
00:08:07.100 The first one is just increase your value.
00:08:09.520 Try to figure out what is it in our product
00:08:11.720 that we can kind of increase the value to the customer
00:08:15.100 so that we can charge the higher prices.
00:08:16.900 So you want to move up on value.
00:08:18.460 You want to move up and to the right on profit.
00:08:20.840 You want to make sure that whatever it's costing you
00:08:23.300 to deploy the product to make sure your customers use it,
00:08:26.540 that you can afford it and it's baked into the pricing model.
00:08:29.600 And then finally, you want to move this way
00:08:32.040 where the velocity increases,
00:08:33.620 meaning the complexity comes down.
00:08:35.180 Maybe you decide to build some API integrations
00:08:38.580 with the product so that they don't need to spend
00:08:40.320 as much time getting set up.
00:08:41.840 But that's how, from the startup graveyard,
00:08:44.180 which is low value or low price and high complexity,
00:08:47.800 you can move up in value, over in profit,
00:08:50.360 and across in reducing your complexity
00:08:53.000 by increasing your velocity.
00:08:54.860 That's how you avoid the startup graveyard.
00:08:56.600 So, if you're in self-serve, many products go like this.
00:08:59.560 You wanna start in self-serve, move up to transactional,
00:09:02.180 from transactional, move over to enterprise,
00:09:04.240 and that is how you scale your B2B SaaS software business.
00:09:09.640 I hope this video finds you incredibly well.
00:09:11.780 I would challenge you to leave a comment below
00:09:13.360 and let me know what was your biggest takeaway
00:09:15.360 from this video, what resonated with you the most,
00:09:17.280 what are you gonna change in your business,
00:09:19.020 and as per usual, I wanna challenge you
00:09:20.560 to live a bigger life and a bigger business,
00:09:22.580 and I'll see you next Monday.
00:09:24.040 If you like this video, be sure to subscribe to my channels
00:09:26.240 for other information on how to grow
00:09:27.640 and scale your software business.
00:09:29.040 I'd also encourage you to join my newsletter
00:09:31.200 to get exclusive invites to events,
00:09:33.740 other contests and free training.
00:09:36.140 And if you want to get going,
00:09:36.980 I got two more videos queued up for you.
00:09:38.540 I'll see you next Monday.