Last week I had three nearly identical conversations with three different early stage startups about pricing. Specifically, how to price, when to share pricing, and how to gain leverage in pricing negotiations. Those conversations inspired this post. This post will be most applicable for B2B SaaS companies selling novel solutions (not commodities), ideally with an ACV > $50,000.
Everything in life is a negotiation. Especially sales. Negotiations are about leverage. When you’re selling to a potential customer, the customer has all of the leverage. She has the money, and you want the money. You have no leverage. She has all of it. How do you turn the tables?
The essence of sales is about inverting who has the leverage in the negotiation. To do that, you must create value in the mind of the customer. Sales isn’t about persuasion, being the nice guy, or hustling to get the deal. Sales is purely one thing: creating value in the mind of the customer so that you can invert who has the leverage in the negotiation.
If knowledge is power, then empowering your customer by creating value in her mind should work against you. The more she knows, the more she can hold over you, right? Wrong. This sounds counter-intuitive, but educating your customer — creating value in her mind — is the best method to extract as much cash from your customer as fast as possible, while maximizing probability of project success.
How To Turn The Tables
Irrationality always beats rationality. Always. See Donald Trump vs climate change. Donald Trump wins every time.
If you sell your product for $100,000, then you need to be unlocking at least $400,000 of value to the customer. Ideally $500,000 (note, the ratio of value-creation you can capture plummets if the costs are soft costs and not hard costs) . Early in any sales conversation, every customer will ask “how much does it cost?” If you tell them $100,000, you just lost the deal.
Because the customer hasn’t yet recognized how you’ll unlock $400,000 of value. Customers will naturally come up with a number that they feel should be the “cost.” That number has virtually no bearing on reality, on your costs to deliver the solution, or most importantly, the value the customer will unlock by using your solution. It’s a meaningless number, and it will be an order of magnitude lower than the price at which you’d like to sell your solution.
So when you tell the customer the solution costs $100,000 and she’s assigned $50,000 of value to your solution, the deal is over. Paying $2 for a $1 bill is obviously non-sense. This happens all the time, even if the solution would have unlocked $1,000,000 of value for the customer! Customers almost never really quantify the value of a new solution on their own accord. They need to be guided to recognize the value that can be unlocked. But naturally, they won’t see it. And that’s why…
…Irrationality always beat rationality. Always.
So your goal in sales is to make the customer realize that your solution will unlock $500,000 of value for her business. And if you do that successfully — if the customer really, truly believes that your solution will unlock $500,000 of value, then she would be stupid not to pay you $100,000.
Who wouldn’t buy a $5 bill for $1?
When you create that value in the mind of the decision maker, and they really believe in the value of your solution, you have turned the tables. You’ve taken all of the leverage away from the customer. Now you run the show. You have all the leverage.
The customer becomes the rational one. She wants to pay you because you will generate more profits for her, which will impact her take-home pay. You can afford to be irrational, and you can probably get away with it (within reason). Because really, even if you up the price to $110,000, the customer is still saving $390,000! Who would turn that deal down?
How To Deal With “What’s The Price?” In The Real World
Now, getting to this point of value realization — the “aha” moment — can be incredibly difficult. The larger the ACV, the more work it will take to build a true ROI realization model or business impact model. In many cases it can take months of working with business analysts to build a sophisticated ROI realization model. Many customers may not be willing to put in that work up front. The best you can do in these scenarios is to try to ballpark the potential ROI to get the decision maker excited enough to allocate 50–100 hours of other people’s time to figuring out the value realization model. If the decision maker doesn’t want to explore, the deal is dead.
Many customers will want to know the price before they do the heavy lifting of understanding the value. But that is the backwards approach. It leads to failure every time. When you share the price that early, you artificially cap your revenue opportunity, or say a number so high that you offend the customer. This always leads to a dead deal.
So how do you deal with the “what’s the price?” question when it inevitably comes up early in the sales cycle? Easy. Remember, it’s not about you. It’s all about the customer.
“Bob, if we can only deliver $50,000 of value to your $20,000,000 business, is that worth your time? Probably not. As VP of [division/company] you probably don’t waste your time on $50,000 problems. So if we can only deliver $50,000 of value, then we will gladly walk away and leave you to your business. We don’t try to hide pricing, we just recognize that if the project isn’t worth your time, then who cares what the price is.”
You’ll feel uncomfortable saying it at first, but it works everytime. As long as you make it about the customer — and not about yourself — you’ll be fine. No one can hate you for saying “you may be too big/important/good for us.” No one.
Savvy customers may use your logic against you and may respond with “well we have a finite budget this year and if it’s higher than the budget, it’s a no-go regardless, and I don’t want to waste your time. What’s the price?”
For which you can respond with “If I save you $1,000,000 this year and the unallocated budget is $50,000, is it not rational to find an extra $100,000 so you can spend $150,000 to save $1,000,000?” If they insist on rigid budgets still, then the deal is dead. There was never a deal to be had. Their organization is too irrational to do business with. Irrationality always wins.
Irrationality may beat rationality, but don’t let irrationality suck you dry. Cut your losses and move on.
You Have No Leverage Until You Have All Of The Leverage
Sales is a beautiful thing. It may have a poor connotation among laypeople, but true, systematic, structured sales is the ultimate sophistication. There is nothing more rewarding than turning the tables of a negotiation. And when you do, everything changes. You generate more revenue per customer, the deployments run smoother because your project is a higher priority to the decision maker, and you’ll have more reference-able customers… to help you sell more customers!