Two pricing heuristics for early stage enterprise software founders

Pricing Otterisms.

A mistake that a lot of early stage founders make when selling to enterprise is that they under-price. Let’s try and help you avoid that with two heuristics.

According to a dictionary, a heuristic is a fancy word for

“any approach to problem solving that employs a pragmatic method that is not fully optimized, perfected, or rationalized, but is nevertheless good enough.”

First up: I’d urge you to read Dave Kellogg on pricing. He writes in paragraphs but we old people like those. Luckily he also does a goodly number of podcasts. Enterprise pricing isn’t simple.

Watch or listen to this one for instance.

In this post I’m not going to discuss outcomes v subscription, land and expand, definitions of ARR, or the impact of AI features etc. I can and will probably bore for Germany on these, but not today.

Context

I often ask founders to guess what SAP takes out of a company like Nestle, and they usually come in between 2% and 10% of the real number. I’ve asked the question 100s of times, and the closest a founder has got is 25% of the number. I’m not going to give the answer here, sorry.

Of course you haven’t got the leverage of SAP. Your customers are 1000s of times bigger than you. You are a minnow. I get that. But you have something they want.

Let’s say for a moment that you are facing sales cycles of 6-9 months. Not unusual.

Today I’m going to give two little tools to help early stage founders think differently about pricing. These aren’t meant to be perfect, so please don’t turn them into a law. But use them to reframe things a bit.

You are dealing with several managerial levels beyond your champion user, RFPs, legal, procurement, IT security audit, responsible AI reviews and integration assessment, finance and more. Now add up the hours the the customer is prepared to spend on procuring your solution. For many of you, that number will be bigger than what you are pricing at, and that’s backwards.

First heuristic

Your Annual Contract Value should be more than what it costs them to buy it.

If a company is prepared to invest a bunch of time and money into buying your thing, then typically they are prepared pay you for it.

The second heuristic

Your Annual Contract Value should be more the annual salary of economic buyer.

This earlier post may help you give more background on how enterprise buyers think.

Your buyer is betting a chunk of their career on your product. If your solution is a success they will get a promotion, and if it doesn’t they won’t. The more “strategic” your product is, the more senior the person buying it. The more senior they are, the more expensive their time is, and typically the longer the process. So if you are selling a new general ledger, the CFO is going to be your economic buyer. If you are optimising recruitment ad spend, it will be middle manager in recruitment.

Time is money, right? Opportunity cost and leverage.

The price of your product should reflect the value the organization can expect from it, minus a bit. If the divergence between these two is too big, organizations won’t thank you, they will simply adjust their value expectations downwards, and push you a layer down the buying tree.

Parting thoughts

1. If they really want your product, they will likely be prepared to pay more for it than you first expect. If they don’t genuinely want your product, no amount of discounting is going to change their minds.

2. When you think about pricing, think in the third person. Founders often have pricing imposter syndrome, so rather than saying I or we will charge x, say the company charges X.

As I usually do, I’ll end with a tune. Last week the bassist, Mani, from the Stone Roses, died. The Stone Roses are one of my favourite bands of all time. So here is Fool’s Gold for you. Play it loud, please.