I was talking with a founder last week who wants to differentiate on price. He's excited because his product's price is 90% less than the main competitor’s price.

The problem is that is a terrible differentiator for B2B SaaS products.

Walmart and Costco can differentiate on price. They have economies of scale that matter in retail.

Software is a different business.

In B2B software, the value you deliver to the business will determine your price point.

But how do you know what to charge?

When you are under $1m in ARR, it’s tough to know how much people are willing to pay for your product.

Most founders start their prices too low.

Just Raise Prices! But how?

In an interview, Tim Ferriss asked Marc Andreessen, "If you had the chance to put up a billboard anywhere, what would you write on it?" Marc replied, "Raise prices!"

This is good advice, but leaves more questions than answers:

"How am I supposed to raise prices on my customers?"

"How much should I raise prices?"

"What's the best value metric for my product?"

"What if I start losing customers because of price?"

These are the thoughts that go through every founders mind when they price their product.

I know because I struggled with this at Levelset.

We were so desperate for new customers and revenue in the first couple of year. Our pricing strategy was simple: charge people in the way that they already know how to buy.

Every customer in a given market has muscle memory with how they buy things. They have a preferred way to talk about pricing. They have a cadence for how often and on what terms they want to pay. Credit Card, Check, ACH, Net terms, etc.

It's important to understand how customers are already buying products in your space. When you are in the early stages of building a company, copy what's already working.

Once you get to $1m ARR you will know much more about what matters to customers. Then you can adjust your price and make it your own.

Principles for Pricing your Product

Every company needs rules that guide the pricing decisions. Doesn't matter if you are a startup or a $100m ARR company. You have to have principles.

So I've put together my principles about pricing. A collection of rules that I have gathered over the last decade of scaling SaaS teams. These rules are for more than just creating the price. These rules will help you and your team get better at talking about price with customers.

I'm certain that you will be able to use some of these principles to make your own sales process better. Here they are:

1. Your product should deliver at least 10x value compared the price that you are charging.

2. You have to ask for the money. People aren’t going to offer you their hard-earned cash. You have to actually say “would you like to buy our product today”.

3. Never negotiate against yourself. Say your price, then let the customer tell you if it’s too expensive. You can always negotiate down. It's hard to go the other way.

4. Price is only a factor in absence of value. Always communicate the price of your product in terms of the value that you deliver to the customer.

5. Sell to your customers the way that they want to buy. If they like to pay monthly, then charge monthly. If they lay to pay based on the number of units consumed, then charge by the number of units consumed. If they like to pay by check in the mail, then accept checks in the mail.

6. If you can, avoid pricing by seat or by company revenue. It creates bad incentives for the customer to withhold information in the relationship. Find a value metric that scales as the customer gets more value from the product.

7. Never communicate price for the first time through email or text. Only send pricing info by text after you have already talked through the price with the customer. Pick up the phone.

8. If you are using a sales team to sell your product, you want an annual contract value of at least $10k. This gives enough room to afford the customer acquisition cost.

9. Product-Led-Growth is not going to get you the first $1m in sales. Before $1m in ARR, the best way to get new customers is to talk to them on the phone. That's how you learn the best way to sell to customers.

10. Make a one-page agreement and get the customer to sign it. Outline the commercial terms of your relationship and link to the terms of use. You will be happy to have something to reference when it’s time to renew their subscription. This leads to more expansion and upsell opportunities.

11. Your future economics will wash out your current economics. You will change pricing 100 times over the course of your business, so don’t over-analyze your pricing. To kick off the relationship, get a price in the customer’s hands that makes sense for them. You can always change the pricing later during the renewal or when new customers sign up.

Higher prices is better business

Higher prices are better for software companies. Unless your strategy is to be the low cost leader in the market (which is a bad strategy for SaaS).

Better (and higher) pricing increases win rates. Companies want to pay for value. They are skeptical of low prices

Your sales team is more motivated because they will be paid more. The commission math is simple: higher prices means bigger commission checks.

Higher prices are a signal of a premium product. And the premium product is a better position in the market for B2B software products

Higher prices means more margin, more margin that you can invest in the product to deliver more value.

But beware of pricing yourself too high. There's no benefit to price-gouging just because you can.

The price should be fair for both you and the customer.