How To Price For B2B with Tom Blomfield | Startup School

**Tom Blomfield** (0:09)
Hi there, my name's Tom, and I'm a partner here at Y Combinator. Today, I'm going to be talking about one of the most common questions I get from founders, which is how to price. So the founder's been working on outbound sales, contacting people, and they finally had a sales call that went really, really well. The champion, that's the person, the customer, who's potentially buying, is really, really interested in the product, and asked us for pricing, and we just froze. What number should we pick? Often, when you haven't worked at a big company, you don't have good calibration about what kind of prices these companies tend to pay for software. And so you might think of the last time you bought software, you know, a subscription to GitHub or ChatGPT, and you pick a ludicrously low number, $19 a month or $49 a month or something like that. Because for founders who have spent the last two or three months building a product, asking for tens or even hundreds of thousands of dollars can feel very uncomfortable. You almost can't say it with a straight face. And so what I'm going to talk about today is a way to come up with a price and justify that price to your customer. So there are three core elements here. And by far, the most important is what I call the value equation. So this is the idea that you sit down with your champion, that's a person at the customer that's really into your product, that perhaps sees it's going to solve one of their biggest problems.
And you write down with this champion, what they expect your product to do for them, what value it's going to deliver to their company. That might be a cost saving, it might be a time saving or an increase in revenue. And you've got to write this down step by step and then get the customer to challenge it, to prod at it and really make sure the assumptions are correct. Because ultimately, it's a tool for that person to take to their boss or their CFO to justify the purchase of this contract. So we're going to walk through a quick example here. Say you're selling a, I don't know, a customer service tool to a big company that has 100 customer support agents and maybe just for the sake of argument, each customer support agent is paid $50,000 a year in salaries, and then there's another $50,000 per employee in additional costs. That might be offices, overheads, health insurance, all that stuff. So the fully loaded cost of each customer service person is $100,000 and they've got 100 of them. So that's $10 million of total customer service cost. And say we're going in to this customer saying we've got this new AI-powered customer service tool that will eliminate 20% of the queries or 20% of the total time spent by that customer service team. That's $2 million of potential cost saving. And so again, remember you're normally saving time, which is cost or reducing cost directly or increasing revenue. Those are typically the three things that companies care about. So once you've established what value you're delivering, the pricing is pretty simple. I typically pick somewhere between 25 and 50% of the value you're delivering. So they keep roughly two-thirds, you keep roughly a third. So our previous example, $2 million of savings, they keep 1.3, you charge them maybe 700k, something like that. And it's a great deal for both of you. This person can take it to their CFO and show really good return on investment. So the great thing about this value equation is it also gives you the success metrics that you need to prove during a pilot project. So you might go to the customer and say, let's try this tool for a month with just a portion of your team. Maybe let's get 10 customer service agents to try it out and see if it actually does reduce queries. And let's measure it. And as long as it reduces queries by 20% or saves the customer service agents at least 20% of the time, we know this value equation holds. And if the metrics come back slightly different, maybe it only saves 15% or it does really well and saves 25%, you can even adjust the pricing based on that. But the value equation tells you the success metrics that you need to prove during a pilot process. So that's the first part of pricing. And by far, it's the most important. If you just stop with that value equation, honestly, you'll get 80 or 90% of the pricing spot on. But there are a couple of other elements it's usually useful to consider. The first of those is cost. What does it cost you to provide this service to the customer? It's important you never start with cost. Some people like to do a cost plus a margin pricing. And it just always ends up with you under pricing your software. Cost should only ever be a floor. So you do your value equation, you take a third of it, that comes out to $700,000. Perhaps your costs are mainly open AI fees or something like that and AWS fees, and that comes to something like $200,000. So $700,000 is your contract value, $200,000 is your cost, you're golden. If, however, you've come up with a value equation and your share of it, which only comes in at $150,000 and your costs are $200,000, you're in a bad business. You have to price at below your cost, which is not sustainable. And so you're either going to have to figure out how to demonstrate more value or change what you're building ultimately or get out of the business entirely. Really, you should be aiming for software margins of like 80 or 90%.