The Complete Startup Playbook for B2B Pricing

Macy Mills from A16Z Speedrun delves into B2B business models, emphasizing the importance of distinguishing between B2B and B2C, particularly in product-led growth (PLG) environments. She highlights four B2B pricing models: usage-based, subscription, project-based, and site-based, advising on their strategic applications. Mills warns against common pricing pitfalls, such as undervaluing products and overly complex pricing structures, while advocating for simplicity and customer feedback. She underscores the significance of metrics like ARR, ACV, and churn rate in evaluating pricing success and encourages adaptable strategies to enhance business scalability and growth.

• Understanding the distinction between B2B and B2C is crucial for startups as it influences product development and pricing strategies.
• B2B PLG (Product-Led Growth) products often foster collaboration, allowing users to derive value while working with others.
• The distinction between PLG and top-down sales is significant; PLG is organic and may take years to build, whereas top-down sales involve active lead generation and follow-up.
• Businesses can employ both PLG and top-down sales strategies simultaneously for optimal growth.

"In a world where PLG or product-led growth continues to gain momentum, the lines begin to blur between B2B and B2C, understanding the distinction for your business is crucial for startups because it will affect decisions such as product development and pricing strategy."

• Highlighting the importance of distinguishing between B2B and B2C for strategic business decisions.

"One key differentiator in my mind is that B2B products often foster collaboration. That means that I can jump into the product and have value while working with somebody else."

• Emphasizing collaboration as a defining feature of B2B PLG products.

"A lot of startups think you have to pick one or the other. Am I product-led growth? Do I focus on organic virality or am I a top-down sales motion? In reality, you can have both motions running simultaneously."

• Clarifying that businesses can simultaneously employ both PLG and top-down sales strategies for growth.

• Customers are charged based on their consumption or usage of the product, popular among cloud providers and AI products.
• This model helps balance infrastructure costs with revenue, as costs increase with higher usage.
• Usage-based pricing scales with customer growth, making it a profitable model over time.

"Usage or consumption-based pricing is basically pay as you go. You charge the customer based on how much they consume."

• Describing the foundational concept of usage-based pricing.

"This allows you to balance your cost of the infrastructure with what you're charging and the revenue that you're getting from customers."

• Explaining how usage-based pricing aligns costs with revenue generation.

• Involves monthly or annual recurring subscriptions, offering predictability for both the business and customers.
• Often associated with user-based pricing, where charges are based on the number of users.
• Subscription models like Slack charge per user, while others like Salesforce offer tiered systems with user limits.

"This is the SAS classic. Monthly or annual recurring subscriptions drive predictability for not only you but also your customers."

• Highlighting the predictability and stability offered by subscription-based pricing.

"It's hard to offer an unlimited amount of users because you're capping your ability to upsell customers in the future."

• Discussing the limitations of offering unlimited users in a subscription model.

• Pricing is based on a specific project or timeframe, common in consultancy or professional services.
• Often involves design partnerships for specific platform features or road map adjustments.

"This is quite common when it comes to consultancy or services or professional support on a one-off basis."

• Indicating the prevalence of project-based pricing in consultancy and professional services.

• Selecting the right business model is dependent on the product, costs, and ideal customer profile (ICP).
• Businesses must consider infrastructure and compute costs, especially in AI, when determining pricing strategies.
• Flexibility in pricing models can accommodate different customer needs and business growth objectives.

"The right one depends on your product, your cost, and your ICP or ideal customer profile."

• Emphasizing the importance of aligning pricing models with product specifics and customer profiles.

"If you're building an AI product, you know that your AI infrastructure costs are now starting to compete with your cloud costs for taking up the most of your margin."

• Highlighting the significant impact of infrastructure costs on pricing strategies, particularly in AI.

• Project-based or services-based pricing can yield early revenue bumps but often result in demanding customers and non-repeatable processes.
• Founders are encouraged to transition to scalable and predictable pricing models to appeal to investors.

"I always urge founders to switch over from project-based pricing or services-based pricing as quickly as possible to something that's a bit more scalable and a bit more predictable for them to talk to their investors about."

• The importance of moving away from project-based pricing lies in scalability and investor appeal.

• Site-based pricing restricts product access to specific locations but is losing popularity due to remote work trends.
• This model is not recommended for modern businesses as it doesn't align with distributed workforce trends.

"As the workforce becomes more distributed and remote working becomes the norm, site-based pricing continues to lose popularity."

• The decline of site-based pricing is attributed to the rise of remote work.

• Combining usage-based and subscription-based pricing is beneficial, especially for AI startups.
• This blend offers predictability and potential revenue growth.

"Blending number one, usage or consumption-based pricing with number two, subscription or user-based pricing is a really good option, especially for AI startups."

• The combination of these models provides both stability and growth potential.

• Tiering allows businesses to segment customers based on their needs, often differentiated by features.
• Common tiering examples include starter, company, and enterprise packs.

"Tiering allows you to drive different users and different ICPs into different tiers based on what products or services they specifically need."

• Tiering helps in catering to diverse customer needs through structured pricing.

• Founders should avoid setting prices too low, even if initial low pricing closes deals quickly.
• Consistently hearing "yes" without resistance indicates potentially undervalued pricing.

"Each time a customer says yes to a price is a confirmation that your pricing is either correct or maybe even too low."

• Customer agreement without hesitation suggests the need to reassess pricing.

• Conduct market research and gather customer feedback to refine pricing strategies.
• Pay attention to customer engagement and questions about product implementation.

"Pay close attention to what they're saying and what they're not saying. If your customer isn't asking you questions about implementation or setup success, how seriously are they really taking your product?"

• Customer inquiries about product use indicate genuine interest and engagement.

• Keep pricing models simple and transparent to facilitate customer understanding and agreement.
• Avoid overly complex pricing structures that deter potential customers.

"Simplicity and transparency are key. Your customers are just like you. They want something that's as easy to understand as possible."

• Simple pricing models enhance customer comprehension and decision-making.

• Pricing based on self-declared data can lead to complications and inconsistencies.
• Founders should avoid relying on customer-provided data for pricing decisions.

"If you're building tiers based on these self-declared things, you're actually leaving the onus on the customer to figure out how much they owe you."

• Self-declared data in pricing can lead to confusion and inaccurate billing.

• Avoid setting arbitrary pricing tiers that require constant customer compliance checks, as this can strain customer relationships and distract sales teams from more productive activities like acquiring new customers or upselling existing ones.
• Compliance-based pricing models can lead to uncomfortable interactions with customers and can be perceived negatively.

"So, if you're setting up these arbitrary tiers, which I told you not to in the last tip, I mean, come on, really? You'll basically again be always chasing customers to ensure that their data is accurate."

• Arbitrary tiers create unnecessary work and can lead to negative customer interactions.

"It's also not the nicest way to start a conversation. Hey, your data is wrong. You lied to me. You owe me more money."

• Compliance-based conversations can damage customer relationships and brand perception.

• Pricing should be viewed as both an art and a science, requiring a deep understanding of your ideal customer profile, cost structure, and business goals.
• Pricing models should be adaptable to ensure they align with the evolving needs of the business and its customers.

"I truly believe that pricing is not one-size-fits-all. I spend my time working with founders of Speedrun, helping them decide all the little details when it comes to the price point and the business models that they're going to take their product to market with."

• Personalized pricing strategies are crucial for aligning with specific business models and customer needs.

"There's a lot of content out there that tells you exactly how to price down to a science. But in reality, pricing is an art and a science."

• Effective pricing requires a balance of analytical and creative approaches.

• Lower barriers to entry by offering free or low-cost plans, allowing potential customers to experience the product's value before committing to a purchase.
• Consider reverse trials that provide full access to features initially, then limit access after a period, allowing customers to prioritize the features they find most valuable.

"Think about pricing as an invitation, not a barrier. You want to lower the barrier to entry so that it's easy for new users to adopt your product."

• Pricing should be structured to encourage trial and adoption rather than deter potential customers.

"One frictionless way to lower the barrier to entry is by offering free or low-cost plans to get people onto your platform."

• Free or low-cost entry points can facilitate customer acquisition by showcasing product value.

• Encourage long-term customer commitment by offering discounts for yearly subscriptions or consumption-based pricing models, enhancing revenue predictability.

"One way to encourage adoption is to offer a 10 or 20% discount if the user will commit to a year instead of, let's say, a month."

• Discounts for long-term commitments benefit both customers and businesses by providing savings and revenue stability.

"You can offer a similar type of discount for consumption-based pricing. The way that this typically works is that you offer a certain amount of tokens or credits upfront."

• Consumption-based discounts incentivize larger purchases and long-term customer relationships.

• Implement tiered pricing with a limited number of tiers to avoid customer confusion and provide clear paths for upselling and expansion.
• Align tiered pricing with the needs of different customer profiles, from hobbyists to large enterprises.

"If you've ever bought a product before, you've probably seen tier-based pricing. The most common use case of this is in the subscription or user-based pricing where the more you pay, the more features you get."

• Tiered pricing offers a structured approach to feature access and pricing.

"If you have more than three, maximum four tiers, you're probably overdoing it."

• Limiting the number of tiers simplifies decision-making for customers.

• Regularly test pricing strategies with customers to gauge their willingness to pay and adjust as necessary to align with market expectations and product maturity.
• Value-based pricing can be introduced as the product matures and customer insights are gathered.

"In terms of picking the right actual price point, test it out. You won't know how much customers are willing to pay until you throw some numbers at them and get their reaction."

• Customer feedback is essential for determining optimal pricing points.

"Therefore, I tend to think of value-based pricing as a strategy. Not only that, but a strategy that I would look to incorporate later on in your life cycle."

• Value-based pricing can enhance profitability as the product and customer understanding evolve.

• Track key metrics such as the number of paying customers to evaluate the effectiveness of pricing strategies and business models.
• Early metrics are crucial for demonstrating pricing model success to investors and stakeholders.

"Let's talk about some ways that you can measure the success of your new pricing and business model. What early metrics will your investors care about to see if it's working or not?"

• Metrics provide insight into the effectiveness of pricing strategies and inform future adjustments.

• Transitioning from one to five customers and then to 30 is a crucial growth phase.
• Tracking customer acquisition rate is essential to demonstrate scaling capability to investors.
• Quality of customers is as important as quantity; focus on Ideal Customer Profiles (ICPs) for sustainable growth.

"Tracking how quickly you are accruing new customers is also crucial as this can show your investors how quickly you're scaling."

• Demonstrates the importance of customer acquisition rate as a metric for business growth.

"Ensuring you're understanding that quality versus just quantity is another key to success."

• Highlights the significance of acquiring the right type of customers for long-term success.

• ARR (Annual Recurring Revenue) and ACV (Annual Contract Value) are key metrics for evaluating pricing effectiveness.
• ARR is suitable for subscription-based models, while ACV is better for bespoke business models.
• Consistent revenue growth is favorable for business and investor confidence.

"ARR tends to make the most sense when you're looking at those subscription-based or user-based models that we talked about, while annual contract value might make more sense if you're looking at some of the more bespoke business models."

• Explains the contexts in which ARR and ACV are most applicable.

• Assessing the time taken to close sales helps determine pricing accuracy.
• The goal is to reduce the sales cycle length over time.
• Founders must ensure sales cycle length isn't influenced by external or personal factors.

"Determine how long it's taking you to get to closed one. This will help you determine if you're pricing correctly."

• Emphasizes the importance of monitoring sales cycle length to refine pricing strategies.

• Churn rate indicates whether customers are leaving or renewing; a 25% churn rate is typical in PLG models.
• Exit interviews can provide insights to improve retention and reduce churn.
• Net Revenue Retention (NRR) measures revenue from current users after accounting for upgrades, downgrades, and churn.

"Churn is going to be something that investors are going to look closely at. Ensure that you're tracking it and also doing exit interviews with customers who decided to not work with your product any longer."

• Underlines the importance of churn rate as a metric for investor evaluation and business health.

"Net revenue retention measures the percentage of recurring revenue from your current users, whether they've downgraded, upgraded, or expanded, not counting for new revenue from brand new users."

• Describes NRR as a crucial metric for understanding customer retention and revenue sustainability.

• Calculation of NRR involves comparing end-of-period revenue to start-of-period revenue, accounting for upsells, downgrades, and churn.
• An NRR greater than 120% is outstanding, indicating significant upsells or expansions.
• NRR below 90% suggests issues with churn or insufficient expansion.

"Net revenue retention formula is revenue at the end of the period, so $4,200 divided by the revenue at the start of the period or $5,000. Times that by 100, and you get your net revenue retention over the period, which is 84%."

• Provides a practical example of calculating NRR and interpreting the results.

"Outstanding NRR is greater than 120%. That means that most of your customers are probably upselling or expanding."

• Sets benchmarks for evaluating NRR performance and identifying areas for improvement.

• Pricing should be viewed as a strategic model, not just a number.
• Flexibility and iteration are key as the business grows.
• Avoid common pricing mistakes by aligning strategy with business goals.

"Pricing isn't just a number, it's a strategy. Start with a model that makes the most sense to you."

• Encourages a strategic approach to pricing, emphasizing adaptability and alignment with business objectives.