Though he’s nearly seen it all, Tyler Gaffney still gets surprised when early-stage B2B startups tell him how they’ve determined their pricing. The common thread? Many tend to make pricing decisions largely in a vacuum and dangerously removed from a broader go-to-market strategy. This is a natural approach, because early-stage companies often lack the resources — the brand recognition, troves of customer data, pricing experts crunching scenarios, or runway to execute — but it can turn into a big problem, especially when you consider how pricing can play an instrumental role in going to market.
As First Round Capital’s Sales Expert in Residence, Gaffney has a unique perspective on how early-stage B2B pricing and go-to-market strategy takes shape, having worked with 30+ Seed or Series A-stage startups over the last two years. He knows how the pieces must eventually fit together, having taken WePay from 0 to $50M in revenue and sold big medical equipment at GE. Now as the CEO of Entrepid Partners, Gaffney’s made his name by helping early-stage B2B startups drive revenue.
In this exclusive interview, Gaffney gives early-stage founders of B2B startups a better sense of where to start, and demystifies the complexity around pricing experimentation by walking through his most fundamental pricing principles. Read on to learn what missteps to avoid, early experiments to run, how to frame your price to early customers, mitigate their concerns along the way, and where to look to find the answers to many of the hardest pricing questions.
MAJOR PITFALLS TO SIDESTEP WITH B2B PRICING
Gaffney is a firm believer that pricing is more art than science for early-stage B2B startups. “You can’t anchor to a mound of customer data, because you simply don’t have it yet,” says Gaffney. “But you have to start somewhere. Getting pricing right requires an experimental mindset and willingness to have an honest dialogue with potential customers — the same sort of mindset that is key to success at the early stage in general. Each conversation is another signal telling you if you’re moving in the right direction, or if you need to adapt and change.”
Though that advice seems straightforward, Gaffney finds many startup teams fail to appreciate how price underpins their overall go-to-market approach. Here are the mistakes he says B2B startups commit over and over again.
Mistake #1: Prices are conjured without customers. “People get caught up behind the computer screen trying to figure pricing out, or doing a ton of benchmarking and research. Instead, they should be having conversations. All the answers are in your customers’ heads,” says Gaffney. “Founders must get out of the their boxes — computer screen, office, city block — and meet with customers. The best I’ve seen do 3-5 daily customer meetings.”
Mistake #2: Prices are set in stone, not in motion. “When it comes to setting a product’s introductory price, Gaffney sees founders falling into a common psychological trap. They pick a price, get a few affirming nods from colleagues — and possibly a few early leads as well — and declare, ‘This is it. This is the price we’re taking to market,’” says Gaffney. “Founders pick what should be a pricing starting point, but stick to it as if it’s a permanent solution, even though their businesses are growing and changing. Eventually, that approach breaks down.”
Mistake #3: The price is too low. “Even the most confident teams price too low. Very rarely do I encounter early-stage founders who’ve priced their product too high. Instead of letting the market tell them where they’re not going to win deals, they’d rather price lower and end up trying to interpret where on the pricing spectrum they’ve landed. That’s how founders talk themselves into the discounted side of the pendulum,” says Gaffney. “This instinct is especially problematic when paired with the rampant belief that it’s very hard to raise prices, but that lowering them is easier. If you’ve already started from a low price and are hesitant to raise it over time, you’re already capping your growth.”
Mistake #4: The pricing structure is overengineered. “In addition to feeling locked into a price, many startups’ early pricing pitfalls are rooted in trying to innovate too much on pricing structure. In competitive markets, customers are used to buying in a certain way, such as a monthly fee or per transaction. Anything far afield, such as charging per API call, can be a high barrier for customers to understand and adapt,” says Gaffney. “Similarly, there can be too many complexities around pricing itself. For example, one company Entrepid worked with wanted to charge companies on a per-location basis, but the industry was accustomed to being charged per employee. Many prospects just couldn't wrap their heads around it, and would back into the numbers anyway."
Speaking to customers about pricing can be stressful. But I promise you that not talking to them and attempting to interpret their silence is more excruciating.
WHERE AND HOW TO START WITH B2B PRICING
Startups must maximize their learning per conversation around pricing. To do so, Gaffney recommends zooming out first to their goals around a go-to-market strategy. At this stage, pricing is a pathway to the market, so it must serve the strategy through which a company hopes to get a foothold. So, before you begin experimenting with pricing, Gaffney advises you to get clear on the main driver in your go-to-market strategy. It might be one of the following:
Getting your first five publicly referenceable customers
Securing one or more key customer logos
Gaining market share
Each of these goals has a different optimization, often at the cost of another. “If you’re trying to secure your first five publicly referenceable customers, your top priority isn’t maximizing revenue — it’s making sure these customers see the value of your product. These are people that will help you get a lot more customers. In the very early days, your strategy is more about getting established and then moving forward,”says Gaffney. “Similarly, maybe you’ve spotted a company that presents a large expansion opportunity. Your goal here might be to price lower than the market so as to get your foot in the door and build from there.”
When it comes to your first paying customers, these folks represent much more than income and validation of your early work. Each of these, Gaffney points out, is an invaluable data point. “If you’re trying to get your first ten, or even 50 customers, you don’t have many swings — but there’s room for a some experimentation. Make the most of pricing conversations by setting a clear hypothesis,” says Gaffney. “Let’s say you’ve started a new workplace collaboration app, and you believe you can charge $30,000 ACV [annual contract value] for customers that have more than 1,000 end users. Deliver this price through conversation with the next five prospects who fit this demographic. Then, gather their feedback. If they’re adverse to the price, ask open-ended questions that expose the root causes of their anxiety, and then re-evaluate.”
What To Have At The Ready Before Speaking with a Potential Customer
For early-stage startups, these pricing tests don’t require a ton of data points to become actionable. Gaffney has found that, in as few as five customer development conversations, teams can apply their takeaways and adapt the next experiment. It’s a much more iterative approach, rather than a big 100-customer test that will take much longer to execute.
Gaffney recommends different customer development questions to ask, depending on where you are with your pricing experiments. Here are a few of his key questions to consider for customer development conversations for early or neutral prospects:
What is the last software solution you bought? Tell me about that evaluation process.
If I told you that I have a solution to [insert pain point], would you be interested? Why?
What do you think is an acceptable price for a product that solves this problem?
What is an expensive price?
What is a really expensive price?
What is your budget for a solution in [insert your product category, such as BI/analytics, security, collaboration tools etc]?
These customer development questions are part of a broader set that Tyler and his team share with startups so they can get a more informed understanding of how customers think about their product and market.
According to Gaffney, your early customer development conversations start to help you define two key inputs around price, which will shape all of your pricing tests and strategies that follow:
Your product’s upper bound: This is the highest price the market will allow you to charge for the value you provide. “Once you secure a handful of data points through deals with early customers, begin gearing your experiments toward finding this ceiling,” says Gaffney. “Force yourself to test this. If you don’t get into that uncomfortable zone of pushing higher for a higher price, you won’t find it. How do you know you’re there? You’ll be getting pushback on price, but if you’ve done a good job showing the value of the product, prospects will still be interested. However, you may find deals getting pushed to the next budget cycle or to a later quarter. That’s because, at a certain point, price can be a barrier and, even if prospects might value your product, they may delay a purchase. But the key here is that you’ve identified your product’s upper bound, and now can decide whether pricing at this point is strategic or counterproductive to current growth.”
Your anchor: While your upper bound is a dollar figure, your anchor is something that the customer compares your product against. “What are you replacing? Set the anchor to something the customer understands, like our software replaces the need for a HR administrator, who typically makes around $75k per year,” says Gaffney. “Make sure you find an anchor that gives you a price point that's high enough. If the customer's going to compare your product to a $500 or $1,000 per month solution, you need to find a way to change that perception. Your anchor can be a full-time hire or even a team — the bigger, the better. How do you get them to compare your solution to their entire marketing team, or to an ERP system that they bought?” Don’t expect your customers to figure this out on their own. They’ll compare you to tools they already use or concepts that are familiar to them. It’s up to you to paint the full picture.”
The goal is to get data that will really give you confidence in your upper bound and anchor. If your early customer development conversations have given you insight into those two factors, shift your focus to the more robust pricing conversations that you will run.
How to Increase Your Confidence — And Signal — in Pricing Conversations
When you’re still testing out the market, pricing is inherently a nerve-wracking conversation. You may only have a handful of customers, but it’s a challenge founders must embrace. “First, step back and remember what this exchange represents,” says Gaffney. “This is the moment when you get trust and money from your customers for all the hard work the team has put into it. If you've made to this point, there's a high likelihood that you'll get something from the interaction — a data point, feedback, a referral or a closed deal. If they’ve given you their time, there’s something to gain.”
The key is to have a plan for these discussions. Most early-stage teams don’t have sales teams built out, so it may land on the founder or a sales-oriented team member. Regardless, here are the key steps for anyone who plans to lead a pricing conversation.
Qualify before you quantify — prospects need to earn pricing.
It’s no surprise that one must outline the offering before one gives the price. But Gaffney finds that people jump the gun, especially if the lead preemptively talks about pricing. “Prospects should ‘earn’ the pricing conversation. Broadly speaking, that means that you, the salesperson, must understand the prospect’s challenges, how your product can solve these challenges, and have verbal confirmation that they agree on the value of the product,” says Gaffney. “Lastly, you have softly closed the customer with a verbal commitment. Get to the stage where you can plausibly ask: ‘Based on everything we have discussed, would you like to move forward?’”
To begin the qualifying process, Gaffney and his team recommends the CONSULT method to ensure that fact-finding happens in the most critical areas and that prospects are fully qualified before discussing pricing:
Current process: your prospect’s present-day workflow
Ongoing challenges & pain: the areas for improvement in the current process
Needs & product requirements: what's important in a solution to the prospect
Success criteria: what a win looks like to the prospect after using a new solution
Understand evaluation process: how a prospect assesses a solution and who pays for it
Leadership involved: the people who make the decision to buy and use the solution
Timelines & priority: when and how badly the customer wants to make the purchase
The goal is to drive home the concrete value your product offers and get customers to “earn” their way to your price point. Even if prospects lean in more quickly than expected, deftly guide them back to the product. “If all of a sudden we’re at pricing, and haven’t yet shown a demo, I have concerns. Customers that only care about price early in the sales process don’t have the chance to appreciate the product. They’re likely just price-driven and playing you off another competitor. Price is a factor in most deals, but when it comes up early it is suspect,” says Gaffney. “There will be times where the customer is very pushy and you need to deliver a price. The best practice is to deliver a range. Try language like: ‘We have some small customers using the basic version of our product paying around $20k per year. Larger customers pay over $100k per year for our premium product.’ Ranges are helpful gauges, so you don’t go too far in the sales process with customers who’d never pay for your solution.”
Once you’ve qualified leads with the CONSULT method, listen for key phrases that express informed intent — versus ungrounded enthusiasm. These are the types of answers to seek:
“I know who could use this. I know which budget this comes out of.” This person is informed enough to pinpoint a beneficiary and/or a budget, so identifies an owner.
“I know which particular problem this solves for us.” or “I can see where this improves what we do.” This declaration shows enough understanding that there’s a suggestion of application to or integration into an existing process.
“This can replace what we have to make my life easier/better/faster.” This assertion indicates an exchange, which links their value system to what you’re offering.
“We’ve wanted/tried to build something like this.” This illustrates a connection to a previous value or need.
In other words, a potential customer saying ‘This is a solution to my problem’ is not enough; it needs to be rooted to sufficient knowledge of your offering. “I challenge founders and ask them for the specific reasons that a prospect is interested. Often they don’t know — or can’t name them clearly,’ says Gaffney. “When that happens, it means they haven’t qualified the deal appropriately and connected a prospect’s values and needs back to the offering. A founder or salesperson must be able to articulate at least three values that are important to the prospect. If they can’t, how can they expect to know if the solution serves those principles and priorities?”
If prospects don’t get to that point, Gaffney says, you’re wasting your time. “At that point people are buying based on cost, not based on the value of your product,” he says. “You're in a market that you have multiple different competitors, and they're going to buy yours purely because it’s the lowest priced. When has that worked out well in the software world?”
Deliver your price in real-time.
When you’re discussing pricing with a lead, deliver the price in person or, at the very least, over the phone. Never deliver pricing over email. This cuts off your all-important feedback loop. “When I hear a founder complain about a prospect who went dark, I ask how the price was delivered,” says Gaffney. “I’d say nine out of ten startups have initial conversations and demos over the phone, but when it comes to price, they deliver it over email. That’s a mistake.”
Whether in-person or on the phone, deliver the price to the prospect, briefly pause, and then ask for their initial feedback on the pricing. “That pause allows the prospect to make an initial evaluation and connect the solution’s value to the price. Don’t rush by that. Many do because they want immediate feedback or affirmation,” says Gaffney. “This is public speaking 101. It’s not about what you deliver. It’s about how they receive it. Give them a moment to consider the price. How they process this news will tell you a lot about where they stand, so observe.”
A conversation allows for more nimble inquiry into objections or context that’s missing. “Let's say the say your proposed price of $30,000 is way too high. If you're having a live dialogue, you can recover from that,” says Gaffney. “Ask the prospect which parts are concerning to them. It could be the structure of the agreement, budget constraints or an entirely different reason.”
One of two things can happen from here:
You're able to deliver an informed response based on that information — ideally, with a price that's a little more palatable — and come to an agreement.
The prospect declines, so the salesperson should reiterate value. If they hold firm, you’ve extracted as much data out of the discussion. If you’ve proven the value of the product and it matches up with their challenges, this should rarely happen.
In addition, conversations not only allow for adjustment, but also set the tone for follow-up. “You can modify your approach in conversation midstream much easier than in email,” says Gaffney. “For example, you can always come back and say, ‘This is really helpful, let me see what I can do on our side and then I can come back to you.’ Outline next steps before hanging up. This gives you a reason to circle back with an email or another conversation. As a conversation, you’ll likely get acknowledgement. As an email, it’s more likely to be archived and forgotten.”
Don’t panic if prospects react adversely.
First, recognize that an objection means they’ve listened and reacted — they’ve internalized what your offering might mean to their work or company. They may not be able to give a specific price or range that works, but don’t panic. Pause before offering a discount. “When people are trying to get early customers or gain market share, they feel like this is the chance,” says Gaffney. “You hear, ‘I’ve got this one shot and if I don't get this deal closed today, who knows what's going to happen,’ which is not necessarily the case. By this point, the salesperson has ostensibly taken the time to qualify the lead, drawn a straight line between the prospect’s challenge and the company’s solution, and gotten signal that the prospect gets the value. Both parties have invested a ton of time at this point and there’s real interest. One more call could delay the deal but not kill it.”
Instead of jumping to a discount, foster empathy. Don’t be afraid to own up being an early-stage company, along with the constraints that come with that. Here’s how that dialogue might look:
Founder: “Hey, we're a young company. We're constantly trying to learn from our customers. We believe that we bring a lot of value to your organization, but what specifically are your concerns around the price?”
Prospect: “It comes down to budgetary constraints for us. If you can get the price under $45,000, we’ll buy your product tomorrow.”
Founder: “That's really helpful. Let me see what I can do, and I’ll come back to you shortly.”
According to Gaffney, this type of exchange reframes the sales conversation and gathers intel. Fewer deals will go dark if more founders and early salespeople can try this type of dialogue.
TOOLS AND TIPS FOR TRACKING YOUR FEEDBACK
As your company grows, you’ll eventually have a CRM system that manages all of your data around pricing conversations: at scale, that could be Salesforce. In the early days, however, Gaffney stresses not to overcomplicate the tracking process. “Don’t think you need a robust implementation to test your pricing. If you’re not using a CRM tool yet, that’s fine. Just open Google Docs.”
What inputs should you be tracking? Early on, Gaffney simplifies it to five key areas:
The price that was delivered
The customer’s feedback on value and price
Your exact counter proposal
If the deal was a win or a loss
Potential impact or how your solution might improve their business
While all those items are important, the most critical input at an early stage remains the voice of the customer. “I get a lot of questions around how to analyze the data, and my question is always, ‘What data?’” says Gaffney. “Unless you're sitting on a ton of information from a prior product or you have a self-service offering, you don't have extensive data to analyze other than the conversations that you're having. With conversations as your key input, take detailed notes in every pricing conversation. It may not help you close the deal in question, but you can record that information and cash it in to help close another deal down the road.”
One of Entrepid’s customers has recently used this system to set — and monitor — its pricing. “Since the beginning, this startup has tracked all of its CONSULT answers, the standard price quoted, pricing feedback, and the final price of the deal — now all within Salesforce,” says Gaffney. “Where there was nothing, they now have built a small data set. They can then report on this as they gather more information and get answers to key questions: Is our price too high? Or too low? Do we get any pushback on pricing? Are customers with the biggest pain more likely to agree to a higher price? With answers to these questions, a company can have confidence in their pricing structure for their current offering, which allows them to deliver price more confidently.”
BRINGING IT ALL TOGETHER
For early-stage teams, it can be a challenge to know where to begin with pricing. For starters, don’t fall into the four most common traps: choosing a price in a vacuum, setting and forgetting a price, pricing too low and over-engineering your pricing structure. Instead, enter into pricing conversations with Gaffney’s questions in hand and two key inputs to get from your leads: your offering’s upper bound and anchor. Then jump into a deepr pricing conversation. Don’t let customers jump the gun to talk about pricing before they’ve “earned it.” Then deliver the price confidently in real time. Don’t panic or prematurely discount if there’s pushback, but continue to fact-find around constraints. Lastly, track and return to all the feedback you get.
“No matter where you start with pricing, at some point, your structure will need to change. You might introduce product changes that deliver more value to your current customers. Or you’ll enter a new vertical and need a different go-to-market strategy. Maybe your ideal customer profile changes. Each of these scenarios alters the equation,” says Gaffney. “Eventually, there might even be a day when you have to pay someone to optimize your pricing structure. But until that point, this approach can serve as the minimum viable process to help nail your early pricing. That’ll get you the data, revenue and resources to rev the engine and put you in the race.”
Photo by Alexander Palm/ EyeEm/Getty Images.