How do you decide the price of your first big deal without pricing yourself out of business? Here are simple steps to a better negotiating strategy.
The product is done and out there. The feedback is great. It’s not perfect, but you and your team have every right to be proud start-upers. Let’s say you even have some cash coming in from early purchasers. Things are good.
Next step: close some big freaking deals!
It’s time to take the one-offs and the small website purchases and leverage the awesome product you’ve built to bring in some real revenue. It’s time to build your sales muscles. But before you run off and hire a salesperson, you and your existing team have to close some initial deals.
The good news is that finding early customers will be easy. You know who is using your product, loving it, and sharing it. You’ve got advocates inside your target companies. So you reach out to a big corporate buyer and say something like, “Five of your 500 people are using this every single day. Why don’t you roll it out to everyone else?” But now you encounter your first roadblock: your proposal price is too high. It’s about four times too high. Ouch.
As a start-up negotiating with a big company, you don’t have much leverage even on a good day. For your first few deals, things are even worse. So while you know you have to walk away from the wrong deal, you also need to close a few enterprise clients, and build some momentum. How do you close that price chasm without hobbling your business? Here’s how I approach it:
1. Find the ceiling. There’s a dollar value that a big company just won’t pay a start-up. Buyers compare your price to other related products from bigger companies, and they won’t go higher than that. Your first job is to find that price and set an anchor price right under it.
2. Start high. The top tier, highest value, biggest ticket option on your product should be close to that ceiling. Some people will buy it. More importantly, a high priced product pulls aspirational people up a tier. They want to buy something good, but aren’t willing to shell out for the deluxe model.
3. Discount. All corporate buyers expect discounts. In the SaaS (Software as a Service) world, discounting is commonly done for volume purchases and advance payments. In the early days, you probably want to include a “beta customer” or similar additional discount that you can write out of later “Most Favored Nation” clauses that some corporate buyers will insist on. For those first few deals, you want to propose pricing between 20% and 40% off the list price.
4. Get feedback from the decision maker. Unless you own the situation, you’ll land a meeting to discuss your proposal. Leading up to it, you might get price pushback from others. Try not to lower your price until you hear feedback from the person who is going to sign the check. Everything else is probably foreplay. It’s good to keep your powder dry for the big negotiation.
5. Have a price floor. You need a price below which you just won’t do the deal before you start the negotiation. One way of figuring this floor is by adding up the variable costs— your product costs some money in people, infrastructure and third party service dollars. Don’t load up on fixed costs like rent, or sunk costs like development investment into your floor price. But do figure out how much you are going to have to spend above where you are now in order to support the deal. Signing money-losing deals and making it up on volume is so 2000.
Another way to think about your floor is the optics that it gives. If your high-tier corporate deal with all the extra premium features ends up costing the same as your entry-level product, you are setting a bad precedent. Probably better to go back to product development and add more value to the higher tier options.
Assuming that you can get agreement somewhere between the decision-maker’s counter offer and your floor, you should be good to go. Don’t forget to ask for extra intangibles like press mentions, testimonials and participation in white papers or research. Those things can make up for a big price break from the right customer.