How to Price Your B2B Product: The Complete Startup Founder's Guide

YC Group Partner Tom Blomfield reveals the proven framework for B2B pricing that helps founders overcome psychological barriers and capture appropriate value from enterprise customers.

Learn the three-part pricing framework that eliminates guesswork, overcomes founder psychology barriers, and enables confident pricing conversations with enterprise buyers through value-based justification.

Key Takeaways

• The value equation (customer value delivered) should drive 80-90% of your pricing decisions
• Price at 25-50% of the value you deliver, allowing customers to keep roughly two-thirds of benefits
• Never start with cost-plus pricing - costs should only serve as a floor for sustainability
• Avoid pricing wars through product differentiation rather than head-to-head competition
• Aim for 80-90% gross margins in software businesses for long-term sustainability
• Keep pricing simple and align with industry payment structures customers already understand
• Use pilots with clear success metrics rather than extended free trials to prove value
• Your pricing strategy determines your viable sales channels and compensation structures

Timeline Overview

• 00:00–01:19 — Introduction: The common founder fear of pricing and picking ludicrously low numbers
• 01:19–04:28 — The Value Equation: Calculating customer value delivery and pricing at one-third of benefits
• 04:28–06:26 — Cost Considerations: Using costs as a floor while maintaining 80-90% software margins
• 06:26–10:08 — Competition Strategy: Avoiding pricing wars through differentiation rather than commoditization
• 10:08–13:42 — Pricing Structure: Industry norms, MRR vs usage-based, and Enterprise vs self-serve models
• 13:42–16:42 — Free Trials Strategy: Short pilots with clear metrics vs money-back guarantees
• 16:42–17:30 — Recap: Three-part framework summary and iterative pricing approach
• 17:30–END — Conclusion: Practical advice for getting started and improving over time

The Value Equation: Foundation of B2B Pricing

• The value equation represents 80-90% of effective pricing strategy and involves calculating specific customer benefits through collaborative documentation
• Sit down with your champion (the person most excited about your product) to document expected value delivery step-by-step
• "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"
• Write down assumptions and have the customer challenge each component - this becomes their internal business case, not your sales pitch
• "This person take it to their CFO and show really good return on investment" - you're arming champions to sell internally within their organizations
• Example: AI customer service tool eliminating 20% of queries for 100 agents at $100k fully-loaded cost = $2M annual savings
• "I typically pick somewhere between 25 and 50% of the value you're delivering so they keep roughly 2/3 you keep roughly a third" - this ratio ensures massive customer ROI while maintaining vendor sustainability
• The psychological win-win of customers retaining two-thirds of value creates internal champions who can justify purchases to CFOs and boards
• The value equation also provides success metrics for pilot projects, transforming abstract promises into measurable business outcomes
• If pilots deliver different results (15% vs 20% efficiency gains), adjust pricing accordingly based on actual demonstrated value rather than theoretical projections

Cost Structure and Margin Requirements

"You never start with cost some people like to do a cost plus a margin pricing and it just always ends up with you underpricing your software"

• Cost-plus pricing signals commodity thinking to customers and reflects fundamental misunderstanding of value-based business models
• Costs should only serve as a sustainability floor - if value-based pricing falls below costs, you're in an unsustainable business requiring pivot or exit
• Aim for 80-90% gross margins typical of successful software businesses, providing cushion for customer acquisition, R&D investment, and competitive positioning
• "Don't assume you'll have unlimited credits forever it'll totally mess up your margins" - promotional credits from AWS, Microsoft, or OpenAI create false economic models
• Calculate costs using full retail pricing even when using promotional credits, as subsidized economics can mask fundamental business model flaws
• Pricing below cost is extremely risky, only justified in specific land-grab scenarios with predictable and dramatic cost reductions ahead
• While LLM costs are decreasing rapidly, betting startup survival on future cost improvements remains dangerous without clear visibility into improvement timelines
• Include total cost of infrastructure, third-party APIs, operational overhead, and support requirements in margin calculations
• Low margins indicate commodity status and prevent investment in differentiation, customer acquisition, and sustainable competitive advantages

Competition and Differentiation Strategy

"Competing solely on pricing really is not a winning maneuver you don't want to get into a head-to-head bidding war for a commodity product"

• Direct price competition represents a confession of strategic failure - it signals to the market that you've failed to create meaningful differentiation
• "The airline industry on average has 2.7% net profit margin it's a brutal brutal business" - this exemplifies how commodity status destroys value for all industry participants
• When competitors undercut pricing, founders instinctively react with counter-pricing rather than focusing on customer value creation
• Price wars create mutual assured destruction where even "winners" operate unsustainable businesses with destroyed margins
• "You want to do is set your product apart based on functionality or value it can't be an apples for apples comparison"
• Successful differentiation strategies include niche focus, deeper workflow integration, industry specialization, or partnership-based positioning
• Avoid head-to-head feature comparisons by serving different customer segments, use cases, or geographic markets with specialized value propositions
• Competition in commodity markets drives all margin out, making sustainable business models impossible regardless of market share
• Build defensive moats through unique capabilities rather than temporary pricing advantages that competitors can easily replicate
• Focus on becoming a strategic partner rather than a vendor, creating switching costs beyond simple feature parity
• Price competition shifts founder attention from customer value creation to competitor action, often resulting in worse products for everyone

Pricing Structure and Payment Models

• "Mirror the way they are used to paying for other software the better you'll do" - customer comfort with payment structures matters more than theoretically optimal pricing models
• Research how target customers currently pay for similar software products to minimize cognitive load and procurement friction
• Common structures include monthly flat fees, per-seat pricing, usage bands, or credit systems already familiar to customer organizations
• Avoid uncapped usage-based pricing as customers fear runaway costs that could exceed budget approvals and create internal political problems
• Innovation in pricing often backfires by creating additional evaluation overhead and approval complexity within customer organizations
• Committed recurring revenue (MRR/ARR) provides better investor confidence than pure usage-based models during economic uncertainty
• "During an economic downturn or a Slowdown your revenue is protected at least until the contract is up for Renewal"
• Usage-based revenue can "fall off a cliff" in bad months while committed contracts provide predictable revenue streams
• Start with usage-based pricing to establish consumption patterns, then offer minimum monthly commitments with volume discounts
• Ask champions about their personal signing authority limits ($15k, $25k) to structure pilot pricing for rapid approval without additional stakeholder involvement
• Keep pricing simple - overcomplicated structures kill sales processes by requiring extensive internal explanation and approval coordination
• Familiar purchasing processes reduce customer risk perception and accelerate deal closure through established procurement workflows

Enterprise vs Self-Serve Pricing Strategy

• Enterprise customers require "contact sales" pricing because value equations and organizational consequences differ dramatically between organizations
• Publishing fixed Enterprise prices leaves money on the table by either overpricing small opportunities or underpricing large ones where failure consequences are severe
• Create 1-2 lower-tier plans with basic functionality while gating Enterprise features behind custom pricing based on organizational risk tolerance
• "Often it's things like sock 2 audit reports or single sign on or audit logs or compliance reports or data being kept in certain geographies"
• These compliance and security features create natural segmentation because individuals optimize for simplicity while Enterprises optimize for risk management
• "That really individuals and small companies don't really care about and Enterprises find absolutely vital and can't live without"
• Enterprise willingness to pay correlates directly with organizational consequences of failure - career-ending risks justify massive budget premiums
• Small companies don't value audit logs or compliance reports while Enterprises find them absolutely essential for regulatory and career protection
• This consequence-based pricing allows 10x price differences between self-serve and Enterprise plans for the same core functionality
• Security and compliance features create natural barriers to entry and sustainable pricing power in Enterprise segments
• Enterprise buyers often pay premiums to avoid downside risk rather than capture upside opportunity, fundamentally changing the value equation psychology
• The same product architecture can serve both price-sensitive individuals and risk-averse Enterprises through strategic feature gating

Sales Channel Implications of Pricing Strategy

• "A good rule of thumb is about a 5:1 ratio between new signed ARR and total compensation for a salesperson including commission"
• Your pricing level determines viable sales channels and creates path dependence for organizational structure decisions made years later
• $100k total compensation requires $500k new ARR annually to justify dedicated account executive roles with consultative selling approaches
• $500k ARR can come from one whale contract, twenty $25k deals, or 500 $1k contracts - each requiring completely different sales motions and skill sets
• "Your sales rep has to close 42 deals every month that's almost two every single working day that's not really a true account executive"
• Low-price, high-volume models require inside sales or call centers rather than true account executives, fundamentally changing talent requirements
• Pricing decisions made today constrain hiring possibilities and organizational capabilities for years, creating strategic lock-in effects
• Higher contract values enable dedicated account management, customization capabilities, and strategic partnership approaches with customers
• Match your sales approach to your pricing model early - whale hunting vs volume harvesting require different skills, systems, and management approaches
• Unit economics determine whether you need hunters (complex, high-value deals) or farmers (simple, high-volume transactions)
• The 5:1 ratio isn't arbitrary - it accounts for realistic sales cycles, close rates, and sustainable compensation models in B2B environments
• Founders often underestimate how pricing strategy predetermines organizational design, talent acquisition strategies, and management complexity

Pilot Programs and Trial Strategy

• "Offering a really long free trial or a pilot is counterproductive uh the customer not actually bought into using the product"
• Extended free trials create "trying" mindset rather than "using" mindset, reducing implementation commitment and urgency
• Keep pilots and proof-of-concepts short (2-4 weeks) with clearly defined success criteria derived from your value equation framework
• Long evaluation periods often prevent rather than enable purchase decisions by creating analysis paralysis and endless scope expansion
• Use success metrics derived from your value equation to measure pilot effectiveness and prevent scope creep during evaluation
• "Push your customers to sign up for an annual contract from the very start but with a 30-day or 60-day money back guarantee"
• Money-back guarantees with annual contracts create psychological ownership and implementation commitment while providing customer protection
• Paid pilots generate immediate recurring revenue and signal serious customer intent, unlike free evaluations that lack consequence
• Clear success criteria prevent endless evaluation periods where customers continuously expand requirements without commitment
• Financial investment creates psychological ownership - customers who pay attention and implement more seriously than those evaluating for free
• This approach transforms evaluation from research project to business process with defined outcomes, timelines, and accountability
• Psychological ownership requires both financial and time investment from customers to create genuine commitment to implementation success

Startup Positioning and Competitive Advantages

• Don't pretend to be larger than you are - leverage authentic startup advantages that established vendors cannot replicate
• "Say to your customers you can have the phone number of the founders and we're on call 24/7 to come and fix your problems you're certainly not going to going to get that from Salesforce or Oracle"
• Direct founder access and responsiveness represent genuine competitive advantages rather than weaknesses to hide or overcome
• Enterprise buyers often prefer working with startups for innovation partnerships, customization capability, and strategic attention impossible at scale
• Customers value personalized problem-solving and rapid iteration capabilities that create switching costs beyond simple feature parity
• Use agility, customization ability, and founder accessibility as justification for premium pricing rather than discount positioning
• Authenticity builds trust more effectively than artificial corporate presentation, especially when targeting technical decision-makers
• Transform startup constraints into strategic advantages by positioning them as exclusive benefits unavailable from established competitors
• Enterprise buyers frequently pay premiums for partnership relationships where they receive strategic attention and influence over product direction
• Startup status signals innovation, flexibility, and customer focus that can justify higher prices than established vendors in many situations
• Position founder involvement as premium service rather than necessity - "you get the CEO's phone number" becomes a luxury feature
• Strategic partnerships with startups allow enterprise customers to influence product direction and gain competitive advantages over companies using established vendors

Iterative Pricing Discovery Process

• "Over optimizing for pricing early is a big mistake pick a number try and sell it and and just experiment As you move on"
• Perfect pricing requires market feedback that can only come from actual customer interactions - analysis paralysis prevents the conversations needed for optimization
• If value equation calculations prove impossible, start with industry-comparable pricing and systematically iterate upward through real market testing
• "Increase that number by 50% for every time you pitch a new customer" until you discover price resistance and optimal market positioning
• "When you start to lose more than 25% of potential deals base solely on price you're now probably in the right ballpark"
• "If every single deal is closing straight away you're almost certainly underpricing" - universal acceptance signals value extraction failure, not sales success
• Target 75% close rate where some customer rejection provides profitable market research about value perception and price sensitivity boundaries
• Optimal pricing requires customer rejection as a feature rather than bug - perfect customer happiness often means leaving money on the table
• Early customers represent tiny fractions of long-term revenue, so prioritize momentum and learning over perfect pricing optimization initially
• "It's more important to start signing deals and getting to the flow of it you can always increase prices as the product improves"
• The first 2-3 sales are typically the hardest due to lack of social proof, reference customers, and founder confidence - focus on closing them regardless of perfect pricing
• Pricing becomes easier as you gain customer logos, product improvements, sales experience, and market validation that builds confidence
• Velocity of learning beats accuracy of initial decisions when operating in uncertain markets with long feedback loops and high uncertainty
• Market education happens through transactions and customer conversations rather than theoretical analysis or competitive research alone

Common Questions

Q: What percentage of delivered value should I price at?
A: Target 25-50% of customer value, allowing them to keep roughly two-thirds of benefits.

Q: Should I publish Enterprise pricing on my website?
A: No, use "contact sales" for Enterprise since value equations differ dramatically between customers.

Q: How do I handle competitors who undercut my pricing?
A: Differentiate through functionality rather than engaging in pricing wars that destroy margins.

Q: What's the minimum gross margin I should target?
A: Aim for 80-90% gross margins typical of successful software businesses.

Q: How long should pilot programs last?
A: Keep pilots short (2-4 weeks) with clear success criteria rather than extended free trials.

Conclusion

Most founders suffer from systematic underpricing caused by consumer reference point anchoring and discomfort with value capture. "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" - leading to ludicrously low prices based on personal GitHub or ChatGPT subscriptions. "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." This psychological barrier destroys more B2B startups than product or market issues.

B2B pricing requires confidence to ask for appropriate value while providing compelling ROI justification. The value equation framework eliminates guesswork and creates win-win scenarios for sustainable business growth.