How to establish what your customers are willing to pay ?

How to establish what your customers are willing to pay

There’s no silver bullet solution to gauging what every customer is willing or able to pay, but three key factors can point you in the right direction.

You’ve created an amazing product – or perhaps added an abundance of fantastic new features – that solve a real problem, but how do you work out what potential clients are willing to pay?

The truth is, pricing your product exactly right for every customer is incredibly difficult. But that doesn’t mean that you have to run in the dark. An informed judgment can be made by considering three key elements: your customer, your go-to-market approach, and what your direct and indirect competitors are charging. From there, it should be consistently iterated and improved as a business develops to maximize sales, value, and profitability.

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Note: What I won’t be coving here is pricing structures (whether it be per user, by usage, or a combination of both), this is an extensive subject that needs its own post!

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Who is your customer?

First of all, to establish what a customer is willing to pay, you must establish who they are, and what their price sensitivity is. Much of this information will come from identifying your ideal customer profile, or ICP. There is an opportunity to take a more granular approach here, but let’s first look at the three very broad profiles that you are likely to sell software services to:

• VC-backed tech businesses and public companies. These are not typically price sensitive, so remember there is always room to push budgets higher. Just be aware that founders and execs want to feel like they are getting a deal, so start at the top and leave space to negotiate.
• Traditional SMEs. These tend to have lower margins and cash flow problems, so are skeptical about price and looking for a clear ROI. They will usually have a very set budget, so expect to negotiate based on their margins.
• Consumers. With D2C, you will rarely negotiate. Highly price sensitive, consumers will have a set idea of what a service should cost depending on the product segment and what the competition is charging.

Many of you will be aware of these broad ICPs, so I’d recommend next identifying a set of narrow customer profiles which specific plans and pricing can be developed for based on their needs, habits, and sensitivities. Connecting an authentic story to your pricing will provide you with an understanding of customer groups that are both willing and able to pay more.

It’s an approach we utilized while I was VP of Engineering at Spendesk. For instance, when we noticed that many companies using the Spendesk card for expense management had team members who frequently traveled for work, we created "The Traveler" plan. Thanks to the direct relevance it held to their professional lives, customers that fitted the profile were more inclined to opt for a premium offering.

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What is your go-to-market approach?

Knowing your ICP is key to arriving at your ideal price point, but for B2B clients, this has to be paired with some more information – which brings us to the second marker: your go-to-market approach.

The price that a B2B customer is willing to pay will always depend on the level of sales and support you are able to offer. One thing that you can be fairly confident with is that there’s a limit to what people will pay without direct contact with a person.

If you are using an entirely self-serve model that is fully dependent on distribution through marketing, clients are unlikely to spend much more than a few hundred dollars per month, per person – and for no more than 10 users. In short, we can estimate this as creating a ceiling of $1,000 per month, per client.

Applying a low-touch sales model allows the ceiling to be lifted. By offering a few initial conversations with a sales team, we estimate that it is possible to push total billing to $10,000 per month – provided your ICP has those budgets available.

Taking a sales-led approach will require the resources for multiple calls, demo meetings, onboarding, and customer success support. For this approach, expect the sales cycle to last one to three months, but deals of up to $50,000 per month to be accessible. Enterprise sales – over $50,000 – require a further step: think six months of wooing, many demos, lots of questions, restaurant dinners, and trips to the client’s offices.

When working out how much a customer is willing to pay, you are always going to be constrained by a combination of your ICP and your go-to-market approach. Too expensive? It will be impossible to sell self-serve or to traditional businesses. Unable to offer extensive support? It’s unlikely a customer will be willing to pay big bucks – and you certainly won’t be able to land an enterprise customer.

Box out

What if I have self-serve and sales-led/enterprise offerings?

The truth is, how you set your self-serve price shouldn’t massively impact your sales-led or enterprise price. Yes, a larger volume will often mean a lower per-user deal, but when selling to public and VC-funded companies, it can often mean higher pricing due to the level of support, service, and extra functionality that you will offer. Just work backward to justify the extra cost, and remember they will want to negotiate.

What are your successful competitors charging?

Now that you’ve established your pricing bracket through a combination of your ICP and go-to-market approach, the third – and often, most straightforward – filter that can help establish what customers are willing to pay is what the direct or adjacent competitors are charging.

This is most simple for self-serve, light-touch sales, and consumer. The fact is, if the competition has three set-price plans, there is a fairly high chance that you're going to have two or three plans that are set at around the same price: when the market has already been established, it’s difficult to radically deviate. Depending on your research and product USP, you can then decide whether to undercut the competition or go premium.

Email provider Superhuman, for example, has been highly successful in marketing itself as a premium alternative to Gmail, establishing that its ICP of tech and business users are happy to pay $30 per user, per month for a faster service. Collaborative design platform Figma meanwhile opted for a two-pronged approach when taking on the incumbent Adobe. It created a free service that provides much of the basic functionality offered by Adobe Illustrator and InDesign, with additional features unlocked through a range of subscriptions that are largely on par with Adobe’s pricing.

When it comes to sales-led and enterprise pricing, it’s time to lean on the research: what is the competition charging, and for what services? If there’s no direct competition to analyze, look to equivalent services in an adjacent space.

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Review, iterate, repeat

Pricing isn’t set in stone, and new businesses will in particular need to experiment with different structures before landing on what works. After that, you will likely constantly improve your product, add new features, and offer a better service. This to will affect what customers are willing to pay, and what you should be charging as a result.

One way of doing this is to introduce major new functionality as an add-on. This is the strategy productivity app Notion has adopted with its new AI assistant. Notion AI can be added to any of the paid plans for $8-$10 per month, per user.  An advantage of this is that it allows Notion to offer a new service and gauge the level of uptake without rolling it out across the board, increasing the subscription price for all users as a result. Going forward, it will also enable pricing for the new functionality to be iterated on without hitting their core pricing plan.

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The challenge for any company using a traditional billing system is that implementing pricing iterations or add-ons will use up a lot of time and engineering manpower, meaning it is unlikely to happen as regularly as necessary. This can result in your product consistently being sold at the wrong price, with potential profits sacrificed as you grow.

With Hyperline, as soon as your pricing isn’t lining up with the value offered to customers, your team can fix it instantly, without writing a single line of code. At the same time, if your pricing isn’t landing right for new acquisitions, it can be updated in minutes, without affecting the billing and price plans of current customers.