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My biggest mistake as an londonbusinessblog.com and startup founder happened just before we raised our seed investment. I sat on a windowsill of our old office, looking out over the sea, thinking about what masterstroke could take my business to the next level. Then it dawned on me: why not just lower the price to $4 per month per user? “If the product is cheap enough, everyone will buy it and see its immediate value,” I thought to myself.
What happened was that I totally overestimated our brand, the maturity of our product, and our ability to drive product-driven growth. I was convinced that the quality of our product would go without saying and that it would sell itself due to the embedded virality of the platform. Instead, I learned that our product was underdeveloped, the market immature, and that we needed to educate our users to show them the full value and capability of our product. In many cases, we even had to help them implement our solution for our customers to avoid churning.
It would later turn out that raising prices would not only increase our revenue growth. It made our users happier with our product the more committed they were.
Related: 4 Reasons Why Raising Your Price Is A Brilliant Marketing Move
The problem with undercharging
My mistake is not uncommon – quite the contrary. I often see young, inexperienced founders paying too little for their products. Either because they underestimate the value of their product because of their impostor syndrome, or because they overestimate their ability to sell bottom-up.
Selling a product for $4 per user would require an insane amount of users to keep growing. Having that many users means you have virtually no contact points with the users, requiring a completely self-explanatory user interface. You need a really tacky product that sells itself. That is not impossible. Slack did it. Idea did. But it’s extremely rare to hit such a home run on your first try.
So, what justifies charging a lot of money for B2B software? Why do companies pay 50k or 100k for a piece of software? The way I see it, your product should be hard to replace, mission-critical to users, and show a clear return on investment. Let’s take a closer look at those three elements.
1. Is it difficult to replace?
The first aspect is that your software is difficult to replace. By that I’m not suggesting that you hold your users hostage with opaque termination terms and well-hidden cancel buttons. It’s about making sure your software is deeply embedded in the workflows of the business you serve. The real value-adding solutions in today’s B2B software landscape are not just digitizing a process or replacing another comparable solution. They change the way we work. Driving real behavioral change in your users’ approach to work requires skilled consultants, multiple touchpoints, a forward-thinking mindset and a lot of training on your part. But it also makes your product unique and very difficult to replace. Simple licenses are useful in some cases, but they don’t encourage loyalty because there is no real engagement involved.
Related: Educating Customers About Increased Prices Without Driving Them Crazy
2. Is it business-critical for users?
Second, your product must touch something sensitive and mission-critical to your user. You can justify a higher price if your software fixes a real pain than if you just take away a little nuisance. And you can charge more if your product penetrates deep into the heart of a business. Certain products are so important to the operation of my own business that I am willing to pay very high fees for them, such as our CRM system or billing software.
3. Does it show a clear return on investment?
The third aspect is the most obvious, but perhaps the most difficult to achieve. Your price is only reasonable if you can justify it from a return on investment standpoint. You need to be able to show your users the value you offer them in order to charge real money. It’s one thing to create a product that creates real value, it’s another to be able to back it up with real evidence. However, if you find a way to calculate your value, you can set the price where it belongs – usually higher than you think.
Related: How Raising Your Prices Can Actually Help You Sell More
That said, there is also a mental aspect. You have to believe in yourself and your product and not underestimate your value. Finding the right price requires experimentation and iteration. I probably still haven’t found it and it changes over time. But in my experience, undercharging affects your users psychologically. It makes them less committed and less likely to perceive the true value of your product. With higher prices, you may lose customers, but those who hold will be more committed. Fortunately, I was able to correct my mistake and take my business to the next level, despite my initial mistakes. But there is no reason to make the same mistake.