Enterprise Pricing Strategies
Enterprise Pricing Strategies

Enterprise Pricing Strategies

Written by: Jim Wrubel Published on: @December 15, 2021 Last updated: @December 15, 2021

Tools Used In This Recipe

AlphaLab Complete Toolset

When your startup is ready to start selling to enterprise (either because you have inbound interest from enterprise customers or your company has enough cash available to both hire the sales talent needed to sell to enterprise and to wait out the potentially 12+ month sales cycle), you'll be faced with the difficult question of how to price your product for this channel. Enterprise customers have different expectations, requirements, sales processes, and support needs compared to other customers, and your pricing needs to reflect the unique nature of selling to these complex businesses. In this Recipe we'll review a number of factors that you'll need to consider and offer some tips, tricks and strategies for pricing your enterprise product.

One of the biggest mistakes growth-stage startups make is focusing on enterprise businesses too early, before they have a solid customer base to ensure they don't go broke chasing these large accounts. But there are no objective criteria that make a company 'enterprise', so how do you know when you're selling to enterprise? One criteria you can use is, if the company you're selling to has their name or logo on the side of a building that is greater than twenty stories tall, it's probably enterprise. But if you have a champion inside the company (someone who is interested in buying your product), ask them what the sales process looks like. If they mention involvement from their IT and Purchasing departments, that's a good way to know you're selling to enterprise.

Getting started

Selling to enterprise can be complex and frustrating. Weeks and sometimes months will pass in the sales cycle with little to no movement. Before you start selling to enterprise, use this checklist to make sure you are ready:

My product has the features needed for this unique channel. For software products, Enterprise Grade has a handy set of criteria and checklist of features that are often required by enterprise.
My company has enough cash on hand (or the ability to raise funds) to support a 12-month sales cycle before I close my first deal.
My company has the expertise, either on staff or through mentors, to help navigate an enterprise sales cycle.
My company has a viable plan for identifying champions in my target customers. We have built personas for these individuals and know how to reach them directly.
My company has a Master Services Agreement drafted and ready to present as part of the sales process.
My company has verifiably completed any third-party audits or certifications relevant to my business.
My company carries insurance typically required by enterprise customers, such as Errors & Omissions insurance, Key Person insurance, and Cybersecurity insurance.
Especially in the first few sales, even if you are a founder or executive at your startup and you have hired a sales representative to focus on the channel you should take the time to meet with your sales prospect's champion and understand their motivation for potentially buying your product. This perspective will be valuable to your ongoing product development and R&D work.

Establishing your pricing baseline

To get started it's fine to use your product's base per-unit price and then add the unique cost considerations that come with enterprise sales. Some of the tips in the B2C pricing Recipe will apply so that's worth reviewing. Depending on your industry and competitors, you can sometimes use the GSA Schedule to obtain competitor pricing. You should consult an advisor with knowledge of the industry for input if you have access to one, and reviewing a book on pricing can help. Once you have a baseline price established, it's time to assess the factors that are unique to enterprise sales and adjust your price accordingly.

Factors that influence enterprise pricing

Cost of transaction

If your startup has been selling mainly to small or medium sized businesses you have likely lost deals because your price was too high. While enterprise customers are concerned about price, the complexity of their internal operations means that the 'cost' to their business to enter in to a contract and process a payment for $100 vs $1,000 or even $10,000 is roughly the same. So pricing low doesn't necessarily help you win deals in this market segment.

Enterprise sales timelines

Enterprise sales timelines are long. Even when you've identified a purchaser in the organization and budget for the sale it can still be 6-12 months before the contract is completed. As a small business your pricing needs to account for this, and you need to make sure that you don't run out of cash waiting to close the contract.

Payment schedule

Enterprise purchases are almost never put on a credit card. You'll need to generate an invoice and submit it to the company for payment. Your customer will set expectations around payment terms; most enterprise businesses are Net 30, meaning the company has 30 days to pay upon receipt of an invoice, but some companies pay Net 90. While more and more companies are using ACH transactions, a significant percentage of your enterprise customers will pay you by mailing a live check. Your enterprise price needs to account for the impact to your cash flow from delays between contract signature and cash in your bank account. You should also expect a small percentage of customers to not pay on time, which means some amount of effort on your part to address the issue.

Your champion's budgetary approval authority

Many enterprise organizations permit managers and executives to approve a purchase under a specific dollar amount. These are almost always round numbers, like $5,000 or $10,000. If your product is priced at or below your champion's approval authority they will be able to negotiate the sale themselves, but if it's higher they will need to get approval from someone above them in the organization, which will lengthen your sales cycle. Unfortunately there's no common tie between job title and approval authority, but if you price your product just below one of these thresholds you are more likely to see shorter sales cycles.

Cost of sales

Although an increasing number of enterprise sales customers prefer not to interact with a sales representative as part of their purchase process, purchase regret for those customers is higher than for those who worked with a sales rep. For this reason you should expect to need sales representatives with a well-structured commission plan to effectively sell into this channel. If you are hiring your first salesperson there's a Recipe that can help you determine fair market equity compensation, and there's a good article to start your commission structure planning here.

Cost of account management

Enterprise customers typically negotiate service level agreements for customer support as part of their contracts, so as part of selling to enterprise you'll likely need to establish an account management function in your startup. The good news is, these costs are typically expected by enterprise customers and are not likely to be negotiated out of the contract.

Pricing psychology

Although the dollar figures are larger and the customers tend to be less price sensitive once they have agreed to purchase, some of the techniques from the research-backed pricing presentation techniques will be useful. Specifically, presenting price that is not a round number can convey that you have done extensive research into your customer's requirements. In other words while a $300k price quote might seem arbitrary, a $312,400 price is a signal that you've done some homework. Assuming either quote is for the same product and service, the second nets you $12,400 in additional profit.

Contract negotiation

When you've successfully negotiated the sales process and your champion has indicated that the company is ready to start discussing contract terms you'll need to be prepared to discount your price up to two times. First, given the size of the contract your champion likely has some part of their annual performance review cycle dedicated to the contract. If your champion can tell their boss that they successfully negotiated a discount and the company has received the vendor's "best price" it can positively influence their performance review. By adjusting your list price to account for this you can agree to the discount, make your champion look good, and still come away with the same revenue. Expect this discount to be 10-20%, but don't offer it unless and until your champion brings it up, and don't simply reduce price. Use this as an opportunity to negotiate. You can try to get the customer to allow you to reference their logo on your website, or ask your champion to be willing to be a sales reference in the future based on a successful implementation.

Likewise, in larger organizations the purchasing department is often bonused based on the discounts they negotiate into a contract. Expect a 10% negotiated discount for this group as well.

Make sure your invoices and any other customer-facing product documentation include both list (original) price and discount(s). Not only does this serve as documentation for your champion and the company's purchase department, it allows you to implement future price increases based on list price, not what the customer is currently paying.

Wrapping up

Pricing for enterprise is a complex process that involves a lot of factors outside of just your product and/or service cost. In this channel each individual contract is a negotiation, and you will likely find each enterprise customer paying different amounts for similar service. There's no single tool or technique for enterprise pricing that's relevant to every startup, but by reviewing your price in the context of the factors presented in this Recipe you'll be able to present defensible pricing to enterprise prospects and close deals that can be transformative for your company.

The contents of this Recipe are © Innovation Works, Inc. and are licensed under CC-BY-SA 4.0 . Contact us with questions or feedback, or to learn more about our structured program in Entrepreneurism based on Startup Recipes.