Most entrepreneurs are clear on what problem their product is going to solve, and have a rough idea of how to monetise. Where most struggle though with the go-to-market: how to sell cost-effectively.
This is especially difficult for entreprise sales as there can be many different stakeholders and decision-makers, and a long and complex purchase decision process.
In my experience working with small businesses, startups and entrepreneurs, the go-to-market (GTM) differs significantly based on the size of the target customer and their long-term value. If we assume you’ve done your homework and already have established buyer personas, decision journey and a preferred sales methodology (eg SPIN selling, account-based, challenger sales, solution selling, consultative selling, transactional selling, etc, etc, etc!) and have built your sales & marketing lead machine and funnel, then you main question now is about negotiating commercial terms, particularly pricing. (If you haven’t done your homework, check out my article about B2B marketing and come back to this one later!)
This first contract is the most stressful. We hear you say “If I can just get this first big contract signed, it’ll transform my business”… So you compromise on the terms, and on the price.
If you put yourself in the shoes of your potential customer, this is not procurement as usual; this is a risk transaction where much could go wrong… People don’t get fired for bringing IBM or McKinsey in, but they could if they bring you in and your product doesn’t deliver!
From their perspective, what could go wrong?
- Your product may not work as advertised (yet)
- Your company could disappear and then they have an unsupported product
- You could infringe (even involuntarily) on someone’s IP and THEY get sued for it
- You may fail to respond to support calls
- Your startup could patch bugs slowly
- You could mismanage private data
- and so on, and so on…!
So, they’ll want to reduce their risk through pricing and protective terms and conditions. You should definitely hire a lawyer to agree the fine print (it’s worth the cost), but here are a few tips to get you thinking about what’s risky for you.
Your pricing power will depend upon how big the problem you’re solving is and how unique you are.
- which customers can afford to buy from you?
- what partners can sell your product on your behalf?
- what is the level of service you’ll be providing
For a startup, cash is likely to be more important than the price, so try and agree to be paid early on, ideally getting a percentage upfront. By the way, make sure also you have an insurance to cover you against liabilities.
The pricing model is a key part of your business model, as it will have an impact on cash flow (and therefore runway and valuation).
The main categories you should explore are based on:
- users: eg subscription model
- usage: eg freemium, tiered usage, usage with guarantees, advertising monetisation….
- features: eg per product, menu-based with add-ons and specific features, or “razor & blades” with a cheap set up and expensive service
Another key consideration: try and get an idea of the “spend authorisation” levels from your target customers, so you know who the final decision-maker is (and maybe reduce your price a bit if needed to make it easier to purchase). Your objective is to get a “yes” as quickly as possible, and pricing should support this.
But pricing is only one part of the negotiation, a few other key points that can make a big difference:
- contract length: when will you need to renegotiate a new contract. Long-term contracts sound better for you, unless your negotiating position is likely to improve over time and you expect to have more leverage.
- “most favoured customer” clauses, ie price-guarantees. It’s hard for a startup to deliver on these, so push back as hard as possible. If needed, try and restrict the clause to a set of direct competitors. But negotiate a better price back as any preference / exclusivity has value.
- publicity: as a start-up, you want case studies, testimonials and other PR. Include it in the contract if possible, even if it costs you a (small, one-off) discount.
- source-code escrow: defines terms under which a customer can access the product’s source code, especially in case you go under. It will destroy your valuation, so reject.
- use of data: clarify data ownership (and data privacy). Can you re-use your customer data? Does it impact your ability to scale up?
- assignment: what happens if (when!) your startup is acquired? What does it mean for your customers? Think about how the contract gets assigned to the acquirer. You want to avoid “break-up” clauses from your customers as here again it could reduce your valuation. If you need it, then try and limit the clause to your customers direct competitors.
- Termination: beyond the (customer’s) risk of your startup getting acquired or going under, some customers want an ability to terminate the contract “for convenience” ie for any reason. It goes without saying this is risky for you and is likely to lower your valuation, so you should push back. Try and understand if there’s something specific they want to be protected against, so that you can negotiate a specific clause instead. Or you can try and replace a longer contract with “termination for convenience” with a shorter contract without it. You can also take-away rights to ask for refunds for pre-paid amounts.
- Right of first refusal (in case of acquisition): not a good idea to give them acquisition priority as it will scare off other investors. Negotiate a Right of First Offer instead, where you ask that customer if they want to buy you before you elicit bids from anyone else (rather than once you already have an offer).
- Roll-out payment milestones: ie, you do not get paid unless certain rol-out agreements are met. In small deals, push back; in big deals, you might have to negotiate some upfront and some on milestones. If you do, try and get reciprocal clauses for customers to deploy resources to support tohe delivery of the milestones.
- Indemnity, warranty and limitations of liability: try to limit scope and be as specific as possible. Ifg the risk for you becomes significant, you probably need to get insurance!
- Entitlements, or scope: make it clear what is included and what is not, eg are new features included?
In other words, don’t give without asking something back.
So negotiating financial and commercial terms and conditions can be tricky, but once you’ve done it a few times you’ll be able to use these negotiations to create more value for both your company and your customer.