Expansion

Are You Charging Enough Money for Your Software? Here’s How You Can Tell.

Opinions expressed by Entrepreneur contributors are their own.

My biggest mistake as an entrepreneur and startup founder happened just before raising our seed investment. I was sitting on a windowsill at our old office, looking over the sea, contemplating what masterstroke could take my company to the next level. Then it hit me: Why don’t I just lower the price to $4 per month per user? “If the is cheap enough, everyone will buy it and see its immediate ,” I thought to myself.

What happened was that I totally overestimated our brand, the maturity of our product and our ability to drive product-led growth. I was convinced that the quality of our product would be self-evident and that it would sell itself because of the embedded virality of the platform. Instead, I learned that our product was underdeveloped, the market immature and that we had to educate our users to show them the full value and capacity of our product. In many cases, we even had to help them implement our solution for our customers to prevent them from churning.

Later, it would show that raising prices wouldn’t just increase our top-line growth. It made our users happier with our product as they got more committed.

Related: 4 Reasons Why Raising Your Price Is a Brilliant Marketing Move

The problem with under-charging

My mistake is not unusual — quite the opposite. I often see young, inexperienced founders under-charging for their products. Either because their imposter syndrome makes them underestimate the value of their product, or they overestimate their ability to make bottom-up sales.

Selling a product at $4 per user would require an utterly insane amount of users to keep growing. Having so many users means you must have virtually no touchpoints with the users, which requires a totally self-explanatory UI. You need a really sticky product that sells itself. That’s not impossible. Slack did it. Notion did it. But it’s extremely rare to hit such a home run on your first try.

So, what justifies charging big for B2B software? What makes companies pay 50k or 100k for a piece of software? As I see it, your product must be hard to replace, business-critical for the users and show a clear . Let’s take a closer look at those three elements.

1. Is it hard to replace?

The first aspect is making your software hard to replace. By that, I’m not suggesting that you take your users hostage with opaque termination conditions and well-hidden cancellation buttons. The point is that you ensure your software is embedded deeply into the workflows of the business you serve. The truly value-adding solutions in today’s B2B software landscape aren’t just digitizing a process or replacing another similar solution. They change the way we work. Driving actual behavioral change in your users’ approach to work requires skilled consultants, multiple touchpoints, a forward-thinking mindset and a lot of education from your end. But it also makes your product unique and very hard to replace. Simple licenses are convenient in some instances, but they don’t drive loyalty because no real commitment is involved.

Related: How to Let Customers Know About Increased Prices Without Making Them Mad

2. Is it business-critical for users?

Second, your product must touch something sensitive and business-critical for your user. You can justify a higher price if your software cures a real pain than if you just remove a little nuisance. And you can charge more if your product reaches far into the heart of a business. Certain products are so important to the operation of my own business that I’m willing to pay very high sums for them — like our CRM system or billing software, for example.

3. Does it show a clear return on investment?

The third aspect is the most obvious but may also be the hardest to achieve. Your price point is only fair if you can justify it from a return-on-investment point of view. You must be able to show your users the value you bring them in order to charge real money. It’s one thing to create a product that really creates value, but it’s another thing to be able to back it up with actual proof. Nevertheless, finding a way to calculate your value will enable you to set the price point where it belongs — usually higher than you think.

Related: How Raising Your Prices Can Actually Help You Make More Sales

With all that said, there is also a mental aspect. You have to believe in yourself and your product, and don’t underestimate your worth. Finding the right price point takes experimentation and iteration. I probably still haven’t found it, and it changes over time. But in my experience, charging too little psychologically affects your users. It makes them less committed and less likely to perceive the true value of your product. With higher prices, you might lose customers, but those who stick will be more devoted. Luckily, I could rectify my mistake and take my business to the next level despite my initial wrong-doings. But there is no reason you should make the same mistake.

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