Pricing Services

The question I hear most from founders during Sequoia Capital's Arc program is about #pricing. Pricing is one of the most underutilized levers for startups. Why does it matter so much? It has the most direct impact on revenue, and the moment you establish your pricing, you determine your TAM. Getting the pricing metric right is, by far, the most important one. The key is to imagine the future: when you are a large and successful company, how have you changed the world, and what metric correlates best with your success? Hitch your financial wagon to that metric! If you are Figma, success is all designers using the app; therefore, the pricing metrics is per designer seat. If you are VMware, success is all workloads run in virtual machines; therefore, the right pricing metric would have been a virtual machine. A pricing metric is like the genie in a bottle: once you get it out, it is tough to rein it back or change it. The pricing model is about when and how frequently you charge. Recurrent subscriptions are the predominant model for SaaS apps, and usage-based pricing is the model for infrastructure solutions. Usage-based pricing creates a beautiful alignment of incentives but is less predictable. Upfront credit purchases and commitments are efforts to make usage-based practice more aligned with the rigid corporate budgeting processes. You can be the premium solution or the affordable one. Both are legitimate approaches. But your pricing needs to be consistent with the rest of your strategy: with your product and distribution channels.  You can’t have an affordable solution distributed through an expensive enterprise sales force. In this case, you need to sell either online or through inside sales—the product better be simple and the sales cycle quick. Many technical founders are shy about asking for a lot of money for their product. Don’t be. If customers like the product and it delivers value, they will gladly pay for it. Unless you hear customer complaints that you are expensive, then for sure you are underpricing. Calculate the ROI of your product, and take 20% of that value as your price point. How much it costs you to build the solution should not guide your pricing. But you should do a sanity check that you have a decent gross margin. Most companies start by selling a single package. Over time, they realize that different customer segments have different maturity levels and willingness to pay. To price discriminate between these segments, you need to introduce multiple packages.  Start by creating a customer maturity curve to inform your decisions on how many packages you need. The trick is to have the smallest number of packages to cover the broadest range of customer needs. Your packages will change and evolve quickly as your product matures. 

One thing I push early-stage B2B founders to do (and it’s harder than it sounds) is to really understand — and quantify — the value you deliver to customers. Very few can put a dollar number on it.💡 Try to estimate the value your product creates for a customer in real dollars ($Z) 💰 Once you do that, , you can ask a few important questions to qualify how robust and urgent the value proposition really is: ▪️ Is $Z actually meaningful in the context of the customer’s business? (If it’s a rounding error for them, say <2% of top line, selling will be painful 😬) ▪️ Can you show or prove $Z quickly, or are you asking the customer to take a leap of faith? Quantifying value proposition also helps with 💵 pricing and 📐market size, which many founders struggle with early on. Example 1: cost / time savings ⏱️ - Say you’re selling software that saves a RevOps team ~5 hours per week. - Fully loaded cost is ~$80/hour → ~$20k/year in savings. That’s your $Z. - If you’re saving time or money, customers will often pay ~10–20% of that value. So a ~$2–4k ACV is a reasonable first pricing hypothesis 🎯 Example 2: revenue generation 📈 - Now say your product helps a sales team close 2 extra deals per quarter. - Each deal is worth ~$50k → ~$400k/year in incremental revenue. That’s $Z. - When you’re directly helping customers generate revenue, they’re often willing to pay more — say ~20–30% of the value. That points to an $80–120k ACV range (assuming you can prove the value). More importantly you can use $Z to estimate market size.  📐 Start bottoms up. Market = X customers × $Y ACV = market size Where: ▪️ $Y ≈ 10–20% × $Z (for cost/time savings) ▪️ $Y ≈ 20–30% × $Z (for revenue generation) Finally, pressure-test the assumptions: ▪️ Are we being precise about who “X customers” actually are? Do I need to sell a story where I start with a small #X and then expand? ▪️ Does $Y line up with real budgets and comparable spend? ▪️ Can we acquire customers for less than ~$Y/3? ▪️ Do we need more product to credibly charge $Y? You don’t need perfect answers early but a strawman that allows YOU to understand why you are willing to spend the next 10 years of your life working on something. 🚩

One thing I get asked often is “𝐇𝐨𝐰 𝐝𝐨 𝐲𝐨𝐮 𝐝𝐞𝐜𝐢𝐝𝐞 𝐡𝐨𝐰 𝐦𝐮𝐜𝐡 𝐭𝐨 𝐜𝐡𝐚𝐫𝐠𝐞 𝐟𝐨𝐫 𝐟𝐫𝐞𝐞𝐥𝐚𝐧𝐜𝐞 𝐝𝐞𝐬𝐢𝐠𝐧 𝐠𝐢𝐠𝐬?” I understand that pricing can be confusing, especially when you’re just starting out. That “charge your worth” advice sounds great… until you realise no one tells you what it means. Here’s how I personally approach it, and hopefully, it provides some clarity if you’re trying to figure yours out. 🔸 𝐖𝐡𝐨 𝐢𝐬 𝐭𝐡𝐞 𝐜𝐥𝐢𝐞𝐧𝐭? A well-funded startup, an established brand, or a new business bootstrapping an MVP? I don’t charge them the same. The more resources you have, the higher the quote, because I know the value the design will bring you. 🔸 𝐖𝐡𝐚𝐭 𝐢𝐧𝐝𝐮𝐬𝐭𝐫𝐲 𝐚𝐫𝐞 𝐭𝐡𝐞𝐲 𝐢𝐧? Fintechs and Web3 startups? They usually have a budget. I price accordingly. NGOs or solo founders might get a different quote. It’s about context. 🔸 𝐖𝐡𝐚𝐭 𝐞𝐱𝐚𝐜𝐭𝐥𝐲 𝐚𝐦 𝐈 𝐝𝐞𝐬𝐢𝐠𝐧𝐢𝐧𝐠? A mobile app, website, web app, and admin portal all require different levels of effort. If the product has multiple user types, complex workflows, or a tight timeline, the quote increases. Simple. 🔸 𝐓𝐢𝐦𝐞𝐥𝐢𝐧𝐞 𝐦𝐚𝐭𝐭𝐞𝐫𝐬. If you need it urgently, the price reflects the pressure. I’m clearing my schedule and prioritizing your work, so that needs to be worth it. There are other small factors as well — the number of inquiries I’m receiving, the cost of my tools, my availability, and so on. Now, for the designers who need an actual number to work with, here’s what I typically charge (note: these are starting prices, not fixed): 👉 𝐖𝐞𝐛𝐬𝐢𝐭𝐞 𝐃𝐞𝐬𝐢𝐠𝐧: Starts at ₦500,000 and can go higher depending on the scope 👉 𝐌𝐨𝐛𝐢𝐥𝐞 𝐀𝐩𝐩 𝐃𝐞𝐬𝐢𝐠𝐧: Starts at ₦800,000 and can go up to ₦1.5M or higher, depending on complexity 👉 𝐖𝐞𝐛 𝐀𝐩𝐩 𝐃𝐞𝐬𝐢𝐠𝐧: Starts at ₦800,000, and I don’t go below this. 👉 𝐀𝐝𝐦𝐢𝐧 𝐏𝐨𝐫𝐭𝐚𝐥: Starts at ₦1.2M and usually goes higher I’m not saying this is the best way to price your work. I’m simply sharing what works for me, in case it gives you a helpful reference point. Your rates should reflect your skills, experience, confidence, and the kind of projects you want to attract. Hope this helps someone.

Many founders treat pricing as a revenue optimization problem. Figure out the product first, scale usage, then monetize. That's backwards. Pricing isn't about extracting money. It's about discovering whether you built something people actually value. At Gamma, we used pricing as a proxy for value and kept it pretty much the same for over 2 years. Free usage will lie to you (especially for B2B and prosumer products). Usage spikes feel like PMF. They're not. Usage without payment tests your onboarding, not your value. If you come out with too generous of a free plan, you'll never know what true willingness to pay looks like. Here's how to use pricing as a proxy for value: 1. Pick your value metric Choose the thing customers actually hire you for. Documents generated. API calls. Minutes transcribed. At Gamma, we gated by AI credits as the primary value metric, with business levers like custom branding. 2. Draw a hard boundary between free and paid Let people experience the "aha," then stop them at a generous but bounded gate. We gave users plenty of AI credits up front. Once they hit the limit: upgrade for access to more AI. 3. Research your range, then let behavior decide We used Van Westendorp to find our starting range. Ask users four price points: too cheap to trust, good value, getting expensive, too expensive to consider. Plot where these intersect to bracket your range. Then test a few prices within it. Research shows what people say they'll pay - conversion shows what they actually do. We watched free-to-paid conversion and early churn signals, picked the winner, and moved on. 4. Instrument retention and talk to customers Track whether paid users keep crossing your value threshold each week. Stay close to customers through power-user communities or direct outreach. Ask questions like: "What job were you hiring us for?" and "What would justify a higher price?" 5. Treat pricing changes like product pivots Once you've validated pricing, the only reason to change it is if you've fundamentally changed what you're selling. We haven't changed ours in two years because the value metric (AI usage) hasn't changed. Constantly repricing means you're still searching for product-market fit. Why this matters: Pricing early clarifies who values you, which channels convert, and which segments to double down on. You're better off launching pricing way earlier so you can see who's actually willing to pay for it.

Sunday Morning Bathroom Read: Market research firm Trilliant Health released research Monday revealing striking differences in the prices providers charge for identical services. The report, which examined data from 2,659 hospitals and 3,491 ambulatory surgery centers, found that commercially insured patients pay widely varying amounts for the same services — and these costs are primarily absorbed by employers. For instance, it showed that the median rate for a coronary bypass without cardiac catheterization or major complications is $68,194, but negotiated rates ranged from $27,683 to $247,902 — a difference of more than $220,000.Oftentimes, huge price differences are present even for the same procedure at the same hospital. Take for example a coronary bypass without cardiac catheterization with major complications at Tufts Medical Center in Boston. The Aetna negotiated rate is $95,989, while UnitedHealthcare’s rate is $144,204.Trilliant Health Chief Research Officer Allison Oakes called it “surprising and problematic” that there is a price difference of nearly $50,000 for the exact same procedure at the exact same facility. “The amount that the procedure will cost depends on who is paying. No other industry works that way. For too long, healthcare has been an exception to the rule and that needs to end,” she said. The report also noted that among a sample of 10 hospitals that often appear on “best hospital” rankings, researchers found no clear link between how much care costs and the quality of that care. Sunday Morning Bathroom Read Editorial Comment: The US is upside down... . 2011-2021  America: S&P 500 (+29%); DOW (+2%); Average Household Income (+23%) VS. Stock Prices: Humana (+747%);Aetna (+527%); Anthem (+715%); United (+1291%); CIGNA (+526%)

Pricing shouldn’t feel like a fight. It should feel like a fair conversation between adults who both want the relationship to last. When costs keep rising and margins start to feel thin, the worst thing we can do is spring a surprise increase and hope customers accept it. The better path is to make small, evidence-based adjustments that people can understand, and to do it with enough notice that trust grows rather than erodes. Here’s how I guide teams through it... We set a simple rule first: price reviews happen on a predictable cadence, anchored to a sensible index, and capped so there are no surprises. Then we give customers a choice. A clear Good / Better / Best set of tiers lets people pick the value that fits, and it means we stop discounting just to “make it work.” For loyal customers, we start with a grace period and then move in small, scheduled steps. It’s respectful, and it smooths cash flow for everyone. We also swap blanket discounts for an early-pay credit that protects the list price while bringing cash forward. We add a few fair boundaries so small, urgent, or high-touch work is priced to match the effort. Where costs have increased in one part of the service, we re-bundle so value is obvious and buyers are never misled. And when it’s time to talk, we keep the message short and human: here’s what changed in our input costs, here’s the adjustment we’re making, and here’s what stays the same in terms of quality and scope. If you track a few signals for 30 days, you’ll see better results like: most eligible accounts receive the scheduled uplift, the overall discount rate falls, more invoices are paid early, average revenue per customer increases, and churn and NPS hold steady. The goal is pricing that is predictable, and defensible. Think caliper, not hammer, with measured moves that protect margin and maintain customer goodwill. How do you explain price changes to customers without losing trust? ------- ➕ Follow Jonathan Maharaj FCPA for finance‑leadership clarity. 🔄 Share this insight with a decision‑maker. 📰 Get deeper breakdowns in Financial Freedom, my free newsletter: https://lnkd.in/gYHdNYzj 📆 Ready to work together? Book your Clarity Session: https://lnkd.in/gyiqCWV2

Why Agencies Must Ditch Time Sheets and Charge for Outcome In 2008, I helped lead Microsoft’s mobile launch across EMEA as part of WPP’s integrated team 👉 Microsoft asked us to test market appetite via a digital campaign. 👉 The goal? 500 pre-orders We tested something new: → Facebook as a lead-gen platform → Two weeks later → target smashed ✅ 500+ pre-orders ✅ Product validated ✅ Launch strategy shaped ✅ Budget delivered beyond ROI expectations 👉 But here’s the problem... ❌ We didn’t price the project around that outcome ❌ We charged for time and FTEs → Not by impact → Not by outcomes or insights → Not by the true value we created 👉 And 17 years later, most agencies are still doing the same. 🌀 The Challenge Today Right now... We’re in a pricing crisis. Agencies are still pricing like it’s 2008: → Selling time → Selling headcount → Selling deliverables Agencies are still stuck in FTE-based models: → Easy to compare → Easy to administer → Exactly what procurement wants But here’s the problem: ❌ It punishes efficiency ❌ It rewards time, not outcomes ❌ It turns expert thinking into a commodity 👉 Worse, it’s nearly impossible to scale or defend in a results-driven economy. 🌀 Why Agencies Don’t Change Here’s why most agencies haven’t shifted: → Fear of losing retainers keeps them quiet → Commercial incentives are built around headcount → Most client teams haven’t been trained in pricing strategy → Pitch processes still favour like-for-like comparisons and rate cards They know it needs to change. But they keep kicking the can down the road. 🌀 The Missed Opportunity Clients aren’t against new pricing models. → They’re against risk → They want clarity, predictability, and value → But they’ll never ask you to change your pricing 👉 That’s your job. And the ones that do change? → Win bigger deals → Keep clients longer → Operate with better margins 🌀 What Independent Agencies Should Do If you're an independent agency, this is your moment. → You're not tied to legacy procurement. → You don’t have layers of approval. → You can move fast. So, don’t copy the networks. → Outrun them. Here’s how: ✅ Start productising key services ✅ Tie pricing to client business goals ✅ Introduce hybrid models (outcome + retainer) ✅ Use pilots to de-risk performance-based engagements ✅ Build a commercial capability inside your leadership team 🌀 My Take? Outcome-based pricing isn’t innovation anymore. 👉 It’s survival 👉 For your agency 👉 For your future margins Clients want ROI. → They want growth → They want risk-sharing → If agencies can’t speak that language, someone else will 🌀 My final thought.... If you delivered £15M in business value... But charged £100k in time. → That’s not strategy → That’s a discount Want to stand out? → Price the result → Not the process It’s time to evolve from time-based pricing to outcome-based value. Because in today’s market... → Clients aren’t buying time → They’re buying transformation ivanfernandes.me

Selling to ENT without changing your pricing model is like showing up to a black-tie event in flip flops. MM pricing models don’t survive in enterprise sales. Why? Because selling 1,000 licenses to an enterprise isn’t 20x harder than selling 50 - but if you don’t adjust your pricing strategy, it will be 20x more painful. Enterprise buyers don’t think in per user terms. They think in budgets, forecasts, and cost centers. They want predictability, not a CPQ nightmare where they’re adjusting seat counts every quarter. If you’re moving upmarket, here’s how to avoid looking like a tourist at the grown-ups’ table: 1. Kill per-user pricing for large accounts. Enterprise CFOs see per-user models as a ticking time bomb...every new hire adds cost. Instead, sell in committed tiers, annual volume contracts, or all-you-can-eat licenses. - Instead of “$50 per user, per month,” structure it as, “$X for up to 1,000 users.” - Price for usage, not headcount - think storage, API calls, transactions, etc. 2. Enterprise doesn’t “expand naturally.” Build in expansion from day one. For MM, you can land small and grow. Enterprise doesn’t work that way. - Ramp pricing: Year 1 at 60%, Year 2 at 80%, Year 3 at 100%. Predictable growth, no CFO freak-outs. - Auto-expansion clauses: If usage exceeds X%, licenses auto-scale. Protects you from procurement pulling a “we’ll just add seats later” stunt. 3. Enterprise buyers expect to “win.” Give them a win - without losing. These buyers are trained to negotiate. They want a lower per-unit cost, but they’ll commit bigger dollars to get it. - Introduce an ENT Rate...lower per-unit cost, but higher minimum commit. CFOs love “efficiency,” and you get more ARR locked in. - Structure custom packaging that makes them feel special. Limited access to beta features, priority support, or bundled services. Want to win in enterprise? Stop selling like an SMB rep. Price for scale, control the expansion, and let procurement “win” on terms that make your CFO smile.

Want to build a business that lasts? Price like it. Here’s something I’ve learned after decades in business: Pricing a product and pricing a service are two completely different games. With products, being the low-cost provider often wins. Think Walmart: lowest prices, massive volume. That model works because customers treat most products like commodities - they want the best price, and companies can scale production to drive profits. But services? That’s a whole different story! Services are built on people. You’re not shipping a widget - you’re delivering effort, expertise, and consistency. That takes time to train, money to retain, and serious investment in culture and quality. And in most markets, it’s the higher-priced service providers who come out on top, not because they charge more, but because they deliver more. They’ve built teams that show up, do the work right, and leave customers raving. At 1-800-GOT-JUNK?, we knew early on that if we wanted to lead, we had to charge in a way that supported our commitment to quality. That meant pricing higher - but delivering more. Better people. Better service. Better experience. If you’re in a service business, underpricing is one of the fastest ways to burn out your team and break your business. You can’t build a great service offering on razor-thin margins and untrained labor. I recently coached a keynote speaker who was doing talks for free…or charging way too little. I told him: Raise your rates. Way up. Why? Because price signals quality. If you’re too cheap, people assume you’re new, untested, or not that great. That skepticism costs you more than you think! No matter what you’re selling - product, service, or yourself - price for value. Own it. Don’t apologize for it. When you back it with excellence and integrity, the right clients will pay for it. Happily. If you’re building something meaningful, charge like it! That’s how you build a business that not only lasts, but leads :)

Assuming your firm still follows the practice of billing for time, you can run the calculations that will chart the eventual demise of your revenue model. If you’re like most firms, Generative Artificial Intelligence currently shaves somewhere between 20 and 30 percent off the time it takes to deliver work to your clients. What do you think that figure will be next year, or five years from now? Consider what kind of revenue stream will you have when time-tracking humans are doing only 5 or 10 percent of the work. Even the most hard-core defenders of hourly billing can see this compensation model is wholly unsustainable in the world of the AI-optimized agency. There is simply no way to monetize the value of AI within the framework of hourly billing. The solution to this dilemma requires agency professionals to remove the blinders that have them trapped in the illusion that they are selling time, efforts and activities to their clients. That’s not what clients buy; they buy solutions to their business problems. So the way to capture the value you create for your clients is to stop charging for the cost of your services and start charging for the value of your solutions. Every firm of every size can make this change much easier than they think. Instead of a chart of hourly rates, develop a chart of deliverables — a “pricing guide” that indicates the price (market value) of every deliverable your agency produces, and base your pricing on the work or solution delivered instead of the hours worked. In context of an output/outcome driven compensation model, it should be of no consequence to your clients that AI-powered tools are helping you create and produce your work. Again, they’re buying the outputs, not the inputs. So as AI helps you deliver your work faster and better, both parties benefit. Your clients get better quality work faster and the agency incurs lower costs — a win/win. Even if clients insist on slightly lower pricing (because they assume AI lowers the costs of your human capital), agencies can provide lower prices and still make a healthy margin on their work. In fact, agencies should be able to earn a much higher profit, even if they agree to lower prices, because AI is such a powerful force multiplier. It’s not inevitable that agency revenues will decline, because as AI continues to enable faster work, clients are assigning higher volumes of work to their agency partners. The result can be the best of both worlds: higher revenues from a higher volume of work, and stronger margins because AI is such an efficient virtual knowledge worker.