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Updated August 22, 2022You’re reading an excerpt of Founding Sales: The Early-Stage Go-To-Market Handbook, a book by Pete Kazanjy. The most in-depth, tactical handbook ever written for early-stage B2B sales, it distills early sales first principles and teaches the skills required, from being a founder selling to being an early salesperson and a sales leader. Purchase the book to support the author and the ad-free Holloway reading experience. You get instant digital access, commentary and future updates, and a high-quality PDF download.
The more costly and complicated your solution is, the more likely there will be negotiation at the end of the purchasing process. This shouldn’t be viewed as a negative and something to avoid, but simply another signpost on the way to a successfully acquired new customer. And this is different than the pricing objections we’ve discussed previously. When you get to negotiation, the prospect is convinced that there is value in your solution—it’s a question of whether he’s going to pay rack rate or 30% below that. Regardless, my goal isn’t to make you a master negotiator; there are plenty of books on that already. It’s to give you a general framework for how to think about negotiation and getting these deals across the line.
Firstly, whenever you are selling to people who have purchased enterprise software before, and especially if they do it frequently, there is going to be a baked-in expectation of negotiation and discounting. We touched on this in Pricing and Early-Stage Sales Materials Basics, but don’t be surprised when your prospect views your first proposal as a jumping-off point to negotiate you down. As such, you should factor this into not only your sticker pricing, but also any initial proposals you prepare. Start with inflated pricing in anticipation of being negotiated down, so that wherever you end up still provides an economically viable deal for you. If the prospect simply takes the price, fantastic, lucky you. And if she wants to negotiate, great, you’ve provided yourself room. And in the event you have to deal with a procurement department, you’ll be really glad you built in that room; they’re likely going to attempt to wrangle another discount on top of whatever you agreed to with your direct decision-maker. (Now, if you’re selling to “deer” like we discussed in Early Prospecting, it’s unlikely that they’ll have a procurement function. But it’s something to be aware of.)
When approaching these negotiations, you want to be clear on what is valuable to you—what you want to preserve—and what may be valuable to your prospect. Then look for opportunities for trades, where you can give the prospect something he wants (which is less valuable to you) in exchange for something that you want. The big levers at your disposal will be price (per seat, per unit), amount, duration of contract (a year? two years? six months? month-by-month?), payment terms (total contract value paid up front? biannually? monthly?), and then terms like automatic renewal and opt-outs. As far as you’re concerned, you would like a long contract, the entire value of which is paid up front, that automatically renews.
So what should you value the most? Cash is king for early-stage companies, and you should always prioritize getting more money in the door up front. You never know what could happen with accounts receivable. The customer could go out of business, have a new purchaser who comes in and holds payments hostage, and so on. Yuck. Get the cash in your bank account. Secondarily, you should value length of contract, in that longer terms reduce the risk that your customer will churn out. In the context of your negotiations, you’ll want to maximize these variables where you can (and later, when you’re training and compensating sales reps, you’ll want to incentivize these variables as well) and, if you have to give things up, give them up last.
When you’re negotiating with a prospect, you’ll want to retreat one increment of a given lever at a time. There’s no reason to give two or three increments when maybe they’d be happy with just one step down, and boom, they sign and your deal is executed. Moreover, when your prospect asks for something (for example, “We’d like a pricing discount”), you can take the opportunity to give them that while simultaneously moving a different lever in the direction you favor.
exampleIf a customer wants a discount per seat, you can counter by saying that you can provide better pricing if they buy more seats or extend the term of the contract. (Say the prospect wanted to start with a six-month contract. Now you can attempt to persuade him into a 12-month contract, which totals more overall but is substantially cheaper on a per-time basis.) Importantly, often your prospect simply wants to feel like he’s getting a deal. Knocking a quick 5% off the top to get the deal done and across the line—without endangering the deal, or getting into less desirable payment terms—is a steal for you. Because now you can turn your attention to another deal, and get it across the line. That easy retreat and win frees you up for yet another win.
If the prospect wants a cheaper per-seat price, propose to lower yours if they buy more of the solution, whether seats, volume (clicks or postings or whatever), or contract length.
If the prospect wants a cheaper total (“I only have ~$10K of budget”), offer to remove seats or volume, and make the per-unit price more costly. Or reduce the length of the contract.
example“You only have ten thousand dollars to spend but want one seat for each of your two recruiters, which would typically cost fourteen thousand? That’s fine. We can do a six-month contract to get you those two seats for ten thousand. Alternatively, I just talked to our VP of Sales, and he says we can do two seats for the year for twelve thousand dollars.” (To which she responds, “Wow, twelve thousand for twelve months for two is a steal, compared to six months for ten thousand. I’ll ask my CFO for the extra money.”)
If the prospect wants to start with a shorter duration, make the per-time price for that duration at least 2–3x what it would be the full year. “I’m happy to put together a six-month proposal for you, but it’s likely going to be five thousand dollars, as compared to seven thousand for the whole year.” If the prospect is unhappy with this, note that onboarding is a fixed cost that is very hands-on, with lots of customer success labor. Your pricing simply reflects that the onboarding cost is only spread across six months (or three months), rather than twelve months.
As with accommodating shorter durations, raise your pricing when the prospect wants to split up payments (biannually, quarterly, monthly). This puts you at accounts receivable risk, and as an early-stage startup, your cost of capital is quite high. So don’t finance your customers. You want to optimize for cash up front as much as possible. If a seat of your software costs ~$10K for a year when paid up front, make it ~$12K if paid quarterly. When the prospect organization realizes they can save ~$2K by paying up front, and they have the capital to do so, they’ll do it, save themselves money, and save you the pain of keeping track of those collections. And now you can take that ~$10K you got immediately and hire another salesperson to start pumping out more deals (versus getting ~$3K, ~$3K, ~$3K, and ~$3K per quarter).
While not exactly the same as negotiating the levers above, sometimes there’s just the question of getting the prospect to execute now, rather than letting him wait to deliberate—this is related to the timing objection we covered previously. There are a couple of handy tricks there. If you’re partway through the month, you can offer the rest of the month for free. Or you can indicate that your customer success team only has so many starting slots available and that they get booked up. Or you can indicate that the pricing you’re providing right now, and the associated discounting, is only valid for this month. Or that in the future, pricing may be going up, so they should lock their rate in now.
As you are progressing through this back-and-forth, it can be helpful to have an authority backstop to refer to and push back with. You may feel like the used car salesman who needs to check with his manager, but it can help provide a rationale for pushback. We already discussed price/value objection handling in Sales Pitches for Startup Founders; you can always use that here as well, to remind the prospect that you’re offering a fair price. Lastly, it’s totally fine to articulate that this pricing is the way it is because A) your company needs money to deliver the service, B) your engineers cost money and need to eat, and C) there are only so many deals you can close in a month, and each one needs to be a certain price to keep the lights on. You’d be amazed how this can humanize the discussion and help the prospect realize that your software costs money for a reason. A more direct approach is to refer to the prospect’s product, and the fact that they don’t give it away for free for the same reasons—though you have to be careful to keep this sort of argument lighthearted and non-accusatory!
In negotiation, there’s an approach called the “best alternative to a negotiated agreement,” often referred to as BATNA—what’s the best alternative the customer has to agreeing to your price and terms? If it’s just the status quo, and you’ve done a great job documenting the cost and opportunity cost of that, you can charge for some proportion of the difference between their opportunity cost and the value your solution would provide. However, if there’s a competitor in the deal who can assist the prospect with the same problem you do, and do so perhaps with cheaper pricing, well, now the prospect has a better BATNA.
The best way to deal with this sort of thing is to have a better product than the competitor, and to charge for it. If there is a delta between the value your product provides and the value theirs provides, you can demonstrate that ROI and reflect it in your pricing.
exampleAt TalentBin, we invested early on in adding lots of recruiting-automation functionality to the product (drip marketing, self-writing email templates, and so on). None of the competition had these features, and as a result, executing certain actions—like sending fifty emails to brand-new candidates, or automatically following up with them after the fact on a cadenced basis—took far more time in those solutions than with TalentBin. We were able to document this (and had it clearly presented in slides) and show the prospect that while the competitor might be charging less, it was actually a false economy—the prospect’s recruiters would be spending way more time doing things that TalentBin could do for them automatically.
If you don’t have that better product, well, you probably should be pricing lower, because the value is less. And you should do your best to document why the competitor’s additional features are not actually all that valuable, are overkill, and are unlikely to be used!
If the prospect says that he has pricing from a competitor that is lower than yours, and he will go with you if you match it—a not-uncommon buyer gambit—you have some options. You can make your best argument for why your product is more valuable and choose to either stick to your guns, provide some pricing relief (discount, but not match the price), or just give in and match the price. Regardless, you should authenticate that he actually has that pricing from the competitor and ask politely to see the proposal or contract in which it’s delineated. Don’t do it in a combative way; just say that in order to justify any pricing inducements, you have to see that (or be able to show it to your boss, or whatever). Then, if you decide to provide some discounting or match, make it clear to the prospect that you will only do so if he agrees to execute the contract the day that the pricing is delivered. And if he can’t commit to that, then don’t deliver the pricing. Otherwise, you’ll be entering into a reverse auction for your services, where the prospect is the auctioneer and you and your competitor are bidding lower and lower. And you generally want to avoid that.
importantWhile hearing the prospect say yes is definitely super exciting, that doesn’t mean your work here is done. Don’t stop to do a happy dance and risk your deal. You have to run all the way until the money’s in the bank, and then run to make sure that the new customer is up and running and getting value out of your solution. We glorify the closing bit of selling, but it’s just another step to nail, of many before and more after.
Once you’ve agreed to a price, you need to act as quickly as possible to execute the contract. You don’t want to leave any room for second thoughts to creep in—get the contract signed and the client on their way to your customer success team for implementation and training.