Jul 25, 2024 · 17m · y-combinator
How To Price For B2B | Startup School · Y Combinator
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this Y Combinator Startup School lecture, Group Partner Tom Blomfield presents a practical, end-to-end framework for early-stage B2B founders to establish, defend, and iteratively optimize software pricing.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. How this is scored →
The partners as informed peer 0.0 Guest teaching 0.0 Guest disagreement 0.0 The partners pushing back 0.0
speaking balance: gold is the partners, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 6:50 Warning against commodity price wars
Blomfield strongly rejects entering head-to-head price wars with competitors, calling it a race to the bottom using the airline industry as a stark negative example.
Hardest push from the partners ▶ 15:05 Pushback against pretending to be a big companyBlomfield refutes the common founder impulse to falsely inflate team size on LinkedIn, arguing instead to highlight 24/7 direct founder access.
Biggest teaching moment ▶ 2:15 The 100-agent customer support value equationBlomfield demonstrates how to calculate fully loaded customer service costs to capture significant value and comfortably pitch high-tier enterprise contracts.
The partners hold their own ▶ 11:20 Sales quota ratio mechanicsBlomfield details the concrete 5-to-1 ARR-to-OTE sales compensation rule of thumb to show how pricing tier directly determines go-to-market structure.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | The partners as informed peer | Guest teaching | Guest disagreement | The partners pushing back | Why |
|---|---|---|---|---|---|---|
| The Founder Dilemma in B2B Software Pricing | 0 | 0 | 0 | 0 | This is a solo instructional presentation by Tom Blomfield detailing the value equation in B2B pricing. There is no active host presence or dialogic interaction. | |
| Core Element 2: Managing Costs and Margins | 0 | 0 | 0 | 0 | Tom Blomfield continues his lecture, discussing cost baselines, gross margin targets of 80 to 90 percent, and handling competition without engaging in price wars. | |
| Aligning Pricing Structure with Customer Expectations | 0 | 0 | 0 | 0 | Monologue outlining how to structure pricing models like MRR and ARR versus usage-based models, and matching internal buyer sign-off thresholds. | |
| Public Pricing vs. Enterprise Sales and Feature Tiering | 0 | 0 | 0 | 0 | Instructional breakdown explaining why enterprise pricing is hidden behind contact sales and how sales compensation maps to deal volume. | |
| Pilot Strategies, Guarantees, and Startup Positioning | 0 | 0 | 0 | 0 | Blomfield advises against long free trials, recommending money-back guarantees and leveraging startup responsiveness. A brief single-word interjection occurs at 15:05 without interaction. | |
| Summary and Conclusion | 0 | 0 | 0 | 0 | Concluding summary of the three main pillars of pricing: the value equation, cost floor, and product differentiation. |
Statements from this episode (16)
Blomfield: Founders without enterprise experience drastically underprice B2B software
“Often when you haven't worked at a big company, you don't have good calibration about what kind of prices these companies tend to pay for software. And so you might think of the last time you bought software, you know, a subscription to GitHub or ChatGPT, and …”
Blomfield: Price B2B software at 25% to 50% of value delivered
“I typically pick somewhere between 25 and 50% of the value you're delivering. So they keep roughly two-thirds, you keep roughly a third.”
Blomfield: The value equation gets 80% to 90% of pricing right
“If you just stop with that value equation, honestly you'll get Eight to 90% of the pricing spot on.”
Blomfield: Cost-plus pricing always results in underpriced software
“Some people like to do a cost plus a margin pricing, and it just always ends up with you underpricing your software.”
Blomfield: Software startups should target 80% to 90% gross margins
“Really you should be aiming for software margins of like 80 or 90%.”
Blomfield: Startups must treat cloud and AI credits as cash costs
“So people at AWS, Microsoft, OpenAI, giving out tons and tons of credits to startups. You should treat those as a cash cost. Don't assume you'll have unlimited credits forever. It'll totally mess up your margins.”
Blomfield: Enterprise Buyers Are Typically Wary of Uncapped Usage Pricing
“People typically are wary of totally uncapped usage-based pricing, so you might want to put a cap on that.”
Blomfield: Matching Existing Software Pricing Structures Improves B2B Sales
“Really, if you can mirror the way they are used to paying for other software, the better you'll do.”
Blomfield: Committed recurring revenue is preferable to usage-based pricing
“In general, committed recurring revenue, that's monthly recurring revenue or annual recurring revenue is preferable to usage based pricing. And that's because during an economic downturn or a slowdown, your revenue is protected at least until the contract is u…”
Blomfield: Publishing fixed enterprise pricing leaves money on the table
“If you choose a price randomly and put it on your website for an enterprise contract, you are certainly leaving money on the table. You'll overprice the product for a whole chunk of customers who don't get that much value out of it. So you've lost them entirel…”
Blomfield: Enterprise compliance features enable up to 10x higher pricing
“Often it's things like SOC two audit reports or single sign on or audit logs or compliance reports or, Data being kept in certain geographies, things like that that really individuals and small companies don't really care about, and enterprises find absolutely…”
Blomfield: Target a 5:1 ratio of new ARR to salesperson compensation
“So a good rule of thumb is about a five to one ratio between new signed ARR and total compensation for a salesperson, including commission.”
Blomfield: Long B2B software pilots are counterproductive and lack customer buy-in
“In general, offering a really long free trial or a pilot is counterproductive. The customer's not actually bought into using the product, and so what you want to do is keep these pilots or these proof of concepts really, really short. Maybe a couple of weeks, …”
Blomfield: Startups should pitch direct founder access rather than fake company size
“What you should do instead is play to your strengths as a startup. Say to your customers, you can have the phone number of the founders and we're on call, 24 seven to come and fix your problems. You're certainly not going to get that from Salesforce or Oracle …”
Blomfield: Startups are priced correctly when they lose 25% of deals
“And when you start To lose more than 25% of potential deals based solely on price, you're now probably in the right ballpark. So you don't need to win every single deal, and if every single deal is closing straight away, you're almost certainly underpricing.”
Blomfield: Over-optimizing early pricing is a big mistake for startups
“And just remember, if your company is successful, these initial five, 10 customers you sign up at the start are going to be a tiny, tiny fraction of the revenue you make over the next five years. And so It's more important to start signing deals and getting to…”