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November 29, 2020

Advice to Early-Stage Startups on Pricing

Summary:

Your pricing is a marketing tool that announces how you want potential clients to think of your offering.

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One of the most stressful topics for insurtech startup vendors is pricing. How should they price their offering? What if they set the price too high and it drives potential customers away? Worse yet, what if they set the price too low and they’re leaving money on the table? Should the startup use transactional pricing or tiered pricing or percent of premium pricing? There are indeed some best practices when it comes to pricing software offerings for insurers, but for startups the most important rule is this: The only thing that matters is getting a paying client to validate the business model. In that context, price is almost irrelevant.

The Goal Is Client Maximization, Not Revenue Maximization

The goal of your startup pricing should be to get new paying clients on board, not to maximize revenue. A single paying client will help you prove the system, deliver real value metrics and, let’s hope, provide a referenceable client that establishes viability for future potential clients. If you underprice your offering (whatever “underprice” means) to get clients on board, those early low-paying clients will drive higher-paying clients later. Even if initial low-paying clients remain low-paying clients forever, they deserve the break. That first client took a chance on your startup and almost always ends up driving the future road map. 

It’s true that, internally, a pricing model might be built around and validate the actual costs per client. It is indeed a good thing when you can tie your price back to real-world expenses. But, importantly, your model doesn’t matter to the client. You should understand what each client will cost you and how those costs will change based on their usage of the system. In the long term, once you have established a base of clients, your pricing model should make sure those clients are profitable. Your clients, however, don’t care about any of that. They are going to pay based on what the offering is worth to them, not based on what it costs you to build and provide it. 

And that’s irrelevant anyway. In the immediate future, startups should choose a simple pricing model that helps bring in new clients over a complex pricing model that guarantees profitability in all circumstances. 

See also: A Glimpse of the Future of Insurtech

Pricing Models Are a Marketing Tool

Your pricing model is a marketing tool. Enterprise pricing is not like consumer pricing, where minor variations have mass impact. Instead, pricing is individually negotiated with each client, and the final price in a contract may look completely different than the initial proposal. What that means is your pricing is merely a first attempt to position an offering in the insurer’s mind, helping the insurance contextualize what your offer is more so than its cost.

How do you want your potential client to think of you? 

  • As a service? Use SaaS pricing with monthly/quarterly payment plans.
  • As a per-transaction value? Offer a per-transaction cost.
  • As a tool? Have an up-front license fee and then future annual maintenance fees.
  • As something that grows with organizational usage? Offer pricing based on seats, like Salesforce.
  • As a business partner? Consider (carefully) a percent of premium model. 

The Goal Is Usage Maximization, Not Revenue Maximization

In general, your pricing model should encourage clients to use your service as much as possible. Don’t artificially limit API access or usage to charge more money, unless those things actually cost you more money. Your goal is to get clients to embed your offering into their day-to-day operations as much as possible so that they can’t stop using your service, not to maximize every possible dollar. If insurers are encouraged to use the system less, they become less reliant on it, meaning they are more likely to shop around for other systems later. Pricing should also be built around encouraging (if not requiring) regular upgrades and should include upgrade support costs, if possible. 

Too much choice in a pricing model can be overwhelming to insurer prospects if they can’t quickly figure out which product to buy or if they have to make too many projections about future costs. The relationship between pricing and product should be carefully considered. Startups with products that allow customizability and multi-tenancy can offer more flexible pricing models. SaaS core system pricing should encourage increased usage and proper behavior rather than discourage it.

Your Customer Is Your Partner: Insurance Industry Best Practices

Be aware of what and how your target clients pay for other systems and services. For example, insurers over $100 million direct written premium (DWP) don’t like paying for things as a percent of premium. You can base your internal pricing model on client DWP, but abstract that away for insurer prospects by putting it into “tiers” or some other mechanism in your external pricing messaging. If your client grows its book of business over the course of the year, that’s fine. You can renegotiate the price based on the new tier at time of renewal. 

You can and should treat your potential clients like partners. You can ask them what they think is a reasonable price. Yes, insurer procurement groups are known for lengthy negotiation processes with established vendors. But insurers have a different goal when approaching early-stage startups with only one or two customers. In those cases, their concern isn’t just price but viability. No insurer wants to invest time into learning and integrating a startup’s offering into its process only to have that startup shut its doors. Insurers recognize that licensing an early-stage startup’s offering is a form of investment and partnership. Rather than paying the lowest possible price, they want to pay the price that will be mutually beneficial and help the startup succeed. They won’t pay more than a product or service is worth to them, but they will be honest with you as to what that number is.

See also: Insurtechs’ Role in Transformation

No matter how you set up your pricing, you will renegotiate it with each client. Startup pricing isn’t mass-market consumer pricing with hundreds of thousands of sales each year; it’s enterprise software pricing for a handful of deals a year. Your pricing is a marketing tool that announces how you want your potential clients to think of your offering, and it is a starting point for further conversations. The goal is to get multiple paying clients (or possibly just one single paying client) as a way to prove that insurers value your business.

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About the Author

Jeff Goldberg is an executive vice president of research and consulting at Novarica. His expertise includes data analytics and big data, digital strategy, policy administration, reinsurance management, insurtech and innovation, SaaS and cloud computing.

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About the Author

Ebony Hargro is a senior research associate at Novarica. Prior to joining the firm, Hargro worked in education as a researcher for the Duke Talent Identification Program.

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