Pricing Strategy for B2B-Focused Fintechs
Next to building product, finalizing a pricing strategy that benefits both customers and fintech platforms is becomes the most challenging feat. There’s often no precedent or benchmark in the market for B2B companies. Somewhere between ‘trial & error’ and ‘start high, then discount’ is a sweet spot of what the market will allow AND revenue targets.
There are many ways to price a product in financial services — fixed monthly fee (per product, per user), pay-as-you-go (usage based on transacting activity, as a % or flat fee), and subscription tiers (more services come with a higher monthly/annual cost). Besides the complex decision of pricing model attached to a new product, fintech platforms also need to be able to gain the trust of their clients. Newly launched companies may take time in building a brand in the market, which can delay charging customers for value provided.
Company segment of customers can also vary pricing structure available. Small startups prefer transactional-based schemes vs. established companies interested in fixed monthly costs that scale down with user volume. At the very end of the rage, enterprise platforms (with massive user bases & transacting needs) will want to dictate something more custom, which can give involve monthly commitments in activity and annual targets.
Let’s take a deeper look at the multiple dynamics that founders, product teams, and executives must consider in shaping strategy on monetization and evaluating its effectiveness. Key points to be covered include:
The pricing frameworks for new startups;
The role of company size (Seed, Series A/B, Series C+) impacts how pricing strategy evolves;
Available options for monetizing products;
For companies already in market with one product, these discussions may shed light on how to price secondary products or bundle a program that has a suite of services.
FRAMEWORKS as STARTing POINTS for pricing models
There are multiple angles for companies to start with and evolve their strategy for monetization. The working model for specific program may be a blend of the four frameworks discussed below. The common thread is balancing value provided to business clients and expenses incurred (in providing this value) from fintechs.
Customer-LED discovery
For many new companies, their mission is focused on solving a specific painpoint for a specific type of customer. For business customers, these painpoints often hover on cash flow management, optimizing operations, reducing costs, and revenue generation. Replacing a manual or legacy process with automation & efficiency is a popular play.
Ultimately, founders and product teams need a high sense of empathy to drill down to the critical need that a customer would pay for a solution. These target clients may already have a product that they pay for which offers similar benefits as your MVP. Understanding how much they currently pay (and for what) and what they would be willing to pay are essential for companies conducting customer discovery. Surveys to firms in your target segment should ask about:
What type of budget do you have set aside to solve this need for your company?
What pricing structures would make the most sense for your team?
Startups with strong connections to prospective buyers should ask about specific pricing ranges to get a feel and gauge what the ‘gut reaction’ is. Getting a variety of honest, transparent opinions and making a comparison is a strong head start for revenue strategy.
Value-SELLING
Challenging to quantify and communicate, value-based pricing comes to estimating the overall benefit a product offers — not just a quantifiable output (e.g. increased capacity, higher transaction volume), but qualitative benchmarks such as less reliance on multiple 3rd parties and long-term upside for upgraded service levels. It’s easy to overlook how valuable more time, capacity, and smoother operations can be — make sure these benefits get included in pricing. Estimated perceived value and then converting into a monthly or usage-basis is difficult due to the level of judgement involved.
It can be made easier if a new solution presents an improved alternative that requires a customer to completely replace what they currently have. The past vendor can represent an anchor (positive or negative) in relation to a newly released product.
If a program is completely new (no other comparable in market), companies should evaluate the ‘job-to-be-done’ perspective and monitor what functions/activities would be absorbed in adopting this new market offering. This can be calculated in less staffing or employee hours needed due to increased efficiency.
Once value is set, a founder or product team should decide how to split the value with their customer so that both sides mutually benefit. A lower cost program with higher benefits should help businesses be more willing to make a transition — but if there’s not enough of a profit margin to keep the offering (and company) sustainable, then modifications will need to be made. Prospective customers will still look closely at other options and try to price-match against newly launched products (for better or worse) — differentiation and communicating value is the key to holding the line.
Setting target margins
Strategy teams can also work backwards when it comes to drafting pricing models by first deciding on what gross margin they should shoot for. This requires understanding what a business’ operating expenses are — staffing, in-house customer support, 3rd parties (i.e. hosting providers, payment providers, cybersecurity).
With this number in mind, projecting for a 50% - 80% gross margin (based on amount of 3rd parties involved) would be a great start. For new startups, operating costs tend to be relatively low due to minimal funding and the urgency of getting into market quickly.
Many fintechs need to work with licensed 3rd parties and required vendors, which chips away at having a higher gross margin. Negotiating for below market costs and volume pricing is difficult for startups without a track record or established base of customers.
The main benefit from adopting this model is alignment with competitors and alternative options (especially in sectors where margins are well-known). Companies should still be aware that this needs to be ‘sensed-check’ with what prospective customers can afford.
iterate as you go
For companies with robust runway, prioritizing growth in the early months with a flat pricing model may be the way to go — especially if speed & transparency are important. ‘Freemiums’ and early adopter bonuses can help platforms gain market feedback on product & pricing right away. Adjustments can then be made as more value is provided — monthly subscription, tiered or volume pricing, usage-based models, or a blend for different user segments.
The ‘right’ strategy will be influenced by customer-led pricing discussions at the beginning, then quickly gravitate towards gross margin targets. If these are two opposite ends of a spectrum, continuous iteration will helps B2B fintechs land somewhere that works well for their clients and company. Differentiation and communicating value (discussed last month) are also crucial in winning sales at key price points and growing as a market leader. As businesses grow and scale over time, small changes will be made along the way to adjust for changes in customer segment, the economy, and product innovation.
THE ROLE OF COMPANY SIZE impacts revenue models
When it comes to pricing strategy, what’s prioritized for a newly launched startup entering the market will not be the same as an established, enterprise-grade company. After starting points have been chosen and businesses start to scale, the goal posts change — from building customer adoption, finding an optimal & repeatable monetization path, to maximizing overall value. Here’s a look at the three growth zones for fintech startups.
Pre-seed & seed stage
The starting point for all companies that are pre-product market fit (or Pre-PMF) focuses on finding the best way to reach customer adoption quickly. Gaining feedback from clients and building up usage of product are critical goals. Early pricing models are designed with this in mind. Simple and straightforward is emphasized over complex, tiered structures that make it difficult for business users to understand.
Since startups are small in size at this stage, founders are the ones driving strategy and deciding what price points work best to get products in the hands of customers rapidly. However, starting with no cost or very low pricing isn’t ideal as future clients can get anchored at a range that has narrow profit margins. It may make more sense to start on the opposite side — a high standard price which then gets discounted for early adopters.
It’s important to communicate these discount offerings as temporary or limited — available for a set period only, with a certain set of features/capabilities. This approach emphasizes value while removing blockers in new customers onboarding. It also allows for experimentation in moving pricing levers and identifying what moves the needle most for acquiring quality clients.
Once pre-seed / seed stage companies are set with a starting point for pricing, it’s time to take a step back and validate for sustainability. Will the company be able to grow & scale with this monetization model? What’s the gross margin? Is there a way to increase pricing by adding more features? Based on the responses, B2B fintechs can decide to make small changes or stay on the same path they start with.
SERIES A, B
Once a company has reached PMF, the focus shifts to making the revenue model repeatable & standardized. Doing so removes variability in revenue generation and allows for capacity & resource planning towards customer acquisition and retention. Renewal pricing comes into play to help minimize churn (or turnover) from existing clients. Bundled packages can deepen relationships. Discounts & sign-on bonuses increase in variety to help attract different segments of new users. Also, tiered pricing gets introduced at this stage — basic, intermediate, premium offerings come with different costs and benefits.
Strategy no longer falls on the shoulders of founders — product & go-to-market (GTM) execs take over this responsibility. Testing various pricing points that deliver revenue volume (with growth of user base and user activity) comes into play here. A measured process that documents performance based on small changes is the way forward. Companies can then debrief quarterly performance and adjust pricing strategy based on data insights.
SERIES C+
At this point, B2B fintechs are starting to scale rapidly and the priority shifts towards how best to maximize value. Pricing strategy needs a north star of how much value a company should target — various paths and levels of product offering can then be designed & implemented to best capture this goal. As companies continue to mature, more blended models come into play — each customized to particular business user segments & needs.
Organization roll out company-wide initiatives to rally all their teams around value targets. A dedicated revenue team (and likely a Chief Revenue Officer) evaluate data on pricing, revenue performance, sales process, pipeline activity, and marketing efforts. Within this team, there can also be a pricing committee who is able to create bespoke proposals for high-profile enterprise clients that don’t fit existing cost structures. Variations in pricing structure can include:
Factoring minimum commitment levels for usage or volume — this can be monthly, quarterly, or annual; once the commitment has been reach, then a flat fee can kick in that is scaled down from standard cost;
A pricing plan in which a lump sum payment is paid upfront for a fixed period and debits are made against this amount for transactions and user activity;
A mixed approach in which an initial amount of usage is free and then tiered pricing applies based additional volume targets;
Enterprises may demand custom product features and service levels, which need to be built out separately from standard offerings — companies should evaluate how much work is involved (for building and maintenance), then add this to existing pricing plans;
In financial services, there are revenue share opportunities between B2B fintechs and business clients — companies can move this lever up or down based on what an enterprise prioritizes;
Established B2B fintechs can also decide to move upstream in terms of business clients that they plan to work with. Serving SMBs at scale may not be as beneficial to revenue generation and net profit as 4-5 enterprise companies. There’s also network effects from capturing well-known industry leaders as clients. Ideal customer profiles (ICPs) are typically reexamined at this point against revenue targets. If the unit economics aren’t there, then it doesn’t make sense for the company.
monetization options in b2b fintech
We covered approaches to finding a starting point for pricing strategy and some of the discussion touched on certain options.. Here’s a quick summary of ways that B2B fintechs price out their programs:
Fixed-fee model: this can be in the form of a monthly/quarterly/annual fee linked to licensing (e.g. user access, ‘seats’) of software or program access. In exchange for the platform, businesses consume a certain set of services — as service level increases, so does the fixed fee. This works well for fintechs that provide automation, management, or analytics via a dashboard/app. Pricing is transparent and easily configurable to gross margin targets; however, success is linked the sale of more licenses or access points (which can be difficult to manage if logins are shared within a team);
Usage-based: businesses pay a flat fee for what they utilize according to a pricing/fee schedule, which works great for cost-conscious clients with narrow budgets. Fintechs that have specific billing, such as API-based firms, can leverage this model as part of a broader strategy. Checking credit, verifying identity, linking an external bank account, and employment verification are examples of companies where per transaction fees fit well. These fintechs tend to be infrastructure-focused and part of an ecosystem of vendors put together for a banking program. Despite this working well for businesses, fintechs can struggle to make this a predictable revenue target due to usage being susceptible to seasonality;
Revenue share: instead of a flat fee for usage, there’s a percentage of transaction volume taken as fee. This is also a linear construct for businesses to know ahead of time what they’ll pay. The drawback would be for enterprise clients that run a massive amount of volume (such as in a payments program) — this segment would prefer a reduced flat fee model instead. Besides payment vendors, marketplace ecosystems, and certain Banking-as-a-Service (BaaS) providers often leverage this approach.
Freemium: this comes with a minimal set of features, usually focused on data insights only (no money movement or transacting); B2B fintechs are giving a sample to business clients to gain their trust and showcase what’s possible with paid options. Companies that find success with freemium are in the personal financial management (PFM) or banking data space in which numerous competitors exist. The challenge comes down to converting trial users to paying customers quickly and minimizing the burn (free) period.
A diversified approach makes sense, especially for established fintechs growing their brand presence. In the BaaS sector, its common to have a combined fixed fee, user fee, and revenue share components. This mixed pricing structure covers the infrastructure and vendor dependencies in offering an embedded banking program.
wrapping it all up
Starting out, pricing strategy is a more of an art — set by founders based on their assessment of the product value provided.
As a B2B fintech evolves, so should its revenue model — expanding to capture different user segments and finding a repeatable ‘recipe’ for success.
When a company starts to scale rapidly, pricing shifts toward a science — data is available as a leading indicator of what needs to be changed to maximize value.
Ultimately, its all about striking the right balance between what the market will allow for value provided AND a sustainable margin for a company to grow.
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