I need to ask you a sensitive question. How many times have you gotten screwed out of fair payment for your product or service? If the answer is more than “zero,” then you’ve probably made sure it’ll never happen again. Right?
Or have you?
Chances are, there might still be gaping holes in your payment strategy.
The best entrepreneurs I know are some of the nicest people I’ve ever met. But even the most generous among them will come at someone with a baseball bat if they try to weasel out of payment for goods or services rendered.
This is one part of the game where we have to be tough as nails. Fortunately however, there are several steps we can take along the way that are merely grit-teeth tough before we need to go baseball-bat tough. And like with most of the advice I give you, it’s a situation where the more we do up front, the less painful it’l be down the road.
So let’s talk about making sure we get paid. Fool us once, shame on them, fool us twice, we’ll see them in court.
First: B2B vs. B2C
There are several functional differences in payment between a business-to-business model and a business-to-consumer model, most of them having to do with method of billing, method of payment, and method of delivery.
I’ve done both B2B and B2C, and while the differences are starting to blur a bit, we’re not all taking Venmo and Bitcoin just yet. Thus, I’m going to talk about payment in broad terms that will serve both models, and then break it down where I need to in terms of B2B vs. B2C.
And by the way, if you’re a B2B startup, you should probably be taking Venmo, and maybe Bitcoin. It’s easy and you never want to have to tell someone you can’t take their money.
Be Clear About Pricing
This is usually the first mistake entrepreneurs make with their product pitch. The customer has no idea how much our product costs because we’re making them jump through hoops to figure it out. This plays out a few ways and they’re all things we need to stop doing:
- We haven’t spent enough time pricing our product. We should be able to answer “How much does it cost?” in a few words and a few seconds. And this is not only a dollar number, but it’s also a volume number, a time number and a lifecycle number. In other words, our customers will pay this much money for this much usage over this much time with this much support.
- We’ve buried the pricing. For psychological or mathematical reasons, we tend to put off the pricing discussion until we’ve “sold” the customer. This no longer works, especially at the startup level. When a salesperson comes at me with “What’s your budget?” I immediately recoil (and leave the used-car lot).
- We’ve added too many variables. The line between service and product is getting blurrier every day, but as far as the buy decision is concerned, pricing should look a lot more like product. The concept of Total Cost of Ownership is fully understood in the business world, and making the customers do the math just makes us look cheap.
Communicate Costs Efficiently
When we’re thinking about how we communicate cost to the customer, we need to go into it thinking these things:
Be expensive. While I wouldn’t call it easy to negotiate a price down, it’s impossible to negotiate a price up. So if on our best day our product is worth $295, then that’s what we list. Don’t get into too many situations where you’ve delivered a $295 product and you’re stuck taking in $150 for it.
Be bold. If we’re hiding our pricing, either our pricing is off or we don’t believe in the quality of our product. Fix that and wear the price like a badge of honor.
Be clear. Unless we want to nickel-and-dime our customers or we want them constantly nickel-and-diming us, we’ll need to put a single, bold number in front of them. Negotiation is fine, trickery and weird math is not.
Get Paid Up Front
This is where we’ll get to some major differences between B2B and B2C models. Regardless of the model though, we should set up our payment plan so that we receive as much as possible up front.
I probably don’t need to get to deep into the “why” here, other than to remind you that no sale is complete until the money hits the bank account. So let’s talk about how we get the customer to pay before we deliver anything.
In a B2C model, this usually isn’t a problem, because the customer is pre-wired to pay for the product before it’s shipped. In those scenarios, the issue is more about keeping the money they pay, and we’ll get into chargebacks and fraud later on in the post.
The B2C scenarios where this can be a problem is when the B2C product is a service — repair, like with your automobile, maintenance, like your lawn service, or administrative, like tax preparation.
These look more like B2B models, and some providers in fact do both B2C and B2B, so we’ll use a B2B service strategy.
Psychologically, no one actually wants to buy services, because as customers, we ultimately don’t think about transacting that way. In other words, I don’t want to think about someone sweating over my taxes, I just want my taxes done.
Packaging a service makes it transact more like a product, and it’s really on us as the provider to anticipate and limit the randomness in our service. But I get it, not every customer is the same, especially in the B2B world. There are a few ways to handle randomness by using a kind of a package-lite strategy:
- Charge a small deposit or an estimation fee that is removed from the price of the package if the customer agrees to the sale. Then charge and collect the remainder before the work begins.
- Go the other way and charge what we think will be 80–90% of the full price of the job and collect that up front with an agreement that any irregularities found will be charged at the end. List the irregularities and cap the total.
- Work on a retainer basis. Charge a monthly fee payable at the beginning of the period that covers either a set number of hours or a quantifiable description of work. An hourly fee kicks in after that.
Limit Free Work (preferably to none)
In the B2C world, free work usually means returns, re-work, unanticipated support time, or demo units/services. The first three are signs of less-than-adequate quality, which we should fix quickly. The last one is promotional, and while that’s an executive choice, I’ve never seen good returns giving a product or service away for any reason other than charity.
Now, in the B2B world, everyone will try to get you to do at least some work for free and there is no avoiding it. As a startup with a new offering, we need to prove ourselves more often than not. So since we can’t always avoid it, we should go to great lengths to limit it.
- We should strive to only do free work that will save us time if we get the job.
- We should be clear at the beginning as to what is free work and what is not, and what the expectations are for next steps once the free work is complete.
- In an ideal world, we should be able to claw back or turn off access to work we’ve done for free.
- If by the third touch-point with the customer, the expectation is that we still need to work for free, we need to walk away.
Again, free work is usually a sign that we’re not confident enough in our offering. This comes naturally with the wisdom of the founders and the maturity of the product and the company, but nothing says we can’t fake that confidence until we own it.
Fight Fraud Early
Anyone can fall victim to someone else’s lack of ethics, and dishonesty comes in a wide variety of flavors. You’ve got your misrepresentation of intent to purchase, which wastes a lot of time and maybe some money, and then you’ve got fraud and theft, which is also unfortunately part of the game.
There’s no single, solid answer to figuring out if someone is browsing or buying, and we’re kind of damned if we anticipate one way or the other.
The longest I’ve ever spent on the hook with a potential customer is four months, and I didn’t discover that they were never going to buy until the meeting to sign the contracts. It was expensive and embarrassing. This was nine years ago and it was the last time I got burned that badly, but I’ll admit I’ve been burned since.
My thinking here is that I’d rather chase ghost business a little than turn down legitimate business at all. Since that awful episode nine years ago, I’ve stuck my neck out for a few prospects that looked like browsers but actually turned into really lucrative contracts.
Now fraud is another story. We have to act early and decisively, because acting late is always too late. The money is likely gone.
In the B2B world, this means qualifying customers, background checking or otherwise determining that our customer has the money they say they do. Believe me, smarter, richer, more well-connected people than us have been wiped out by trusting and not verifying.
In B2C, there are a few things we should do without question, like pre-authorizing when we’re not collecting up front, and using best practices with credit cards like CVV code, zip code, and billing address.
Then there are some optional steps. If we get into too many situations where we’re seeing chargebacks and stolen cards, there are fraud prevention services that can deny or highlight transactions before they happen. Basically, if the program’s AI smells fraud during the transaction, it kills the sale.
Some of these programs are offered by the payments providers themselves and are available for an extra fee on each transaction (fraud or not). Others are more robust options that work directly with our system, these usually require some integration and then a monthly fee based on volume of transactions (fraud or not).
To decide if we need fraud prevention, we just need to weigh the losses against the fixes. But be advised that the costs of the fixes can pretty quickly add up to thousands of dollars per month.
As I said before, getting proactive late with payment strategy is almost always too late. The more proactive we are earlier in the process, the cheaper it is for us, and the less friction there is for our customers.