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Have you ever almost lost a friend over a game of Monopoly, even if you’re not typically a sore loser? You’re not alone! Monopoly epitomises a zero-sum game, where every gain for one player directly corresponds to a loss for another. When you collect rent from your opponents, they lose money. When you buy properties, they have fewer options to land on without paying you. It’s a ruthless cycle of wealth accumulation and bankruptcy.
If your customers also come across as sore losers during price negotiations, you might be framing the conversation as a zero-sum game. But there’s a much better way! Curious to learn what it is?
Welcome to the latest edition of “Math Meets B2B SaaS,” where I explore how math theorems can be applied to strategic decision-making in the world of B2B SaaS.
This time, I delve into how B2B SaaS companies can avoid finding themselves in zero-sum games during price discussions with their customers, and how this yields better returns for all those involved.
Let’s start with the basics: What’s a zero-sum game?
Game theory studies how people make decisions in situations where their choices affect each other. A zero-sum game, which is a specific game theory scenario, is a mathematical model where one participant’s gain is precisely offset by another participant’s loss. In simpler terms, the total gains and losses within the ‘system’ sum to zero.
A non-zero-sum game is characterised by scenarios where participants can collectively achieve outcomes that generate positive value for all involved. These games allow for win-win outcomes, where one party's success does not necessitate another party's failure.
How’s this relevant to B2B sales?
Let’s assume that you’re a B2B SaaS provider, and your customer pays a $100 subscription fee per month for your software. You want to increase the fee by 20% to $120 a month at the upcoming renewal cycle. Let’s look at how the perceived cost of this price increase changes for your customer when presented as a zero-sum game versus a win-win game.
Case 1: Zero-Sum Game Price Increase
You believe a 20% price increase is fair given most of your expenses from data feeds, to productivity tools to office rent have been increasing in a similar fashion. So, it’s not “off market”. You email your customer to notify them of the upcoming price increase, stating:
"Due to rising operational costs and the current high inflation environment, we will be increasing the price of your subscription to $120 per month, starting [Effective Date]. We appreciate your understanding and continued support. For any questions, please reach out to us at [contact info]."
In this scenario, your customer can either accept the price increase or negotiate to keep the price at $100. The payoff for you and the customer under this scenario looks like this:
Customer Accepts | Customer Negotiates | |
Increase to $120 | (20, -20) | (0, 0) |
Offer $110 | (15, 5) | (0, 0) |
Payoffs in a Zero-Sum Matrix:
(20, -20): If you increase the price to $120 and the customer accepts, you gain $20, and the customer loses $20.
(0, 0): If you insist on $120 and the customer negotiates down to $100, no gain or loss occurs (assuming successful negotiation means the status quo is maintained).
(10, -10): If you offer a $110 compromise and the customer accepts, you gain $10, and the customer loses $10.
(0, 0): If you offer $110 and the customer negotiates it down to $100, there is no additional gain or loss for either party.
By following a cost-driven approach, you have framed your price increase as a zero-sum game, where the customer's objective has become to secure the lowest possible price while you aim to maximise revenue. Every extra dollar you gain, your customer loses, and vice versa. However, this perspective overlooks the potential for mutual value creation inherent in a B2B SaaS vendor-customer relationship.
So let’s look at the perceived cost of the same price increase when you follow a value-based approach to pricing and by doing so you frame the price increase as a win-win situation.
Case 2: Win-Win Game Price Increase
Imagine approaching your customer not just to inform them of a price increase but to engage them in a conversation about the value they are getting from your product. You frame the price increase as an opportunity for both parties to benefit, which should be a more accurate description of the situation anyway! This time, your communication with your customer might be:
"We’re excited to share some upcoming enhancements to our product that will significantly improve your experience and provide greater value to your business. These enhancements include [list of new features/improvements], which we believe will help you [specific benefit related to the customer’s business].
To support these advancements and continue providing top-notch service, we will be adjusting the subscription price to $120 per month, effective [Effective Date].
We’re also pleased to see the value you have already received from our product over the past year. Your use of [specific feature or benefit] has contributed to [specific positive outcome], demonstrating the substantial benefits our product delivers.
We understand the importance of budgeting and planning, so we’d like to offer a complimentary consultation with our customer success team to ensure you’re getting the most out of these new features.
Please feel free to reach out to us with any questions or to schedule your consultation. Thank you for your continued partnership."
With ‘value’ at the core of the pricing conversations, the payoff matrix is no longer a zero-sum game and looks like this:
Customer Accepts | Customer Negotiates | |
Increase to $120 | (30, 10) | (0, 0) |
Offer $110 | (10, -10) | (0, 0) |
Payoffs in Mutual Value Creation Matrix:
(30, 10): If you increase the price to $120 and the customer accepts due to the added value, you gain $30 (the extra revenue plus increased customer satisfaction and loyalty), and the customer gains $10 (the value of the new features and improvements).
(0, 0): If the customer negotiates to maintain the current price of $100, there is no additional gain or loss, but you’ve initiated a positive discussion about value.
(15, 5): If you offer a compromise at $110 and the customer accepts, you gain $15 (moderate revenue increase and customer satisfaction), and the customer gains $5 (still benefiting from added value but at a reduced rate, given not all planned features can be delivered).
(0, 0): If the customer negotiates the compromise down to $100, no gain or loss occurs, but the discussion about added value may still foster goodwill and future opportunities.
Move from Cost-Driven to Value-Based Pricing Negotiations
Negotiations are never easy, and pricing negotiations in B2B SaaS are no exception.
Like all other negotiations, they are best approached as non-zero-sum games, where the goal is not to extract maximum value for one party at the expense of the other, but to collaboratively create value that benefits all stakeholders involved.
A cost-centric conversation, which more B2B SaaS companies than one would expect default to, tends to position price increases as zero-sum games, focusing on covering costs for the vendor rather than on mutual benefits. A value-centric conversation, however, can position a price increase as a win-win situation, demonstrating your customer-first approach and emphasising the additional benefits you are working hard to bring to your customers’ business.
Remember, in the game of B2B SaaS pricing, there’s no such thing as expensive or cheap —only positive ROI and negative ROI purchases for your customers. And everyone can win when value is the ultimate currency!
Get in touch
I’m always happy to discuss math theorems and how they are applied to the day-to-day business world. If you’d like to connect, you can find me on LinkedIn, or you can drop me an email at gc@oxx.vc.
