Many businesses have a two-fold problem with pricing: First, they don't spend enough time thinking about their pricing strategy. Instead, it's treated as an afterthought to the design and development of the product. The product is the business, but the pricing is what determines how successful it is. As such, it deserves careful consideration.
The second mistake business owners make is setting the price and then forgetting about it. To maximize growth, pricing cannot be a set-it-and-forget-it part of the business.
Pricing is a growth lever, too often underutilized. In this post, we'll talk about why pricing changes are important, and how to do them without frightening away existing and new customers.
Pricing changes: A revenue growth lever
If you go to the grocery store, it's not uncommon for the price of things to change. This comparison doesn't directly translate to SaaS business, because physical goods have supply chains that are more easily interrupted and tend to use cost-plus pricing. However, having a digital product, and even utilizing value-based pricing, doesn't mean that variables that affect price aren't also constantly changing.
New competitors or new technology popping up can reduce the perceived value of your software, causing you to lower prices. The new features you are constantly adding should raise the perceived value. Your software isn't stagnant, the surrounding market isn't stagnant, your price points shouldn't be stagnant either. Most subscription businesses are missing out on as much as 30% or more of growth because they haven't thought about pricing optimization in years. By ensuring your price always reflects the ever-changing value equation around your product, you'll also be ensuring that you're making as much money as possible.
Preparing for a pricing change
In the beginning, we mentioned a two-fold problem most businesses have with pricing: not putting enough thought into it, and never changing it. If you decide to change your prices regularly, you can't ignore the first problem. Pricing changes are a fantastic growth lever, but only when great care is taken when pulling that lever. Below are some tips to help you prepare for your change in pricing.
1. Know your market, do your research
Market research and analytics is where you'll likely spend the most time. In fact, if there are too many people involved in the process, you can get caught up in a feedback loop that forces this step to take longer than it should. Setting deadlines is a good way to help prevent that and avoid hitting what we call "analysis paralysis." Five weeks or so is a good target for this step in the process. As you begin to regularly change and optimize your pricing, you'll find that much of the market research you've already completed can be reused along with updated research reflecting new pricing changes.
2. Use value-based pricing
You may know that we have a bias toward value-based pricing, particularly for SaaS companies, but not without merit. Value-based pricing is highly effective because it's based on what your target customer is willing to pay—it's based on what they think it's worth. Value-based pricing allows you to be able to price higher than your competitors and continue improving your product. And because of the consistent communication you're having with your customers, you're building impactful relationships. And all this can translate into higher retention.
3. Check in with what existing customers think
Customers aren't usually going to be thrilled about a price increase, but many of them will be honest if you ask them about the value your product brings them. Customers also appreciate honesty and directness. Don't use open-ended questions. Ask them direct questions about your biggest concerns, as well as what questions they have. Understanding how your actual customers think or feel is crucial. This is also best accomplished by choosing a select group of your customers, rather than blasting out a survey to all of them.
4. Understand the impact of your new pricing
You can implement legacy pricing with existing customers, so they're not affected by the new pricing. But it's still a good idea to run an analysis to see how existing customer segments would be impacted by higher prices. If you notice that one customer segment is hit especially hard by the price increase, be sure to reach out to them and maybe offer a transition discount to ease them into the pricing change. This can also help ensure that the pricing structure you've settled on is indeed the correct one.
5. Build a communications plan for your price increase
Price changes can be confusing and frustrating for your customers, so it's crucial to have a communication plan in place. Giving your customers as much information as possible right from the beginning when it comes to increasing prices, and giving them resources to find out more on their own is vital. But you must also ensure that support staff and anyone else who deals with customers fully understands the new pricing, so everyone is communicating the price change honestly, effectively, and correctly.
How to increase prices without offending existing customers
One of the biggest reasons companies don't change prices regularly is that they're afraid that raising prices will offend their existing customers. What if you raise prices and all your customers leave? As long as you're using value-based pricing and checking in with existing customers as part of the feedback process, your new prices are likely to still be something your customers are willing to pay. Still, there are steps you can take to soften the impact of any pricing changes.
Know your customer segments
Different customer segments will likely have different price sensitivities. Which of the methods below are appropriate will depend on the customer segment. Therefore, understanding those segments is vital to getting the right method.
Offer legacy pricing to your early adopters
Legacy pricing means that customers are guaranteed the price will not increase for the same product. This is typically offered to customers that may be more sensitive to a price increase.
Offer VIP discounts based on customer segment
An alternative to legacy pricing is to offer transition discounts to certain customer segments. Discounting would apply for a number of months after the price change, and then expire. The conditions and timing of the discounts must be clearly communicated. Promotional pricing helps customers feel rewarded for their loyalty.
Set timeline expectations with customers for price changes
Changing your prices should be something that you do regularly but appropriately. The pricing change could come automatically after a given number of months, or it could come as new features are rolled out. Whatever the schedule, clearly setting those expectations will help eliminate shock and pushback from customers.
Communicate with clarity and stick to your decision
Every aspect of the price change should be communicated clearly and in advance. More importantly, once you've made the decision to change the current pricing, you should not reverse it. If you've done the proper research and preparations, then you have what you need to support your decision, which will help you easily communicate the changes and why you're making them, to your customers.
The golden rule of price increases: Treat pricing as a process
Thinking of pricing as something you spend a little time on when you launch and then forget about, as many businesses do, leaves a lot of money on the table and severely limits your possibility for growth. The market is constantly evolving. Hopefully, your product is continuously improving as well. When all the variables that go into pricing are changing, but your pricing isn't, it's a problem. Instead, pricing should be a process. One that is refined regularly to keep up with changes in your product, in those of competitors, with the state of the economy, and with the software market as a whole. It is an ongoing process.
Make data-driven pricing changes with Paddle's Price Intelligently service
A lot of work goes into determining the correct price. Market research, customer research, and experience in understanding what the various customer segments value, are all required to arrive at the price that will bring in the most revenue without scaring off customers. Paddle's years of experience make our Price Intelligently service uniquely positioned, with a specialized team and software together, to ensure your pricing strategy is driven by data.
Understand how to differentiate
Whether it's differentiating yourself from your competitors or differentiating your pricing tiers from each other, understanding the value customers place on your features is key to knowing what to focus on in order to stand out. This information also allows you to focus on the right value proposition, making customers more likely to buy and more willing to pay a premium price.
Persona & market research
Without the proper understanding of the different personas that make up your customer base or the market realities you are working within, you're likely not making the right decisions around your pricing. At Paddle, we know pricing. And we know what questions to ask and where to look, to find the information that's most relevant to your decisions related to pricing changes you plan to make. Our software and methodology is a powerful pairing of our proprietary algorithms and market panel.
Take the guesswork out of your pricing strategy
Choosing the right strategy may seem like a time-consuming and daunting task, and it can be, but Price Intelligently makes it easy by doing all the hard work for you. We study subscription pricing and growth more than anyone else on the planet—taking the guesswork out and ensuring your pricing strategy is optimized for growth.
Pricing changes FAQs
How do you announce a price change to customers?
There's never going to be a time when customers will be perfectly happy with a price change/increase, but if you've conducted the proper research, that data will back your decision. The key, then, is to be as transparent as possible, utilizing your data to explain to customers exactly why the pricing change is happening. Customers appreciate honesty and it builds trust.
How do you justify a price increase?
Customers understand that market realities change, but no one likes a hike in price that isn't justified. Consistently delivering on and increasing the value of your product or service, is a sure way to keep customers around. When customers are happy and dependent on your product, the more understanding they'll be with any pricing changes, and likely be willing to pay the extra money. You should, however, have solid research and/or quality improvements to back your pricing changes. Regular pricing updates also condition customers to expect changes.
How often should you change prices?
The most successful companies are reviewing their prices quarterly and making adjustments every six months. If it's been over a year since your last pricing change, you are most certainly leaving money on the table.
Why should a business change prices?
If you don't change your pricing, your business will not grow. As new competitors enter the market, new features are added to your own product, and the economy as a whole shifts, the variables that went into your original pricing decision change as well. Your pricing should always reflect the current reality. And contrary to what some may think, any increase in price will actually help stabilize the revenue of your business, maximize your profits, as well as maintain a predictable growth rate.