How to Properly Increase Your Software Pricing
Patrick Campbell is Co-Founder and CEO of Price Intelligently, a value based pricing software company based in Boston, MA.
One of the most common questions we receive on our pricing strategy blog concerns how to change prices, and more specifically how to raise them. These conversations are always pretty interesting, because most individuals make it seem like the concept of raising prices requires all the espionage and tradecraft of a national security spy mission in enemy territory.
What’s unfortunate is that many don’t realize that changing or raising prices doesn’t have to be exceptionally complicated. In fact, the process can be something welcomed by customers, but only if you set and align expectations properly. After all, theoretically, your software is constantly improving with additional features, more efficient usage, and even more functionality, which means your pricing should follow in suit.
Of course, this can be easier said than done since pricing isn’t a core competency for many organizations. Let’s explore how you can set the right expectation by aligning your pricing along value, as well as properly communicating expectations early and often.
Always Align Your Product to the Value and Usage Your Customers Seek
Before you’re even able to set expectations and properly communicate price changes, you need to make sure your pricing is aligned along the value you’re actually providing your customers. We call this aligning your pricing along a “value metric,” which essentially means if your customers are receiving more value from using your product more and more (from their perspective), then you can charge them more for each unit of value they’re receiving.
Imagine paying for a monthly license of a product you only have a need for once per month. No amount of communication, discounts, or apologies will make up for a drastic price change on that license if your usage remains the same. Unfortunately, too many businesses haphazardly raise prices on products that remain incorrectly positioned and packaged for their customer personas, thinking a simple explanation blog post will immediately justify the changes.
On the other hand, customers will typically be more than understanding (and many even welcome paying more) if you are aligned along value. Of course, you still have to justify the price increase on each unit of value (more on this below), but the conversation becomes exceptionally easier. Look at Wistia as a great example (a Boston-based video hosting and analytics SaaS company). Their team discovered that feature differentiation wasn’t their true value. Instead, the number of videos and the amount of bandwidth they offered was the true value in their service.
Think about it: As customers upload more videos or get more video views, they’re finding more engagement with their own customers, and are thereby getting more value from Wistia. Essentially, their revenue and pricing expands with the value they’re providing.
Another big point here is that deciding the price for each plan was only a third of the battle. The Wistia team needed to identify where clear step-levels existed with their customers’ usage. A large bevy of their customers exist in their $100/month plan. If they instantly took that plan away, thereby forcing those customers to jump up to their enterprise plan, outrage would ensue, because these customers would not have a need for that much usage (or “units of value”), leading to massive churn lost to competitors or a massive drop in customer satisfaction.
Long story short, if you understand:
- Your customer personas’ usage requirements, and
- The value for which they’re willing to pay
the problem of increasing prices and justifying those increases to customers becomes exceptionally easier.
Communicate Early and Often to Create a Value Culture with Your Customers
Let’s say you’ve already got the alignment in the bag. You’ve lined up your customer personas with your plan differentiation and customers are rolling in happy. When you raise prices you should just tell them, right? Well, sort of; you need to make sure these types of changes are justifiable and that the value conversation happens early and often.
Too many businesses believe that pricing and value is this big secret that if you talk with your customers about what they’re paying, all of a sudden the house of cards you’ve built is going to fall to the ground. Reality couldn’t be further from the truth. A business transaction isn’t trickery; it’s a partnership, and you should look at pricing in the same light. Speaking with your customers about what and how much they value is the only way to figure out how to properly setup your positioning, packaging, and pricing.
You’ll find that most customers welcome the conversation, because it involves them in the partnership that is the transaction and indicates you actually care about providing them the right value for which you’re charging them. Customers are smarter than you think, and know they have to pay you for the need you’re fulfilling for them. Plus, you’re already (hopefully) speaking with them about product, marketing, and sales improvement, pricing is simply an extension of this conversation.
The positive externality of these talks, though, is that you’re building trust and setting the expectation that the prices are subject to change, because you’re constantly evaluating the exchange rate on the value you’re providing. To bring this all home, ensuring the conversation takes place with individual customers, as well as the aggregate will ensure the culture around your product’s pricing embraces updates, changes, and increases.
Always be open and honest while justifying why the prices are changing
When actually making the change though, you need to make sure everyone (including your customers and team), know exactly why the prices are going up. Remember, if you have your pricing aligned along value, the conversation shouldn’t be too difficult.
When speaking with customers though, don’t hide why you’re making these changes, even if it’s just because you need to scale the business more. A perfect example is Expensify’s recent price change announcement that eloquently laid out what was happening with the price increase and answered any and all questions surrounding the increase. As we’ve mentioned, customers understand that prices sometimes need to go up due to costs, market pressures, additional features, and the like. Just be honest with them. You’ll notice in the blog comments, customers weren’t necessarily ecstatic the prices went up, but understood the reasoning.
That being said, price changes are easier to communicate when you’re adding features, better service or increased functionality to justify the increase. Regardless of the change (or lack thereof) though, you need to do an audit of how your customers will be impacted. The more drastic the change, the higher the likelihood customers will be outraged and not only churn out, but be an awful marketing foghorn. We don’t recommend more than doubling your prices for any customer cohort, and even then that might be too much. Take a look at the graph below, comparing price increases and customer reaction (note this is a sample of 20 companies in the software space who recently raised their prices). These companies also mentioned that churn rate amongst impacted customers followed a similar trend.
That’s Great, but How Do You Pragmatically Set Expectations
Maintaining this value conversation with your customers is great, but this advice needs to be pragmatic, as well. To truly set expectations you need to decide what kind of company you’re going to be from a price change perspective and communicate that properly to your customers from day one. Additionally, you need to always be upfront and justifiable with any changes.
Pick a methodology and stick to it
Firms handle price changes in many different ways ranging from always grandfathering in existing customers to guaranteeing price increases on a clockwork like basis. One method isn’t necessarily right and another wrong, but you need to make sure you’re consistent with each tranche of customers in practice and also messaging.
It’s not to say you can’t change your method, but you should always be consistent with each set of customers under each practice. Here’s a quick set of best practices we’ve encountered in the field:
Grandfathering: Guaranteeing that the price will never increase for the same product for the lifetime of the account. This is used mainly amongst younger companies who want to encourage early adopters to hop on the bandwagon for the long haul as the product and service improves. If the product drastically improves, you can offer to keep the account on the old product or offer a discounted rate for the upgrade.
Grandfather Discounting: Similar to grandfathering, but you put a timeline on when the discount will expire. You can even put this on the invoice or billing statement to condition customers that the discount will be taken away in 3 or 6 months. You’ll find customers are much more accepting of a price increase/change when they feel like they’ve received a reward for being a loyal customer before the change.
Clockwork Price Increases: More common in the enterprise, these price increases happen 1-3 times per year and condition customers to get in early or sign longer term contracts to take advantage of the current price.
Random, but Justifiable, Price Changes: More on this below, but a lot of businesses fall into this boat, because sadly, pricing isn’t something they’ve thought about until it’s too late. That’s ok, but communicating that change needs to be direct and honest, along with being completely justified.
Here’s a breakdown of how fifty companies handle price increases (note that these are all software companies, but they range in size, platform, and customer):
No Matter Your Path, Always be Upfront, Honest, and Justified
You don’t have to stick to one of these paths over the entire lifecycle of your product, but when questions of pricing come up, it helps to maintain the consistency, especially amongst your team.
The Bottom Line: Pricing is a Process That Must Involve Your Customers
The best way to set expectations and cushion any potential pricing blows to your business, is to keep the line of communication wide open with your customers. No matter the industry, customers realize they’re paying for the value you’re creating for them, and if you have the value conversation early and often within your product and marketing development, you shouldn’t have any problems updating or increasing your price. Yes, you won’t make everyone happy, but if you understand your customers, align your value with their perceptions, and remain upfront and honest, you should minimize any and all problems.
To learn more about pricing specifics, check out our Pricing Strategy ebook, our Pricing Page Bootcamp, or learn more about our price optimization software.