How to Increase SaaS Prices the Right (and Profitable) Way
Have you ever gotten a bill that—inexplicably—is two or three times more than usual? What was your reaction? Probably something like this:
[A SaaS vendor] pulled a massive price increase on us (over 300%!) and that was it. I don’t care how much I like their product, I’m gone. We use Drift now.
I got that from a user who junked her paid account after a vendor jacked up their price by 300%. Stories like this might terrify you if you’re thinking about increasing prices for your SaaS product. You might annoy them or, worse, lose them outright to a cheaper competitor.
Your fear is reasonable. As CrazyEgg’s co-founder, Hiten Shah, puts it: “When customers have countless choices available to them in the market, they are prone to shop around for the best price.”
But there’s hope: Churn isn’t the only outcome of a SaaS pricing increase. You will anger some users. Some will churn. But, if done right, a net revenue boost is entirely possible.
Need proof? The SaaS brand I mentioned at the start is Intercom. And, as of now, they still boast 30,000+ paying customers (each of whom is paying more than before).
Much of the outcome depends on what you do before you announce the price increase. This post will help you get that (and a few other things) right:
- Identify if the time is right to raise SaaS prices;
- Know your strategic options for increasing SaaS prices;
- Communicate a price increase to existing users effectively.
Is it time to raise prices for your SaaS product?
Justifying a price increase is almost always about creating more value—making your product better. But what’s the definition of “better”? And who defines it? An email from Seth Godin’s “The Marketing Seminar” has a profound definition of what “better” really means:
When your better aligns with the better of those you seek to serve, you’ll have found an internal compass that can guide your work…”
You may think your product is better, but users must agree before you can hike your prices. “Better’s not up to us. It’s up to those we seek to serve,” wrote Godin in another post.
So how do you determine whether those value judgments align?
Talk to users to find out if your “better” is also their “better.”
Survey users about the features they find most useful, or the ones they’d like to see in your product. Neil Napier of Kyvio shared with me how they could’ve improved their price increase process if they’d found out what their users really wanted first:
In the past, we messed up and raised prices too quickly because we “promised” certain people we would. Now, we are taking a more calculated approach, which involves running surveys and interviews to learn what people want and value.
Have unstructured, in-person conversations with your users. In an interview with Hotjar, Drift’s founder David Cancel shared how he and his team would get on a plane and have lunch with their users—big and small—so they could chat with them like normal people and get quality product feedback:
Every week, we do things like meeting up with small groups of customers. We’ll fly out to a city, one or two of us, and meet up with some prospective customers, some people in the industry, some existing customers, and I’ll do a lunch with them. I’ll do a dinner with five of them. I do it a lot.
We want to have a mix of successful customers, unsuccessful customers, new customers, old customers. So, we try to mix it up.
And this is not a product pitch for Drift. We just let everyone talk. Let’s just be real people and have a conversation.
And it’s amazing that in every one of these cases, without coaxing them, the conversation naturally goes into Drift.
And we just sit back and mostly listen to them.
But discovering your users’ definition of “better” isn’t the only factor to consider before raising SaaS prices for existing customers.
Other factors to consider before you raise prices
In addition to aligning on value with your users, there are three other things to keep in mind.
Slow vs super-active periods
There may be times (e.g. Black Friday, Christmas, summer, etc.) when your users are inactive or significantly less active. Those are not ideal periods to increase your prices.
If, according to your data, paid users seldom engage with your product over the summer, it’s best to wait until they’re more active before you introduce a price change.
If users aren’t engaged when you increase prices, you won’t get an accurate reaction to the price change. CEO at KlipFolio, Allan Wille, recounted his experience with seasonal fluctuations in his SaaS business:
With more data to compare, I can see evidence that there are seasonal fluctuations in our business. For example, this summer, organic traffic to our website was flat. And perhaps most telling, the percentage of daily active users (%DAU) of our dashboard was down.
It makes sense … people are on vacation. Likewise, seasonality is evident at Christmas and New Year’s. There is a precipitous drop in activity on both those days. It’s clear almost nobody’s working.
Similarly, Better Proposals’ founder Adam Hemphy shared how raising prices around a Black Friday deal wasn’t a good decision:
My advice would be to do a price increase when you don’t have anything else affecting it. In our case, doing it in February or March would have been a better immediate test for whether the price increase was a good move or not.
When users are active, you may even get unsolicited feedback that it’s time for a price increase.
If you’re getting comments from paid users like, “You could really charge more for this,” then it might confirm that your prices should go up—especially because they may be speaking for many paid users.
But does that ever really happen? It does. A paid user once told the Appcues team:
You guys should find a way to charge us more $$$. $450 isn’t enough—we should be paying you well over $1k.
They raised their prices soon after. Sarah Hum of Canny had the same experience:
If you’re getting comments like these from your users, it’s probably time to lift your SaaS prices.
However, if you never hear from ready-to-pay-more buyers, take a more methodical approach with a competitor pricing analysis.
Competitor pricing and the Van Westendorp Price Sensitivity Meter (PSM) are two market-research strategies that can give your price increase a safe landing.
Your competitors’ prices help establish expectations. You don’t want to price your SaaS product far outside the established range—unless you’re sure that your product justifies the premium.
The PSM approach to SaaS pricing asks four key questions to determine viable price points:
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
- At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
The CMO of Paubox, Rick Kuwahara, recommended the PSM approach for finding ideal price ranges:
After you survey enough people (through the PSM approach), you usually get a range of prices where you can see how elastic pricing is between the answers for each question (in the PSM). Like too cheap may be between $10 and $20, and too expensive between $50 and $75.
Additionally, you can then do some market research and see how that would bear out in the marketplace. While I don’t like competitor-based pricing too much, you also don’t want to be way out of the range that the market has set.
If your research suggests that a price increase is justified, you may be able to move on to execution. But, as Alexa Hubley, Head of Marketing at CXL cautions, there are other factors to keep in mind:
“Research” should include more than just determining acceptable price ranges. It’s also important to do projections/predictions of churn and retention related to new pricing, as well as business impact analyses, etc.
Once you’ve completed all relevant research, you can choose any of three strategies to execute on it.
3 strategies to increase prices for SaaS users
1. Create a more expensive pricing tier with more features.
Time and again, subscription businesses take heat from users because they increase prices. Many (or even most) businesses weather it out.
Take Netflix. In the spring of 2011, they hiked their price, and many (800,000) of their subscribers deactivated their accounts. The company’s stock price dropped 77% in four months, battering its management’s reputation.
But did Netflix survive? Actually, they did better:
Still, these companies could have avoided the painful process of trying to explain their price hike after the fact. One way they could have improved their execution? Creating a new, more expensive tier with added features for interested users.
Avoid angering users by introducing a new pricing tier
Pricing experts at Price Intelligently say it like this: “Pricing changes don’t always mean higher prices. It could be [. . .] shifting features within tiers.”
In other words, instead of raising prices for all users, you can announce new features (or shift existing ones) into a more expensive tier.
But will existing users switch to the new tier? It depends on two previously covered topics: value and the market:
- Which features offer users more value?
- Do competitors provide this value? Could they start providing this value quickly?
If your new pricing tier provides exceptional value and is protected from competitor challenges (i.e. is an economic moat), you may compel users to upgrade.
Growth expert Ammo Singh shared a success story from a client:
I created a new tier that included some features I knew users wanted as they requested them. (I can’t share specifics due to an NDA.) Users liked it and understood that if they wanted more advanced features, they had to pay extra.
If, however, you’re convinced that existing paid users won’t fuss if you increase the price of their current plan, you don’t need a new tier. Here’s what to do instead.
2. Increase the price of plans for existing customers.
Not all SaaS businesses that raise their prices end up regretting it. Appcues increased their price, and sales grew by 263%. ChartMogul’s customer base and revenue kept increasing as their minimum price did. Since 2014, Netflix has increased their price by about $1 each year:
It is possible to thrive after a price increase for existing users. Companies that have done so usually share three characteristics:
1. They have the size to take the heat. Losing a few hundred (or several thousand) customers won’t crater their revenue.
2. They notify customers well in advance. Appcues talks about how they did it:
We tried to write the email to be clear and upfront, and dispel any concerns around our motivations behind the increase. Most importantly: we thanked our customers and gave them sufficient notice to change their plan before the price adjustment. 85% of our customers opened our email and not a single one churned 🙂
Kuwahara seconded the importance of clear communication:
It’s just communication, over-communication if you can. Do it ahead of time and often enough so it’s not a shock when someone receives their bill.
3. They increase pricing significantly only for bigger customers. Some SaaS brands roll out large price increases only for customers with deeper pockets who may not feel the effects of the price increase as significantly (and who, in theory, should be getting far more value from the product).
Alternatively, an across-the-board increase could work if you’re willing to let smaller clients churn and, instead, focus on more valuable enterprise accounts. The former product manager at Yotpo, Adi Ben Mayor, shared a story with me:
I was working for Yotpo, which started as a product for SMBs and now serves enterprises (Staples, for example). The prices went up significantly, way out of reach of SMBs, and some did churn. But it allowed the company to focus on our Enterprise features.
But what about grandfathering people in?
3. Grandfather existing users into their old pricing.
One way to avoid trouble from a price increase is to grandfather paid users into old pricing, taking out much of the risk (and some of the profit) from a price increase.
You can inform existing users that prices are increasing for new customers but that pricing won’t change for them. It shows loyalty and can strengthen their bond with your brand and product.
But how long should you grandfather them in? A few months? A year? Forever? I put the question on some SaaS groups on Facebook. Most SaaS marketers and founders in the group say they’d rather grandfather old customers forever.
And it makes sense. The trust you build by grandfathering in current users may even spawn word-of-mouth marketing (and more revenue).
One response also highlighted the similarity between time-limited grandfathering and simple advance notice:
I would give like a 3- to 6-month email of why the increase and the date that the customer can plan ahead…sort of how Amazon did with their Prime increase.
So how should you explain your price increase?
How to communicate a SaaS price increase
Emails are a primary method of communicating a price increase. Here are two price-increase emails you can borrow ideas from—especially when grandfathering users in:
These emails were sent to Appcues’ current customers (left) and free-trial users (right):
If, like Appcues, you’re increasing prices primarily for power users, that can have benefits. Wes Bush, the author of Product-Led Growth, explains:
If you’re charging based on value metrics (i.e. the number of users, videos uploaded, or MAUs), your new pricing plan will charge your power users more while limiting the price increase for accounts that are not getting a lot of value from your solution. All in all, this reduces your churn with a price increase.
Here’s an email that Close.io sent, which increased their average customer lifetime value by over 10%. As their CEO Steli Efti noted, “When we increased prices, our conversion rates stayed the same, our customers stayed happy, we had a huge bump in paid seats.”
In a previous article CXL published on raising prices, they identified one theme for successful communication (email or otherwise) that stood out more than any other: transparency.
If you feel compelled to obscure the reason—or if it takes thousand-word essays and charts to justify it—that’s a sign you don’t have a strong case.
Still, focusing on key points can help justify an increase:
- The length of time since the last price increase;
- The value you’ve added to your product or service during that time;
- If you have service limitations (e.g. consulting hours), the increase in demand.
While price changes are often “one off” events, few experts recommend treating them as such. Price Intelligently, for example, recommends reviewing your pricing every few months. Pricing, like a website redesign, may be best understood as an iterative, not radical, process.
Regardless of your cadence, remember these four points:
- Make sure your “high value” features are high value for users, not just your product team.
- Consider the PSM model to find out how a proposed price fits into the broader market.
- Grandfather paid users into their old pricing plan or create a new, more expensive tier they can opt into.
- Give users plenty of time to make a decision, and give yourself plenty of time to remind them of your value.
The post How to Increase SaaS Prices the Right (and Profitable) Way appeared first on CXL.