If you do not want to lose money, you need to change your prices after every 12 months. Studies indicate that the most successful companies in terms of revenue and adoption review their prices quarterly. They also make changes after every 6 to nine months.
While you may view this as a challenge, it is important to come up with a pricing strategy that will be in line with your company and products. Pricing is without doubt the core of your business. Other areas such as sales, marketing, support and even the product only serve to reinforce pricing. If you want to improve these areas, you must improve pricing too. Failure to do this will lead to loss of income.
This article aims to help you understand better how to go about making the change.
5 Steps To Changing Your Prices
It can seem difficult to change your prices. Probably you have put off this decision until the need arose—perhaps after launching a new product or even after complaints have been raised by your customers, investors or board. Here are the 5 steps to changing your price.
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Market & Customer Research
This is what will consume most of your time. To make it a lot easier, you need to be in maintenance mode. This means that pricing is your key competency and you are not doing it for the first time. You should bear in mind that the aim here is not to get to the best price as this is not possible.
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You should aim to hedge as much risk as you can. When you do it in the right manner, you will come close to perfection. If you work with a team or in a large organization, you may be bombarded with lot of opinions. You should set a deadline if you do not want to waste time, money and the opportunity to boost your revenue or adoption.
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Finalizing The Nuance Of The Pricing Grids & Tests
After completing customer and market research, you will face some big findings. These will provide you will one or more options for the pricing grid. Take a look at your other metrics, such as your churn, and Lifetime Value. After going through the research, choose an option for the initial test. You may pick an entire pricing page or do with a slight modification.
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Have A Customer Advisory Panel Review The Price Options
You now have enough data from your internal sources and market research. But you are still operating in a vacuum. You need to speak to twenty different customers either as a group or individually. These will help you review your new pricing. Avoid asking open ended questions such as “what are your thoughts?” Instead, ask questions that tackle your concerns such as “what are your questions?” The importance of a Customer Advisory Panel Review Board is best explained in Paul Marsden’s paper:
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Carry Out An Impact Analysis
You should do this for 5 days in tandem with step 3. While talking with the customers, carry out an analysis of how the new pricing is likely to affect new customers. If you feel that there will be a minimal impact, you will realize that your move is not drastic. However If you find that some or all your customers are complaining about your price increase, reach out to them individually. Alternatively, give them a transition discount that will soften their feeling. This data will help you realize whether the increase is warranted.
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Have A Communication Plan
Do this for 5 days in tandem with step 3 and 4. You need to have a transition plan that should be agreed and distributed by every person who interacts or talks with the customer. When it comes to price increase, it pays to be honest. You must be transparent as to why you are effecting the change.
While it can be easier to effect a price increase accompanied by new features, you must be prepared to have some of your customers complain. Therefore, it is necessary to have a response or script in place. Bear in mind that when you launch a new price and it affect current customers, you are going to ask for feedback. It may be necessary to make some changes that you hadn’t foreseen in the first place.
However, you need to stand by your decision unless it becomes a complete disaster (If you did your homework well, this should not happen).
Handling Your Current Customers
Another major point of concern is on how you will handle your current customers. There are several methods of doing this.
Here are a few successful ones:
Grandfathering:
This can be more effective with customers who are price sensitive or with low customer satisfaction. It is also popular with companies that did not do their pricing homework in the past. In this method, you guarantee the customers that there will be no more price increase in the lifetime of the product. If there are changes in the product, you can provide discounted rates for the new product. This method is best explained in this excellent blog post by Christoph Janz.
Grandfather discount:
This is similar to grandfathering. You offer a discount for a period of time. However, the discount will expire. You should make this discount clear on the billing statement or invoice. This will help condition the customer that the discount won’t be there after 3, 6 or 12 months. When customers feel that they have gotten reward for their loyalty, they will be more receptive to the price increase.
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Meet in Middle Discount:
This is not the best idea as it offers lifelong discounts to customers. Here, you increase the price globally but offer a lesser increase for your customers.
Clockwork increase:
Some pricing increase will occur 1 or 3 times in a year. You can ask customers to sign longer contracts to benefit from the current prices.
Direct but justifiable increase:
Here you effect a price increase without any of the methods mentioned above. This can be a challenge if your brand relies heavily on customer loyalty. It is best effected with a proper communication channel.
Choosing The Best Method
After considering hundreds of SaaS companies, we have realized that grandfather discount seems to work best for most companies. This is because you soften the blow without affecting the MRR for the life of the customer account.
If your company is in its early stages, you should review your prices quarterly. Make changes after every 6 months. Older companies should also do so quarterly but should change prices after every 6 to 12 months. Below is a diagram of SaaS companies and how they handle their price changes. You can see that most of them focus on grandfathering.
The diagram below explores the level of customer satisfaction after a price increase. You will realize that there is a drop in the level of customer satisfaction when the price increase hits 50%. However, this is not a reason for not increasing price. You should see it as a reason to review your prices regularly. Ensure that pricing is your core competency. It is not a painful affair to change your prices as well as pricing. However, you must ensure that you review your pricing process regularly.
The post The Smart Guide to Changing Your SAAS Pricing (Part 2 of the Pricing Series) appeared first on Abacus Metrics.