Estimated read time: 7 minutes, 21 seconds
Increasing the price of a SaaS product can boost revenues and reveal the customers who are serious about using your product.
The problem businesses face is treading the fine line between increasing the price of their product, and retaining their customers. Correctly increasing the cost of your product not only helps to build a more sustainable business model, but it also has the highest impact on improving your profits.
One article about SaaS pricing found that a 1% improvement in price optimization efforts can result in an average boost of 11.1% in profits. In this piece, we’re going to talk about:
- Why pricing is pivotal to the growth of your SaaS
- 3 ways to raise your prices and keep your customers
Let’s dive in.
Why Pricing is Pivotal To The Growth Of Your SaaS
The number one goal of a company, whether it’s a startup or an established company, is to find a way to continue growing.
And if we look at how that growth happens, strategies like customer acquisition and lead generation are often at the forefront. Yet, the importance of pricing as a path to growth can’t be understated. As a company grows, it’s typically done in one of two ways:
- Market: As your company starts to gain momentum, the understanding you have of your target market grows. Every day comes with new insights into what matters to these people and what they truly value
- Product: As you add, change and increase/decrease the features offered in your product/service, the value that your customers get from your product will reflect those changes. Your growth could mirror the release new features, or continuous daily efforts to improve your product offering.
While this growth is happening, if you don’t focus on your pricing, it could result in loss of revenue. A study by PriceIntelligently found that monetization is the single largest growth lever for businesses, with a more substantial impact than retention and acquisition.
Let’s take a look at how this growth lever looks like if a SaaS company in real life uses it.
When SaaS company StatusPage first began, Co-Founder StatusPage says the company had two price points: either free or a $49/month package. Gradually, StatusPage cut out the free tier offering and eventually 8x their prices. Not only did the move have a relatively minor effect on customer churn, but it was also a crucial factor in their growth. Their average revenue per user (ARPU) grew by 2.4x and netted the company a $2.5M annual revenue run rate over two years.
One of the hardest decisions around pricing is when you should be raising the price tag of your product. Three signs you may be ready to increase your prices include:
- Your prospects don’t question your pricing before they sign a contract
- Customers comment on your low prices
- You can’t remember the last time you raised your prices
If your company is ticking all the boxes, it’s time to pick a strategy to help increase your prices
the right way.
3 Ways to Raise Your Prices and Keep Your Customers
If you’ve decided that your company might be ready to raise your prices, here are three ways you can do it without alienating your customers.
Option 1: Communicate the Value of your Product, Not the Price
There is a psychology behind how people decide if your product is worth buying, and it’s not always down to price.
In an article for Forbes, Daniel Newman says personal value has two times the impact on the buyer than business impact does. Newman says that for brands, it’s more important than ever to focus on telling a story that resonates with a prospect on a personal level.
“When brands connect to people that way their impact goes further, and it is much more likely to lead to a sale,” he says.
Communicating value is a crucial step in increasing the price tag of your product. If you fail to do so, you run the risk of your customers churning and losing money. However, if you communicate value successfully, prospects will be more open to any changes in price as they’ll know they are still getting great value with your product.
Close’s Steli Efti said when the company decided to increase their prices, they put together a strategy to communicate the increase to their customers. It was based around three concepts:
- Communicating to customers early and letting them know what’s coming
- Announcing the upcoming price increase on their blog and in personalized emails
- Getting to the point and not “sugarcoating” the price increase. The company wasn’t apologizing for the price increase, and it clearly told the customer how it would affect them
The company’s price increase kicked off with an announcement on their blog. Then, they sent an email out to existing customers about the price increase:
Close’s conversion rates stayed the same, their customers remained happy, and their average customer lifetime value increased by over 10%.
Of course, results will vary for each and every company which increases their prices using this strategy. Yet Efti believes one thing: “You probably haven’t found your perfect price point yet, and your perfect price point is likely higher than your current price.”
Option 2: Look at your competitor’s pricing
Keeping an eye on your competitors’ prices not only helps establish your customer’s expectations, but it also gives you a reliable benchmark for your own strategy.
If you price your SaaS product beyond the range of your competitors, it can be a turn off for prospects. One approach to figure out if your pricing research is on point with your customer expectations is by using the Van Westendorp model. This requires you to ask four key questions to determine your ideal product value:
- At what price would you think this product is a good value?
- At what price would you think the product is getting expensive?
- At what price is the product so inexpensive you doubt its quality?
- What price would you think is too expensive for you to consider buying the product?
Then, you can use the answers to determine the following price definitions:
- Point of marginal cheapness (PMC): Where more sales would be lost due to questionable quality than would be gained from bargain hunters.
- Point of marginal expensiveness (PME): Where the price point is felt that the product is too expensive for the value derived from it.
- Optimum price point (OPP): The percentage of customers that feel the product is too expensive is the same as those who feel it is so low that the quality is questionable.
- Indifference price point (IPP): The point where the same percentage of customers feel that the product is getting too expensive as those who feel it is at a bargain price. T
- Range of acceptable pricing (RAI): The point of difference between marginal cheapness and the point of marginal expansion.
Researching a price point in this way not only helps you consider your competitor’s prices but find the ideal price point for your own product.
Option 3: Think About “Grandfathering” Existing Users Into Their Price Packages
“Grandfather” pricing is a strategy where you keep your existing customers on the same price bracket, while new customers are charged more for your product or service when they sign up.
Grandfather pricing is quite common in the SaaS industry, as it’s a way to avoid churn and reward early adopters of your product.
Here’s how to successfully “grandfather” your existing customers.
You let them know that even though your prices are increasing, they will be kept on the same pricing tier. And a ConversionXL article found that while some SaaS companies grandfather their customers for a limited time, most say they’d rather grandfather old customers forever.
Grandfathering current customers can be a win-win for your company. It keeps your current customers loyal and makes them feel appreciated, and new customers won’t ever know that they are paying more for the same product or service.
Remember, Raising Your Prices is a Process
Increasing the price of your SaaS product is daunting.
There is a fear that you will alienate your current customers or scare away prospective ones. Without a pricing increase plan, these fears can become a reality.
However, there are strategies and formulas you can use to make sure that you not only keep your customers but supercharge your growth through carefully thought out pricing increases. Using your competitors as a benchmark, you can formulate the ideal price of your product, keep your current customers happy through grandfathering, and communicate the change effectively.
One thing is for sure. If you don’t keep an eye on your pricing and give it the same amount of attention as you do with customer acquisition and retention, you risk losing revenue. And that will hurt your company’s growth—and its bottom line.