I’ve spoken with a few entrepreneurs recently where the topic of raising prices came up. In all cases, it was clear this was an uncomfortable topic … What if my customers leave? What if I lose deals to competitors? How do I justify it? Despite the concerns, the entrepreneurs sensed they were currently way underpriced. This is very common, and in most cases, you probably are underpriced! Let’s talk about how you know you are underpriced, how to determine price raises, and how to execute price raises.
How to Know You are Underpriced
Most startups underprice for three reasons: 1) out of concern to not lose any customers due to price, 2) worries over a deficient product feature set, and 3) feeling they need to discount because they are a young company. While that is sometimes okay for early adopters, it sets a tough precedent and can undercut the true value of your offering. As you are moving through the sales process, listen and observe how potential customers are reacting when they hear pricing … do they even ask any pricing questions? Do they express concerns? Does pricing come up going through contracting? Does their body language imply anything? Those are often the best clues to realize your price is not an issue in their purchase criteria. Another way to tell, is comparing your pricing to competitors (some markets are fully transparent on a website, others are harder to discern). If you have a business with low churn, that is another sign customers are finding a lot of value/ROI from your current product and pricing so raising prices may be easier to do.
How to Determine Price Raises
The number one way to price effectively is to price based on ROI/value. Customers buy based on real/perceived value and when you can justify your product cost with clear ROI, that becomes a much easier sale and renewal. That ROI/value may vary based on customer segment, market, or product and that is okay. The nice thing about pricing is the larger you get, the easier it is to conduct experiments. Test different price points on new deals and gauge reaction. Test different price strategies with existing customers. Lastly, you should always do some basic analysis to ensure the margin profile of your pricing is suitable (supported by market), sustainable (profitable), and strategic (i.e. you may be okay with a loss leader product to drive other revenue). But always remember, you can do all the analysis you want, but until the pricing gets in the field, you will never truly know. Don’t be afraid to experiment!
Don’t be afraid to experiment!
How to Execute Price Raises
Now that you have realized you need to raise prices, and have a sense of what that number/pricing construct is, then how do you implement it? One thing to consider is current vs. new customers. Sometimes it makes more sense to start testing on new customers first and measuring changes in close rates/yields. For existing customers, try to start with annual price escalators (3-5%) in your contracts, that way you are setting an expectation that prices will rise over time. Now admittingly, there can be some pushback here, but in most cases you will be fine. Another strategy is to let existing customers know a price raise is coming, and that if they commit to an extended contract now they can stay at the current price. I like this because you get early renewals, but you have also set the stage that regardless of whether they accept or not, a price increase is coming in the future. Back to ROI/value, it is always help to justify the price increases based on value customers are getting and tying it to new functionality. For example, the product is now complete with new module X that does Y which results in Z benefit. Lastly, I prefer to communicate changes with some of the suggestions above vs. trying to just “sneak” price increases past customers. In the long run, that is more transparent and lets customers know you understand the value you are delivering and are confident in what you are doing.
Pricing has many more nuances, but don’t be afraid to try and raise prices. In many cases, the customers will not even flinch at the increase if you are delivering value through a “must-have” product.