When raising prices is easier than lower them
Originally published on https://flexpoint.tech/2021/03/21/when-raising-prices-is-easier-than-lower-them/ but copied here fully.
When you are building a B2B SaaS product it’s very hard to know what the appropriate price for your product is. Even if you magically found the correct one, it might not be the correct one next month when you made the product better and you are providing new values. That’s why you need to be constant experimenting with prices on your app.
When I started my career I was afraid of raising prices, of having to justify why they went up (I wasn’t even aware of grandfathering). When I started to learn that most entrepreneurs set their prices too low, my partner and I decided to set the price too high and then lower it if it was necessary. Without realizing we painted ourselves to a corner.
We didn’t want to just lower prices, we wanted to experiment with prices (switching from per-user to 3 plans, things like that). The problem was that anything we would come would cost a different amount for each customer. For some customers it would go up, and that wasn’t a problem, because we would grandfather them in. But for some customers it would plummet.
There were two options for those customers:
- Lower their prices according to the new plans and lose the revenue.
- Don’t lower their prices and risk them being very angry about overpaying.
Because we were a bootstrapped startup living month to month, every time we discussed this we would get stuck in a cycle of what-ifs one or the other situation. Eventually one day we made a rule of forbidding talking about pricing (trying to get some work done, because we would spend days and days discussing pricing).
Eventually I found myself wishing that instead of starting with a high price and lowering it for experimentation, that we started with a low price and raising it for experimentation. We would have experimented much more. There’s another obvious solution which is not depend on the sweet revenue of those high prices. But even though it’s simple, I don’t think it’s easy… like sitting in front a pizza and not having a slide. Yeah… right!
Next time I want to increment prices over time and even then try to give myself room for experimentation.
Great insights Pablo. Thanks for sharing. I wonder one thing. I don't have a SaaS product so I don't know how people manage it. Here is the question, if I subscribed on $25 monthly and you changed it to $20. Next month, do I need to pay 25 or 20? The same situation occurs when you make it 30. What is the policy here? I think this affects the whole point that you stated.
On the other hand, I think yearly subscriptions will be affected exactly you stated above. Because, in my point of view, you have a yearly contract for a fixed price.
As the maker of a SaaS product, you can decide what to do each case. A very common approach is to raise prices and grandfather the current customers for a period of time or forever. Grandfathering means respecting the price at which they signed up. Now this days most companies grandfather customers for a year or two, but there's no single policy.
Our policy was generally to grandfather customers for a year or so, but we also had some special arrangements with some customers. It was really hard on us not to be able to experiment a lot more with pricing because we quickly became dependent on our revenue.
So, at first, you need to decide how long will you grandfather your customers and state that in your contracts. Then, the statement above also occurs for monthly subscriptions either.
Jic, If you won't grandfather them, it will be better to write it in the smallest possible font size to your contracts. 😂 Anyway, thanks for the explanation Pablo.
It sounds like you were experimenting with the actual billing model rather than just the pricing. I would think that starting high and going lower would be fine if you are sticking to the same billing model (per user, plan-based etc). No friction that way, all your customers just end up saving money if you drop your pricing.
I call that pricing model, not billing model, but that's not very important. If you grew to depend on revenue, and you discover that your prices are too high, you can't easily lower them, even if you are just changing prices and not the pricing model.
Okay, I see your point that if you can't afford to lose revenue then experimenting with lower pricing may seem prohibitive. I guess it depends on how certain you are that high pricing is holding you back to begin with, if you're confident that lower prices would get more customers then you could experiment with something like a limited time signup discount that doesn't lock you into a permanent price drop.