First price increase in over 10 years in business

Today, for the first time in our history, Less Annoying CRM is raising prices. Existing customers will stay at $10/user/month indefinitely, but anyone who signs up from now on pays $15.

Here are some thoughts I have about the price increase:

#1, the importance of taking things seriously:

Here's a blog post about the change: https://bit.ly/39bQe7d

Because $15 is still cheap and current customers aren't effected, several people have told me I'm overthinking this and shouldn't be so apologetic. I disagree. I forget where I read this, but: Imagine you're sitting at a table with a customer when something arguably bad happens (a bug, a price increase, etc.). There are two tokens on the table:

  1. "This isn't a big deal"
  2. "This is the end of the world"

You can take whichever token you want. The customer will take the other one.

I think about this all the time. I tend to take everything too seriously. When customers see you taking things seriously, they're inclined to trust you, and they end up thinking it's not a big deal. Even though this new price doesn't impact current customers, it still sends a message. Should they worry that we've sold out? That we're moving upmarket? They could be worried, but because we over-communicated, they took the other token. When we announced this, we got dozens of kind messages from our customers. They loved the explanation, that we're grandfathering current customers, and that $15 is still cheap/simple. Some even volunteered to have their price increase. Could have gone the other way.

#2, why aren't we applying this to current customers? Partially because it'd feel slimy. Partially because we don't need to. One of our main costs is support, and most support time is spent on new customers. Sure, it'd be neat to get an immediate revenue boost, but what really matters is what new customers pay. Going to $15 means either user grow slows and our current support team can handle it, or it stays the same and we can afford to hire. This will make growth easier.

#3, simple pricing leads to a simple business. Our pricing will still be simpler that almost any other SaaS, but for the first time ever, not all users will pay the same amount. As a result, I've had to re-do a lot of the reporting I use to monitor the business. The main change is that "# of paying users" was our main metric. That used to directly tie to revenue, but it's not that simple anymore. We're switching to ARR going forward. The main thing I'll discuss with the team is "new ARR added this month"

Why ARR and not MRR? Obviously they boil down to the same thing, but I think it's easier to reason about annual costs vs. monthly. For example, a new developer starts around $75k/year. If we add $35k in ARR this month, that's almost half a developer's base salary. Or: Every employee at LACRM gets an automatic $10k raise every year. There are 14 employees (this doesn't count partners). So we need to grow ARR by $140k each year just to pay the raises we've promised. That's easier to understand than MRR I think.

I'll admit, I'm a bit bummed about the change. It was so clean to just focus on # of paying users. That's what we actually observe day-to-day. I just talked to a lead, they said they'd pay, that's one user. Now I have to think "that person is $180 ARR". Not as intuitive or human. More to the point, it makes me realize how much we've benefited from simplicity. It would be so much harder to run this business with different pricing tiers, annual payments, discounts, multi-year contracts, etc. If you're not a finance pro, keep it simple.

#4, one interesting thing I'm keeping my eye on is how this interacts with churn. At first, all churn will be $10 users and all growth will be $15 users, so even if we have zero net user growth in a month, we still grow revenue quite a bit. A normal month might have 200 net new users. At $15/user, you might think that means adding $36k ARR. But to net 200 users, we actually add ~600 and lose ~400. That's actually $60k in new ARR.

The impact of this will wear off over time as our $15 customers start to churn, but there should be a honeymoon period where our revenue growth increases almost no matter what (knock on wood I guess)

#5, how might this impact customer acquisition? Maybe not much. We should be able to spend 50% more to acquire each customer which should make some things easier, but it might not fundamentally change anything. Also, it might be counteracted by lower conversion rates. But it might result in a bigger change. It seems possible to me that this makes a lot of paid acquisition channels go from not viable to viable. It also seems possible it'll give us escape velocity with channels we're already using. What I mean is, we spend money on e.g. Adwords and Capterra. If we increase our budget, customer acquisition costs (CAC) get too high, but they might level off at some point. What if 50% higher CAC allows us to increase volume by much more than 50%?

#6, time will tell how this impacts the overall finances of the business, but I'm optimistic. At $10/user we were profitable, but just barely. Growth was a challenge, and we always had to make sacrifices. My goal is for this to let us do the same things, but more comfortably.

#7, let's say this goes as well as I'm hoping. Does that mean the "raise prices" crowd is right? Were we wrong to pick such a low price originally and stick with it for so long? Should we raise prices even more until it actually starts hurting growth? NO! I love being a low-cost option for small businesses. Being able to succeed with a low price point is a competitive advantage. I don't want to get complacent. Even if this goes well, I'll still be glad it took us 10 years. Maybe we do it again in another 10.

  1. 1

    Thank you Tyler for this detailed account of changing pricing as a long-term, later-stage SaaS! We definitely need more of this on IH.

    It's interesting that your internal metric is ARR, but your rationale makes total sense. I guess as you grow, the money enables you to do different things and make larger bets and the context changes. I'm still working on getting ramen profitable on a monthly-basis so MRR makes sense to me for now :)

    Love the version 1 screenshot btw!

    1. 1

      Thanks for the kind words!

      Yeah, honestly, ARR still feels a bit unnatural. I don't think I'll ever 100% get away from using "number of new users" as how I evaluate our progress, but over time I hope ARR becomes a more native metric for me. It's already been helpful to think "I want to add this expense which is $X/year, we're adding $30k ARR each month, so this expense will cost Y% of a month of growth. The concept of "ARR added per month" is weird because it's muddling together monthly and annual considerations at the same time. Hmmm, maybe I'm over-complicating this.

      I hadn't thought about your point that as an individual (or very small team) MRR is probably a better fit since you probably think in terms of things like paying your rent, hosting costs, SaaS subscriptions, etc. which are all displayed as monthly prices. After a business has hired a handful of people, the main cost is normally payroll, and employee salaries are normally thought of in annual terms, so ARR starts to be more appropriate. That's a very interesting insight.

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