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According to a PwC survey, 92% of private company executives expect to raise prices this year, significantly higher than the 62% of all respondents who said the same. In a separate survey by SaaStr on LI, their respondents suggested that 54% of companies plan to increase their prices in 2023. This trend will likely continue in 2024 as an inflationary side effect and limited access to capital, and many companies are struggling to reach their breakeven threshold. So, we are dealing with various reasons outside the higher product value.
A unique dichotomy between strategic appearances and tactical justification characterizes the price increase process. Yes, every biased co-founder will tell you their product is worth more than they charge. Still, the best validation you can get is to introduce a price increase so that it doesn't impact your ongoing operational processes or regularly reported metrics. So, let me be clear here. If you communicate with your customers and that information doesn't (or barely) impact your acquisition win rate, churn rate, or NRR, it remains the same or even improves, then you are right. Your product is worth more than you were charging before. On the other hand, if you see your critical ratios/ KPIs notice a reduction, you were wrong about the price increase or product value. It is the bottom line of the conversation. Everything else said after that conclusion is just a chase behind the reasons or justification why we were wrong.
I would like to compare that to this inexperienced stock investor who bought stocks at a record high without proper technical analysis while the stocks started to decline and remain in the downtrend. The trader keeps the stocks because they think it might turn back up again the next day, adding 10%, or another week or month; this will turn around somehow. Yeah, if you know you were wrongly buying, you sell, accept the loss, and wait for a better moment based on your technical analysis. Yes, you lose some money, but you don't lose more and retain the ability to gain again. The same is true with the price increase. Your stock market is the customers that might accept the higher price or tell you to get lost, keeping you in the downtrend. You must see the bottom line of that process and the upside you will get. The key is to focus on the product, usage, and adoption. Raising Princess without it based solely on anecdotal feedback or co-founder perception is a dead-end and high-risk gamble. You are set for failure if you miss your customer analytics or do not understand your customer. The consequences might take quarters or years before you repair the damage done by that decision.
Another area for improvement while working on the price increase is the wrong choice of metric. The typical logic suggests that if your customer has plenty of users, seats, or high data usage, these will give the right answers or indicate that the price increase is inevitable. Yes, you can take the benchmark approach, taking other incumbent prices and trying to justify why $x is your value for the product. That might work initially, but you still have a dilemma with your existing customers deciding about grandfathering or price increases. Picking the right metric is essential for many reasons, as pricing is another one on the list.
The next problem is making your poor communique about the pricing structure. If your pricing is unclear and it takes more than 30 seconds to understand, you are putting yourself in the bucket of people who smoke too much or don't know what they are selling (one can lead to another). Yes, the 'custom' category is allowed, but it must be clear what is in it and how it relates to the other defined pricing categories. If your pricing is unintuitive, this will deter the potential customers or existing customers when you increase you price or price increases are changing the structure they were operating in.
Most of these failures are blamed on poor communication about the changes. It's a tough spot to be in, to begin with. If you do it too early or too late with customers, it's a gamble that might cost you greatly. Remember that many customers expect you to have a personalized approach and experience, and if you drop the ball on this one, your list of likely churning customers will only grow.
Conclusions:
The key to avoiding all these mistakes is to develop a data-driven company that understands the customers well and product adoption. Suppose your acquisition is slowly ramping, but your product is being used broadly by your (even limited but loyal) customers. That provides strong use cases and opportunities to use them in acquisition. That's a good starting point. Your teams will leverage that understanding of the behavior first while you retain and engage more of them. Another critical factor here is something everybody knows, but only a few do or avoid doing.
Overpromising and underdelivering is a recipe for failure, burned cash you will never recover, and higher churn in the long run. Yes, sales must be opportunistic by nature, but there are limits to that. Disciplined sales teams around that principle must be established in the company. Another dimension of that is the development of the new features that the customer or prospect is asking for, making these conditional while signing with the company. If you know you won't have the resources to keep that promise, you just say you won't be able to do that. Yes, I know this might be controversial, but it's essential that new or existing customers hear good things about you on the market. Remember, people talk and will talk regardless of how much you charge them. They can speak well or very badly about their experience working with you. The choice is yours. Here are a few things that you can do while working on the price changes:
Consider grandfathering pricing for some time with your existing customers. Yes, it sounds counterintuitive, but it gives someone the additional benefit of sticking with you when you have idiosyncratic data around product adoption. Your offset should be done within a limited timeframe, as the companies can't benefit endlessly from the suppressed prices.
Give yourself a comfortable time between announcing price increases and implementing them. I recommend three to six months, depending on how difficult it is to switch away from your product. It is too short, and people will feel trapped; if it is too long, you may end up at square one anyway, as the person on this account left or never communicated to the rest of the team.
Set the stage for the value your product offers. Assuming you have your customer analytics in order, you can see what are the critical/ core features in your product usage. Another way to put it is that you must know what is indispensable and what can be treated as a nice-to-have feature. If you think the indispensable part is having higher consumption and adoption, you should consider a price increase. Don't forget about the benchmark approach to validate before the rollout.
Ensure that customers are aware of the timelines for that change. You must put the basics of the MOC in place. Be transparent about the reasons, clear justifications, and even benchmarks to other solutions if you think this is reasonable. There is nothing wrong with being transparent. Consider adding a note about the company or product's evolution. The loyal customers will understand where you are coming from and where you are going.
Communicate where you plan to focus next with your product development or how you will use the additional funds to improve the product.
Offer a longer discount as a transition period for existing customers. If you know that you have customers who are price sensitive because of the budget but offer future higher returns, ensure you create custom offers to retain them for a period of time at a higher discounted price.
The last one is the most important. Talk to your customers and reach out with questions. Don't send the message via email, assuming this is all they need. Remember, they expect you to personalize their experience, and that's a damn good opportunity.
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