Increasing prices is the most effective way for growing SaaS startups to scale revenue. One study of Fortune 500 companies found that increasing prices by 5% results in a 22% jump in operating profits.
Should your SaaS startup raise prices?
For SaaS startups that depend on customers sticking around, the prospect of increasing prices can be daunting. The last thing you want to do is irritate loyal customers, or worse lose them. You don't want to leave money on the table, either, simply because you can’t bring yourself to ask your customers to pay what your product is really worth.
5 Reasons to Increase SaaS Prices
The main motivation for increasing SaaS prices is financial, of course, but there are other reasons SaaS startups in particular should raise their prices.
Scales revenue, quickly
Aligns the price with new value-adding features
Increases the value of your product and brand, monetarily, and in the eyes of consumers
Attracts the right customers, and deters the wrong ones, supporting lean and efficient growth
Enables the business to invest in future product improvements and innovations
Below, we'll guide you through how to increase SaaS prices, when to do it, and how often your startup should consider raising them.
How to Raise SaaS Prices and Keep Your Customers
It's not easy to acquire a new customer and it ain't cheap either! But if you're going to scale your SaaS startup and evolve it into a mature business, you're going to have to raise prices at some point — and you'll probably have to do it again and again. So, how do you do it without upsetting your customer base?
Tactics for Implementing a Price Increase
The first step in implementing a price increase is figuring out your new SaaS pricing strategy. You have to know how much you want to charge, for what, and to whom. If you haven't done that yet, check out these 5 ideas for running price experiments, which include testing on small cohorts and getting direct customer feedback, courtesy of Maxio.
Now that you're ready to change your pricing, here are X ways to do it.
1. Raise prices for new customers only
It may seem like the easy way out, but it might not even make financial sense to migrate your early adopters to a new pricing structure. So, if your pricing model and growth rate allow you to exempt your existing customers from a price increase, go for it. Only raise your prices for new customers.
2. Provide options for existing customers
Eventually, you'll need to raise prices for your startup's earliest customers. It's best to let them choose from a set of options ranging in value and price, which helps them feel like they are part of the process and gives them some control over their new plan. You might let them pick from options that include: retaining their current plan at a higher rate, downgrading their plan to remain at their current rate, or a better plan at a discounted rate with a commitment by a certain date. That leads us into the next tactic.
3. Offer discounts and adjusted plans when needed
You can ease the transition and still boost future revenues by offering discounts and adjusted plans on a case-by-case basis. Kyle Poyar, VP of Marketing Strategy at OpenView Labs recommends proactively identifying customers who will experience steep increases and making a plan to retain each of those individual accounts. “Typically, if they’ll see a price increase beyond 50%, a best practice is to stair-step them so they gradually move up to the new rates rather than swallowing it all at once,” said Poyar.
4. Incentivize an upgrade
You can also add incentives that make a price increase look more like an opportunity. When Close.io increased prices, they offered existing customers an exclusive, limited-time deal that let them add new user seats at original pricing. After the deal expired, new seats could only be added at the higher prices. This led to a big increase in seats, which boosted the company’s average customer lifetime value by over 10%!
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How to Communicate a SaaS Price Increase
A firestorm about a pricing increase likely stems from customers' experiences with the change, which results directly from how it's communicated and implemented. Stacking the Bricks makes a great point that if your customers are angry about updates to pricing, it's likely they're angry about the way you raised prices rather than the prices themselves.
Helpful Tips for Notifying Customers You're Raising Prices
Steli Efti, CEO of Close.io, believes straightforward communications are the way to go, without explanation or apology. He says, “Just give it to people straight: We’re increasing pricing. Here is what it will be. Here is how it will affect you. Let us know if you have questions. Thanks.”
Customers will always appreciate straightforward and transparent brand communications. If you want to ensure you've covered all your bases, consider these 7 additional tips for effectively communicating a price increase:
Offer customers choices.
Communicate early, and set a clear deadline for changes and actions customers need to take.
Align communications to prospects and existing customers, ensuring messaging is consistent.
Don't apologize. Do justify your product's value.
Answer questions — an FAQ can help.
Over-communicate and be transparent. Don't just send an email about such a sensitive subject. Call them, meet in person if you can, and prepare to negotiate if it means preserving an important relationship.
Express your sincere gratitude for your customers and say, "thank you."
When to Raise SaaS Prices
As for when to increase SaaS prices, it’s important for prices to align with the value of your product. If the value your produce creates for customers doesn't match what you’re charging, it is time to raise prices.
Poyar identified five signals that tell a SaaS company it's time to increase prices:
Prospects aren’t negotiating on pricing. If potential customers seem fine with your prices, never pushing back or seeking discounts, then it’s probably time to raise them.
Customers tell you your prices are low. You’ll hear a lot of feedback from customers — if you're hearing people comment on what a deal they’re getting with your product, they’re probably happy to pay more.
The ROI from your product is high. If your customers are getting tremendous value from your software, your pricing should reflect that benefit. If it doesn’t, time to raise prices.
Your pricing has stayed the same for years. If you haven’t raised prices for ages, chances are you’re due for a bump. Many larger SaaS companies raise their prices 5 to 7% every year by contract. Not raising prices for years will put your further and further behind your competitors.
You aren’t charging for new features. If you habitually provide new included features to keep your customers happy, you’ve been adding value to your product without charging for that value. Customers are likely to accept a price increase when they get new features and more value — and they know that you will keep bringing them more.
SaaStr Founder Jason Lemkin takes a more revenue-based approach on the timing of price increases. He recommends maintaining your first customers’ pricing through $1 to 2 million ARR, only charging them more for a new edition of the product. “Take care of your number one advocates,” Lemkin says. “They will be a very small cohort of your revenue over time, your early adopters. They are often your fiercest advocates for decades.” Eventually, though, all bets are off. “Once you have a big brand and are at $30 to 40 million ARR or more, revisit it all,” said Lemkin.
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How Often to Raise SaaS Prices
How often you raise SaaS prices depends on many factors, including your size, market share, the value of your product and how frequently you add new features, the barriers to switching, the nature and loyalty of your customers, and your own comfort level, among other things.
So, unfortunately, there's no one-size-fits-all answer to the question: “How often do I raise SaaS prices?”
Annual SaaS Pricing Increases
Some of the largest SaaS companies stipulate an annual price increase in their contracts. Salesforce, for example, locks customers into a price increase up to 7% at each subscription renewal. Part of the logic of this is to get customers to sign multi-year contracts, which maintain the original price for the length of the contract. The built-in price increase also allows sales staff to waive the increase as a form of discount.
Smaller SaaS startups can certainly try this growth strategy, but instead, Lemkin recommends guaranteeing pricing for three years, and using that as a selling point. This puts startups on a natural path to raising SaaS prices every three years, which will support healthy, sustainable growth.
Even if you adopt the three-year pricing plan, don't get too comfy. Things can change fast in startup world, and you'll want to change pricing at key inflections points as you increase value or battle competitors in a changing market.
Ultimately, pricing is as much an art as a science; how you manage it depends on many factors unique to your business and your own perspective. Whatever you do, go forward with confidence and with a healthy respect for your customers and their needs. And always listen to customer feedback!
Monitor Key Metrics After Raising Prices
If executed well, raising SaaS prices can result in higher customer LTV. However, a startup might see an increase in customer churn or higher customer acquisition costs (CAC), too. Be sure to keep an eye on your LTV/CAC ratio and unit economics following a pricing increase to ensure your startup stays on track with its long-term goals.
Measure Your Way to Startup Success
Our guide to the 8 SaaS Metrics That Matter gives you a comprehensive look at the core metrics startups and investors use to measure SaaS company success. It's our most popular founder resource! Using simple examples, we show you how to calculate each metric and explain why it's important.