Raising prices is the most effective way for growing SaaS startups to increase revenue. A study of Fortune 500 companies found that increasing prices by 5% results in a 22% jump in operating profits.
Should You Raise SaaS Prices?
For SaaS startups that depend on customers sticking around the prospect can be daunting. The last thing you want to do is irritate your loyal customers. Yet the second-to-last thing you want to do is leave money on the table because you can’t bring yourself to raise prices to charge what your product is really worth.
When evaluating on your SaaS pricing strategy, take heed of our advice below in which we explain how to raise SaaS prices, when to do it, and how often SaaS companies should do so.
How to Raise SaaS Prices
One method of not angering your existing customers with a price increase is to exempt them from it — only raise your prices for new customers. Depending on your SaaS pricing model and growth rate, the effort of migrating those early adopters to new pricing may not even be worthwhile financially.
It’s quite possible it will seem worth it, however, and you’ll decide to raise your prices across the board, even for your existing customers. If you do, you can follow the advice below to make the process as smooth as possible.
At Stacking the Bricks, they make the point that customers’ anger about adjusted pricing may be more about the way you raise prices than about the new prices themselves. A firestorm about price increases likely reflects negatively on the manner in which you’ve communicated and implemented the change. They wrote:
“Turns out it’s not so hard if you don’t act like a jerk ;)”
Steli Efti, CEO of Close.io, says you should communicate about the price increase as straightforwardly as possible, without explanation or apology:
“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.”
Offer incentives, discounts, and adjusted plans on a case-by-case basis to both ease the transition and take the opportunity to increase future revenues.
“You should still proactively identify customers who will see especially steep increases and have an account-by-account plan to retain them,” says Kyle Poyar, VP of marketing strategy at OpenView Labs.
“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.”
Poyar also recommends allowing customers to choose from a set of options regarding value and price. Such options include retaining their current plan at a higher rate, downgrading their plan to remain at their current rate, and providing a time window in which they can commit to getting a discount if they bump up to a better plan. This helps customers feel they are part of the process and can retain some control of their pricing levels.
Another tactic is to add incentives to help people see the price increase as an opportunity.
When Close.io did a price increase, they offered existing customers the option to add new user seats within the next 14 days at original pricing. After 14 days new seats could only be added at the new higher prices. This led to a big increase in seats, which boosted the company’s average customer lifetime value by over 10%!
When to Raise SaaS Prices
As for when to increase SaaS prices, Poyar emphasizes that it’s important for prices to align with the value of your product. If your product’s value has become mismatched with what you’re charging, it is time to raise prices.
Poyar has identified five indicators that a SaaS company is ready 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, and if some of it centers around what a deal they’re getting with your product, they’ll probably be happy to pay more.
Your product offers high ROI. If your software offers tremendous value to your customers, your pricing should reflect that benefit. If it doesn’t, time to bump prices up.
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 5-7% 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 your habit is to provide new features for free to keep your customers happy, you’ve been adding value to your product without charging for that value. Customers will more readily accept a price increase when they see this value, as well as when they know that you have a habit of adding more.
SaaStr Founder Jason Lemkin takes a more revenue-based approach on timing, and recommends maintaining your first customers’ pricing through $1-$2 million ARR. If you raise prices on them, only do so for a new edition of the product.
Eventually, though, all bets are off: “Once you have a big brand and are at $30-$40 million+ ARR, revisit it all,” said Lemkin.
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.
The not terribly helpful answer to the question, “How often do I raise SaaS prices?” is: “It depends.”
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 Lemkin recommends instead guaranteeing pricing for three years, and using that as a selling point. This will put you on a natural path to raising SaaS prices every three years. But don’t get locked in—remember to think about the value you’re providing and raise prices at other intervals to match as you incrementally increase that value.
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!
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