Inflation is on everyone’s minds. Along with its effects on consumers— U.S. consumer prices rose 9.1% between June 2021 and 2022—inflation affects businesses, too, including the software companies I back as a growth and private equity investor. In this new environment, companies are grappling with sometimes-frightening economic volatility along with record-setting costs related to labor, utilities, and technology services, among other inputs.
All of this can hurt your company’s ability to provide the best products and services. And while rarely an easy topic to discuss, it may mean, ultimately, that you need to pass some of these added costs onto customers via price increases.
Pricing is easy to ignore in good times, and many executives take it for granted. With a growing and loyal customer base, companies can get comfortable and forget to assess their market position. But with rising inflation, companies can no longer afford to ignore pricing. It’s time to revisit it.
Here, I’ll discuss three specific reasons why now is a great time to rethink your pricing structure. In a second post, I’ll explore how best to communicate any pricing changes with your customers.
Why Reassess Pricing?
An April 2022 survey by Blue Ridge Partners of more than 100 SaaS companies in the U.S. and Europe found that 46% hadn’t raised prices in the past year despite inflation’s current, 40-year peak. It’s understandable: Many founders react to market uncertainty by trying not to rock the boat. They fear that raising prices will annoy all their customers, and many will leave. They may also lack experience in implementing price increases successfully.
I counsel my companies to think differently. Raising prices can actually enhance the company’s product and market positioning, even in tough times—and it may not be perceived negatively by customers. Why?
1. Internal costs are rising faster than you realize.
Along with rising revenues, internal costs are growing. Even before the current inflation trend, prices rose steadily–but they were obscured by faster customer growth. Founders should examine the following areas:
- Costs for labor and benefits, financing, utilities, even for cloud services, have increased or soon will. According to Indeed, the average salary for a junior software engineer was almost $120,000 by mid-2022, up 7% between 2020 and 2021. Similarly, benefit packages are more expensive. Health insurance costs alone jumped by 6.3% in 2021, along with costs of everything else— from lunches to office furniture. Trying to economize by cutting costs will gradually diminish your product’s quality, tarnishing your brand and reducing customer satisfaction and loyalty.
- Additionally, constantly improving your product requires ongoing investment to extend and support your product suite, and it ultimately delivers more value to your customers. In other words, this investment is for your customers—so it’s OK to extract higher fees for making that investment. Most of my software companies spend 20% to 40% of their revenues on R&D and product improvement.
Unless you raise prices, you will gradually generate less income because you’re providing more to your customers–in terms of development, new functionality, and support.
2. The market has definitely changed.
Along with internal cost trends, founders must assess the current market, not the market in which they first set prices. Two things are true:
- It has evolved. New firms have entered with different price points, offering different packages. Your company’s position will have changed. You must understand this positioning and whether it fits your vision.
- Value is generally conflated with price. If your product’s value is greater than your price, you’re leaving money on the table, robbing you and your stakeholders. If the opposite is true, your company may be on a slow, downward slide.
I advise CEOs to embark on a market assessment to determine their current position and whether that’s still optimal. You should quantify the impact of your product vs. the price customers are paying for it.
3. It’s smart business strategy.
Beyond responding to internal costs and changing market position, revisiting your pricing can provide crucial information to your company about its competitive position.
- Increasing prices acts as a vote of confidence. It’s good to occasionally ask your customers, “How much do you love me?” It shows that you understand the value of your product. In fact, not increasing prices in inflationary situations suggests a lack of faith in the product.
- Customers have likely increased their own prices. Simply reading the headlines creates urgency around raising prices across the board. Not doing so may raise suspicions of earlier price-gouging or current management inattention.
- The best companies charge the current fair price for the best products. This cycle allows them to continue to innovate and remain great—think of Apple. Someone will always be cheaper. The question is who offers the best products, services, and, ultimately, value to its customers.
You should think about this now. After a company in which I recently invested took a fresh look at its pricing, it raised prices for the first time in its 20-year history—by 10%. Very few customers pushed back, and not a single one chose to leave.
In the Blue Ridge Partners survey cited above, those companies that raised prices reported very little customer resistance. Moreover, higher price increases (over 15%) encountered no more resistance than smaller boosts. Surprised? You shouldn’t be. Raise your prices fairly. If customers rely on your product, they want you to survive financially.
By increasing your prices and training your customers to expect moderate price rises each year, you create a new, highly profitable income stream. These revenues position you to plan, hire, innovate, and invest in the company, providing ongoing, top-quality products.
The information contained herein is based solely on the opinions of Morad Elhafed and nothing should be construed as investment advice. This material is provided for informational purposes, and it is not, and may not be relied on in any manner as, legal, tax or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund or investment vehicle managed by Battery Ventures or any other Battery entity.
This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and is for educational purposes. The anecdotal examples throughout are intended for an audience of entrepreneurs in their attempt to build their businesses and not recommendations or endorsements of any particular business.
Content obtained from third-party sources, although believed to be reliable, has not been independently verified as to its accuracy or completeness and cannot be guaranteed. Battery Ventures has no obligation to update, modify or amend the content of this post nor notify its readers in the event that any information, opinion, projection, forecast or estimate included, changes or subsequently becomes inaccurate.