When times are good, software companies can forget to make sure their pricing is competitive and covering costs. But in today’s volatile market with rising inflation, companies may need to revisit pricing.
In my last article I shared three reasons companies should consider a price increase. First, internal costs are rising faster than you realize–including the costs of investing in your product. Second, the competitive market has probably evolved since you last looked at pricing. Third, raising prices can act as a vote of confidence in your product.
If you’re ready to adjust your product pricing, where to start? Here I’ll offer a more-tactical guide to pricing increases in three steps.
1. Assess the situation.
Start with comparative price studies. It’s easy to set prices and forget them, but your competitors will have changed along with demands on, and features of, your product. Be sure you’re positioned accurately.
Next check how satisfied your major customers are. If they’re happy and see ROI, they can likely absorb your price increase and implementation will be straightforward. If they’re not, you’ll need to implement more cautiously. In either case, your responsibility is to do the right thing for your company, while considering customer relationships.
Then evaluate your current pricing structure. It’s easier to change some elements than others. For instance, if you have a subscription + transaction fee structure, consider just changing your base subscription, which is viewed as your base cost to serve customers. The transaction element is your share of customers’ revenue stream and will increase naturally as transaction volumes increase. Changing that part of your pricing can be interpreted by customers as you eating more into their revenue. Since the base subscription reflects your investment in serving them, that’s easier to justify.
Other elements can be adjusted. You can choose a new pricing structure, or layer on implementation, installation, or onboarding charges for new customers. Alternatively, you might experiment with consumption-based pricing, where customer fees reflect product usage, a model which is gaining traction as it aligns better with customers’ success (if they do well, you do well, and vice versa).
Alternatively, change the bundle of services offered. (Here’s where usage data is helpful.) By reconfiguring the bundles at given price points, you can better match prices with levels of customer value.
2. Decide how to convey the news
No one is happy when prices increase. But many of your customers are changing their prices, too, so they probably “get it.”
The market supports this move: Gartner Research forecasts software spending to grow 9.8% this year, and IT services by 6.8%. A recent Blue Ridge Partners survey found most software price increases fell between 5% and 15%, so yours should too. This survey also found higher price increases generated no more pushback than did smaller rises. Consider your current pricing, history of price increases, and market position and then evaluate the increase that meets your needs.
Once you’ve made your policy decision, customize price increases to reflect each customer’s longevity, business health, the size and timing of any prior price rise, usage levels, and any initial discount they received. You can also factor in your customer’s vertical. If they’re a cost-conscious retailer, implementing price increases will be hard. So, bite the bullet and ask for what you need now, instead of hoping for a steady program of price rises.
3. Share the news.
Once you’ve made your price-change decisions, consider how you’ll convey the information. No need to apologize; everyone knows what’s going on. To make it more palatable, describe the increase’s impact over a longer period—”less than 1% per year” if it’s a 5% increase and the customer has been with you five years. Remind them of the value you’ve added to your product over time and explain how you’ve customized the increase for them. They’ll see your conclusion is reasonable.
Be aware of cultural differences. In Japan, you’ll want to pay a personal call to your customer, thank them for their historical support, and only then explain the reasons behind the price increase. In the U.S., you could send an explanatory email and field any questions from there.
How does this work in real life?
Many CEOs have never implemented a price increase. One of my companies had expanded over a 20-year period and never once raised prices. After assessing its market position and evaluating the competition and its own revenues, it realized raising prices was essential for its survival as a top-tier producer.
The team emailed clients outlining the reasoning behind the change. The company instituted a 10% increase on one element of its pricing package, effectively halving the change.
Customers widely accepted the change, although some needed accommodation to their budget-setting process. For the company, this increased revenue has funded staff expansions and product enhancements. It’s considering minor annual increases in future.
You can do this. It takes careful planning and sensitive communication. But your product matters to your customers, and they understand quality doesn’t come free.
The information contained herein is based solely on the opinion 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.
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