Happy Thursday,
Today, we’re going to talk about training for a marathon preparing for a pricing change.
A colleague of mine told me once that making regular pricing changes was like going to the gym. A small percentage of the population does it with consistency. The majority don’t and when they realize it’s too late, end up in the hospital.
The analogy fell a bit flat.
But upon reflection, it actually has some legs. There’s a legitimate argument that making regular pricing changes leads to higher ARPU growth.
Companies making some sort of monetization change once per quarter tend to see about 100% higher ARPU growth relative to those who haven’t made an adjustment in five years.
This is not saying you should change your price point once per quarter (you should not), but rather adjust things like value metric levels, feature placement, and annual discounts on an ongoing basis to, you know, stay out of the proverbial hospital.
For many without a clear playbook, the common best-case scenario for new pricing tends to look something like this:
While not terrible, I tend to think this is a poor approach because the change is predicated on pain (i.e. plateaued growth).
When using pricing as a reactionary tool to overcome some sort of organizational challenge, it’s going to be more complicated than if it becomes an ongoing, regular practice.
That said, whether you’re gearing up for your regularly scheduled pricing adjustment or you’ve realized an internal need to make a change, here are the six axes I’d recommend auditing prior to embarking on the journey.
Personnel
If you missed my deep dive on the Scarred Pricing Coordinator Club, the main takeaways are as follows…
Designate a Strong Quarterback
Ideally one with more Peyton Manning DNA and less Johnny Manziel.
Your pricing coordinator should have deep cross-departmental knowledge and be capable of transforming the varying perspectives of sales, marketing, and product leaders into actionable hypotheses.
Their job is to be, in equal parts, a motivator (to keep the train running), a tactician (to remind folks of the end they are working toward), and a debate-settler (to ensure little ambiguity in the path forward).
Designate a Decision Maker
Perhaps just as important as the quarterback, the decision maker will be responsible for giving a thumbs up or down on various changes. You may be considering increasing prices, eliminating freemium, removing features as add-ons, etc — these are big decisions and ones that, without one person to approve/disapprove may not get done.
DM’s vary based on company size and stage but often will fall on the plates of the CEO, CMO, or CPO.
Create a Pricing Committee
Your pricing committee should involve each major department lead and meet regularly. One of the central purposes of the committee will be to discuss varying hypotheses and disagreements. The coordinator will synthesize this discourse, turn it into an action plan, and later get approval from the decision-maker.
Current State Analysis
It’s relatively easy to see a competitor make a pricing change and follow suit thereafter. While monitoring the competitive pricing landscape is generally a good idea (and as our friend, Rob Litterest unpacks in
, PricingSaaS may be a great tool to leverage), it should rarely be your primary input.You’ll want to also evaluate data from multiple angles. I’d recommend beginning with the following:
Financial & Usage Data
You’re likely monitoring your subscription metrics in some capacity (and if not, here’s a friendly nudge to check out our free metrics reporting tool) — this is a great way to ground your pricing hypotheses in data. For example, you may feel you’re giving away too many features in your entry-level plans but until you see via your subscription metrics that expansionary revenue has declined by 20%, it’s tough to form a strong internal case for change.
Similarly, product analytics tools like MixPanel, Pendo, and Amplitude will allow you to identify which features are driving regular usage, vs. which ones tend to collect dust on the shelf.
Pricing History
Most of you reading this likely haven’t been with your current company since its founding. Because of this, there may be breadcrumbs laid from previous trial-and-error pricing tests that will impact how you approach your next change.
Digging into previous pricing changes and their impact will allow you to generate additional perspectives on how your target buyers may react. Some buyers tend to be fairly insensitive to price, in which case, a regular pricing increase will be expected. Others may fall into the bucket of “high churn risk” and should be approached delicately when you ultimately make your shift.
Current and Target Buyer Research
We have a saying that we probably overuse on the Price Intel team: Your price is the exchange rate on the value you’ve created.
It’s a mantra few disagree with. But time and time again we chat with SaaS operators who fail to fully quantify prospective buyer value. And rightfully so; it’s a difficult and tedious process, but it can be done quite effectively if you’re using the right tools.
Quantitative and qualitative analyses are excellent for telling the story of how buyers ascribe value (e.g. methodologies like Conjoint, Gabor Granger, Max Diff, etc.). They also require you to source a panel of current and look-alike buyers, run surveys and/or user interviews, and have a framework for analyzing the findings.
We’ll spend another week fully unpacking some of these methodologies but the takeaway here is if someone on the team hasn’t collected data on your current and target buyers, you’re likely skipping a critical step.
Go-To-Market Alignment
Once you’ve aligned your team and have a good grasp of your current state via historical data & the competitive landscape, the next step is aligning strategically on how your pricing future will look.
Monetization Ethos
This is a fairly loaded point and I’m going to boil it down a bit here. Your monetization ethos represents how your organization approaches pricing and packaging.
For some, leaning fully into PLG (product-led growth) will be integral to their long-term ethos. Meaning, rather than hiring a full sales team and teaching them to continually sell bigger deals, they’ll be focused on acquisition channels, product marketing, positioning, and (of course) aligning prices/packages with the value ascribed by prospective customers.
For others, PLG may be an in-road to moving upmarket. As I discussed a few weeks ago, this is a common playbook for many of the highest-performing SaaS companies. This ethos can be described as building a premium solution in the market, focusing less on acquisition, and identifying how high up one can move.
Similar to company values, your monetization ethos will drive your strategic direction and should be discussed regularly in pricing committee meetings.
Product Roadmap
Developing new products and features is one of the leading reasons folks make pricing changes. I don’t fully subscribe to this approach as, similar to the above, it implies the pricing change is reactionary rather than an ongoing practice. However, there are worse reasons to make changes.
When you develop new features, you’re likely boosting the value of your products and as such, should be making changes accordingly.
So, while you’re gearing up for a change, align with your product team not only on historical feature usage but also on which features will be coming down the pike.
Success Criteria & Metrics
I believe it was Stephen Covey who famously coined the phrase, begin with the end in mind. He didn’t know he was creating a playbook for highly effective SaaS companies, but alas, here we are.
Your desired end state should be reverse-engineered into your strategic approach to pricing.
Similar to your monetization ethos, success criteria & metrics will vary. However, most companies don’t define what success will look like before making a change. It sounds elementary but it’s a crucial step toward an effective rollout.
Generally speaking, most success metrics come in three broad forms: increasing acquisition, increasing retention, and increasing revenue.
Pricing won’t fix all of your problems at once. But, when approached with clearly defined outcomes, can have an outsized impact on growth.
Technical Rollout
Now we’re going to get into the tactical details of pricing changes. The best strategic preparation falls flat if not for flawless tactical planning.
Billing System
Whether you’ve been around for ten years or you're moving to subscriptions for the first time, you’re likely familiar with folks like Stripe, Zuora, Paddle, and Chargebee. All of these companies (+ many others) exist to help subscription companies convert customers via subscription billing.
Choosing a billing system can be pretty overwhelming. I remember we once wrote an article on the top-25 billing systems for SaaS businesses. 25!!
We’ve worked with hundreds of subscription companies over the years and one of the biggest letdowns we’ll butt up against is the “we can’t make the change because our billing system won’t allow it” problem.
So, before rolling out a well-thought-out pricing change, consider jumping on the phone with your billing provider to ensure they can support your changes (e.g. usage pricing, multiple pricing metrics, moving features with ease throughout plans, etc).
Seriously, few things will bum you out more than being ready to implement and learning you’re restricted technologically.
Pricing Page
Your pricing page is one of the first pages customers will click on. Screw it up and you’ll squander the opportunity to generate intrigue and conversions.
Last month, I shared my favorite pricing pages evaluated among the following axes:
Clarity - the degree to which the page clearly articulates the solutions and value propositions of each offering.
Simplicity - the degree to which the page is easy to navigate and understand.
Transparency - the degree to which the page is providing necessary information for a prospective buyer to make an informed decision.
Expansionary potential - the degree to which the buyer will have natural expansion paths as they attain more value from the product.
The best pricing pages are nearly proficient in all of the above categories. And, not surprisingly, some of the fastest-growing SaaS companies have the best pricing pages.
Product marketing is of course, one of many inputs into the broader monetization strategy, but I can’t underscore how important a good pricing page is to keeping the engine running.
Internal Rollout
Because pricing takes a cross-departmental village to implement, you’ll likely find, unfortunately, that your pricing enthusiasm isn’t as contagious as you’d hoped. The internal rollout can be almost as crucial as the external rollout.
Cross-Team Communications
Beginning your internal communication strategy with “why” tends to be one of the least inflammatory ways of breaking the news of a pricing change. You may find some pushback from Sales & Customer Success initially but reasonable people tend to accept change when they understand the rationale.
If increasing prices lead with something like, “Hey team - It’s been two years since we made a pricing change and we’ve added [new features]. We believe this has significantly increased the value of our products. Additionally, to hit [success metrics] en route to [agreed upon org-side outcome], we’ll be increasing our prices.”
Compensation restructure
After you’ve explained the why, share the details of how teams will be impacted. The comp restructure should be developed carefully and, again, with outcomes in mind.
Kyle Poyar from Openview put together a comprehensive comp breakdown last month in Growth Unhinged worth reading in full.
I’ve been fascinated by the incentive change from new deals to upsells. As enterprise value becomes more correlated with NDR (net dollar retention) vs. acquisition, sales teams are being compensated when their initial deals expand.
External Rollout
The end is near. You’re almost to the promised land but have one final mountain to climb. And as is the case with most great things, the final stretch may be the toughest.
Customer Communications
It’s best to not bury the lede when communicating a pricing change to existing customers. I’ve seen many update emails where the pricing change is reflected in paragraph three of a six-paragraph email. It’s not a great look.
You’ll likely communicate the pricing change via email, social channels, website, and in some cases with legacy customers, on a live call.
As a rule of thumb, you should take this opportunity to lead with the update, back it up with the why, and explain the full details of what specific changes will be made.
Here’s a rough email template to follow:
Hey [customer name],
We’re writing to let you know on [date], we’ll be increasing your price to [updated price].
Since our last pricing change on [date], we’ve been hard at work, adding [new features] to deliver you the best product we could. The reality is we’re a different product than we were on [date].
We look forward to continuing our journey to best serve your needs and helping you [insert outcomes achieved via using your product].
Best,
The [company name] team
Now, obviously, this email should be brushed up a bit depending on your brand and voice, but you get the idea. Don’t dance around the point, explain the why, and focus on outcomes.
Success Tracking
Your updated pricing may take longer than you expect to roll out. Depending on the type of product and number of customers, it may take anywhere from 2-18 months. That shouldn’t stop you, however, from tracking what’s working and not working.
When rolling out new pricing, we generally recommend rolling out in cohorts rather than all at once, each customer cohort segmented by revenue potential and churn risk (e.g. high churn risk & high revenue customers should be rolled out last with plenty of warning).
Along the way, your pricing coordinator will consistently track the impact in line with your predefined success metrics. And after a long journey to hit those success metrics, take a moment to celebrate because it might be time to start preparing again.
Recap
Pricing changes should be done proactively (read: play offense, not defense).
If they must be done reactively, don’t rush.
Ensure your team is aligned on the following six axes:
Personnel - one coordinator, one decision maker, and one pricing committee
Current State - financial & usage data, pricing history, and target buyer research
Go-to-Market - monetization ethos, product roadmap, success criteria, and metrics
Technical Rollout - billing system and a rockstar pricing page
Internal Rollout - cross-team communications and a compensation restructure
External rollout - customer communications and success tracking
Rinse & repeat.
See you in a few weeks!
-Evan