Deciding | Communication Strategies | Execution: Add Value, Timing, Grandfathering
[7 min. read]
Pricing policies aren’t static.
Costs fluctuate, market conditions change, and our understanding of pricing evolves. Inevitably prices change.
And by change I mean increase.
Prices can go down. Dynamic pricing may even introduce questions for customers when that happens. But by and large, price drops don’t trouble customers.
Increases are more complex.
The new price may cross over a customer’s WTP threshold or trigger a new evaluation of competitors. And that’s the main question we have when we’re looking at executing an effective price increase.
Will customers churn?
Best practices tend to fall into three buckets:
10a. Deciding to Raise Prices
10b. Communicating Price Increases to Customers
10c. Executing Price Changes
10a. Deciding to Raise Prices
Raising your price may be as complex as choosing the price in the first place.
Start by gathering the data that’s easy to get.
- Existing customer behavior—churn.
- Review notes from any previous price changes.
- Solicit experience and opinions from your executive team. Not every voice is equally credible, but it’s just shortsighted not to capture these insights.
- Expand from your internal team and ask board members, investors, personal networks, and advisors.
- Speak with your Sales and Customer Success team. Are customers happy? Do they complain about pricing?
- Revisit Chapters 1–9.
- Consider the implications of the timing (frequency, current events, etc.).
- Consult any relevant market research you’ve done previously.
Then decide if you need to do some additional research to anticipate customer response.
Case Studies
In the oughts and early 2010s many well-known print newspapers and magazines were trying to understand what strategy to adopt to support their digital counterparts.
Back then there weren’t a lot of examples to look to and it was anyone’s guess exactly how consumers would react.
The Economist
In 2011, The Economist bundled its digital web-access edition with its print edition.
They generated revenue from two sources: advertising and subscriptions.
Ad revenue was going strong, but subscriptions actually lost money.
They contemplated raising their prices to get the subscription side revenue positive. But would customers go along?
Their research concluded:
- Any increase produced SOME churn.
- Churn rates were similar for any increase below 20 percent.
- At 20 percent churn would wipe out revenue gains.
- An Increased impact was felt over three years. Year 1 saw customer reaction. Year 2 saw revenue growth. Year 3 saw stabilization.
As a result, they settled on a strategy of significant (up to 20 percent) and infrequent (minimum three year gap) price increases.
By executing their price changes in an informed way, they were able to deliver consistent growth for years.
GoReact
In Chapter 4, I shared that we launched a survey at GoReact to help us decide if we should raise our price from $19.95 to $29.95 per user, a 50% increase.
Following the checklist above, the situation was this.
We had the occasional grumble from prospects about price, but it was more common for prospects to express surprise at how low our price was.
Our existing customer base had very low churn. NPS scores were high and anecdotal customer avidity was through the roof.
Our price change two-and-a-half years earlier had gone fairly smoothly. We only lost one or two small customers. At that time a few customers had told us this was their limit. Some of our team wondered, would another price increase go too far?
On the other hand, our customer base had grown seven times its size since then. With that kind of growth, was our past experience even relevant?
The senior team all had a sense that our current pricing wasn’t right. Our pricing meetings were thoughtful, opinionated, but ultimately non-consensus. There were wildly divergent opinions about the response to a price increase.
Some were concerned a price increase would rock the boat and introduce dissatisfaction in an otherwise very contented customer base.
Others argued that we had clear evidence that our pricing was too low.
Almost all of our competitors charged more and (we felt) delivered less. Some charged differently. Did they know something we didn’t?
Our category had no established leader and no norms we could view as reliable guides.
We started collecting wisdom wherever we could find it. We polled our personal networks, questioned investors and board advisors (who echoed what we had seen from Andreessen Horowitz—that they had rarely seen a company err by pricing too high), and scoured all the online resources we could.
Ultimately we admitted that our data was scant and we ran the Van Westendorp survey.
Our survey results indicated that 80 percent plus of our customers were willing to pay more.
To make the arithmetic easy, let’s say our annual revenue was $1 million. If we lost 20 percent of our customers, the current price equivalent would drop to $800K.
Factoring in the price increase meant the same 80 percent of our customers would generate $1.2 million in revenue and we should come out ahead.
Plus we were growing fast and would capture the additional revenue from the increased price on all of our new business.
Ultimately we went ahead with the price change and this became an important chapter in the company’s growth.
10b. Communicating Price Increases to Customers
Money and trust go hand in hand.
Introducing a change in the financial relationship with customers therefore automatically raises questions of trust.
Communication shows the customer that we value the relationship and creates an opportunity to retain their trust.
Communicate Internally First
Effective communication around price changes starts with a thorough briefing of your internal team before communicating to customers.
An informed team presents a united front to customers, so they will perceive your message clearly.
Sending your team out to talk to customers without all the information just sets them up for embarrassment and frustration and can be detrimental to your company culture.
Communicate Early and Often
Aim for no surprises. Surprises undermine trust.
Start telling customers what is coming as early as possible. In that communication you want to:
- Be direct, specific, and clear. Don’t beat around the bush.
- Don’t over-communicate and don’t use euphemisms. Microsoft, YouTube, and Netflix have all made this mistake.
- Don’t apologize. This sounds impolite but signaling that you don’t have a good reason for your price increase will be confusing.
- Include a rationale and give them a reason for the change.
- Reinforce the value of your product or service.
- Communicate any added value.
- Offer a way for customers to voice questions and concerns.
10c. Executing Price Changes
When executing price changes, these three things help things go as smoothly as possible.
- Add value
- Carefully consider the timing
- Judiciously apply grandfathering
Add value
A spoonful of sugar helps the medicine go down.
Where possible add more value when you raise prices. Added value can come via new features, free upgrades, more time, etc. Having something to offset the negative news of a price increase, defuses mistrust and knee-jerk churn.
Non-cash loyalty rewards can add value, as can promotions to position your company against competitors.
Timing
I have already mentioned communicating early and often as well as timing price increases to coincide with added value such as new feature releases.
Also think about the context at large. Inflation and times of upheaval can cause people to be more price sensitive or price aware (think about how much closer you pay attention to the price of gas when prices are volatile).
If price changes are due to something affecting the whole market, say a raw material price increase, then consider if you can use time to your advantage.
For example, can you time things so your competitors introduce their price changes first?
You also have the option of a staged roll out. Only you can tell if it’s right to “boil the frog” and go slow or “rip the band-aid off” and get the pain over all at once.
Staged roll-outs can be done over time or across only certain products, bundles or tiers. By reconfiguring your offering, you may be able to limit price increases to only where they are needed.
Grandfathering
The big key to grandfathering is whether or not you are growing. If you are in a rapid growth phase, it may cost you little to keep customers at the old price. They will soon be dwarfed by new customers who are paying the new price and know no difference.
If your customer base is large and fairly static, you may not have this option.
At GoReact, we used several of these techniques. We grandfathered certain customers for a year.
We also notified prospects that if they purchased their licenses before the increase went into effect, that they would get the old price for the coming year.
This served as both a timing incentive to soften the blow of the price increase for existing customers, and also a lever to close more business as the price change approached.
The scarcity of “get the old price while you can” helped us motivate more purchases.
We strongly considered creating a new pricing tier (see tiers in Chapter 5), which would become our standard product offering while retaining a lower tier with some restricted features to appeal to those more budget-conscious and likely to churn (ultimately we chose not to do this and stayed with a single price).
Conclusion
There’s more to say.
Pricing is bigger than just what I’ve included in these pages.
Yet, I think this is the guide I needed when I first encountered questions about pricing strategy.
Most of what I’ve encountered since fits within the framework I’ve outlined here and in my journey to provide the comfort and confidence that comes from understanding, this guide has become a go-to reference for me.
I sincerely hope that you find value here and that these learnings contribute to your success.
Namaste.