Change pricing: Why and how to make smart pricing change?

Your first customers are still on your first pricing model? You’re applying custom pricing for each new client? You’re unsure how to navigate the iterative process of changing your pricing strategy? Well - you're not alone, here is the guide for “pricing change”

According to PriceIntelligently, (no follow) a well-oiled pricing strategy is 7.5 times more effective at generating growth than relying solely on acquisition strategies.

Don't overlook monetization as an afterthought - finding the right pricing model is crucial to the long-term success of your company. It’s a common error to stick with the same pricing strategy indefinitely despite the dynamic nature of the market, evolving customer needs, and increasing competition.

What is really behind “pricing change”?

It is important to note that "pricing change" should not be limited to merely raising or lowering prices.

The introduction of new features presents an opportunity to reimagine your pricing model and packaging. Instead of solely adjusting prices, consider leveraging the introduction of new features to offer customers a whole new pricing structure.

This can involve introducing tiered pricing plans, usage-based pricing models, or value-based pricing approaches. By exploring different pricing strategies, you can align your offerings more closely with customer needs and capture additional value from different segments of your customer base.

The flexibility to adapt your pricing model allows you to respond dynamically to market demands, enhance customer satisfaction, and maximize revenue potential. Therefore, viewing new features as an opportunity to reshape your pricing model can unlock untapped potential and drive long-term success for your SaaS business.

The error of never changing pricing

The primary rule of pricing states that pricing is an ongoing process. Why? Because pricing should be aligned with the customer's willingness to pay, which is constantly changing.

It responds to market trends, competitors' pricing, and the evolving sophistication of your products. Since willingness to pay is a moving target, your pricing strategy requires regular revisions. Adopting an iterative mindset, similar to the mindset needed for product development, is the most effective way to extract greater value from your customers.

Many businesses believe pricing as a one-time exercise and then neglect it, which is a mistake.

Failing to challenge your pricing model can have significant consequences. By neglecting to adapt to market changes and customer expectations, you risk leaving money on the table and losing out on potential revenue growth.

Why SaaS companies change their pricing models?

There are several factors that should serve as motivations for a pricing model change:

Elasticity of demand:

Pricing based on the elasticity of demand involves adjusting prices according to how much the demand for a product changes when its price is altered.

If demand is elastic, a small price change can greatly affect demand, suggesting a strategy of lower prices to increase sales volume. Conversely, if demand is inelastic, demand changes little with price changes, allowing for higher prices without significantly reducing sales.

Competition and market shifts:

It is crucial to closely monitor industry trends and competitor pricing strategies.

If your competitors are altering their prices or new players emerge with disruptive pricing models, it becomes necessary to adapt your pricing to maintain a competitive position. Set up a regular review cadence to help you stay responsive to market changes.

Zoom during COVID-19 pandemic is a good example of pricing strategy led by market and behavior change.

They rapidly adjusted their pricing strategy to accommodate the surge in demand by offering free access to their video conferencing solution for individuals and introduced tiered pricing plans for businesses with varying needs. This flexible approach allowed them to capture a larger market share and drive significant revenue growth.

New features and value proposition enhancements:

As your SaaS solution evolves and you introduce new features or enhance existing ones, reassessing your pricing is essential to reflect the increased value you are delivering to customers.

Updating your pricing in line with the increased value offered ensures that customers perceive the correlation between the enhanced features and the price they pay, resulting in improved customer satisfaction and revenue growth.

Dropbox is a notable example of this. After introducing advanced collaboration features, Dropbox adjusted its pricing to align with the enhanced capabilities.

Customer feedback:

Actively listening to your customers and collecting feedback on your pricing is paramount.

Paying attention to recurring concerns, requests for changes, or signs of price sensitivity allows you to incorporate valuable customer insights into your pricing strategy. Demonstrating that you value customer feedback not only strengthens the relationship but also helps you make more customer-centric pricing decisions.

How to increase prices?

In the ideal world of business, every company aspires to a point where increasing prices isn't just a necessity but a testament to their success and value in the market.

If your business finds itself on this promising threshold, mastering the art of "pricing increase strategies" becomes essential. Let’s explore some effective approaches:

Gradual pricing increase

Implementing incremental price increases can be less shocking to customers compared to a significant one-time hike.

Example: A subscription-based streaming service currently charges $9.99 per month. To accommodate rising content acquisition costs without alarming subscribers, it plans to increase the subscription fee by $1 annually over the next five years. This methodical approach helps customers slowly adapt to the price change, reducing the risk of sudden subscription cancellations.

Bundling

Offering products or services as bundles can mask individual price increases while providing perceived added value.

Example: By bundling its Office applications (like Word, Excel, and PowerPoint) with additional services such as OneDrive cloud storage and security features into a single subscription, Microsoft transitioned users to a recurring payment model.

This approach not only represented a price increase over time compared to one-time software purchases but also delivered greater value to customers, encouraging adoption and enhancing customer loyalty.

How to optimize pricing iterations effectively?

Pricing iterations play a vital role in achieving the ideal go-to-market strategy, and it usually takes companies approximately three years to discover the "right" price point.

The challenge lies in balancing customer satisfaction and the necessity of pricing iterations for a scalable and repeatable pricing model that benefits your business.

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How to announce a change in pricing to customers?

Communicating a change in pricing to your customers is a critical step that can significantly impact customer satisfaction and loyalty, now, let us tell you “how”:

1. Transparency:

Transparency is an absolute must in pricing change. When customers purchase a product, they aren't just buying a SaaS; they are entrusting you to help improve their professional lives. They invest in a promise. Remember it is crucial to proactively inform them about any upcoming pricing changes well in advance.

2. Advance notice:

Give your customers ample time to adjust to the new pricing. This demonstrates respect for your customer base and provides them with an opportunity to make informed decisions. For example, send them multiple emails and tell them why, when and how their pricing are going to change.

3. Value proposition:

Like we just said, you have to explain “why” the price is changing. Reinforce the value that your product or service offers. Highlight enhancements or added features that accompany the price change.

4. Customer support:

Make sure their questions are answered. Offer exceptional customer support to address any concerns or questions. This can include FAQs, direct lines of communication, or even personalized outreach to key accounts.

Grandfather pricing

The golden rule of pricing iterations is to employ the practice of "grandfathering" prices. By grandfathering prices, you commit to continuously providing additional features and benefits to existing plans for a specific period, typically two years.

What are the advantages of this approach?

1. Customers are not taken aback by sudden changes.
2. It allows them sufficient time to adjust their financial plans and budgets accordingly.
3. This allows them to evaluate the impact and future features, helping them decide whether to continue as a customer.

Intercom is a prime example of both the best and worst practices regarding these two golden rules. The article published by the British blogger Henry Dillon discusses Intercom's new pricing model back in 2013 and highlights what the company did right and wrong in its implementation. Back then, Intercom introduced its first tiered pricing model ever - a real business opportunity. What should be noticed is also the way they’ve treated their loyal early adopters and their approach to grandfathering.

While the frequency of pricing iterations can vary depending on your specific market and business model - quarterly, biannually, or annually - consider the following best practices:

Collect market data

Conduct market research, competitor analysis, and customer surveys to gather insights about pricing trends, customer preferences, and willingness to pay. This data-driven approach will help you make informed decisions when adjusting your pricing.

A good way to learn about your competitors' pricing iteration strategy is to track any updates on their pricing page.

You can also use a tool to consult the history of their pricing page for the past months/years. Also, when in competition with a rival for a deal, confidently request details of the offer they presented during the sales process - it will give you a tone of data to prepare your next pricing iteration.

Test and analyze

Before implementing significant pricing changes, conduct small-scale tests to gauge customer reactions and measure the impact on your bottom line. Analyze key metrics like CAC, CLTV, and revenue growth to ensure alignment with objectives. When testing new pricing, two options are possible:

Implement the new pricing model solely for new business. This avoids confusion or disruption for existing customers while gathering valuable feedback from new customers. However, there is a risk of not applying the improved pricing model to previous clients.

Test the new pricing model on a specific customer segment. This allows quick validation of pricing suitability for customer needs and scalability across other segments.

The limits of changing pricing

While it is crucial to challenge your pricing model, there are limits to how often you should iterate:

Customer confusion

Excessive changes to your pricing structure can lead to customer confusion and erode trust. Strive for a balance between frequent evaluation and providing stability for your customers.

Operational efficiency

Iterating too frequently may create operational challenges, especially if your pricing changes require significant updates to your billing systems or customer contracts. Consider the impact on internal processes and resources when determining the frequency of pricing iterations.

Tech priority

Every pricing iteration directly affects how you bill customers. If your billing system lacks flexibility, it can result in lengthy integrations by your tech teams. To ensure smooth pricing iterations, it's essential to use a flexible and non-tech friendly billing solution (try Hyperline!).

Pricing iterations should be a business opportunity, not a pain, allowing your tech teams to focus on your product, not managing billing systems.

To conclude about pricing change

The power of iteration in pricing cannot be underestimated. SaaS companies must challenge their pricing regularly to adapt to market shifts, enhance value propositions, and gather customer feedback. By embracing transparency, employing grandfather pricing, and leveraging market data, businesses can optimize pricing iterations effectively. However, it is crucial to find a balance that avoids customer confusion and maintains operational efficiency. Investing in a flexible billing solution allows tech teams to focus on product development rather than billing management. Pricing iterations are a business opportunity, driving long-term success in the ever-evolving SaaS landscape.

Take your pricing strategy to the next level with Hyperline – the perfect partner for your iteration journey.

Q&A about pricing change

Who should lead the pricing strategy?

The responsibility for leading pricing strategy can fall on various departments, depending on the organization's size, structure, and industry. Ideally, it should be a cross-functional effort involving:

• Finance: For pricing models and profitability analysis.
• Marketing: To align pricing with market positioning and customer value perception.
• Operations: To ensure that pricing reflects operational costs and efficiencies.
• Founders/executives: For strategic oversight and alignment with the company's long-term vision.

In larger organizations, a dedicated pricing or monetization lead can coordinate these efforts, ensuring a better approach to pricing strategies.

What is the role of a pricing lead?

A pricing lead or monetization lead specializes in developing pricing strategies that optimize revenue while considering market demand, competitive landscape, and internal cost structures. They play a crucial role in:

• Strategic planning: Developing and implementing pricing strategies that support the company's overall goals.
• Market analysis: Conducting market research to inform pricing decisions.
• Cross-functional coordination: Ensuring alignment across departments.

When to recruit a pricing specialist and what are the missions?

Consider recruiting a pricing lead or monetization lead when:

• Your company is experiencing rapid growth or entering new markets.
• Pricing strategies become complex and require specialized expertise.
• There's a need to closely monitor and respond to market and competitive dynamics.

A pricing lead or monetization lead is responsible for:

• Developing pricing strategies and models.
• Conducting competitive analysis and market research.
• Working with product, marketing, sales, and finance teams to implement pricing changes.
• Monitoring the impact of pricing changes on sales and customer behavior.

How to manage pricing changes easily?

One of the most efficient ways to handle these adjustments (before even thinking of recruiting) is by leveraging a sophisticated recurring billing platform equipped with comprehensive analytics dashboards.

Platforms like Hyperline stand out in this regard, offering tools that simplify the implementation of pricing strategies through features designed for A/B testing, customer satisfaction tracking, and churn analysis.

Why use a recurring billing platform to manage pricing change and strategy?

1. Streamlined pricing adjustments: Platforms like Hyperline enable businesses to swiftly update subscription models and pricing, responding quickly to market shifts or internal decisions.
2. A/B testing for pricing: With the right billing platform, A/B testing different pricing strategies becomes straightforward, allowing businesses to explore various models with customer segments and gather essential data for optimal pricing.
3. Real-time analytics and dashboard: These platforms provide insights into how pricing changes impact customer behavior, satisfaction, and revenue, aiding in informed decision-making.
4. Monitoring customer satisfaction and churn: Billing platforms assist in tracking satisfaction and churn, identifying trends from pricing changes to help adjust strategies for customer retention.
5. Simplified customer communication: Communicating pricing changes clearly and timely is facilitated by features in platforms like Hyperline, helping customers understand the value of their subscription.

Now you know why and how pricing change is so important for your business!