5 Reasons Not To Raise Prices on Existing Customers. And 2 Better Ways to Do It Anyway.

I remember the first time I tried to do the Old Price-Raise-Without-Notice tactic.

We’d closed Qualcomm in Year 1 for the grand total of $10,000.  Not all of Qualcomm, but a nice division.  It was a great logo in Year 1, and our champion and buyer did 3 webinars for us, an external case study — and an internal case study at Qualcomm.  They were magic, these pieces of content.  He also did reference calls for us with great prospects in the industry.  Yes, we earned it.  But it was also a gift.

But as time went on, we got a bit better at pricing 😉  No one else anything like Qualcomm was paying less than $60,000 a year by Year 2, and by the time the Year 3 renewal came up, no one was paying less than $100k+ for the same level of service as Qualcomm.

And the same month their renewal came up sales was … a bit soft.  We were going to miss the month.  But you know what the easiest way to make the month would have been?  Just to increase Qualcomm to the same pricing everyone else had at their bracket.  Just $60k.

So we sent them an invoice for $60k, and our champion went … ballistic.

He called me almost immediately.  He said he’d cancel (well maybe, maybe not).  He said he hadn’t budget for it (probably true).  And most importantly, he said it wasn’t fair.  He told me he had taken a big risk on us, and just getting an invoice out of the blue with a 600% price increase “was just not OK”.

He was right.  I canceled the price increase.  And the next time I did increase pricing on an existing customer, we did it very differently.  See below.

Across 25+ SaaS companies, I’ve seen way too much time spent on pricing increase discussions on existing customers.  Time that could be used for value increasing discussions instead.

Here are 5 reasons pricing increases on existing customers usually aren’t worth it:

  1. Pricing increases — increase churn.  You may not see it if you are doing annual contracts, and if it takes customers a lot of work to leave your service.  But talk to our B2C friends with much shorter sales cycles (and shorter customer lifetimes) and they’ll all confirm this.  Price increases on existing customers always lead to churn.  It’s just in SaaS, that churn often takes 2-3 years to show up.  More on that here.
  2. Pricing increases often damage NPS, and thus referrals, and thus case studies, and thus so many good things in Second Order Revenue.  This just isn’t worth it.  Two vendors after the SaaStr Annual jacked up their prices 50% on us.  One we canceled.  The other, we are going to renew.  But I told them I would no longer be a reference, to remove my quote from their website, and to no longer work directly with me.  Not worth it.  More here.
  3. If you are growing > 60% or so a year, it won’t even matter.  Say you are at $1m in ARR and you get to $50m in 6-7 years.  Or even 10 years.  That $1m growing to $1.2m via a price increase won’t matter.  But if you lose the referrals, the growth in the account, the other benefits … you need those logos happy.
  4. Pricing increases on existing customers suck up a lot of oxygen.  The sales team will want to talk a lot about it, especially if sales are soft.  Everyone will have an opinion.  Now, raising pricing on new customers is different.  If you are going from $1m to $50m and you raise prices 20% on the next $49m in ARR, that can get you there a lot faster.  That’s different.  But creating lots of drama in internal discussions here often isn’t worth it.  Put that energy into something more future-oriented.
  5. It’s like a cookie.  It’s gone almost instantly.  It only works once, really.  Yes, a one-time price increase on existing customers might help you make the month or quarter.  But then it’s done.  It doesn’t really fix any real issues.

Ok, so hopefully I’ve convinced you to be more thoughtful about raising prices on existing customers.  But that doesn’t mean there aren’t better ways to do it.  There are two things that work better:

  1. First, add a new, more expensive but 100% truly optional edition instead.  We migrated a lot of our early “enterprise” customers to a “global” edition at a much higher price point — but made the migration totally optional.  That eliminated 90% of the friction, and made it seem like a benefit, not a tax.
  2. Do a small increase, and telegraph it way ahead of time, and apply it equally.  This is what Salesforce, Google and others do.  I still wouldn’t do this until growth slows below say 30%.  E.g, the core Salesforce CRM/SFA product is very mature and is growing < 20%.  Here, raising prices say 5%-6% a year may irk some customers.  But if you apply it to everyone, and give everyone 3-4 months notice, the issues will be fewer.

Drive up your deal size.  Put more energy there, a little less energy into the early customers that took a huge risk on you.  And maybe in the end got a great deal because they took that risk.

CLTV Isn’t The Whole Story. Don’t Shortchange Second-Order Revenue.

Published on February 28, 2019

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