It can be intimidating for SaaS business owners to implement any pricing changes. They worry about scaring off existing customers, plummetting acquisition rates, and the intensity of work involved in rolling out such major core adjustments.
Who even knows what the best price model is, anyway? There’s so much contradictory information on B2B SaaS pricing, and what works for one business may not work for another. So where to begin?
If you’re in B2B SaaS, the simple solution is to ‘begin’ at all. Your current price almost definitely isn’t optimal, and even if it is—it may not be next year. Or even next month.
Pricing is not an area of your business you can afford to set and forget.
If you’re continually evolving your SaaS product, adding new features, upping your service levels, and delivering more value, your pricing should reflect that. In fact, many customers even expect a price change. After all, other industries (like retail or food) seem to be ramping their prices at a rate of knots, especially given the evolving economic climate. And SaaS giants like Salesforce even have a built-in 7% annual increase.
Despite that, the average SaaS startup spends an average of just 6 hours (ever!) on its pricing strategy. And yet 98% of SaaS companies that make changes to their pricing strategy see positive results.
The evidence all points towards optimized pricing leading to maximized revenue. Let’s explore a few of those success stories.
1. Podpage’s money-making price change
Podpage is a website builder designed for podcasters. Raising prices resulted in a whopping 28.5% increase in annual recurring revenue—all while retaining current customers and driving new subscriptions.
The plan
Before making any changes, Podpage began by defining clear metrics. Knowing how you’ll measure success is vital early on. Otherwise, you run the risk of twisting the numbers—whether consciously or not—in favor of the campaign’s success.
In the case of Podpage, those metrics were recurring revenue and new customer subscriptions. This allowed the team to see the instant revenue increase as they acquired new customers and existing customers upgraded plans.
Since Podpage is an early-stage startup, it made sense to compare numbers with the previous month.
The pricing strategy change
Interestingly, Podpage didn’t lose any customers after its pricing change. Not a single one.
In fact, nobody even questioned the price update. Qualitative signals actually showed that customer loyalty improved—supporting the idea that business owners’ fear of driving customers away with a price increase is often unfounded.
The lesson
So, what lessons can we extract from this?
Firstly, don’t forget to establish the metrics you’ll use to measure success. This will ensure you carry out a data-focused, objective analysis of results.
Secondly, we should take note of Podpage’s customer-centric approach to pricing strategy. In your own pricing conversations, make sure to include real customers’ opinions. Brenden Mulligan, founder of Podpage, doesn’t look to competitors for guidance on product development or pricing strategy.
He explains, “It’s a cliche but I don’t think about competition too much.” Mulligan prefers to spend more time speaking to his customers directly via the Podpage Facebook page. Why hypothesize your customers’ reactions to a pricing change when you could find out their honest thoughts directly? This kind of feedback is like gold dust.
“If you’re not talking to your customers, you’re wasting your time” —Brenden Mulligan, Podpage founder.
2. How Klipfolio refined its pricing strategy
Klipfolio is a powerful analytics and business intelligence platform. In 2012, it created a pricing model based on the number of users a customer wanted on the software. Fast forward a few years, and the business refocused its objectives and began targeting SMBs rather than larger companies or enterprises.
Was its old pricing strategy still a good match? As you may have guessed, probably not.
The problem
Having changed direction, the team at Klipfolio quickly realized the old pricing model wasn’t suited to its new audience. Not only that—Klipfolio’s pricing strategy wasn’t aligned with its strategic objectives. The key to Klipfolio’s growth strategy was market share and massive user adoption. But its pricing model, based on limited seats, was actually inhibiting user growth.
The pricing strategy change
Before making any solid price changes, Klipfolio ran A/B tests. The team compared numbers from new signups using the old pricing model (based on users) vs. the new one. The new, higher prices were based on the number of resources and features customers choose.
The idea was that by allowing more users, SMBs would see more value in the tool and have a better opportunity for collaboration and, ultimately, success.
The test ran for over two months. The first obvious difference was with the average starting subscription value, which was significantly higher under the new model. And, there was no significant difference between conversion rates—so far, so good.
Klipfolio also saw an increased number of users per account. This was a major win as strong user growth is critical to the business’s strategy.
The cherry on top? Cancelations remained relatively unchanged, and revenue expansion increased.
The lesson
The main takeaway here is the importance of aligning your pricing model with your growth strategy. Fit your pricing to your target customer (persona) and you’re on track for success.
We can’t ignore the magic of A/B testing, either. This reduces the fear and uncertainty of making big changes, as you can:
- roll out changes to a small, select group,
- monitor customer behavior, and
- use real numbers to back up your final decision.
The role of A/B testing in successfully executing pricing changes should not be understated.
To do this, you’ll need a comprehensive subscription management system with the functionality to run pricing tests on different customer segments. Even then, there’s always risk involved when you roll out a price hike—but as we’ve learned from these examples, it often pays off.
“I think there’s a lot to be said for thinking bigger and taking more risks.” —Allen Wille, Klipfolio founder.
3. Why Front tests new prices every three weeks
Front is a help desk software and a communication hub. By embracing price experiments (at least one per month!), this SaaS start-up has gone from strength to strength, attracting big-name investors and achieving a recent valuation of $1B to $10B.
The problem
When Front started out, it opted for pricing similar to that of many B2B SaaS start-ups: a freemium model. Then, over the course of two years, it made three price changes.
The problem with this was every time new pricing was introduced, the Front team had no idea how customers would react. Nor did they know whether to increase prices for the higher-ticket 20% of the market, or price lower for the masses (i.e. the remaining 80% of its customers).
That meant that sometimes Front would roll out price increases across the board, see a drop in metrics and then hastily change it back. Not a great look for a new company wanting to establish brand trust and customer loyalty.
So, what changed?
It was clear there was a better way to do things. Mathilde Collin, Front Founder put it quite simply. “We needed to find a way to improve pricing more quickly and with less risk.”
The answer lay in price experiments. Collin and her team realized “iterating on pricing more frequently would give us more data on what works and what doesn’t.” It allowed a glimpse into the future.
Front went from iterating on its plan price points once per year to making it a regular process every three weeks. Now, with flexible software in place, Front tests price changes on small cohorts and only rolls it out to its full customer base if the results indicate improvement in metrics like lifetime value (LTV) and customer acquisition cost (CAC).
The main benefits of these frequent incremental price increases include:
- fewer repercussions for messing up price changes,
- getting a better sense of what your customers really want (refining buyer persona), and
- gradually achieving better price elasticity, i.e. aligning price with value.
All of this brings Front closer to finding the optimal price for its SaaS product—gradually, steadily, and with less of a gamble.
The lesson
The key lesson here is that new pricing shouldn’t be an annual event (or in some cases, even less frequent!).
Smart SaaS companies revisit their pricing almost constantly—at best every month, if not every second month or so. That doesn’t mean you hit your customers with massive price changes all the time. It’s about creating an effective feedback loop, analyzing data, and testing pricing changes on small cohorts first (ideally specific customer segments or even sub-segments).
“To build your own experimental pricing strategy, you need more than just numbers and spreadsheets. You need to focus on behavioral and revenue data and find a way to group and compare that data over time.” —Mathilde Collin, founder of Front.
An ideal way to do that is with comprehensive subscription management software that allows for granular reporting, A/B testing, and accurate automated billing, and has great catalog flexibility.
Done right, price changes won’t scare existing customers away
In summary, don’t be scared to play with your pricing—but make sure you have the right tools in place first.
Then,
- roll out pricing changes incrementally,
- control and monitor response (for example, you could use an email survey), and
- be careful to communicate openly throughout the process (send an email announcement with plenty of notice. Offering a transition discount could also be helpful).
Transparency is important. Giving your customer base basic information like the reason for the changes, and whether they have the option to remain on legacy pricing, will help a price increase (or decrease) go much more smoothly. Have a solid communication plan in place.
Ultimately, optimizing prices should result in more revenue generated from the additional value you deliver. More money means you can invest more into your SaaS product, marketing, services, and support. You could expand the locations in which you sell your services. Or, just enjoy the extra profits.
In any case, staying on top of your prices spells a win-win for both you and your customers.
FAQs about Pricing Strategy Changes
Q: Why should SaaS business owners carefully consider their pricing strategies?
Pricing strategies can highly influence the revenue and growth of SaaS businesses. Failing to regularly optimize these strategies can result in lost opportunities for maximizing revenue.
Q: What measures should be taken before implementing pricing changes in SaaS businesses?
Before implementing any pricing changes, businesses should define clear metrics of success, such as recurring revenue and new customer subscriptions. Running customer surveys, consulting with the customer base, and conducting A/B tests can also help inform the decision-making process.
Q: What are some success stories of SaaS businesses benefiting from pricing strategy changes?
Examples include Podpage, Klipfolio, and Front. Their pricing strategies resulted in an increase in annual recurring revenue, user adoption, and improved evaluation metrics like lifetime value (LTV) and customer acquisition cost (CAC), respectively.
Q: How often should SaaS businesses consider reviewing and changing their pricing strategies?
Pricing strategies for SaaS businesses should be reviewed often—ideally every six months. However, major changes should be backed by substantial data and customer feedback.
Q: What are some key lessons learned from these SaaS businesses changing their pricing strategies?
Key lessons include the importance of setting clear metrics, considering customer feedback, ensuring the alignment of the pricing model with the business growth strategy, frequently testing pricing strategies, and transparent communication with customers.
Q: How necessary is it to align the pricing model with a business’s growth strategy?
Aligning the pricing model with the business’s growth strategy is crucial as it directly influences market share and user adoption, thereby affecting the overall growth of the company.
Q: What is the importance of A/B testing in changing pricing strategies?
A/B testing allows businesses to understand the potential impacts of pricing changes before implementing them broadly. It helps reduce uncertainties and risks associated with major adjustments.
Q: How can SaaS businesses mitigate potential customer backlash due to pricing changes?
Transparent communication, advanced notice of changes, providing reasons for the adjustments, and offering options like transitional discounts or legacy pricing can help mitigate potential customer backlash.
Q: Can frequent changes in pricing strategy impact customer loyalty?
Business experiences vary. For instance, Podpage didn’t lose any customers after its pricing change. However, sudden and frequent price changes without clear communication can also harm customer loyalty.
Q: How do pricing changes contribute to overall business revenue?
Optimized pricing strategies can help businesses garner additional value from their services or products, thereby increasing their overall revenue.
