Pricing for Growth: A Step-by-Step Guide to Raising Subscription Prices
Are you looking to boost your subscription business profits? This blog post provides a comprehensive guide to raising prices, from determining the optimal pricing to communicating price increases to your customers.
One of the biggest challenges of running a subscription-based business is getting your pricing right. You need to keep your monthly fee at a price point that will make it attractive to new customers but you also need to ensure that you’re making enough profit over time. Even if you manage to hit the perfect pricing sweet spot, expenses increase over time slowly eating into your profit margin.
So, how do you raise prices in a subscription business? We’ll walk you through what to consider, how to manage the pricing change, and what to do if you get customer pushback.
Before a pricing change
Decide if a pricing increase is right for your business
When you first set your prices, you might not have made a long-term strategy for how you might increase them. After all, you were focused on validating your product and finding the right product/market/pricing fit. Now that you’ve been in operation for a while, you have different priorities.
You want to build a strong and profitable business – and your current prices are holding you back. The good news is that just because you started with a lower price point, that doesn’t mean you have to keep it low forever. After all, you’ve not greatly improved your product and it’s providing even more value to your customers. Plus, making small price increases over time is a much better customer retention strategy than making a big price increase later on.
The first thing you should do is study whether the pricing increase could impact the viability of your business. To do this, you can:
- Study other companies: Look at what happened when similar companies changed their pricing. Were customers upset? Did many leave for their competitors? How did they message it?
- Survey your current customers: How much more would they be willing to pay? How would they react to a pricing change?
- Survey potential customers: How much more would they be willing to pay? You want to make sure that you price in future growth so you don’t have to increase the prices frequently but you also need to make sure that your prices are still competitive. Finding the right balance is key.
- Look at your competitors: How much are they charging? You don’t want to charge too much more than they do unless you have something additional to offer that is a compelling selling feature.
Consider grandfathering the pricing
Many SaaS companies have successfully increased their subscription prices for both new and existing customers. That said, increasing prices for new customers is easier than asking your loyal customers to pay more.
It’s entirely possible to do so successfully but it could lead to churn and might end up hurting you more than it helps. For that reason, you should consider grandfathering in your previous pricing for older customers. That can also potentially help those customers stay with your service since they’ll face higher prices if they ever cancel then need to return.
That said, it could be that your own expenses have increased so much that you’re unable to keep your current subscribers on the same pricing plan. If that’s the case, it’s entirely possible to increase your pricing on your current users while reducing churn as much as possible with the right strategy.
During the price increase
Don’t increase prices too much
Customers often understand moderate price increases but will get upset if you increase prices significantly. For example, if you currently charge $10 per month, increasing it to $30 per month is not going to make your customers very happy.
Our recommendation is to keep pricing increases to no more than 25%. That means that if you have a subscription for $10 per month, you can increase it to $12.50 per month. If you have a $40 per month subscription, you can increase it to $50 per month.
Netflix has done these types of gradual price increases well. For example, they increased the price of their Basic plan from $7.99 to $8.99 in 2019 and then increased it to $9.99 in 2022. Such small increases aren’t going to have a big impact on their customers’ budgets. .
In contrast, Google Maps’ 2018 price hike was greeted with significant pushback by developers who used their APIs. The company had previously offered a free tier for its digital mapping APIs and the increase reduced the number of free calls from 25,000 per day to around 930 per day. That resulted in a price increase for some developers of up to 1,400%.
The price hike was made with little notice and Google’s terms of service stated that customers couldn’t use Google Maps APIs with any API component by another digital mapping provider. That meant that many customers were locked into Google’s plan until they could find a way to switch over to another service. The fallout of this price hike has included a hearing with the House Antitrust Subcommittee and a class action lawsuit.
If you plan to roll out the pricing increase with a new program or service, you might be able to get away with a higher increase. For example, if your product is an image editing software and you’re adding video editing to your services, you might be able to get away with a 50% increase because you’re adding more value. That means you could go from $10 per month to $15 per month or from $40 per month to $60 per month. However, the value that the additional service offers has to be widely seen as worth it to your customers.
Communicate it beforehand
If you’re planning a price increase, giving your customers and potential customers as much advanced warning as possible is key. If you’re increasing prices on current customers that will give them time to adjust to the increase before it happens.
When you’re communicating this increase to current customers, it’s important that you do so in a way that reminds them of your product’s value. You could talk about how useful your product is or even point out how that customer has benefited from service by customizing the messaging by including some of their usage stats. You can even talk about new services or features you’re working to bring them in the future. If they feel like they are getting good value out of your service, they’ll be less likely to get upset that your prices are going up.
In 2022, Slack did this well by sending out emails to their customers months in advance and then creating blog posts and other assets explaining the price change while centering the value that Slack offers to its users.
In comparison, Gumroad’s price increase was widely seen as confusing and poorly communicated. Gumroad helps creators sell custom merchandise on their site. In the past, they charged creators less according to tiers based on lifetime sales through the site. They started at 9% per transaction for people who had under $1,000 in lifetime earnings and went down to 2.9% on people with $1,000,000+ in lifetime earnings.
As they also no longer covered credit card processing fees in their fee, that meant another 2.55% + $0.30 per transaction was added. The price increase was, therefore, huge for their most successful creators. Many of which then took to social media to communicate their displeasure at the increase and the way it was communicated.
If you’re grandfathering prices, you could potentially use it as an opportunity to get more people to subscribe now at the cheaper price before prices go up. That's a great motivator.
After the price increase
Monitor your KPIs
After you implement the price increase, it’s the moment of truth. Will the increase in your pricing have a positive impact on your bottom line? It’s critical to monitor your conversion rate after you’ve increased your prices to see whether the new price is going to reduce your conversion rate. If you’ve done it right, there shouldn’t be that big of an impact on your conversion rate. However, if you’ve miscalculated what the market can afford then you could see a big drop off.
That could be a big problem for your business since your MRR growth could slow or go into the red if you aren’t converting as many people as you used to. The goal of your price increase was, ultimately, to increase your overall income but price increases can backfire by making your product less appealing to a broader group of customers and actually reducing how much you make overall. If you see this happening, here are some things you can do:
- Tweak your funnel copy: If you’re not converting like you used to, your first step should be to try playing with your funnel copy. Perhaps previously you were selling yourself as a cheaper option or focusing on your product’s impact. Focusing more narrowly around things like total value of ownership or the premium nature of your product might work better at your new price point.
- Offer an introductory price: If your customers are struggling to convert at the higher price point, consider offering them a lower price point for three to 12 months. By the time the higher price point kicks in, they’ll better understand the value of your product and be willing to pay it.
- Incentivize annual subscriptions: Annual subscriptions give you guaranteed income in advance and reduce the risk of churn. Consider offering a lower rate for annual subscribers. That will help you and also give your customers a lower cost option. Indeed, this is the strategy that Slack used when they increased their prices.
- Adjust your pricing: What if you increased your pricing too much? If that’s the case, try A/B testing a number of different price points to see which give you the right increase in revenue per user but still keeps your conversion rate high.
How to deal with unhappy customers
With any change, there are likely to be a few people who are unhappy. This might be particularly true if you increased prices on your existing customers. It’s therefore important to have a plan to deal with unhappy customers. Here’s what you should include in your plan:
- Messaging: You want clear messaging that communicates why you made the change and the value of your product that you can use to respond to customers who are upset. This could point out that your competitors charge a similar amount or that you have additional features that make it reasonable for you to charge more. Empathize with the customers in question and offer them a deal or concession for being loyal customers.
- Special price: You might want to offer existing customers who complain a special price for the next few months as a good faith gesture showing that you appreciate their business. This could be the price that they’re currently paying or a discount on the higher price.
- Annual plans: You could also potentially offer them an annual subscription price or negotiate a multi-year contract for your services if they’re a business. This is a great way to lock in income and keep the business of your loyal customers.
- Free upgrade: Depending on your product, you might be able to offer customers who are unhappy a free upgrade for the price they’re currently paying. If it’s no additional cost to you, doing this could keep their business while providing them more value.
Sell yourself as a premium product
Now that you have shifted to a higher price point, it’s important to shift how you market your brand.
The good news is that some people might actually have a better opinion of your service now that you’re charging a higher price for it. The higher price will signal to them that your product has more value. It’s important that your branding and messaging also communicate that. Revisit all your ad and branding copy to see how you might want to tweak it.
Changing your pricing is complicated and shouldn’t be done quickly. The most successful pricing changes happen when a business researches their customers and market, creates a communication plan that gives existing customers plenty of notice, and has options for unhappy customers.
At Upollo, we’re in the business of helping you create more happy, paying customers. We do that by helping you do things like identify customers who are using multiple free trials or sharing accounts. Read more about effective trials.
Looking to increase your MRR? In addition to considering a pricing change, try our product to see how much MRR you’re losing out on from users who are using your product – and just not paying. We’ll help you convert the previously unconvertible and boost your MRR considerably.
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