In the current inflationary environment, it is important to carefully consider price increases. Many companies have pushed through an across-the-board price increase due to inflation and rising input costs. If you haven’t considered a similar action, you’re likely losing ground in real dollars.
One significant concern that may be holding you back from increasing prices is the impact to your customer base. Existing customers and new customers should be considered differently. Balancing these two factors requires both transparency and sensitivity.
We will primarily discuss price increases for existing customers below, though some of these principles may apply across the board. In all scenarios, price increases should be considered in light of competitive dynamics and sensitivity to recession, and where possible, tailored to customers or customer segments.
Existing customers present an interesting challenge, because they already have a pre-negotiated price in their contract that we are now seeking to change. They have also had the benefit of interacting with your product and experiencing its benefits.
Explain the reasoning, be transparent, and call a spade a spade
In the current environment, there are a host of reasons why a price increase is justified. Companies may experience higher input costs or supply chain shortages, depending on the specific industry. For B2B SAAS companies, higher labor costs are often the primary driver, with increasing hosting costs a secondary contributor.
Whatever the reason for a price change, it’s worth crafting a short, direct message that explains exactly why you’re increasing prices. Calling it a price increase, rather than an adjustment, or similar non-direct language, makes the message more authentic. This principle is particularly important when delivering bad news.
Link pricing to a value narrative and product innovation
It’s important to remind customers how much value they’re already getting from your products and services. There are several points you may bring into the conversation to support a price increase:
- The value of features you’ve added in the past year
- Changes in UI or UX that have made the product easier to use
- product adoption statistics
- number of active users
- use cases deployed
- how well your product solves the problem they bought it to solve
This last narrative is likely to be unique for each customer, and might require input from a customer success manager, particularly for larger strategic customers.
Contact customers directly and well in advance to give them time to budget for any price changes. Send a price increase letter or email directly, ideally personalized to each customer. You may choose to use this as an incentive to add products prior to the increase occurring.
Provide plenty of time for customers to react. They might have to adjust budgeting or consider alternative options.
Check your contracts. If you already have contractual ability to increase prices and have been doing so regularly, you may skip this step. But if you have not done this for a while, it is best to communicate proactively.
Communicate internally first
It’s essential to ensure your team is on the same page before rolling any changes out to customers.
Team members of all functions should be made aware of price increases and the reasoning behind them. They should be armed with the talk track and messaging to execute on price changes well in advance of implementation. This ensures that different functions, such as CSMs, account managers and executive sponsors, have a consistent voice on the topic and are not blindsided during their regular touchpoints with customers.
Most importantly, communicate that the price increase and related customer communications are not up for debate. Price increases may not always be popular internally, but it should be made clear that they are not optional.
Price Increase Methods
There are several types of price increase that you may choose to employ. Here are the most common options.
One-time net price increase
You may choose to increase the price paid by existing customers (net of discounts) by a pre-set percentage, such as 10%. This does not have to be a blanket increase across all customers. Ideally, it should be tailored to a customer or customer segment depending on how price sensitive they are, their willingness to pay, and how much the macro environment has affected them.
A one-time price increase should also take into account your competitive environment. If key competitors are either not doing price increases, or are doing only small ones, it may not be a good idea to do a double digit price increase. However, be careful not to coordinate price increases with competition – you might get into trouble for collusion.
A one-time price increase really depends on what you have been able to do for the last few years. If you have made no recent increases, a one-time increase will be much more palatable.
Communicate that a discount given to existing customers will have to be reduced or removed in subsequent years. This is easier if the discount was positioned as one-time or temporary. Tactically, it achieves the same effect as the one-time price increase, but may be easier for customers to swallow. We recommend that a discount be given only for the first year of a contract rather than the entire multi-year term.
Annual price increase
Many large SAAS companies include an annual price increase term in their contracts, reserving the right to increase their prices ~7% every year. This allows companies to push multi-year contracts which guarantee the same price for a few years, or waive the price increase as a negotiating tool.
Such a price increase can be positioned positively as a cap beyond which you can’t increase further. This is helpful to customers in their budgeting processes.
CPI contract clause
At a minimum, something companies can consider doing is inserting a clause in their contracts that states that they reserve the right to increase prices on an annual basis in line with increases in the Consumer Price Index.
Outside of an inflationary environment, it is tough to regularly do price increases unless you have this clause in your contracts. We strongly recommend including them for all new customers and at time of renewal.
At the same time as adding a CPI clause or an annual price increase in the contract, we also recommend adding an auto-renewal clause.
Tactically, it is possible to trade off price increases in a negotiation with customers. Below are some items that you can use in trade off for your first offer.
Reduce year one price increase
Customers may push back on a price increase with the argument that they have not been able to budget for it. One way to resolve this is to negotiate a multi-year deal, and reduce or give up the year one price increase in exchange for increases in years two and three. It may even be possible to increase the percentage of price increase in years two and three to compensate.
Commitment to early renewal
Some customers may be willing to do an early renewal, e.g. one quarter early. Others may sign up for a 15 month contract in lieu of the price increase. Particularly for smaller accounts, this could end up being a worthwhile trade.
Additional spend or cross product purchase
Customers who may be on the fence whether to spend extra on cross-sell products or additional licenses may be motivated to do so if a price increase is waived. This cross-sell trade could include subscription support or a service package that you are trying to get customers to purchase. As long as this extra spend is over a minimum threshold, this can be very valuable. It provides an expansion in lieu of the price increase in the current year, with the opportunity to recapture it in future years.
Joining or participating in an advocacy program
It may be advantageous to partially or fully trade the price increase for a commitment to participate in your advocacy program. Customers might also earn a price increase waiver by producing a webinar, co-hosting a conference, or doing some customer reference calls.
Meeting with a C-level executive
Getting to the C-level can be a challenge for many sales teams, and another trade to consider is an intro meeting to a c-suite member to explain your product, its benefits and use cases. This can increase stickiness, and at best, can allow you to ultimately unlock new use cases within the organization.
A price increase can be a tricky topic to consider, but companies should be highly motivated to consider one in the current macro environment to ensure real gains year over year. At the same time, a price increase, while valuable in itself, can be traded partially or fully in a negotiation for several other items of value to a company.
Having a dedicated renewals team who are well-incented to ensure the success of the program will ultimately reap most benefits from a price increase program. Change management is important – the executive team needs to lean in and make sure it happens. A mere mandate without follow up will likely be unsuccessful.