AMA on Raising Prices Intelligently

February 2, 2024

EVENT RECAP

Price increases are an important lever to align the cost and value of your product—but anyone who’s tried them knows how prickly they can be. In this session, Mark describes how to manage a price increase (hint: it probably shouldn’t be an across-the-board increase) including deciding how much more to charge, which customers it should affect, and managing roll-out.

Ideal for Product Leaders, Finance Leaders, Go-to-Market Leaders and CEOs/Founders

Join to discuss:

  • Why inflation might be an excuse to raise prices, but it shouldn’t be the reason 
  • Four indicators you should consider raising prices
  • A tiered approach to implementing price increases among your current installed base
  • Three techniques you can use to charge different prices for identical products
  • When and how to use Van Westendorp and Conjoint for a data-first approach to price increases

Video

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So we’ll move into, I’ll let you kick things off by introducing yourself.

Unnamed Speaker

All right. Well, I guess it says it right there. Mark, I have been in pricing for 30 years. You could say 50 years if you count when I was 12 years old. I remember going to the grocery with my mother and seeing prices that ended in nine. Cap’n Crunch was $ 0. 49. Now, why do companies do that? We know it’s really $ 0. 50. There’s no real difference. Do they think we’re stupid? 20 years later, I was in a doctoral program at UC Berkeley, and I had a chance to play with scanner panel data.

Unnamed Speaker

And this is the data grocery stores collect when you use your loyalty cards. I could test whether this $ 0. 09 thing really works or not. And it turns out it works. It works because we are lazy subtractors. But I became addicted to understanding how people use prices to make decisions. And from there, I went on to realize that it’s really always about value. And how is it that we communicate value? How is it that we create value? And then how is it that we capture more of that value through the pricing mechanisms that we use?

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So I’ve been in pricing and value for most of my life, and it is my favorite topic.

Unnamed Speaker

Awesome. So we have a bunch of pre- submitted questions. We took some of the most common ones and put them together here. As you have more questions, feel free to put them in the chat, and we will continue the conversation as an AMA. So kicking things off, what are some signals that you could raise prices and you should?

Unnamed Speaker

So the list up here is a really good list. So if you’re not losing enough deals, one of my favorites is if you never lose a deal, you are not charging enough. Because we have to lose some deals. Now, nobody wants to lose, but the point is, if I could raise my prices 10% and I lose 1% of my deals, guess what? I just made a lot more money. So the question is, are you trying to maximize your customer count, or are you trying to maximize your profit? And I always think about how do we maximize profit?

Unnamed Speaker

If your win ratio is increasing, this is a great opportunity to raise prices. Something’s going on in the marketplace, in your product, your competitors aren’t keeping up. Something’s happening in the marketplace that says, hey, your product is more valuable. Maybe you’re just getting better at selling it. But regardless, it’s a great opportunity to say, hey, we can get away with raising our prices. Your competitors raise their prices. This is a no- brainer in my mind.

Unnamed Speaker

If your competitors raise prices, don’t think to yourself, oh, I’m going to keep my price low because then I can take their share. Because here’s what your competitor’s thinking. Well, if they don’t raise their price and follow, we can just bring our price back down, it’s okay. And so we end up missing an opportunity to raise industry profits. If your competitors raise their prices, just follow them. Raise prices, shares don’t change at all, and everybody makes more money. And the last one, you’ve been adding enhancements.

Unnamed Speaker

If you’re in software, you know you’ve added a ton of new features, new capabilities over the last year, over the last two or three years, if you haven’t raised prices. What a great opportunity to say, hey, we’ve been adding more value, so it’s time for us to raise prices. So these are all no- brainer times. But by the way, let me give you another time that you should raise prices. It’s a year that’s gone by since the last time we raised prices.

Unnamed Speaker

Yeah. What’s, do you have guidelines on annual price increases? Like, should it be tied to CPI? Should it always be X percent?

Unnamed Speaker

It should be what you think you can get away with. When we had inflation that was really high, what a great opportunity to be raising prices, at least the rate of inflation, if not a little bit higher than that, because you added a lot more value. There are so many companies who let inflation happen and never raised their prices, they actually fell behind the curve. It’s like they lowered their prices during that period of time. And so we should be thinking at least inflation, and then plus a little bit more because we’ve added value, right?

Unnamed Speaker

Because we’re doing more for our customers. I think you want to get in the habit, get your customers in the habit of expecting an annual price increase. I don’t know about you, Kate, in your business. I use QuickBooks. Every single year, I get the email that says, hey, we raised your prices. Can I just tell you that I hate that?

Unnamed Speaker

I do too.

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But I pay it anyway, because I don’t have a choice, right?

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Yep.

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How do you think about the value of multi- year commitments versus annual price increases?

Unnamed Speaker

I’m, I’m not a huge fan of multi- year commitments, um, for a couple of reasons. Number one, there were a lot of people who had multi- year commitments and they didn’t even written into their contract. We get to raise prices 3% every year. Well, guess what happened when inflation went to 9%? You fell behind, right? My preference is to say, we’ve got no commitment to price, no commitment to price increases. In fact, if I’m, I’m a huge fan of a monthly month by month agreement.

Unnamed Speaker

And the reason I like that is because if you’re a SAS company and you can’t keep your clients happy every month, you don’t deserve to have those clients. And if you lock them in for three years, it gives you an excuse to ignore them. It gives you an excuse to treat them badly. One of the best things about SAS businesses is we have no choice but to make our customers really happy every month. So I love month by month contracts.

Unnamed Speaker

Now if someone says to you, but by the way, month by month contracts helps you win customers because they don’t have to make a huge commitment. Now, if someone says, Hey, I know I’m going to commit, uh, I’m happy to pay for a year. I’m happy to pay for three years. We can do that and maybe give a little bit of a discount because of the cashflow issue that we get. And, but, but I’m a huge, huge fan of not forcing my clients to make longterm commitments and delivering so much value. They want to stay with me.

Unnamed Speaker

That does sound very aligned. So moving on to a next doozy of a question, how much should you charge or how much should you raise prices? And you’ve introduced this first decision, second decision concept. Do you mind talking through that one a little bit?

Unnamed Speaker

I do not. So when people, when people make a purchase decision, especially when they’re buying something for the first time, they almost always make two different decisions. The first decision is, will I buy something in the product category? And then after they’ve said yes to that, they then go on to say, okay, now which one will I buy? Um, so imagine for a second that tomorrow morning, your significant other nudges you and says, Hey honey, I’d really like it if you would learn to play the guitar and sing me a love song, right?

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You’ve never had a guitar in your life. You’re all of a sudden you just said yes to the will. I decision. Yes. I’m going to buy a guitar, right? By the way, price didn’t come into that decision. I’m going to go buy a guitar.

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Yeah.

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What do you do next? You go to the guitar store and you start shopping for guitars. Which one fits me? Which one sounds good? Which one’s worth the money, right? And price becomes a really important decision as we start making that, which one decision. And this is the same way your customers are deciding, Hey, do I need to buy a CR, a new CRM? Yes. Okay. Which CRM am I going to go buy? And they go shop a bunch of different CRMs. And so people are not price sensitive when they’re making the will I decision.

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They’re very price sensitive when they’re making the which one decision. The reason this is so important is because a lot of times people only make a will I decision and then buy. They don’t go on to make the which one decision. If you are a SAS provider today and you’ve sold someone, you’ve got an existing customer, you’re in their platform and they want to buy an upgrade to your product. Can they buy that from anybody but you? Probably not. And so that is a will I decision. Am I going to buy it or not?

Unnamed Speaker

And what’s so great about that is they’re not looking at how much are you versus how much is the competition. They’re looking at what’s the value of solving the problem that this thing solves. And it’s a very different sale. You get away with much higher prices that way.

Unnamed Speaker

So I end up in this situation a fair amount because OneGuide is kind of a, we’re a type of category creator. There aren’t a lot of direct competitors to what we do. But sometimes getting the will I buy anything at all decision is harder than it seems. Convincing somebody that they should buy versus doing it themselves. How do you think about positioning price or price increases versus DIYing it?

Unnamed Speaker

So you can think of DIY as the alternative and just like any purchase decision, what we need to do is put ourselves in the minds of our buyers and understand how they’re making this decision. And the truth is in the world of B2B, which you and I both play in all the time, in the world of B2B, the only reason someone pays you money is because they think they’re going to make more profit because they paid you money. That’s it. There’s no other reason. So now the question is, can you get to how much more profit are they going to make?

Unnamed Speaker

I have a tool or a framework I use called a value table, which helps us get there. And so we could say to ourselves, give me a feature of a product and you built this feature because it solves a problem for a customer. Can you articulate that problem really clearly in the customer’s words? Now the next question is if a customer, if you find a buyer who has that problem, you can solve it with your solution, what’s the result they might achieve? And can you make this result quantitative? So it’s 3% higher turnover, 5% higher valuations, right?

Unnamed Speaker

Can you actually quantify it? And then given that you can quantify it, then the value is how much additional profit did they make, right? How much additional profit are they getting? And so this is a way to think about it. And I can tell you of those four steps, the easiest one is your features because you think in features, everybody thinks in features, right? The hardest one is the problem. We have the curse of knowledge and we don’t know what it’s like to be in our customer’s shoes anymore. We don’t know what it’s like to not know what we know.

Unnamed Speaker

And so it’s really hard. When you can learn to articulate that problem, the rest of it happens relatively easily. So my advice to you would be, let’s see if we can find those real problems that people have, articulate those problems, and then quantify what are those expected results.

Unnamed Speaker

Awesome. Okay. So here’s one that we got a bunch of pre- submitted questions on. Should we increase prices for all customers? I’ll let you…

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Okay.

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What should we do instead?

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Okay.

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So shall I assume that we are in a SaaS world?

Unnamed Speaker

For now, yes. Let’s assume it’s a SaaS or maybe business services.

Unnamed Speaker

Okay. I’m going to do SaaS for a second because there’s a really great thing for all SaaS companies what you should be doing. And that is you should be monitoring usage of your product. By the way, you should be monitoring usage of every feature of your product. But if you have an overall usage number of your product, we’re going to use that as a proxy for value. So someone who uses your product a lot gets a lot of value from it. And someone who doesn’t use it very much isn’t getting very much value from it.

Unnamed Speaker

So what you can do is take your customers, rank order them based on usage, take the top 20%, raise their price, and they’re just going to pay you the money. And then you’re going to go to the next 20% and raise their price. And you might get some pushback, but they’re probably all going to pay you. And then you go to the next 20% and raise their price. And now you might get one or two people to churn and you’re like, I didn’t like that. And then you’re going to go to the next 20% and more people are churning and you say, ooh, this hurts. Let me stop.

Unnamed Speaker

And you’re not going to raise prices on any more. And so what we just did was raise prices on people who get the most value from our product, but not raise prices on people. Can I give you a great example of this?

Unnamed Speaker

Yes, please.

Unnamed Speaker

Netflix recently raised their prices by two bucks or something like that. They’re charging for ad- free video. I guarantee you when that happened, here’s what went through your mind, everybody’s mind who’s a Netflix subscriber. Am I watching Netflix enough that it’s worth the extra $ 2? And if you never watch Netflix, you canceled your Netflix. If you watch it every day, you’re like, oh, I don’t like that, but I’ll pay it because I use it. And this is exactly what we’re talking about.

Unnamed Speaker

So here’s an interesting angle on this. Say you have a legacy customer who, let’s imagine they’re a very heavy user and you’ve determined they should pay $ 30, 000 a year, but they’re only paying 10. So tripling their price would be really aggressive. What do you do?

Unnamed Speaker

Yeah. So I think as a general rule, and by the way, I have no research other than what I’ve seen and how I feel, okay?

Unnamed Speaker

Yep. Yep.

Unnamed Speaker

But I think as a general rule, you should limit your price increases to about 20% a year. And so here’s what happens is when you raise prices 10%, your clients or your customers are going to say, I don’t like that, but it’s not worth the hassle to pay it, right? To go find something different. When you get up to 20%, you’re getting at that cusp where they’re really starting to dislike you a lot. When you get over 20%, they’re going to find ways to punish you. So even if they should spend 30K, they’ll take the hit because they hate you so much.

Unnamed Speaker

Right.

Unnamed Speaker

And so my advice is, you know, tell them up front, hey, you know, new customers that are getting what you get are paying us $ 30, 000 a year. So we’re only going to raise your price 20% this year and say it again next year and say it again next year. Right. But I would not, I would not triple their price.

Unnamed Speaker

That’s a slap in the face. So a cousin of that question, a lot of early stage companies have this missionary selling where you give heavy discounts to get traction in the beginning. So let’s say you have some of those early adopters who are not heavy users. Maybe it doesn’t justify really aggressive price increases. Do you just let them hang out if assuming it doesn’t cost that much to serve them?

Unnamed Speaker

Yeah.

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So I think this is more of a mental problem for the company selling than it is for the customer at this point in time. So ask yourself how much effort and energy are you going to put into raising prices on your first customers versus the return you’re going to get? And would it make more sense to spend that time and energy trying to win new customers at the prices you actually deserve? I think there’s a point at which you can raise prices on existing customers or on your first customers, your initial customers.

Unnamed Speaker

But if you think about it, it’s what percent of your customer base, 1%? Does it really matter if you raise their prices? So I think it’s a question that we fret about way more than it’s worth in us fretting, right? It doesn’t matter to me if you raise their prices. It doesn’t matter to me if you don’t raise their prices. I don’t think it hits your revenue very much at all. But what you really should be focused on is can I win new customers at the prices I think I deserve?

Unnamed Speaker

Nice. Here’s an interesting wrinkle. Thanks, Ben. Let’s say you sell into multiple lines of business within one enterprise. And so they can talk to each other. They know what each is being charged. Does that mean that even if they have different levels of usage, their price increases should be more or less identical?

Unnamed Speaker

Yeah, I think as a general rule, when you sell into a company that has centralized purchasing, or you have a purchasing department that understands your pricing, that you have to be consistent across those companies. I used to be in the semiconductor industry a lot. And we would actually pay attention to huge corporations and know is their purchasing global purchasing, or is it country by country purchasing? Because if it’s global purchasing, we have to charge one price for the entire company.

Unnamed Speaker

And if it’s country by country purchasing, we could charge different prices for different projects in different countries. So it’s important for you to understand that. I’m guessing that if it’s all in one country, it’s one purchasing department, you probably need to be consistent for the company.

Unnamed Speaker

That makes sense. All right, let’s talk rolling out a price increase. So if you don’t mind walking through kind of the steps of how you would go about rolling out a price increase.

Unnamed Speaker

This is kind of what I just described to you.

Unnamed Speaker

It is more or less, yeah.

Unnamed Speaker

It is. So identify your usage metrics. So how much are people using? Bucket customers by usage. And I had said top 20%, next 20%, next 20%. Start by raising the prices with those top users, the people who are at the very top. And then once your churn loss exceeds margin gain, definitely stop. You might start stop a little bit before that. And since we repeated that, I’ll give you a little bit more information. What happens when you raise prices and someone calls you up and says, hey, I’m leaving because you raised my price.

Unnamed Speaker

So you start to get pushback. Well, here