Pricing is one of the most challenging parts of running a business.
Patrick McKenzie, also known as patio11, has a wealth of knowledge on the subject of pricing. If you’ve been following him, you may have heard him say "charge more!" But don’t let the simplicity fool you — there’s much more to his pricing strategy. In fact, his pricing advice is so effective that he charges startups upwards of $30k/week for pricing consulting. In this article, we’ll look at seven of his most powerful pricing tips from a recent Startup Victoria event:
“Charge more” may sound obvious, but startups still don’t do it enough. While working as a pricing consultant for software startups, Patrick estimates that roughly half of revenue uplift came from experimenting with higher prices. His advice is to "go with the highest number that you're thinking of and probably double that." Why? He finds that software founders tend to undervalue their work because it comes naturally to them. The value your software creates for the user is not proportional to the effort you put into creating it, so give yourself permission to take a big swing when it comes to pricing.
Companies can use plan names to nudge their customers towards a higher-priced subscription. For example, Patrick recalls a situation from early in his career when he asked his manager if he could sign up for a Hobbyist Plan priced at $9 per month for a project that he was working on. Although the plan name was "Hobbyist", it had all of the functionality that his company needed. His manager said, "I’m never going to put the word hobbyist on something I send up to my boss. We are an enterprise. We pay for enterprise rates.” Ultimately, his company signed up for the $500 per month Enterprise Plan – all thanks to the plan name! When it comes to getting customers to self-select into more expensive plans, don’t underestimate the power of plan names.
Over time, the plans that your company offers will inevitably change. You should expect your pricing to be constantly evolving as your product evolves. Patrick recommends that startups revisit their pricing at least yearly and do more minor pricing experiments (ones that don’t impact all users) at least quarterly. Given that you should expect a lot of changes, there are a few things you can do to set your company up for success.
When you're ready to introduce new plans, what should you do with the old ones? It's important to never delete a plan that you've already created. It's best to keep them on hand for historical reporting purposes, as well as the needs of your customer service team. It's helpful to give your customer service team the ability to transfer a customer onto a plan that's no longer formally available. To prevent your customers from signing up for these old plans on their own, all you need to do is mark them as inaccessible. That way, they won't appear on your website or "change plan" interface.
If you haven’t been deleting any plans and customers are scattered across dozens of plans, it can make reporting a nightmare later on. Setting up new plans in the right way will save you a ton of time on reporting. Create new plans with an internal ID and assign them to a bucket. When you're setting up the plan, think of an informal bucket that might be appropriate to report on. For example, if you were trying to get more SMB customers at the end of March, you might create a plan (internally) called "March 2022 SMB promotion" and assign it to the "SMB" bucket. That way, when an investor asks "what is your churn on a user demographic basis?", you can easily roll up the subscribers on the "March 2022 SMB promotion" plan with all of the SMB users that you've acquired through other promotions. You'll thank yourself later.
Let’s say you've decided to increase the price of your products. How do you announce this to your current and prospective customers?
You may have an email list of people who are interested in your product, but haven’t signed up yet. Locking in a lower price is a great excuse to sign up right away. Send them an email that explains the reasons for the pricing change. Start by highlighting the new product announcements you've been making to connect the price increase to an increase in product quality. Next, give them a chance to sign up before the new pricing goes into effect on a specified date.
Patrick recommends a similar email for existing customers, with one important difference: offer existing customers the old pricing for a generous period of time (1 - 2 years) or forever. Why? When the price goes up, they may think twice about continuing to use your service. Moreover, it’s important to reward early customers for their loyalty. Give them pricing that nobody else can get - something that acknowledges the years they have stuck with you. Don’t say you’re giving them a discount or extending old prices. Instead, frame it as an “early adopter reward” in recognition of their loyalty. It’s important that the email includes a boldface statement so existing customers know they won't be impacted by the pricing change: “This is just an FYI. Your pricing is not going to change because you have been our loyal customer.”
You might be wondering why you should tell existing customers about the price change if it doesn’t affect them. In some places, it's necessary by law to let them know. Beyond that, it's a good idea to highlight the additional benefit that you are giving them for their loyalty. What does that mean? They’ll get to use the service for $20/mo less than everyone else because they’ve been a loyal customer. Take the opportunity to further strengthen customer loyalty by highlighting this early adopter reward.
It’s better for cash flow to get customers to make an annual payment rather than monthly. By not requiring monthly payments, you will minimize the churn that happens when a customer’s credit card fails. Your customers are also less likely to unsubscribe if they have to decide on a yearly basis, instead of every month.
One way to incentivize customers to pay upfront is to offer a small discount on the annual payment option. Patrick recommends offering one month free. In his experience, it performs similarly to offering two months free or 10% off, but it is the least costly option.
If your business targets enterprise customers, though, offering a discount isn’t necessary. Enterprise customers expect to pay annually by default because it’s easiest for them.
A typical customer has somebody whose job it is to ask for discounts - that’s how they measure success. As a result, your sales reps will often offer discounts in order to seal the deal. This erodes the perceived value of your product and gives away margin for no reason. You can avoid this by instituting a “give-to-get” arrangement, where sales reps can offer up to ten percent off as long as they get something in return. For example, customers can give logo rights or referencing rights in exchange for the discount. Getting logo rights will prove valuable to the company, but the customer will have to go through a lot of legwork to get it approved. Typically, they won’t want to do all that work, so they'll accept the original price without the discount. A “give-to-get” arrangement will keep your margins strong and unlock new value for your business.
Free plans are enticing and might be tempting to offer, but they can be risky. SaaS founders should hold off on offering a free plan to their users until they have really dialed in their marketing and customer success operation. It’s much better if 100% of your users agree in principle to pay upfront, while you give them free trials or generous guarantees or refunds. Once your marketing operation is strong and your customer success team is built out, it may be wise to start offering a free plan. These employees will get your users to the point where they can realize the value of your offering and justify upgrading from a free plan to a paid plan.
Even the best strategy won’t work unless visitors can understand your pricing. A well-designed pricing page will clearly communicate your product tiers and convince visitors to buy. If your pricing page is in need of a refresh, visit Glance to discover hundreds of examples from leading companies.
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