Effective pricing strategy involves part art and part science. But it’s not a “set it and forget it” aspect of your business plan. Once you start getting some traction for your paid offering, it’s time to experiment with pricing. The obvious forms of experimentation include premium offerings or value offerings at different price points or maybe volume-based pricing. But what about simply increasing your price(s)?
Time for a Price Increase?
Regardless of whether you have competition in your space, it’s something you should serious consider – especially if you have a transactional product (rather than one that requires a consultative sale). Raise your price 10% and compare the results. The length of time needed for your test varies based on your volume. In some cases you might be able to run the test for a day or two and in other cases maybe a month. If the volume/profit trade-off worked out well with the increase, try it again.
This is especially important if your target customer changes over time. Many startups begin by focusing on SMB or mid-market customers out of necessity (shorter sales cycle, less complicated buying process, sometimes less competition). But later, as they start selling more to enterprise customers, they fail to think about changing their prices to match the new target customer.
One startup I know executed such a shift and accompanied it with a brilliant pricing strategy. Out of necessity, upon initial product launch they started with a self-service e-commerce model to validate the offering and various aspects of their operational model. After successful validation, they hired an enterprise sales team to go after the new target customer. With this, their original annual subscription price became their new monthly price. In other words, a 12X price increase! Their self-service sales dropped dramatically, but that was easily offset by the ramp up in enterprise sales.
This general concept is referred to as “price-demand elasticity”, which is simply a measure of the influence that pricing changes have on demand (or vice versa). The results of your experiments can, and should, be graphed and the shape of the resulting curve really matters.
Refer to the graphic below to see three different elasticity scenarios. The formula used is Elasticity = Change in Demand / Change in Price. An elastic change (what you’re hoping for) means a 20% reduction in price is offset by more than a 20% increase in demand.
For subscription offerings, price increases require some pre-thought regarding renewals for existing customers. During your experimentation phase, maybe your existing customers are grandfathered at their old prices so as to not upset them and drive higher churn rates. But that probably can’t go on forever, so if you ultimately settle on a higher price point you’ll possibly want to bring your existing installed base there as well. But hopefully they have seen improved functionality, support, etc. since they first purchased and will be willing to come along.
By the way, I love this article from HubSpot describing common pricing mistakes: http://bit.ly/Z12dNx