How do I raise prices?

This is part of an ongoing startup advice series where I answer (anonymized!) questions from readers, like a written version of Smart Bear Live. To get your question answered, email me at asmartbear -at- shortmail -dot- com.

Regretful Pricer asks:

Can you recommend any good price negotiation approaches with the existing customers? My service has greatly improved as times goes, but the rate is still ~30-50% lower than other companies are charging for the same thing.

That was ok for me as a freelancer, but now we are somewhere in transition from me as a freelancer to a company (2 guys joined me recently), and what we’re doing is with a potential, but the historically low rates are keeping us from takeoff – hard to afford marketing, R&D…

 Almost all companies will raise prices on customers at some point. It makes sense — as the product and service improves, and new customer segments becomes clear, it’s unlikely that the price you set with three features plus services is different than twenty features without services.

At Smart Bear, Code Reviewer started at $34.95/seat and, years later, ended up at $1300/floating seat. And not in one jump either — in a progression of price-hikes, all of which brought up the issues of price-increases.

It’s not going to be as big a deal as you think, so long as you’re honest and generous.

The honest truth is that you’re a small company who isn’t charging outrageous prices, even with the hikes. You’re trying to build a better, more sustainable business, both with more customers and a stronger product and deeper tech support bench. You’re not gouging customers or taking advantage of their good will. You’re not taking the money and running off to a beach; in fact you’re working harder than ever and growing the team. Your old pricing was friendly for customers but ultimately not enough to build a sustainable company, and that’s the old reason for the raise.

Can you communicate this clearly? And if so, what will happen?

First I’ll help with the former question. Here’s a sample email that I’d use myself. Note how personal I make it, and so honest that it could easily make you “look bad” or “lose face” or seem “unprofessional.” That’s exactly why it works.

Subject: Announcing new pricing for ${product}

This is ${name}, founder of ${company}. I have some news for you which will start out seeming like bad news but end up being good news.

We’re raising the prices of ${product} to ${new_pricing}. That would be bad news, except when you see the reason.

Lots of companies say “we value our customers,” but it’s hard to imagine a massive corporation as actually valuing them beyond their collective impact in various financial spreadsheets.

But ${company} is not a massive corporation, and in fact we don’t have any financial spreadsheets. It’s just me, ${name}, trying to make a living doing what I love, which is building ${product} for you. The truth of this is evident in that I’ve quite literally given up everything for it — a normal life, hobbies, enough time with my family, and savings in the bank.

As one of my first customers, you weren’t just a “sale – closed – won,” you’re a critical factor in the success of this business, and therefore fulfilling my own dreams and making 70-hour work-weeks worthwhile.

So believe me when I say that I’m actually scared about raising prices. I don’t want to lose this relationship, both personally and financially. And as an early-adoptor, I’m especially grateful, and here I am rewarding your trust and loyalty with a price increase!

The fact that we’re raising prices anyway should therefore be taken only one way — that it’s necessary for the health and continued success of this business, and therefore of the product that I hope you’ve come to love and depend on.

The truth is that we’ve been under-priced since day one. And perhaps that’s best — after all, it wasn’t perfect (and still isn’t!), and in fact that pricing was a just reward for your patronage.

But now the results of that under-pricing are having a negative impact on our business. We can’t afford to put in the development effort required to take ${product} where we all want (i.e. hiring a few developers). We also can’t afford to market ${product} like we could, which is stifling growth, which in turn makes it hard to run the business month-to-month. And we can’t afford to hire tech support folks who will ensure your questions, bug reports, and feature requests are handled with the speed and friendliness you’ve come to expect.

In short, we’re hamstrung. It’s all our fault for setting the price lower than the cost of creating ${product} and growing ${company}. But there it is.

So it’s our fault, and yet I’m asking you to lock arms with me and walk through this phase of our development by accepting this modest price increase.

It’s a lot to ask, I know. But I hope that you feel at least some of the kinship that I feel towards you, and that you agree this is really is best for continued improvements to ${product} and ${company}, and not something meaningless like padding an accounting statistic or funding my mai-tai habit on a beach somewhere.

If you have any questions or concerns at all, please reply to this email or call ${phone}.

I’ve coached a handful of founders through this process, using this technique. Every single one reports the same results — almost everyone stays, and in fact love you more as a result. Why?

Most people are reasonable and in fact want you to succeed, both personally as a small-business owner and professionally in that they want updates to that software. Some are not, like the Sparrow users who “want a refund of my $10″ for software they used for a year, even though they’d never ask for a refund from a game that came out with no updates or a lunch that left them hungry a mere 7 hours later.

The ones who don’t understand aren’t long-term customers for you anyway. They don’t share your goals, they’re not acting as partners, they’re not aligned with your own long-term success.  The ones that don’t get it, are often same ones who bother you the most on tech support, who were the most demanding and critical of features, and perhaps aren’t getting that much value out of it anyway.

In short, they don’t matter. In fact, the extra revenue from the majority who stay will outweigh the loss in revenue from the others.

And anyway, you’re banking on 10x more customers than you have now, all like the friendly ones, so why burden yourselves with a few mismatches?

Of course it might in fact be inappropriate to charge old customers more. Also there’s another class of customer — the one who visited your site yesterday, saw the original prices, and today sees a different price!

This is where the generosity comes in. If anyone complains, and you agree, just give them the old price. Or only raise their prices a little.

There, that was easy. I did that a hundred times at Smart Bear at it was never a big issue.

I realize how trivial that sounds — just give them different prices.  But the last two founders I coached through this process both intuitively thought this was impossible, and weren’t going to do it.

Another trick — back to the honesty bit — is to declare that new prices are coming right on the pricing page. Set a deadline of, say, a week.  Then new people have fair warning and ample time to decide whether they want to buy before the hike, and there’s no surprise. In fact, if you have steady website traffic, you’ll likely see a pop in orders as people get in before the deadline.

It’s actually very easy to raise prices if you own up to the entirety of what’s going on, and share this process with your customers instead of imposing it on them.

What are your tips for raising prices? Let’s collect more in the comments.

Add your advice to the discussion section!

  • http://twitter.com/smfarmcentral Small Farm Central

    In the past I have allowed folks to grandfather in at the old rates (plus a certain percentage price hike or not). This seems like a kind thing to do to your existing customers.. but I like your letter idea if you need to raise it on everyone.

  • kroonder

    Jason,
    whoah. I agree with your advice for keeping it honest and personal (don’t know about generous?), but that e-mail is awful. Sure, make it personal, but you don’t need to grovel and make it this ‘detailed’ and lengthy. Much of that ‘detail’ may even be perceived (at least by me) as disingenuous. It is so not my style.

    People don’t quit services they like if prices go up somewhat; it is nothing new. Unless your service is crap (pardon my French) and/or development has been stagnant for a while and/or there are (much!) better alternatives available at the new price point. Then you need to fix your business.

    Getting a little personal, as in “you’ve been with us since the start” or “we appreciate the confidence you’ve shown in us (or me)” is enough for people to “forgive” you that price hike they’ve been expecting anyway and feel good about it.

    If you haven’t priced your service at ‘flat fee’, re-price the ‘plans’ to a competitive level and give existing customers ‘a little extra’ to show your appreciation.

    You don’t have to apologize for pricing it (much!) too low to start with; just be clear and tell them the extra cost will go to improving the service, as shown by adding staff. Maybe even tell them what the new staffers will work on to improve things (in terms of customer value).

    Just my 2c (soon to become a nickels’ worth).

    George/

    • http://blog.asmartbear.com Jason Cohen

      That’s good advice too — you have to let the email match your style.

      Also needs to match the general expectations of your customers, and depends on the size of the hike. Moving up 10% is not as big of a deal, but sometimes you want to hike 100% or more, and then you need more than a one-paragraph explanation.

      • kroonder

        Going from $29 to $59 is easy if the alternatives are still at a higher price point. Unless people will forego the service (and alternatives) alltogether… This is where ‘plans’ can help.
        Multiply the amount by 10x and it may warrant some additional explanation, but the value proposition doesn’t change with regards to alternatives.

    • Boudewijn

      I agree on the email, I didn’t like it either.

      Basically, any letter should fit on one page; the rest is an appendix. Worse for emails; you have about 2 paragraphs before it becomes unreadable, or worse, unread.

      But more importantly, stuff like this should be done in person, not by mail. If you have not too many customers: give them a call, then follow up with a short mail. That way you can also gauge reactions, and who knows, you can even pick up new business.

    • Guest

      I think the point about the email (whether you like it or not), is that you need to relate to your customers as a PERSON not as a company. People can easily feel resentful or disgruntled at a company, but it is harder to do that if you have been approached by a person and they have explained their situation to you.

      My takeaway is be honest and be yourself in relating to your customers – which is always the best policy – in lots of situations. :-)

      Thanks for all the pointers Jason.

  • http://thinkexperience.com/ Kelley Boyd @msksboyd

    I don’t like the email either but I do agree that any kind of correspondence like that needs to be in the stye of the writer. A professional salesperson knows that the price doesn’t matter until someone decides your solution is the one they need. And when you quote a price – quote the right price, the first time. The right price is the one that keeps you in business and allows you to adequately support your customer. If you get push back, my response has always been “I can certainly do that – what shall we take out?” Probably not relevant to Web 2.0 but old school sales 1001 – Don’t change the price without changing the package. If you do then the customer feels that you tried to gouge them in the first place and that will undermine trust in the long run.

  • http://www.facebook.com/jason.r.coleman Jason Coleman

    I like this advice.

    A couple things I learned when I recently increased our consulting rate for the first time in a couple years:

    1. About 33% of the recipients of an email similar to the above (a bit shorter though) said they would have preferred a phone conversation. Not sure if that is really true (it’s kind of hard to turn an email like this into bullet points for a phone call without getting derailed by the clients initial response). But you might want to call your top clients and make things (at least seem) like a negotiation instead of a new enforced rate.

    2. A few clients were “surprised” by the size of the rate increase (from $75/hr to $125/hr) even though we were giving them 3-6 months warning. In reality, we had given them a break for a couple years by not raising rates, but because we didn’t really convey our lower rates as a break, it didn’t come across this way. We allowed some clients an abbreviated period at $100/hr before jumping to $125/hr full.

    So maybe call some clients. And be sure to make price increases (or the deferral of an increase) part of the annual discussion. In general, I was more worried than I should have been and shouldn’t have delayed the increase as much as I did.

  • Pat

    My small 400$ per seat software for developers, compete with a 13.000$ per seat software provided by a software giant (and of course is much better, really :) Should I use that fact in such email, or should I avoid to compare with them.

    • Brooks Moses

      I wouldn’t mention it. “Look what the market will bear” is about how much you could be charging them (bad!), not about the value that you’re providing (good!).

      Also, with that level of price discrepancy, you’ve probably got a lot of customers for whom the alternative you’re competing against is not the $13000 software, but them simply deciding they can’t afford anything and getting by without it.

      • Pat

        Make sense! Thanks Moses!

  • http://blog.serverdensity.com/ David Mytton

    I’ve always been of the opinion that you shouldn’t increase the prices for existing users because that’s not what they signed up for. This is particularly the case if they’re paying for a subscription rather than a one time license fee. For example you could increase the support/updates fee which is an optional annual renewal vs the one time license fee they pay to use the product.

    We just changed our server monitoring SaaS service pricing from pay as you go to packages with a minimum monthly fee of $99 up from $10 and increased revenue by over 100% as a result. This only applies to new signups though and where a few users saw both pricing (due to a colleague seeing it on another machine or clearing their cookies) we offered the cheapest option for them. This was written up at http://www.kalzumeus.com/2012/08/13/doubling-saas-revenue/

    • http://blog.asmartbear.com Jason Cohen

      I agree in general — grandfathering is also what we did in Jan when we changed pricing tiers at WP Engine.

      However that might not be feasible for e.g. a small consulting shop where the hourly rate is everything and the might already be 70% full. Or for a small shop with a few larger clients where they truly cannot afford to continue or invest in the company without at least a little boost.

      For high-volume, high-transaction, low-touch businesses like yours, I agree a hike on existing companies is probably unnecessary.

  • Insiya Hussain

    I actually like the email. It’s real, it’s personable, and it’s makes a convincing enough case. I agree that in some areas it appears a bit “grovel-y”, but save for some minor editing, I’d use it.

    One thing to consider: maybe giving customers a “deal” on the higher price to come. For instance, you can say (roughly):

    “Look, we’re going to raise prices to $99/mo next month — we just have to (reasons already mentioned above). But before we jump that high on you all at once, we wanted to offer our existing customers a slightly better deal — i.e. x% off on the new price, or only $79/mo. We realize this is still higher than what you’re paying now, but we really value our early customers and wanted to give you something a bit better than people joining our service for new… etc. etc.”

    This way, you’re sort of putting a “spin” on the price increase and turning a negative into a positive. Ties into the whole generosity point Jason makes too.

  • http://abdallahalhakim.tumblr.com/ Abdallah Al-Hakim

    I think the last bit about declaring the deadlines for new prices is my favourite piece of advice in this post. If your service is good and you believe is undervalued compared to the competition then your customers will also know that. I don’t believe customers or clients will leave the service as long as the price hike is justified, reasonable and is still within the market standard. Communicating the price hike to existing email in a personable email is a good idea but I would do it in a brief manner and not make a big deal out of it.

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  • wfjackson3

    That email is really great, but how will it be received if after your first price hike, you try again 12 months later when the software is amazing? Do you change strategies? How far apart would you separate price increases? Do you recommend splitting the product into multiple feature options if you get lots of pushback?

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