How do I raise prices?

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.