In this article Andreas covers how to develop and execute a systematic approach to price increases to maximize impact while minimising risk
In general businesses underprice, and that is especially true for fast-growing start-ups that have achieved product-market fit and acquired and retained a number of customers. It’s understandable, as their focus early on is not to maximize revenue but to build out a compelling product, and show enough traction for the next round of funding. If managed correctly this presents a great opportunity for businesses to go back to existing customers and ask for higher prices.
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The impact of consistently increasing prices for existing customers year-on-year is enormous. A business growing at a CAGR of 100% from £1 to £100m over an eight year period will add £120m in additional ARR, £200m in cumulative free cash flow, and £1.2bn in enterprise value at a 10x revenue multiple assumption by increasing prices by 10% per year on average.
In addition to that we are now firmly in a high-inflation economy, likely to persist into the future. So if you aren’t increasing prices by at least 10% per year on average you are going backwards in real terms.
UK CPI inflation Jan 20 to march 23.
If you’re reading this you probably recognise the impact available to you, so the question becomes how to do it in a way that maximizes impact and minimizes risk. These exercises can become quite complex, but when you really boil it down there are seven steps you should follow to give yourself the best chance of success.
Step one: Review and adjust contract terms
It’s worth reviewing contract terms of existing customers to understand if there are any contractual limitations to increasing prices. The most common limitation is based on the contract period, but it's also possible price increase caps, or price increases linked to indices, where agreed historically. This is an especially important exercise if you have acquired other businesses and are unfamiliar with the contractual terms acquired customers are on. In general you want to ensure contract terms give you maximum flexibility to set whatever level of price increase your strategy demands given the inflationary environment. Simple clauses where ‘we reserve the right to adjust prices’ are sufficient.
Step two: Set differentiated price increase targets
Differentiation is your friend. Don’t set one standardized price increase across all your customers, but flex the increase depending on where you think you can achieve more, and be less aggressive where you believe there is more risk. By doing this you will not only achieve a higher increase on average, but you will also minimize the risk of important customers churning.
The easiest way to do this is to develop a simple pricing grid that flexes price increases based on 1) a measure of risk e.g. usage and 2) a measure of price e.g. discount. One could create a composite metric for the measure of risk, but I’d advocate for keeping things simple. Another way to view the risk measure is a measure of value i.e. risk is the inverse of value. One could also create two to three of the below price grids to further differentiate price increases across different segments such as size or industry.
Step three: Build the narrative
Use the power of storytelling to justify your price increases to customers and increase the chances of customer acceptance. There are basically seven generic arguments listed below you can leverage to justify your price increases. Use three to four of the arguments most relevant to you and make it your own.
Step four: Agree plan B
As well as setting price increase targets it’s also a good idea to provide clear guidance to employees on the minimum increase they should be achieving and when they should consider walking away. They should also be given the opportunity to review price increases for strategic accounts and make adjustments where needed. It’s also helpful to identify a number of concessions that can be leveraged during negotiations for key customers. This could cut both ways, there may be concessions you are willing to provide to hit your price increase target such as expanded product access, or concessions the customer could provide such as longer multi-year contracts in exchange for a lower price increase.
Step five: Prepare Sales and Customer Success
Pricing isn’t just about the intellectual lift, it’s also about hearts and minds. Your Sales and Customer Success teams are being sent into battle, so be sure to train them, prepare them and arm them to be successful. The list below provides a number of common actions you may want to consider as part of your preparation. Invest enough time with your team to build up their confidence that you deserve higher prices, and that they are well equipped to deal with push back.
Step six: Prepare customers
Customers push back against the magnitude of price increases from fast growing start-ups much less than one would think. They are much more likely to complain around timing as they hate unexpected increases they cannot plan for and have not budgeted for. By systematically increasing prices to existing customers each year in a predictable way you will slowly train your customers to expect and plan ahead for increases. You may even get to the point where your customers are proactively contacting you to find out what your next price increase will be so that they can budget for it.
Give your customers sufficient time to plan ahead, as a rule of thumb provide three months notice for smaller customers and around six months plus for enterprise customers. As customer spend increases you’re likely to need to leverage multiple communication channels to reinforce your intention to increase prices, and deal with any push back e.g. leveraging QBRs.
Step seven: Monitor the outcome
Finally, make sure you closely track and monitor your initiative in real time. Measure what price increases you are achieving against what you hoped to achieve, and any early insights you can glean to refine your approach. Look at your realization rates across different segments and customer sizes to identify opportunities to push prices higher or a need to be less aggressive. Getting early wins and sharing those across Sales and CS is also a fantastic way to build momentum and give an added boost of confidence.
Increasing prices is part preparation, part intelligence, part guts. Follow the seven steps we’ve set out to develop a differentiated price increase approach, backed by the supporting activities which gives confidence to your team, and provides the best chance of success. You’ll almost certainly be surprised by how little push back you receive from customers, and will wonder why you didn’t do this sooner.