The following is a guest post by Steli Efti. Efti is the co-founder & CEO of Close.io, an inside sales CRM that allows users to make and receive calls with one click, automatically tracks all your emails, and minimizes manual data entry.
Hey SaaS startups: When was the last time you increased your pricing? Or lost a valuable customer because you were “too expensive?”
If the answer is “never,” I’ve got bad news for you: Your product is too cheap.
I’ve worked with hundreds of startups, and this is one of the most common mistakes I see founders make: Using pricing as their primary competitive advantage.
What they don’t realize is that their “competitive” pricing will eventually kill their startup.
Let’s talk about why “affordability” isn’t a sustainable marketing plan, how to find the best price for your product, and how to raise your prices without upsetting your current customers.
Why startups underprice their product
Startups undercharge for their product for a number of reasons, such as:
- Lack of confidence, or
- Just plain laziness
But it always comes down to one thing: They’ve discovered the easiest way to be competitive in a crowded market is to be the cheap alternative. But there are two huge problems with that strategy.
1. Low retention rates
In most cases, the lower your price, the higher your churn.
Being cheap might yield high initial traction, but it almost always leads to low retention. The less you charge, the less invested your users are. The less invested they are, the less incentive they have to stick around.
Who cares if you have 500 users when 400 of them will be gone by the end of the month?
2. Price wars
Marketing yourself as the affordable solution only works as long as you remain the affordable solution.
What happens when a new startup comes along with a cheaper product? If you don’t lower your price, you won’t survive. And how many times can you afford to lower your price before you lose your profit margin?
Don’t assume you’re going to be the next Dropbox. The truth is, very few startups can survive a marketing plan centered around being cheap.
The alternative: Increase your value
When someone says, “Your product is too expensive,” they’re really saying, “Your product doesn’t provide enough value to justify the price.”
To resolve this, most startups take the easy route: Lowering their price to match their value.
But a smart startup does the opposite: They increase the value to match their price. Here are a few ways you could add more value to your SaaS product:
- Add relevant features,
- Remove irrelevant features,
- Streamline your interface,
- Provide better support, and
- Focus on customer success
If you constantly strive to create a more valuable product, you could charge practically anything and your customers will pay it.
Finding the right price for your SaaS product
If you’ve never repriced your product, you’re probably undercharging. So how do you know what your price should be?
SaaS pricing isn’t an exact science, but here’s a formula to get you started.
(Perceived value) x 3 = Starting price
Here’s what that means: Ask yourself, “What is my product worth?”
Take the first number that comes to mind and multiply it by three. If it seems too high, good. Find a way to raise your value. You’ll know you’ve found the right price for your SaaS product when:
- 10% of prospects think your product is cheap,
- 20% of prospects think your product is overpriced, and
- 70% of prospects think your product is expensive, but worth the price
Notice that the 70% still think your product is expensive. That’s what salespeople are for.
At face value, your product should be expensive. But once a salesperson demonstrates the value you provide, your prospects should have no issue paying full price.
Raising SaaS prices without upsetting customers
Let’s assume you discovered you’ve been dramatically undercharging for your product. You need to increase your price, but don’t want to upset your current customers.
That was the problem we were facing at Close.io a few years back. We knew we had to raise our prices, but we wanted to make sure that we did it in a way that:
- Kept our customers happy,
- Kept our conversion rates high, and
- Used the price increase as a sales tool
Thankfully, we found a way to accomplish all three with a single email. Take a look at the template we used below.
We’re increasing the plan prices for Close.io in two weeks.
But not for you! 🙂
You’re going to maintain the original rate for your current paid seats forever.
Even better, we’re offering a 14-day grace period to all our current customers. That means you can purchase new seats at the original price for the next two weeks, and they’ll be locked in at that price for life.
All you need to do is respond to this email and I’ll take care of everything.
As always, I’m happy to jump on a call anytime to discuss this and any other questions you might have. Thanks for choosing Close.io, and happy selling!
Notice how that email clearly communicates the three points that mattered most to our customers:
- When the price change would occur (two weeks from now),
- How it would affect them (it won’t), and
- How they could take advantage of the change (14-day grace period for new seats)
The result? In two weeks, the average LTV of our pre-existing customers increased by over 10%.
Value > Price
Nothing about a startup is static, so why should your price be?
Just ask CloudSponge’s Jay Gibb, who says his SaaS business is currently on pricing experiment #7, and that he expects there to be at least 7 more to come.
Jay’s got the right idea: Be aggressive with your pricing. Charge more than you’re comfortable with, exceed that amount in value provided, then raise your price again. Rinse, repeat, succeed.
But that’s enough theory. You’ve got all the formulas you need, so get out there, raise your price, and crush it.
Want more by Steli? Sign up for his free SaaS sales success course.