Discount Management: How to Stop Margin Leakage
Monetization & Pricing
January 21, 2022
How to increase prices to discounted customers? How to make more profit of your existing customers?
How to increase prices to existing customers: discounted clients
Did you know that less than 20% of the SaaS companies increased the pricing within the last year? We have asked 101 companies to learn that one of the most common SaaS pitfalls is the pricing grandfathering of old clients.
It always surprises us how bad practices tend to thrive while good ones have a hard time becoming a market standard. The message of this article is clear: you should increase prices for existing customers, and we will explain how to do it step-by-step.
This article is the begning of the series of articles about price increase in digital/SaaS industries. In Volume 1, we're focusing on the lowest hanging fruit in pricing optimization: heavily discounted customers. According to our project studies, they're the most manageable group to manage, and you should start from them.
What is price grandfathering, and why is it wrong?
In a nutshell, grandfathering allows your customers to pay the same price when they have subscribed to your product, and whenever you change the pricing scheme, you only do it for the new customers. It's so common that when we have run a worldwide survey among 101 SaaS companies, 49% of the companies disagreed with the statement: "we regularly increase prices to an active customer base," while only 36% agreed it's the right approach.
There are tens of excuses mentioned by SaaS companies:
- Clients have been with us since the beginning.
- We don't want to make them unhappy.
- We will build the growth through new business.
- We don't want them to churn to competition.
Excuses, excuses, excuses, but we get it. When your business grows, especially initially, you want to acquire customers at any cost. Priorities are straightforward: customer feedback over revenue, product stickiness over margins.
You go on AppSumo, run Black Friday sales, and give discounts to customers that are threatening to churn. But you're not in that place anymore. There is initial traction you've achieved with your sweat & tears, so now it's time to put a bill on it.
All of these leads to having an influential group of your customers discounted vs. your actual market price.
You're hurting your product value proposition and future customer base by not raising prices. Also, heavily discounted customers are more likely to churn.
Even if you lose some of them due to an increase, it's still okay. Our consulting experience suggests it will increase your overall MRR because of price inelasticity.
What we're doing now is we're showing you our entire methodology of increasing prices to discounted customers step-by-step.
1. Discounted accounts screening
The process is simple:
1) Go through your last month MRR data and accounts - ensure you have them all outlined
2) Check the plans of customers, compare the listing prices with the actual ones
3) Calculate the % differences, mark all the accounts with discounts different than what you usually give, e.g., 15-20% (we don't recommend going further)
2. Shortlist the issues
4) Check how long these accounts are with you.
You're in great shape if you have had active clients since the beginning or early period, and they're still using your product! Congratulations, it means you're truly delivering the value to them, so how about sharing some of it with you?
If they're new accounts, which receive heavy discounts, it might be a good time to have a serious talk with your sales/customer success team to see what happens. Start fixing these things now, so you won't need to go through the whole process again in the nearby future.
5) Mark the accounts you can't increase for various reasons, e.g., agreements, barter, influencers, etc. Qualitative factors are critical here.
3. Calculate the initial impact
6) Once you have your accounts, try to model how significant the increase will be. Ideally, we recommend matching the new price to the current listing price. Most likely, you will see the accounts with even 50% or even higher discounts - don't worry. You might want to have a special offer for extreme cases, e.g., two months free.
7) Check the costs associated with these accounts and understand unit economics margins. One of our clients had users with a -1700% margin. If your tool relies on AWS heavily and has a particular upkeep and service cost, losing the $1 paying customer is beneficial.
8) Run scenario analysis. See what happens if 10,20,30,40% of discounted customers will churn. What will surprise you is the asymmetry of your data - you can lose a substantial part of your base and still retrieve the MRR. That's the power of pricing.
4. Communicate the price increase
9) Once you have the accounts qualified for the price increase, prepare the communication plan and don't forget about there aspects:
- First of all, be candid and tell why you're raising prices. Don't BS with "price adjustments" or "revenue normalization" buzzwords. There is a great Harvard Business Review article on that: https://hbr.org/2021/06/if-youre-going-to-raise-prices-tell-customers-why.
- Secondly, mention the product changes that have happened since the client onboarded. Tell about all the features that increased the overall value. Use the account usage data to support it with the parts of your product customers love - they can't say no to it as it would mean they disagree with themselves.
- Thirdly, give them something back and prepare for an increase. For instance, Close.io proposed discounted annual plans (https://blog.close.com/how-to-successfully-increase-your-saas-prices/), mention when you're increasing the prices, offer additional usage of your key value metric, but focus on one thing: you want to increase the price point.
10) Last but not least, take the human factor under consideration. You need to ensure your whole team communicates effectively and has clear guardrails and an action plan to execute.
Also, it's okay when the client asks you to maintain the discount for fundamental reasons. Maybe they're struggling as a company, still want to play around with the product at lower cost, perhaps they don't see the ROI yet or need it until their agency project ends. There might be multiple reasons why. Being nice & friendly to people always pays back. In the end, that's the difference between the target impact and realized one, and still, you're going to reap the benefits.
The plan above is relatively brief as we wanted to ensure you capture the essence. Start by auditing your accounts, shortlist them properly, flag the ones with raising potential, and execute on that.
According to case studies we've seen, you should expect a 10-15% MRR increase only because of that. While it may differ in your case, 20-30% of customers pay the discounted price.
As for parting words, keep in mind that everything we share here is the same as what we do with our clients. You need to have one critical capability: organizational confidence. People love your product; they're using it on a day-to-day basis. The majority of them won't churn just because you've decided to raise the prices.