A Huge Mistake When Raising Subscription Prices
My last several subscription clients all wanted to raise prices. They provide excellent value to their customers, and some even have ROI studies to prove it. They are in a great position to do precisely this. Yet every one of them made the same mistake.
They didn’t think about new buyers and existing customers differently.
As a subscription company, you must manage three revenue buckets: win, keep, and grow. You win customers by marketing, selling, and pricing correctly to new buyers. You keep customers by making sure they receive a lot of value from your product. (Not raising prices helps keep customers too.) There are several ways to grow customers, one of which is raising prices. The win bucket is all about new buyers. The keep and grow buckets are about existing customers.
New Buyers and Existing Customers Are Different
New buyers don’t know your past pricing. New buyers don’t know your value as well as existing customers. New buyers are probably comparing you to a competitive alternative.
Existing customers know their current price point, see the value you deliver, and aren’t considering competition unless you do something to upset them (like raise prices). They are different. Treat them differently.
If you think your product has enough value, the first thing to do is raise prices on new buyers. They don’t know your old price. You can see if they believe your product is worth the higher price. Compare the resulting sales with previous or forecasted sales. Is the higher price hurting your customer acquisition? You can relatively quickly change this price back if needed.
There is no problem with charging new buyers higher prices than existing customers. Nobody will get upset. However, if you do this in the reverse order and charge current customers higher prices than new buyers, especially if you show the latest prices on your website, you will upset your customers, not a good thing.
I have two strong recommendations for raising prices on existing customers.
- First, try to make them feel special. Tell them you raised prices but will hold off on their price increase for a few months.
- Second, raise prices in a phased manner. Raise prices on the customers who get the most value from your product first. They probably won’t churn. Then, raise prices on a set of customers who get a little less value. Watch churn. Keep doing this until you reach a cohort where more customers churned than the increased revenue of the price increase. Don’t raise prices on customers who get less value than that level.
Remember, new buyers are different than existing customers. Treat them differently, especially when increasing prices.
Now, Go make an impact!
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Mark is a pricing expert who helps companies understand value, how to create it, communicate it and capture it. He has a PhD from U.C. Berkeley and an MBA from Santa Clara University, plus 25+ years pricing experience. As an educator, speaker and coach, Mark applies innovative, value-based pricing strategies to guide growth and increase profits for large and small companies.