Elevate Your Game (and Software Pricing)
Written By: Mike Anello and Kane Hochster
Project Sponsor: Mark Roberge, CRO @ Hubspot
Special thanks to Tim Bertrand the CRO at Acquia for inspiring us to dig deep into this topic.
Bottom Line: Ensure your team has a process to regularly review and test your pricing. It could be the difference in needing 10,000 customers or 3,500 customers to hit the same ARR.
As we spoke with a dozen seasoned sales executives, an interesting theme emerged related to pricing. Most of these experienced sales leaders admitted to not having spent much time actively thinking through a long term pricing strategy. A common approach was the age old method of holding a finger in the air to decide when and by what magnitude to increase pricing. To their astonishment, most companies faced little resistance and lost very little business due to these haphazard increases.
Tim Bertrand, Acquia’s CRO, shared his experience, “We increased prices last year by 15% and again this year by 10%. In just over a year we’ve increased our total price by 26.5% and haven’t lost any business because of this.”
As part of a survey we conducted of scaling sales leaders, we found on average these individuals raised prices 2.7 times over the prior 24 months. The magnitude of these increases averaged 29.1% each.
Why this is Meaningful
What this means is that in less than two years, these companies charged new customers 2x the price as they had 24 months earlier. If you had to close 5,000 vs. 10,000 customers to hit $100M ARR think about the impact this would have across your entire organization:
- Fewer deals reps need to close — greater focus on high quality leads
- Less leads marketing needs to generate — pass fewer, but higher quality leads to reps
- More time to focus on existing customers — should result in greater customer satisfaction resulting in more referenceable clients
- Reduced strain on your implementation team — fewer new customers to onboard
- Fewer customers to provide customer support — less customer support reps needed, higher quality of service or both!
- Greater focus on high quality prospects and customers — more efficient and scalable company
This creates a virtuous cycle resulting in a stronger overall company. See the chart below for the math behind these numbers.
The final pricing question we asked was how much further sales leaders believed they could increase prices without losing deals. Once again to our surprise this was significant, averaging 42.9%. This means that if these teams were to increase prices to this perceived optimal level, their solution would be 2.9x higher than when they started 24 months earlier — nearly triple the revenue from the same customer!
Yea but what if we…
When we first set out to test this hypothesis, the question that came to mind was how would companies who publish their prices effectively increase prices without losing business. We were surprised to find that although these companies on average increased prices slightly less (2.2x over the past 24 months), they did so at a greater magnitude (32.2%). This resulted in an 83.5% increase in overall price during this time period, falling just 16.5% short of the aggregate respondents.
Product Evolution over 24 Months
We agree the product does evolve overtime providing a greater ability to capture additional value through price increases. However, given the magnitude and frequency of the increases by our respondents coupled with their perceived optimal price, we believe many firms are leaving money on the table by not regularly evaluating and testing price increases.
Ways of Implementing Price Increases
Team Wide — Increase Discount Levels
If reps are traditionally allowed to discount up to a certain percent prior to seeking manager approval, then you could choose to increase the magnitude of this discounting level by the new price increase for a trial period.
Example: if your rep were allowed to discount up to 10% without manager approval, she could decrease the price of a product from $1,000 to $900. Now you decide to implement a 20% price increase, bringing the new sticker price to $1,200. Since the rep would still have the ability to discount to $900, she would now have greater flexibility to discount up to 25%.
Territory or Rep Specific Testing (assumes pricing is not published)
One of my favorite ways of testing new ideas is through creating a subset of reps or territories. This provides the ability to test the new idea — in this case pricing — with a control group. If the size of your team permits, it is always better to have at least two reps trying this new approach to avoid false negatives. For a situation like this, I would make sure that at least one of these reps was a strong value focused sales rep as they tend to be less intimidated by these increases.
While every company faces unique challenges both internally and externally, we believe the opportunity to regularly evaluate the price of your products is something sales leaders and the broader management team should commit to regular check-ins.
Even if a you cannot get to the top end of the close to 3x increase, but just to 1.5x its current price, this can have a meaningful impact as you scale your firm through needing less total sales reps, less marketing driven prospects, and less customer support and implementation reps to hit your growth goals. This does not just increase a firm’s financial strength, but also reduces the complexity in scaling given fewer bodies needed to hire, train and deliver on the same top line numbers.
We would love to hear your feedback on successful pricing strategies you and your teams have employed.
We would also be interested to hear approaches to raising prices for current customers who may have benefited from buying your solution prior to price increases for new customers. Examples of this include COLAs and price increases for significant new releases.