I recently received a question from someone who was curious about how to raise prices. They have service customers paying a monthly fee going back almost 20 years. All their customers are on the same price plan – and they’ve had always been at that price. They were concerned that they could not raise prices without losing a bunch of customers – a legitimate concern since they hadn’t changed their pricing in close to 20 years.
There’s a couple things to look at here. First off, if you’ve had customers for 20 years, you’re probably not going to raise prices by such an egregious amount that you’re going to lose a bunch of them.
One possible exception to that – you’re seriously under charging now, losing money and what some might consider an egregious increase is actually what you need to get your margins right. However, this seems extremely unlikely after 20 years unless losing money on this product is a recent development. What I usually find when I see someone’s books is that they’re doing OK, but could be doing a lot better if their pricing made more sense.
While this conversation could have a lot of variables, the raise prices question comes up fairly often. Many times “How do I raise prices for existing clients” ends with “… who have been paying ‘nothing’ forever?”
Customers going back almost 20 years who were all on the same price plan, so the company didn’t know what to do. They were concerned that they could not raise prices, without losing a bunch of customers.
There’s a couple things to look at here. First off, if you’ve had customers for 20 years, you’re probably not going to raise prices by such an egregious amount that you’re going to lose a bunch of them unless you’re seriously under charging now and actually losing money.
If you’re still losing money after 20 years. it’s hard not to wonder what’s wrong with you, or whoever is funding you. I’m guessing that’s unlikely. I didn’t look at this company’s books, but if I had, I suspect that they’re doing okay. And could be doing a lot better if the pricing and their price structure, made more sense.
It’s a bad time to raise prices
The first reaction to get out of the way is that now is a universally bad time to raise prices. It’s COVID time. It’s October. It’s 2020. Winter is coming. My competitors haven’t raised prices recently. Sales are down. We can find many reasons why the time is bad to raise prices. Some of them may be true, but that doesn’t mean it’s a bad time.
Of course, raising prices for existing customers isn’t the same as raising them for new customers. While you’re focused primarily on pricing, keep in mind that “the price” is but a single component of “pricing”. Pricing includes volume, service delivery, packaging, price tiers, timeliness, value proposition, and other things.
How you sell this new pricing needs to be carefully thought out, particularly if it involves a restructuring of delivery, service structure, etc. Sometimes customers you’ve had for 20 years commonly have different needs and bought for different reasons than those who bought recently. Sometimes not. You should know.
A common thought is “What features can I add to the existing product so that I can raise the price for existing customers?” While that’s useful – do your existing customers want the new features you’re dreaming up to add to the product?
Negative margins? Nope.
The company with the question sells software as a service, but the conversation applies to almost any service that has a recurring service model. Sure, there are some exceptions to the “any service” thing, but there are an awful lot of parallels across industries.
First off… these customers don’t expect you to lose your shirt just so they can do whatever they do with your product / service. If they expect that, they’ll disappear when you make these changes and frankly – that’s a good thing. No one needs customers who buy a product with a negative profit margin. Sure, you might say “Well you know with the whole COVID thing, I can’t afford to get rid of customers.” Tell me, how many customers do you want if you’re losing money on each one? Do most businesses really want even one more customer that costs them more than they charge that customer? In almost every case – no. The exceptions are by design.
Next week, we’ll consider options.
Mark Riffey is an investor and advisor to small business owners. Want to learn more about Mark or ask him to write about a strategic, operations or marketing problem? See Mark’s site, contact him on LinkedIn or Twitter, or email him at firstname.lastname@example.org.