“Raise prices” is universal advice that is given to startups. The pricing of your software, products and services is a key driver of both revenue and the valuation of your company. Early stage startups often price too low with their first customers, which can have a long-term negative impact.
Pricing too low to get the sale
Early customers of tech companies often get a fantastic deal as founders price low in the belief that they need to be cheap to make a sale. In many cases, pricing is decided on a thumb suck or based on charging less than competitors. Pricing should rather be based on the value that a customer will derive.
Pricing should rather be based on the value that a customer will derive.
Don’t subsidise your customer’s businesses
Prices are also distorted when early employees at a young company accept salaries that are way below market rate. This means that costs and opportunity costs are not correctly factored into cost plus pricing. The result of this is that a tech startup is often effectively subsidising their customers and giving them a deal of amazing value.
As a business matures it gathers market data and better understands the value that it provides. This becomes a driver for increasing prices and implementing value based pricing.
Charging new customers higher prices is relatively easy if you understand your value proposition. However, with your original customers, it’s much harder to raise the prices as you have long-standing relationships and their expectations are anchored by historic pricing.
Charging new customers higher prices is relatively easy if you understand your value proposition.
Charging new customers more than old customers creates a problem. New customers become far more valuable than your historic customers and it becomes hard to allocate resources to them.
To level the playing field, you need to figure out how to start charging old customers more.
How do you raise prices?
Before you do anything about your pricing, you need data that supports and justifies your expected price increases.
…you need data that supports and justifies your expected price increases.
Internally, this means you should know the costs associated with providing a product or service. From a customer standpoint, you should have a good idea of the value that the customer is deriving from using your product (e.g. their ROI), or their willingness to pay (i.e. how much they would conceivably be prepared to pay).
Strategies for raising prices
Depending on your relationship with a customer, providing a sound rationale for increasing prices is a viable negotiation strategy. Explain your costs and the difficulty in committing resources or prioritising requested product features when you have other customers who will pay more.
Repackaging your product or services
Product repackaging: Repackage and increase the pricing of your product by changing the mix of features and value metrics for each price tier. New product features can also be used as a justification for repricing.
Services repackaging: Repackage services from hourly rates to day rates. Base the day rate on a full 8 hour day (and not 80% utilisation), or look for opportunities to profitably package services as fixed cost projects.
Make sure your legal paperwork creates future opportunities for re-pricing
It’s also important to create future opportunities to re-price products and services. To do this, make sure you have term limits on your contracts. If you’re dealing with large enterprises, they’ll often try to lock you into perpetual agreements with no clauses that allow you to terminate. Make sure you have agreements that have term limits (3 years is generally a good term length), or that allow you to terminate the contract for convenience (with a reasonable notice period).
Subscribe to our newsletter
Receive updates and useful information about scaling your sales