Inevitably, your SaaS pricing model will change. In fact, it might change every month until you find something that’s profitable and sustainable.
“It’s impossible to find the perfect pricing right off the bat, so most startups launch with a pricing scheme that’s on the lower end to make sure that they don’t scare away potential customers,” says Christoph Janz, managing partner at venture firm Point Nine Capital. He recommends that early SaaS businesses “err on the side of being cheap.”
You may have made some promises to your early customers that you regret today. You may have told early customers things like “You’ll get unlimited support,” “Sure we can write custom scripts for you,” and “You can speak to a live person anytime that you’d like.” Those were easy guarantees to make when you were bootstrapping out of someone’s basement and had six customers.
Even if you have managed your customers’ expectations, you should still be reviewing and optimizing your pricing strategy often. “The companies we’ve seen with the most success with revenue and adoption are reviewing pricing at least once per quarter and making tweaks or changes every 6 to 9 months,” says Patrick Campbell, CEO of Price Intelligently.
So what happens to the customers who are paying outdated prices? Generally, it’s smart to grandfather older customers, as forcing them to accept new pricing terms can be upsetting for them. It’s best to honor your agreements.
The reality is that those low paying customers (or no paying customers) are here and you have to deal with them.
Free download: Mistakes Companies Make When Pushing Customers to Upgrade
Early customers offer lots of value
When you’re looking at your accounts, try not to get frustrated that early customers are paying less than newer customers. Sure, it would be great if everyone was abiding by your current, optimized pricing strategy. And yes, keeping different payment schemes organized requires additional management resources. But, those early customers provide a lot of value.
SaaS tools are iterative products. They are released early and refined over time. We use validated learning from our customers to make improvements to build the best product. This process of releasing in increments extends beyond product development, as well. Over time we optimize onboarding, customer support, sales processes, and, of course, pricing.
This means that early customers were used to gather data. That data is the foundation of the current product. So while those old customers might be paying based on an outdated pricing structure, you have to look at the revenue difference as the cost of validated learning. It’s not like you’re giving away your product for free.
Upgrading Grandfathered Customers
Even though you appreciate the learning experience that those early customers provided, it’s still smart to move them to paid plans. This is especially important for super-early customers (we’re talking alpha and beta customers) who might be paying nothing.
If a customer is using your product for free, your goal is to move them to any paid plan. It doesn’t matter which plan because you can always upgrade them later. Your first step is to normalize the idea of paying for your service.
If a customer is paying a low cost for a plan that is now more expensive, your goal is to get them on a retail plan, as opposed to something custom. This will reduce your management costs.
Try these strategies to un-grandfather customers.
1. Whatever you do, don’t offer ultimatums
You don’t want to force early customers to pay more or cancel their service. That type of behavior could cause serious damage to your reputation, especially if your early customers are aware of the learning value they have provided (“We suffered through early versions of your product and this is how you treat us?”). You want everyone to feel like they’ve won something.
2. Start by offering a discount
Make the customer a discounted offer for one of your current plans that fits their “current and near-future situation” (credit to Lincoln Murphy for that phrase). Identify the plan that fits their usage and give a discount for a year or two. Eventually, they’ll be on a full-priced plan.
3. Discount a plan that’s better than the one they need
Make the customer an offer for a plan that’s more than they need. If you have free, $100/month, and $200/month plans, offer a discount on the $200/month plan, even though the customer only needs the features of the $100/month plan. This can be a big deal for the customer if they were expecting to grow soon (which your customer success team should know about).
4. Find other ways to add value
There are multiple ways to make your service more valuable to your customers. Instruct your customer success team to uncover some solutions your grandfathered customers need. Ideally, you should start by offering value-added services that you already provide so you don’t incur the cost of developing and managing new solutions.
For instance, many SaaS companies offer consulting services (paid and free for higher tier plans). You could sweeten the offer for a grandfathered customer by adding consulting to a paid plan that doesn’t usually come with it.
Play around with individual features, as well. You don’t have to stick to the plans advertised on your website. You can bump a feature up a bit if it gets a low/no-paying customer off of a free plan. For example, if your plans offer 5GB, 10GB, and 20GB of storage, you could offer the 10GB plan with 3 extra GB to sweeten the deal.
5. Find other ways to take value
You can be paid in more ways than money. Remember how I said that early customers were responsible for the initial validated learning that allowed you to build your current product? You can continue that arrangement by trading a low/no-cost plan in exchange for more data. You could ramp up your data mining for early customers to levels that other customers would consider invasive.
6. Don’t improve your profitability through punishments
It may be tempting to squeeze some profitability from low-cost accounts by capping usage, limiting features, or cutting support. While those tactics may work financially, they never encourage a customer to pay more to get those features back because the customer feels like you are taking something away. Instead, the customer just moves to another solution and lampoons you whenever they can.
Avoid these mistakes when you transfer grandfathered customers to paid plans.
Last resort: cutting ties
If it costs more to serve the customer and they refuse to transfer to a more profitable plan, you may have to break the relationship.
I don’t suggest that lightly. This is your absolute last resort after you’ve made numerous attempts to restore profitability to that account and after you’ve had an honest conversation with the customer where you explain that the account is losing money for you.
If you decide to break up with a client, your work isn’t done. First, make sure you aren’t bound by any contractual obligations that prevent a premature divorce. Next, have a clear conversation with the customer and give them time to find a new solution. This could take up to a year, depending on the customer and how thoroughly they’ve built you into their workflow. You may have to recommend some alternative solutions and help them migrate.
As someone who’s been around for the birth of the customer success role, and someone who thinks about retention every day, I recognize that cutting ties with a customer is painful. But, sometimes it’s necessary for the health of the business.
Need help with pricing or retaining customers during a pricing adjustment? Contact us.
