SaaS Companies plan to raise prices in 2023, do they know how to do this?
Steven Forth is a Managing Partner at Ibbaka. See his Skill Profile on Ibbaka Talent.
Part 2 in a series of posts on pricing and inflation - preparing for 2023
Part 1 Pricing and Inflation: How to Respond
Part 2 SaaS Companies plan to raise prices in 2023, do they know how to do this?
Part 3 Inflation does not give you a Carte Blanche to raise prices
Part 4 Value Driver Priority and Pricing Under Growth and Interest Rate Scenarios
Part 5 Pricing in consolidating markets
Part 6 How will a recession change market dynamics and impact your pricing strategy
It is now Q4 2022 and companies are beginning to plan for 2023. According to SaaStr ‘the world’s largest community for business software’ more than 50% of its members plan to increase prices next year.
See Half of You Are Planning to Raise Prices in 2023
It is important for companies to grow their Average Customer Value (ACV) and to improve Net Revenue Retention (NRR). Price increases can play a role in this. And in an inflationary environment (US inflation is projected at more than 8% in Q3 2022, UK inflation at more than 9%) many see a price increase as a quick win and logical response.
Jason Lemkin, an advisor at SaaStr, cautions companies to be careful about raising prices to existing customers and to do so only with plenty of warning. See 5 Reasons Not To Raise Prices on Existing Customers. And 2 Better Ways to Do It Anyway.
Even this caution is not strong enough. Before you change prices (and packaging) you need a plan and that plan needs to take into account the value you are providing to customers and their willingness to pay (these are not the same thing).
The Differentiated Value x WTP Matrix
Take a look at this simple 2x2 matrix. Will the same plan work for each of these segments? And you can be sure you have customers in all four of these segments, at least you do if you are doing a good job on value innovation.
Ibbaka Valio can help you track changes in Value and WTP
Before raising prices you need to test how your current customers are distributed into each of these quadrants and then decide what you want to do in each quadrant.
Differentiated Value Decreasing x WTP Shrinking
Let’s start with the big challenge, the red quadrant in the bottom left. First make sure you understand why this is happening.
Is the market commoditizing?
Are your customers struggling to create value for their customers?
Has a new competitor or alternative emerged?
Your response will depend on the underlying reason. But you cannot successfully increase prices for these customers so you will need to decide if you are willing to abandon them (often the right decision in the case of commoditization) or if you need to create a new package that addresses their needs.
Differentiated Value Decreasing x WTP Increasing
Let’s move up to the yellow quadrant in the upper right. You may think this never happens, but it does. This generally happens when the market has not been receptive to your value messages and then something changes to improve reception. This could be a change to your messaging, but just as often it is a change in the environment that suddenly makes you relevant to current obsessions. Today, people are receptive to messages about inflation, interest rates, risk, the great resignation … do you address any of these?
Differentiated Value Increasing x WTP Decreasing
Moving to the bottom right, we have another paradoxical but common situation. You are providing more value; WTP is decreasing. Ouch. When this is happening it is usually the result of troubles at your customers, they are struggling, maybe they are struggling to create value for their own customers.
Look at your messaging and offer again. Is there a way for you to help your customers help their customers? Can you price in a way that reflects this? There is often hidden opportunity in this quadrant.
Differentiated Value Increasing x WTP Increasing
The green quadrant in the top right. This is where you want to be. You get their by understanding your customers and delivering value-driven innovation. (This is the theme of my presentation in San Francisco on October 20 at the Professional Pricing Society’s fall conference).
How you take advantage of this advantage will depend on your business and pricing strategy. First make sure that your pricing metric is tracking your value metric.
Value Metric: The unit of consumption by which the user gets value
Pricing Metric: The unit of consumption for which the buyer pays
This probably implies some form of usage based pricing or even outcomes based pricing. The top quadrant is the best place to implement a usage-based strategy.
Five things to do before raising prices
Understand how your customers are creating value for their customers and how this has changed
Segment your customers into the Differentiated Value x WTP Matrix
Prioritize each quadrant (revenue opportunity, revenu at risk, cost implications)
Design a response that aligns price to value and that communicates this alignment
Plan out how competitors could respond and how you will respond to their response
You should be considering a price change for 2023. But you need to shape the market and not be passive or reactive.