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Don’t Grandfather Prices

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I don’t know of another industry that grandfathers price like SaaS does. Traditional software — basically the father of SaaS (if you want to keep with the lineage analogies!) — doesn’t grandfather legacy price points. In fact traditional software vendors are notorious for doing the exact opposite — gradually INCREASING licensing and support fees for installed software! In virtually every space — business and consumer — when the price goes up — new and old customers alike pay it.

So where did people in SaaS get this ‘best practice’ notion from? I suspect it comes from two main drivers.

First — the relentless pursuit of growth at all costs. Founders have been told that to raise money, or please your investors, you need to be growing customer numbers, market share, and top-line revenue. And — you can’t afford churn. So who would risk even talking to the existing customer base when you are entirely externally, top-of-funnel focused!

Second — the Engineer Founder, the dominant CEO type in early stage SaaS businesses is not usually an aggressive revenue maximizer. Product trumps all, marketing is the passive way to grow product, and sales is a necessary evil. Product focused founders, in general, under-value their creation. They view pricing with a cost-plus or competitor-comparative mentality, not a value-delivered one.

Pricing tends to be an after-thought of feature-driven businesses, whereas in benefit-derived companies, value is the mission and pricing is a core part of strategy.

The reality is that grandfathering pricing really means new customers are subsidizing existing ones. You could follow that logic a step further- and actually make the argument that with grandfathered pricing, new customers are over paying! If you believe in value pricing — that the price of the product should reflect a % of the value a customer gains from using it — then all customers should be paying a similar rate.

As the business grows and invests more in the product and team, the value (hopefully!) increases. The one thing for sure is that as the business matures and the value changes, the price dynamics should change too. Not just basic price changes — but business model, and product-configuration options (“plans”) should be re-evaluated as new value drivers are created.

As the value changes — your customer base may change too. Another effect of subsidizing existing customers with new business (or “grandfathering”) is that your customer base does not evolve naturally as it should. Your product is not the right fit for all users, for all time. As the product and market evolves — the customer profile will to. By charging the entire-base on value — you end up with customers that are happy to pay. Happy because value pricing means they are getting a lot more from the product then they are paying you for it.

Subsidize your customer base by grandfathering pricing and end up servicing a forced split of customer types, which will end up going from an expensive distraction to a strategic blocker (you can’t be all things to all people) or right-price all your customers, and grow a business with like-minded happy customers.

* Interestingly, pricing decreases tend to get passed on to the existing base. What logic allows that but not increases?

** Loyalty discounts — from the market price — are totally acceptable as a strategy to say thanks to existing customers. Let’s just not confuse a discount from market with leaving whole segments of customers on legacy prices.

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