Price increases aren’t just a fact of life — they’re crucial to the health of every ScaleUp. Making regular increases should be a part of your pricing strategy; however, they have to be done just right. If the implementation of a price increase is handled poorly, it can be catastrophic. Case-in-point: Microsoft’s Xbox subscriptions.
Gamers and pricing aficionados may have noticed Microsoft’s attempts to change the price of Xbox Live Gold in January 2021. The tech giant planned to double the price of an annual subscription, while also increasing prices for those who pay monthly and quarterly. On the flipside, a Game Pass subscription – which uses a game-streaming model similar to Spotify and Netflix – would not see a price increase.
Microsoft’s intentions were understandable: to increase the price of a product that makes up only ~5% of a typical millennial’s average spend on games and divert attention to Game Pass, a more profitable and higher-lifetime-value product that has been heralded as the future of gaming. Unfortunately, they were met with a PR nightmare. In just 24 hours, the company experienced so much customer backlash that it issued a public apology, reversed the price increase, and for the first time allowed customers to bypass this subscription entirely to play free-to-play games.
In short, Microsoft made several critical errors in the execution that not only rendered its price increase a failure but also put future price increases at risk. Fortunately, this product is only a small part of the overall behemoth that is Microsoft’s revenue stream, but if you’re a B2B or B2C ScaleUp, increasing the price of your main product can be a company-changing move. Just look at Netflix, whose failed attempt at increasing the price of its combined DVD and streaming subscription in 2011 cut its share price by 70% in one day. It took many years of recovery before Netflix could increase subscription prices again.
Price increases can be risky, but not if you have the right strategy. Below are some of the key elements to keep in mind when changing your price. By following this checklist, you should be able to successfully increase your price and keep your customers happy.
Plan: Keep your price increase level in check
When implementing potential price increases, it is always important to plan for the worst. In subscription businesses, there is a risk the price increase will trigger a churn event, causing many customers to cancel their subscriptions. While some churn might be worth risking, it is important to try and mitigate this as much as possible. The best way to do that is to limit the additional amount any given customer will have to pay and phase the increase out over time. Based on our experience with price increases, we have categorized churn risk for (non-commoditized) B2B and B2C businesses below:
Higher risk does not mean you should avoid price rises at all. Instead, ensure you have the right mitigation in place to avoid customer churn and spreading negative sentiments about you and your brand.
Mitigate: Reduce the risk of bad press and churn
Like most of us, customers do not like being told what to do. When implementing medium-/high-risk price increases, you should provide options to customers rather than asking them to “take it or leave it.” While it may provide some operational headaches, gradually migrating customers onto new plans will keep them happier and prove revenue optimal in the long term.
1) Give customers a grace period
Customers should be given time on their existing plan and price point before having to adopt a new one. Depending on scale, it could be anything from three months to a year or more, which will allow them time to plan their budgets accordingly. Avoid deprecating their existing plan until most customers have had time to migrate of their own accord.
Netflix, after trying (and failing) to force customers to adopt new prices in 2011, was much smarter about it in 2014 and allowed customers to keep their existing pricing for a full 2 years. In subsequent increases, this period has shortened (and now stands at 3 months) as Netflix has gotten customers used to the motion and continues to invest heavily in content and platform features.
In B2B sales, you can plan to stage larger price increases over a period of time, gradually increasing by ~10% per year for 2-3 years until they are closer to what new customers are paying for an equivalent offering.
2) Limit access to new features and functionality
While being customer-friendly is the name of the game here, that does not mean you have to be overly generous. You should ensure that you restrict “legacy customer” access to significant new features that add value to their experience unless they migrate to a new plan. As you invest more and more in your product over time, this feature gap will widen and incentivize customers to up-sell of their own volition.
3) Incentivize switching to new plans (especially pricing models)
Finally, make sure that you sweeten the deal for any customer who wants to migrate. They are loyal and have been with you for some time, so they deserve a slight break (usually between 20% and 50%) from the higher prices that you charge new customers. If you are migrating customers to a plan with a higher growth price model (e.g., a usage-based component), we would recommend you offer them a comparable price point in the new plan with usage limits. This will allow you to capture more value upon renewal from the growth in their usage.
4) Enable customer success and sales
Your customer success and sales teams will form a key part of mitigating the risk of price increases. Keep them informed long before any price changes are planned and provide them the tools and talk tracks to effectively deal with any adverse customer reactions. This will mean providing them with the ability to make additional concessions on the discounts and incentives offered to customers or increasing the time they must migrate to the new pricing.
Communicate: Talk about value rather than price
The most important thing in any price communication, especially an increase, is to focus on why a customer should pay, not how much they’re spending. In any business. The price that you charge should be commensurate with the value you deliver, so if there is a reason why you are increasing price, there should be additional value that you can highlight to justify the increase. I’d recommend focusing on:
- Leading with new features and product improvements – In any subscription software business, you will be making constant improvements to your product, whether adding features, extending functionality to cover new use cases, or making improvements to usability and reliability. Make sure that customers are aware of what has been added to the product since they last agreed to a price and how that benefits them. One of Microsoft’s key failures was that it hadn’t greatly improved its product in years, so this was seen as a price increase without any change in value.
- Including commentary about ROI – It can be hard to communicate true value based on features and functionality alone. The best price increase communications also include examples of real-life value (such as case studies, testimonials, and reports like Forrester TEI), which highlight how customers are achieving a return on their investment with your product.
- Wherever possible, personalize – The very best companies communicate the specific value that the customer in question receives and how that has improved in the last year. This could be an increase in overall product usage, usage of new features, and/or a demonstrable return on investment. This is most easily done where the price increase is being communicated by sales and customer success teams, although it is possible at scale with personalized emails and in-app experiences (think Spotify’s “Wrapped”).
Use a Checklist
It is important that you approach price increases carefully to mitigate the potential risks. If you don’t, there is a good chance that the plans will backfire, which typically means that not only will the increase program fail, but your brand will suffer as a result. Based on the thinking above, we have developed a checklist to follow so that you can make sure you are taking a considerate approach that will mitigate potential customer risks.