How to Raise Your Prices

By Tien Tzuo January 17, 2020

With all the talk of video streaming, a recent headline caught my eye the other day: “Matchroom’s Eddie Hearn Wants DAZN To Double Its Subscription Price.” For those who don’t know, DAZN is one of the largest streaming services in the world. Last year, they streamed over 507 million hours of sports across nine countries. They’re the Netflix of live global sports, bigger than ESPN.

So should one of the leading streaming services double their prices? I actually have no idea. (And full disclosure, DAZN is actually a Zuora customer). This column isn’t about what DAZN should or shouldn’t do with its pricing, or whether the entire video streaming space is actually undervalued because investors don’t realize the untapped pricing leverage these companies actually have.

But I’m guessing many of the readers of this column have repeatedly faced this question for their subscription business: should I raise my prices?

After all, there’s certainly nothing wrong with prices that increase over time! They are a sign of a healthy business that continues to provide value to its customers. If you’re running a successful subscription service, over the past couple of years you’ve probably invested a huge amount of time and resources into better content, faster response times, cooler features, etc. Shouldn’t you be able to charge for all that new value?

But as subscribers ourselves, we all know what it feels like to be on the receiving end of a seemingly arbitrary price increase. As author Robbie Kellman Baxter notes, reading that email instigates a “consumer mode” re-evaluation process that potentially betrays the trust implicit in a two-way relationship. There have also been some notable price increase fiascos over the years – anyone remembers the whole Netflix Qwikster debacle?

Hence the dilemma: as a business owner, I want to raise prices to increase my revenue. As a subscriber, I hate seeing prices for my subscription services go up. So what’s the best way to handle a price increase? Here are five main lessons that I think are worth sharing (and thanks to the folks listed at the bottom of this post for their input):

First, figure out your churn. According to Zuora’s Chief Data Scientist Carl Gold, the companies in our Subscription Economy Index that raised their prices last year grew an average of 24%, compared to 17.5% to those who did not. Good news! What’s more, those companies had a much lower churn on average: 23% versus 29%. Also good news! So does raising prices lower your churn rate? Of course not! The companies that raised their prices were confident that they could do so because their customer retention numbers were solid. Before you do anything, make sure you have a strong handle on the loyalty of your customers, and the true value that they ascribe to your service.

Make a long-term pricing road map. Before you do anything, you need to make sure your leadership team is aligned around a quantifiable long-term pricing strategy, and one that delivers the greatest lifetime customer value. This might sound obvious but it’s frequently not the case! It’s amazing how often I see management teams relegating pricing to some department in marketing or finance like it’s a second (or third, or fourth) order of business. Pricing decisions shouldn’t be surprises; they should be planned in advance, and they should be aligned to a pricing roadmap that squarely ties your pricing strategy into your core corporate objectives.

It’s always better to upsell. In my opinion, it’s always better to pair a price raise with a new offering, service plan or at least a new acquisition announcement. Something of tangible benefit that you can point to (or use as an upsell motion). In the early days of Salesforce, we raised our monthly prices from $50 to $65 without offering much in the way of justification, and we got so much negative feedback that we never did it again. Instead, we created a higher-tier offering, an Enterprise Edition, and encouraged our customers to upgrade at their own discretion. Within a year, half of our customers had opted to upgrade, and they all felt good about that decision. When you allow your customers to have a choice by creating a higher tier, you get both literal and figurative buy-in.

Give your customers plenty of notice. Let’s say you don’t have a discrete new offering to promote. Let’s say you’re just asking your subscriber base to support the ongoing improvements of your service. That’s perfectly fine, but you’re still going to have to make your case: we haven’t raised our prices in X amount of time, we’re investing in the team and the product, here’s what we’ve rolled out over the last year, here’s what we’re working on to bring you XYZ features in the coming year, etc. Make sure to do so well in advance, and above all, be transparent. Customers want to know why you are increasing your prices, and the more transparent you are about your reasons and your journey as a successful partner, the more willing they will be to invest in you.

Grandfather in your current subscribers. Instead of raising prices across the board, consider only raising prices for new subscribers and “grandfathering in” the current subscriber base, so they get to keep the old pricing for a period of time. Or consider only raising the monthly subscription price, but not the annual cost. Or try phasing in price increases to your subscribers based on usage, starting with the top 10%, then working your way down. Analyze the impact of your unit price on your churn rate, then set your price to optimize customer lifetime value. You can always experiment. You don’t have to jump in all at once. That’s the beauty of the subscription model. You have an entire laboratory at your disposal.

I’d like to thank the following for their helpful input: Robbie Kellman Baxter (Strategy Consultant and Author), Mark Stiving Ph.D. (Chief Pricing Educator at Impact Pricing LLC), Chris Hopf, CPP (Founder at PricingWire), and Natalie Louie (Zuora Product Marketing Senior Director).

 

For more insights from Zuora CEO Tien Tzuo, sign up to receive the Subscribed Weekly here. The opinions expressed in the Subscribed Weekly are his own, not those of the company. The companies mentioned in this newsletter are not necessarily Zuora customers.

And check out his book SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future – and What to Do About It.