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Bursts of Color - Have You Tried Raising Prices?
I am a big fan of price testing, as prices typically have higher leverage on a business than almost anything else. In some cases, a minor price decrease may unlock a big increase in demand. In other cases, we can significantly raise prices without hurting demand at all, and we just get better margins.
As Chris Erickson from Range Ventures put it in this thoughtful post:
If you’ve never raised prices, you could be holding a magic wand that could solve all (or at least a lot) of your problems - “Accio Better Margins!”
There are all kinds of other possibilities too. In a very special and counterintuitive case I have see a few times, higher prices may even *increase* demand.
A 500% Price Increase
As I mentioned in The Power of Experiments: when we first started selling ads at Yelp, we had no idea what customers were willing to pay, so we picked a number and priced our initial packages at $50 per month. We had some sales success, but learned that our unit economics were upside down: it cost us more to sell and service a new client than they would pay us in a year. Since we needed this math to work better, the next month we tried doubling the price to $100.
To our sales team's surprise, new customer signups actually increased at this higher price. So the next month we tried $150, then $200, then $300... where we found a good equilibrium point that held for a couple years. Of course this testing wasn't very scientific, as we had few sales people and no real control group. Nonetheless, the results were pretty obvious (ACV up 6x while velocity increased!), so it taught us the value of testing even when it's the "quick and dirty" kind.
Don’t Forget Packaging
While we usually focus on a product’s sticker price, there are lots of other ways to improve unit economics with packaging. For instance:
Term Length. One consumer app company used to offer both a monthly and annual subscription. When they dropped the monthly option, new subscriptions decreased very slightly, but average revenue per user tripled.
Pre-Payments. Late payments and early cancellations often cost companies anywhere from 5-30% of annual customer value. When customers pay in advance, this loss rate effectively goes to zero.
Adjacent Services. Peloton earns some revenue from selling bikes. It earns lots more from the ongoing subscriptions.
Adjacent Fees. StubHub famously generates most of its revenue from service fees that only appear at checkout. And many marketplaces impose fees for both buyers and sellers on the same transaction.
Auto-Renewals. We’re all used to these with consumer apps; they work well in enterprise agreements too.
Built-In Price Increases. If we foresee price increasing based on time or customer usage, why not put that stake in the ground today and save ourself a renegotiation later?
Etc. Get creative…
We’ve all spent plenty of time talking about runway and expense management over the last few quarters. Revenue growth is more fun. And while pricing experiments may or may not unlock new value for your business, there’s only one way to find out!