This article is based on a presentation given by Josh Bean at the Product Marketing Summit in Chicago. Catch up on this presentation, and others, using our OnDemand service. For more exclusive content, visit your membership dashboard.
Hey there! My name’s Josh and I work for Zendesk, where I recently took on the task of helping to drive one of marketing’s most forgotten pillars: pricing.
Think about the four Ps of marketing – product, promotion, place, and pricing; now tell me, how do you spend your days? I’m guessing you obsess over crafting the perfect messaging and campaign creative. Meanwhile, pricing may feel scary, almost mystical. However, there’s tons of low-hanging pricing fruit that companies overlook.
Raising prices can seem terrifying, but B2C companies do it all the time – just look at Netflix and Spotify. You can even see the point on the graph below – around 2017 – someone joined Netflix with a mandate to increase their rates. You’ve likely grumbled and swallowed a few such price hikes yourself.
Why strategic price increases are crucial
Now, nobody loves price increases, but they’re essential to ensure companies’ long-term success. Here’s why:
- Ongoing product innovation: Customers expect constant innovation, and you need to fund this expectation.
- Keep pace with economic pressure: As inflation rises, if you’re not keeping pace, you’re losing money.
- Funding talent: Customers want to work with the best, but you need to be able to afford the right talent.
At Zendesk about a year ago, we were facing many of these pressures. Our pricing had remained almost flat since the company was founded back in 2010. We realized it was time to raise our prices.
Of course, our last attempt at a price increase flopped spectacularly. We doubled prices overnight and made headlines for all the wrong reasons. Sure, we only increased from $3 to $6 per month, but our timing and tactics backfired. The intense public backlash left us shell-shocked, and we honored those legacy price points for another decade
But in 2021, the stars aligned. There were a lot of signals encouraging us to think the time might be right for another try:
- We hadn’t made any material price increases in over seven years – despite massive product innovation.
- Our 1,000+ product and engineering pros ship game-changing features daily. Yet our pricing stayed stagnant apart from minor tweaks like add-on charges.
- We boast immense perceived value compared to our competitors.
- Despite economic uncertainty, research shows that SaaS spending is rising steadily.
- For tools like Zendesk, functionality and support outweigh the price for most buyers.
So, we developed a new price increase strategy, with me leading the charge from the product marketing side. Was I super excited? No. Was it scary? Absolutely, but the opportunities outweighed the risks.
Today, I’ll share our strategic playbook so you can evaluate price increases for your business. This is a huge untapped growth lever that more companies should pull. Let’s dive in!
Step one: Market analysis and benchmarking
First, it’s crucial to build a solid market analysis and understand your benchmarks. To do this, there are six key sources you’ll want to lean on:
- Market interviews: Talking to your customers is key. The right customers will tell you if they feel they’re getting good value. They’ll also help you understand price sensitivity and where your product has stickiness.
- Data analysis: Look at all the data you can get your hands on. Which tiers of your products are being discounted? How often is your product actually being sold at the list price? Are people switching plans? How many customers do you have on your premium plan versus your basic plan?
- Competitive analysis: Who’s trying to undercut you on price with similar capabilities? Who’s positioning themselves as premium products? Where do you fit in this spectrum?
- Market surveys: This is a great way to gather data on price elasticity. You might not have a market research department, but it’s worth investing in this kind of third-party research. If a price increase could mean thousands or millions in revenue, you want to spend the money to back your decisions with concrete evidence.
- Expert input: Think about consulting experts in the field or hiring a pricing consultant if needed.
- Internal interviews: Your customer-facing teams have insights into where your pricing is spot-on, where you’re underpriced, or perhaps overpriced. You need to calibrate based on this feedback.
Testing price elasticity
When surveying the market and your existing customers, it’s vital to ask questions like, “If we were to increase prices by X, what would you do?”
Let’s take Netflix as an example. If Netflix increased their prices by $100 a month, I wouldn’t stick around to watch the next season of Love is Blind. But what if the increase was smaller, say $10 a month? Well, I might consider it – the last season was pretty good and I want to see what will happen in the next one.
Everyone has a threshold where the price increase aligns with the value they perceive in your product. By surveying customers and prospects, you can gauge where that threshold is and how they’ll react to a price hike.
For instance, I’ve noticed that most companies see a willingness in customers to downgrade their plans, change their behavior, or even churn entirely at around about the 15% mark. Now, that’s not to say you should raise prices by 14.9% – a 12% increase, like YouTube’s recent one, seems to be more palatable.