How to calculate a churn-free price increase for your SaaS product (Step-by-step)

Price increases in SaaS can be really stressful. You’re trying to add value to your SaaS product and ensure that the pricing aligns with it. However, you risk losing customers by doing so.

In this step-by-step guide, we’ll show you how to carry out a churn-free price increase so you can keep adding value to your solution without risking customer churn in the process.

We’ll go over:

• Understanding what churn is and how it impacts your business
• How to analyze your pricing
• The importance of customer feedback
• How to compare your pricing with competitors
• How to actually calculate price increases
• How to communicate changes without alienating customers
• Tips for gradual implementation
• Why you should keep monitoring and iterating after pricing changes

Let’s start with the first step.

Step 1: Understand churn and its impacts

Customer churn is the rate at which customers decide to stop using your SaaS product or service. It's a critical metric for any SaaS business because it directly affects your company's long-term growth and financial health.

Customer churn negatively impacts your business in several ways. It leads to lost revenue, as you're no longer receiving the recurring income those customers provided.

Additionally, churn can damage your brand reputation if customers are leaving due to negative experiences or perceived unfair pricing. A high churn rate can also demoralize your team, hindering motivation and overall company morale.

But how do price increases affect churn?

Price increases themselves are a significant contributor to customer churn. This is because customers may feel the new price no longer aligns with the value they receive from your product. Moreover, sudden or poorly communicated price changes can erode customer trust, leading them to seek out alternative solutions.

Step 2: Analyze your current pricing

Before you even think about price increases, getting a crystal-clear picture of your existing pricing model is crucial. Here's why:

• Understanding your foundation: Knowing how your pricing is structured helps you make informed decisions. Are you using a per-user model, tiered pricing, or something else? This is your starting point.
• Uncovering hidden issues: A careful analysis might reveal areas where your pricing isn't serving you well. Maybe you're undercharging for certain features, or your packages are too confusing for customers.
• Finding growth opportunities: Your pricing model shouldn't be set in stone. By reviewing it, you might discover untapped potential for increasing revenue.

How to dissect your pricing structure

• List your plans/tiers: Jot down each pricing plan or tier you offer, along with its features and cost.
• Analyze usage data: Look closely at how customers actually use your product. Are certain features popular while others go unused? This helps you understand where customers get true value.
• Map value to price: Does your most expensive plan offer enough value to justify its higher price? Are lower-priced plans providing too much for what they cost? You want to create a balanced sense of value for each tier.
• Talk to your sales team: They have a front-row seat to customer feedback on pricing. Are there common objections or questions that point to potential issues in how you charge?

Where to look for improvements

• Confusing packages: Are your plans too similar or difficult to understand? This can lead to customers choosing the wrong option, feeling frustrated, and being more likely to churn.
• Misaligned value: Your pricing should directly reflect what customers truly get from your product. Identify if this balance is off. Getting customer feedback is crucial here.
• Competitor analysis: Take an honest look at how your pricing compares to similar products in the market. This doesn't mean you have to be the cheapest, but you need to be competitive. More on this later in step 4.

Step 3: Gather customer feedback

Changing your pricing can't happen in a vacuum. To figure out a "churn-free" price increase (or as close as possible), you need to understand how your customers truly feel about your product, its value, and their willingness to pay more.

This is where surveys and interviews come into play.

Think of your customers as your pricing consultants. Their feedback provides invaluable insights into their satisfaction levels, what they value most about your SaaS, and perhaps even where their price sensitivity lies.

This knowledge allows you to tailor a price increase that minimizes negative impact and feels justified to your client base.

You need to gauge overall sentiment, identify areas where you can provide even better value, and perhaps find ways to lessen the impact of a price increase by offering alternative options or strategically bundling features.

Here's how to strategically gather and analyze customer feedback before a price increase:

• Surveys: Design surveys with questions about feature satisfaction, overall value, and pricing perception. Keep them focused and relatively short.
• Interviews: Have in-depth conversations with a select group of customers. This gives you space to ask open-ended questions and dig deeper into their thought process.
• Analyze carefully: Don't just tally up "yes" or "no" answers. Look for overarching themes in the feedback. Are customers concerned about specific features? Would most be open to a price increase if you add something they've requested?

Step 4: Benchmark against your competitors

It's easy to get caught up in your own pricing, but ignoring your competitors is a recipe for trouble. Understanding how your pricing stacks up in the market is crucial for a few reasons.

First, it helps you understand market standards — how much customers expect to pay in your specific industry.

Second, it allows you to identify any competitive advantages you might have. Are you significantly cheaper than others? This could signal room for a price increase.

Third, it helps you find your unique place in the market, justifying a higher price point if your value proposition warrants it.

Price isn't everything. Value matters a whole lot more. Your goal with competitor analysis isn't to copy what everyone else is doing but to understand the broader context in which your customers make buying decisions.

Here's how to go about it:

• Identify your true competitors: Who are the other SaaS products your ideal customers might consider? Don't just go for the biggest names. Focus on those serving a similar market segment.
• Dig into their pricing: Look at their public pricing pages. What plans do they offer, what features are included, and what are the price points?
• Compare apples to apples: Be honest about how your features and capabilities stack up against theirs. Where are you similar? Where do you offer more or less?
• Think about value, not just price: Don't just get fixated on who's cheaper. Do they offer better customer support, more advanced features, or an easier user experience? These all contribute to the value a customer perceives.

Step 5: Calculate the price increase itself

Crunching the numbers for a price increase isn't just about slapping on an arbitrary percentage. To find that sweet spot where you maximize revenue and minimize customer churn, you need to consider a few critical factors.

Factor 1: Cost of service delivery

Have your costs gone up? This includes things like hosting fees, customer support expenses, and even your team's salaries. Even if these increases seem small, they can add up over time and eat into your profit margins. Your updated pricing should ensure you can comfortably cover your operating costs.

Factor 2: Increased value

Since your last pricing update, have you added significant new features, improved existing ones, or maybe expanded your customer support? Remember, price increases should ideally feel justified to customers. Showcasing the increased value your SaaS brings is crucial to getting their buy-in.

Striking the right balance

After considering your costs and the enhanced value your product offers, you'll start getting a sense of a reasonable price increase. Here's a general guideline for SaaS price increases:

• Aim for a 5-10% increase initially. This range tends to be one most customers can digest without too much shock, especially if you've improved product value in the meantime.
• Analyze your competitive analysis and churn data. A smaller increase might be wiser to avoid further customer loss if your churn was already high. If your product is a clear market leader with minimal churn, you might be able to push towards the higher end of that percentage.

Quick reminder: Pricing is an ongoing journey. Start with a reasonable increase, but be open to adjusting further based on market response and your evolving business costs. Regularly reviewing your costs and customer feedback will guide these future adjustments.

Step 6: Communicate changes in pricing effectively

Imagine getting an unexpected bill increase without any explanation. A very frustrating feeling, right? The same goes for your SaaS customers. That's why a transparent and assertive communication plan is crucial for any price increase — it goes a long way in maintaining trust.

Here's how to develop a communication plan that minimizes frustration and emphasizes the value proposition:

• Be upfront and timely: Don't try to hide the price increase or spring it on customers last minute. Provide ample notice (ideally at least a month) so they can adjust budgets and expectations.
• Focus on the "why": Clearly explain the reasons behind the increase. Be honest with your customers, whether it’s due to rising operating costs or major product improvements. Remember to frame new features as investments that directly benefit them.
• Highlight the value: Go beyond simply listing what's changed. Remind customers of the core benefits your SaaS provides, the problems it solves for them, and how the updates take this even further.
• Offer choices where possible: Could you introduce a grandfathering option where existing customers stay at their current price for a period? How about the option to lock in old prices with an annual contract?
• Use multiple channels: Email is crucial, but also consider website announcements, in-app notifications, or even personalized outreach for your highest-value clients.
• Offer support: Anticipate questions and plan to answer them promptly. You could put together an FAQ section or create specific email addresses for pricing-related inquiries.

Step 7: Implement price changes gradually

Instead of a single, sudden price increase that shocks your customer base, consider a phased approach. This gives customers time to absorb the change and make adjustments on their end.

One strategy is to start by increasing prices only for new customers. This allows you to test the waters and gauge market reaction without impacting your entire existing user base.

Another tactic is to offer existing customers the option to lock in their current rates for a limited time, perhaps 3-6 months. This rewards their loyalty and shows that you value their business.

You demonstrate understanding toward your customers by phasing in price increases or providing options. This approach can soften the impact of the change, minimizing potential churn and maintaining that important trust factor.

Step 8: Monitor the impact of your pricing and adjust accordingly

Implementing a price increase isn't a "set it and forget it" affair. You need to be vigilant in the following weeks and months to understand its true impact on your business. Here's why monitoring and adjusting are essential:

• Spotting early warning signs: Keep a close eye on your churn rate. Is it spiking way higher than before? This might mean you need to revisit your pricing or communication strategy.
• Understanding customer reactions: Pay attention to direct feedback from customers. Are you getting complaints or seeing negative reviews? This qualitative data is just as important as numerical churn statistics.
• Staying informed about your market: Are your competitors changing their pricing? Are new, disruptive SaaS products emerging? The market is always shifting, and you need to be ready to adapt.

Flexibility is your ally here. Maybe you need to offer additional discounts for specific customer segments, rethink your pricing tiers, or even pause the increase temporarily if you're seeing significant customer pushback.

Next steps

You've carefully considered the factors for your SaaS's successful, low-churn price increase. But now comes the practical side — implementing those changes without hiccups.

One of the biggest challenges in executing a price change lies in updating your billing systems. The good news is there's a robust billing platform designed to streamline this process and optimize your pricing strategy's impact: Orb.

Here's how Orb helps you navigate price increases with minimal customer churn:

• Effortless price adjustments: With Orb's intuitive setup, you can easily change your pricing across multiple plans, tiers, and customer segments.
• Smooth customer experience: Prorating, upgrades, and downgrades are handled seamlessly, ensuring a positive customer experience during delicate situations like price changes.
• Pricing transparency: Orb's granular invoices offer detailed explanations of charges. This promotes confidence in your price increase and reduces customer confusion.
• Informed decision-making: Track crucial metrics with Orb's reporting, providing insight into customer reactions to the price change. Use this data to fine-tune your pricing for maximum results.

Learn more about how Orb can solve all your billing needs.