You may have heard about this inflation thing lately. It’s causing quite the dilemma for software companies.
Increasing software pricing during high inflation can seem like a difficult task. In the tug-of-war between supply and demand, software companies are in a tough spot. While other industries can leverage commodity shortages and cost increases to raise their own prices and, in some cases, generate additional profits (see earnings reports for oil, consumer product and steel companies, for example), software companies can’t exploit such factors. There aren’t a lot of raw materials in code.
Sure, a primary cost for software companies—the wages of smart, experienced and innovative software engineers, architects and developers—is skyrocketing. The average base salary for a software engineer in the US reached nearly $120,000 at the beginning of 2022, with rising bonuses, stock options and benefits further lifting total compensation.
But wages aren’t a commodity, and the disparity in how they affect individual software companies—due to differences in geography, work structure or even willingness to subsidize growth—makes using them as the basis for raising prices especially difficult.
Which leaves a lot of software companies debating if, when and how they should increase their prices in this inflationary time.
Rationalizing your way into a price trap
Obviously, it is tempting to jump on Inflation as a cover to adjust your prices. Many software companies have added great value to their solution over time but have resisted, neglected or had no mechanism to determine price increases. They may view the current environment as an opportunity to catch up.
But underpinning your price increase with an inflation bump is like setting your initial pricing model based on how your competitors do. It’s a trap—a shortcut with no foundation in actual performance. And it can lead to future problems.
Without the hard work of developing your own perspective and substantiating your own worth, you have little chance of making the right adjustments for your solution and customers. More likely, you’ll be stuck with pricing that doesn’t optimally capture the value you deliver and creates churn among your customers and unnecessary friction in your new business efforts.
But that doesn’t mean you can’t, or shouldn’t, raise prices. It just means that you need to do it the right way.
Factors to consider before a price increase
Getting your company and customers through price increases require navigating a few glaring trouble spots. Be sure to consider these:
1. Adding value
Software pricing must reflect the value of your solution. It is not a game of “how much can we get away with” (We’ve written extensively about this foundational pricing principle before—see An Introduction to Successful Software Pricing—and if your pricing model doesn’t already align with how your customers use your product and generate value from it, you should start there).
So, when you increase prices, consider ways to make your software more valuable. For example, could you increase capacity or speed, improving security or including new services? Are there valuable new features that you could add? If so, this could even dictate the timing of your increase, to coordinate with feature availability.
2. Roll-out timing
Timing is a key consideration when increasing prices, specifically:
- For whom will prices increase and when?
- Will the price for existing customers and new customers go up at the same point or will you start with new customers only?
- Will all legacy customers get the price increase at the same time, or will you stratify based on length of relationship or some other criteria?
How you handle the timing can have a large impact on customer churn and must be well-planned.
When it comes to raising prices, you should be aware of these software pricing pitfalls
A warning: Choosing to increase prices only for low-probability-to-churn customers is risky, and violates important Market Fairness principles. If persuaded to take this route, be sure to have a plan for rolling out the increase to other customers.
1. Phase in or all-at-once?
Again, with an eye on minimizing churn, you must determine if you will invoke the full increase in one shot or phase it in incrementally over time.
Perhaps the most impactful consideration of all. Achieving a successful price increase, with minimal customer churn, requires effective communication to your customers. You will need to clearly and thoughtfully explain the rationale—why you are increasing prices—and the process—how and when you are going to go about it. The process component will address decisions you make about the roll-out timing and phase in or all-at-once elements above. Moreover, the communication edict also extends to your internal marketing, sales and customer service staff, as they must be able to understand and convey the rationale and the process.
When it comes to price increases, a “soft-land” approach is key
Your overarching objective when enacting price increases is to “soft-land” the changes with your customers. Not only will careful planning, open communication and fair-minded implementation help you accomplish that, they will protect you from using Inflation as the excuse to claw back revenue from past pricing mistakes. And in the end, you will be able to minimize customer churn and sales friction, and even strengthen customer relations.