Now’s the Time to Revisit Your Pricing
In a matter of weeks, we’ve begun to realize the magnitude not just of the COVID-19 pandemic, but also of the global economic recession that it will leave behind.
New business pipeline has fallen off a cliff and will likely remain depressed through 2020. Churn rates are starting to tick up, and not only for businesses with a customer concentration in hospitality or travel. And major layoffs have been announced, even among SaaS companies recently touted as possible 2020 IPO candidates.
Even still, I’m energized by the opportunity to turn disruption into opportunity and come out of this crisis even stronger than before. There has never been a better time to test innovative pricing and monetization models to outmaneuver slow or legacy competitors.
This post will guide you through 10 innovative pricing plays you should consider along with high-profile examples of companies who are testing them. The pricing plays are loosely organized from quick wins (adding value to existing plans) to bigger bets (buying out competitors’ contracts).
1. Add value to existing plans
The spread of COVID-19 has rapidly accelerated remote working models, leading to a massive surge in adoption of tools like Zoom (daily users increased from 10 million to 200 million+), Slack (we’ve all seen the Twitter thread) and Microsoft Teams.
Do you offer functionality that enables companies to successfully work remotely? Or do you integrate with any of the products that are currently booming? If so, why not move those features to your basic or standard plans as opposed to putting them behind a paywall?
My day job (also: night job) is CEO of Slack, a publicly traded company with investors to whom I am a fiduciary, 110k+ paying customers of all sizes, and thousands of employees I care about very, very much. The last few weeks have been 🤯😳😢 Here’s what it’s been like. [Thread]
— Stewart Butterfield (@stewart) March 26, 2020
Example: Calendly improved their free offering and now supports integrations with booming video collaboration tools such as Zoom through June.
How to mitigate risk: The main risk here is cannibalization from customers trading down. To mitigate this risk, consider limiting the offer for e.g. 3 or 12 months.
2. Introduce promotions to bring on new customers
Real-time customer data from the team at HubSpot confirmed what we’ve already suspected. New deal volume started dropping on March 9 and is far below COVID-19 levels. But at the same time website traffic keeps climbing, indicating that buyers are still doing research and engaging with businesses.
This gap tells me price promotions should be on the table to entice new prospects to try your product. You might start by testing 25% or 50% off for the next six months to boost your conversion from website visit to qualified opportunity.
The charts below are from HubSpot:
Example: Gusto lowered the starting price of its Core plan by 50% for six months. This promotion is only available to new customers.
How to mitigate risk: The main risk here is backlash from existing customers who see the promotion and want to take advantage of it. To mitigate risk, test the promotion with existing prospects who are in the pipeline but have not yet converted. Or offer the promotion via the sales team only towards certain industries that are being most severely impacted by the downturn.
3. Adopt more flexible payment terms and contract structures
Sometimes it isn’t specifically the price that holds potential customers back from buying. Instead, they could be nervous about being locked into a long-term prepaid agreement with no ability to back out should something happen to their project or their business. Sales reps have always pleaded for more flexible contract and payment structures only to be blocked by the CFO. It’s worth revisiting the conversation.
One specific idea to test is an annual contract paid quarterly and with a four-month opt-out clause. Your customer gets more flexibility and you retain some of the protections of an annual agreement.
Example: Chargebee’s SVP of Global Sales shared that the company is now offering annual contracts with monthly/quarterly payment, favorable exit clauses and payment deferral for up to a quarter.
How to mitigate risk: The main risk here is generating negative margin on new customers who sign up, implement the software and then don’t pay. This risk is particularly acute for companies that require a weeks- or months-long professional services implementation. You can mitigate this risk by either (1) charging your standard services fee or (2) only offering the contract flexibility for “turnkey” implementations.
4. Push for (discounted) multi-year deals
Stay with me here, as this sounds highly counterintuitive at first. Yes, many businesses are reeling from the current crisis. But some companies are less impacted (think healthcare, durable goods, eCommerce, diversified tech companies) and they may be open to locking in a multi-year contract at a lower rate.
This could be a win-win opportunity and should be kept on the table when it’s appropriate. Keep in mind that you likely will need to make a concession on billing frequency (i.e. quarterly/annual payments) even in a multi-year agreement.
Example: Annual and multi-year SaaS contracts were core to the playbooks of large, successful SaaS companies such as Salesforce during the last economic downturn. Salesforce currently benefits from those deep contractual agreements and the revenue visibility they create.
How to mitigate risk: The main risk in this model is that you commit to sizable discounts on your product that you can’t easily pull back when the crisis is over. To mitigate this risk, add an annual price escalation clause to your contract. That will also give you justification to continue raising the price at renewal.
5. Extend your free trials from 14/30 days to up to 3/6 months
The next set of options involves offering a free version of your product. Probably the most straightforward way to do this is simply to extend the duration of your free trial from 14 or 30 days to up to six months.
I consider this approach defensive rather than offensive. It protects the existing sales pipeline by giving prospects extra time before they need to commit to a purchase decision. Hopefully by that time trial users will be fully hooked on the product and won’t want to give it up.
In all honesty, I’m not a huge fan of this approach unless you serve an industry that has been immediately impacted by the pandemic (e.g. restaurants, hospitality) and expect that industry will bounce back quickly in a few months. Otherwise you lose the benefit of creating urgency with the trial, which incentivizes new trial users to adopt the product quickly.
An extended free trial also generally doesn’t get to the heart of a pricing problem and instead kicks the can down the road. Finally, extended free trials don’t typically expand the top of the funnel as well as freemium editions or free products.
Example: Toast is giving three months free of their online ordering service as restaurants quickly pivot towards pickup and delivery to keep serving customers.
How to mitigate risk: The main risk is that your new business slows to a halt as prospects stay on a free trial of your product rather than convert to a paying customer. To mitigate this risk, you could offer extended free trials on a selective basis (e.g. only certain products or only for certain industries).
6. Turn your product into a marketing channel
During this time of quarantine and self-isolation, it has been uplifting to see so much creativity. Everything from YouTube shows (may I suggest Some Good News) to at-home fitness classes to Michelin-star restaurants now offering delivery. You have a unique opportunity to support these creators while simultaneously turning your product into a marketing channel, driving precious awareness for your brand.
Example: Tableau is visualizing trusted COVID-19 data through Tableau Public. These visualizations can be embedded into web pages, blogs and social media.
How to mitigate risk: The main risk is that would-be paying customers now get to use your product for free. To mitigate it, restrict community access to your product only for those who are willing to share their creations with the public.
7. Offer a freemium version of your product
As I’ve written before, freemium in 2020 feels cutting edge again. SaaS companies have gotten much smarter about when and how to apply a freemium model to amplify their Product Led Growth strategy. It’s no surprise that so many companies are using the current crisis as an opportunity to test more generous freemium editions.
The main benefit of freemium is its role as a low-cost acquisition strategy—it removes the barrier to trying out a product before buying it. But the same old rules of freemium still apply. Make sure you have a stellar free experience for new signups, layer in virality and collaboration to grow your footprint in an account and design a compelling paywall to convince your free users to start paying.
Example: GitHub is now free for teams. Importantly, CEO Nat Friedman emphasized that this isn’t a short-term promotion, but rather something that the company has wanted to do for a while and has accelerated in the current environment.
How to mitigate risk: Expect your free product to become the biggest competitor to your paid version. The push and pull between product and sales can be paralyzing. Ensure that there are different value propositions for free and paid tiers, which can help get teams on the same page. You should also consider assigning a true executive owner and setting OKRs specific to the free edition.
8. Launch net new free products
Feeling even bolder than freemium? You may consider launching an entirely net new free product that’s complementary to your core product. A new free product has similar top of funnel benefits to freemium, but has a far lower risk of cannibalizing your paid products.
A complementary product is something that makes your existing product even more attractive (think peanut butter and jelly). Ideally this would be something that your customer usually adopts prior to purchasing your product and it’s something that they might buy from a competitor.
Example: GoDaddy, which monetizes domains and web hosting, launched a free website builder tool to make it easy for brick-and-mortar businesses to get online. Not to be outdone, Mailchimp, which monetizes on email marketing, started offering free .coms for up to five years. They already had a free website builder product.
How to mitigate risk: The main risk here is opportunity cost. It can be difficult to justify allocating precious product and engineering resources towards a free product when you already have a long backlog of feature requests from paying customers. Only adopt this strategy if you have strong executive (ideally CEO) buy-in.
9. Add a usage-based component to your pricing
Up until now, the pricing plays that have been shared have been things that a business could layer on to their existing pricing and packaging model. The next play is about overhauling the model to incorporate a usage-based component.
Usage-based pricing is fundamentally win-win. Customers only pay when they’re using the product and seeing value; however, they start to pay a large sum very quickly if the product becomes embedded in their work.
If you already had a usage-based model in place, the pandemic likely led to a rapid realignment of your customers’ pricing based on their specific business context. This quick adjustment helps to both retain existing customers who have been hurt (by lowering the price as usage decreases) and monetize customers who are growing through the pandemic (by raising the price as usage increases).
Example: Back in 2011, HubSpot sold its software only in Good-Better-Best packages. The company then added usage-based pricing on top of its Marketing Hub subscription offerings (their usage metric is marketing contacts). This change is credited with helping HubSpot improve net dollar retention from about 75% to almost 100% between 2011 and 2014.
How to mitigate risk: The main risk of usage-based pricing is lack of predictability. You can mitigate this risk by starting with new cohorts of customers or with a new product line before re-pricing your existing base.
10. Buy out competitors’ contracts
History shows us that the strong come out of a recession even stronger than before. If you have a superior product and balance sheet relative to competition, this could be your chance to take bold action. Do you have the ability to poach competitors’ customers and buy out their contracts?
Example: T-Mobile promises to pay off existing contracts for customers who switch from a competitive carrier. They’ll pay up to $650 per line or $350 in termination fees!
How to mitigate risk: This pricing play could quickly escalate into an all-out price war, wiping out value for both you and your competition. Before going down this road, ensure that you—and not your competitors—have the cash and ability to actually win the war.
Recap: 10 innovative pricing plays you should consider
We’re in uncharted territory. What has worked for your business so far won’t necessarily get you to the next level. The good news is that you have the power to take bold action to not only survive the crisis and shore up your runway, but to thrive on the other side.
Consider adding one or more of these 10 pricing plays to your arsenal to turn disruption into opportunity.
- Add value to existing plans
- Introduce promotions to bring on new customers
- Adopt more flexible payment terms and contract structures
- Push for (discounted) multi-year deals
- Extend your free trials from 14/30 days to up to 3/6 months
- Turn your product into a marketing channel
- Offer a freemium version of your product
- Launch net new free products
- Add a usage-based component to your pricing
- Buy out competitors’ contracts
More posts on pricing and COVID-19
- Pricing in a Time of Uncertainty
- Early Survey Results Show the Most Common Pricing Responses to COVID-19
Thanks to the rise of product-led growth, it’s more urgent than ever to revisit freemium.