Startups: How to Increase Prices with Zero Backlash
In case you haven’t heard, Gmail for Business is no longer free. That’s bad news for any startup that hasn’t signed up for it yet. The good news for startups, however, is that with almost zero backlash, Google’s announcement provided a perfect model for how to break the news of your own price increase.
This is a common issue at expansion-stage companies. Many startups choose to undercharge for their product originally to demonstrate demand to investors, build up a critical mass of customer referrals, and gather feedback while they make improvements.
But at some point in almost every company’s adolescence, it becomes obvious that their foot-in-the-door price was too low and they’re leaving money on the table. Raising prices without causing sticker shock can be difficult, but Google just gave a great example of how to do it the right way.
Emulate Google: Take these Steps to Increase Prices with Zero Backlash
1) Grandfather in current accounts
Although Google’s existing customers were unaffected, it has to make them feel good that they still get the service for free while new accounts have to pay for the same set of features. This will likely benefit Google’s word of mouth marketing and help it retain customers.
2) Don’t wait too long
By my estimates, Google currently has less than a 20 percent market share of small businesses, although this number is growing by the day. This allows the company to grandfather in current accounts without leaving too much money on the table.
If it had waited another year or two before making the announcement, Google may have had to think seriously about removing the grandfather clause, which would have been disastrous on customer retention.
Facebook, for example, waited way too long to charge customers for its service, and now it’s impossible to do it. If Facebook wanted to charge even a nominal fee per account, it would have to either grandfather in half of the Internet-enabled planet, leaving little opportunity for further revenue, or increase prices on their bajillion users, which would cause riots in the streets. Neither scenario is attractive.
3) Give customers value in exchange for the higher price
The worst thing to do is make your new customers feel like they’re paying more for the same product. When SmugMug raised prices earlier this year, it was guilty of this mistake, even though the company did do many things right in its delivery of the news.
Google got around this pitfall by eliminating that tier of service altogether, so that customers who are asked to pay the higher price at least get more features for it. Another way of accomplishing this is by piggybacking the pricing change on a new feature announcement to soften the blow.
4) It’s all about the delivery
A delicately crafted press release or blog post is a must. You don’t want to appear arrogant, like Netflix did when it delivered a 60 percent price increase and told customers they could cancel if they didn’t like it.
At the same time, (most of) your customers aren’t stupid and they know a price increase when they see one. Deliver the facts unambiguously, but provide some context around them to explain why you need to raise prices, and what you’re going to do with the revenues (ideally, pour them back into the product).
Major price increases can be a disaster or a non-event. Which bucket yours will fall into doesn’t hinge on the size of the increase, but rather its timing and delivery. Do you want to be like Netflix, which lost hundreds of thousands of customers due to its price increase, or Google, which seems to have made its announcement with zero backlash?
The decision is up to you. Think hard about the details, and don’t underestimate how much the delivery matters.