When Should You Increase Your SaaS Prices? (What The Gurus Always Leave Out)

When Should You Increase Your SaaS PricesIf you’ve read anything about when is the best time to increase your SaaS prices, it usually goes off of some simple calculation and the result is a great outcome. I say, not so fast. There’s far more to it and running with a simple calculation can have disastrous effects.

The Traditional Calculation

Here’s what the common suggestions flying around on the Interwebs usually look like when deciding to increase your monthly SaaS or membership pricing:

Let’s say you are currently charging $20/mo. At 100 subscribers, that’s $2000/mo. If you increase your price by just $10, that’s $3000/mo.

But usually, there is a drop off in subscribers with the price increase. Say 25 subscribers decide to bail. That’s still 75 subscribers and $2250/mo.

There it is. A rosy picture of what will happen if you increase your SaaS monthly pricing. The truth is, it’s nowhere near reality.

The Missing Ingredient to Increasing Your SaaS Pricing

The above scenario is extremely simplified. What’s missing than? Actually – you!

Here’s what I mean. You’re making a certain amount per month from your SaaS. Maybe it’s $2000/mo from 100 subscribers. Not bad. But do you really know what the impact of a price increase will be? Do the gurus, showing these simple calculations and who know nothing about your specific SaaS, know what the impact will be? The answer to both is no.

Business is very personal. Each of us takes our own path. While there are guidelines and advice to follow, there is no boilerplate template that you can follow step by step to success. We all have to find our own unique way.

So how does this factor into the question: When should you raise your SaaS prices?

Here’s how: Only you know what level of income is needed to maintain your specific lifestyle. Let’s say it is $5000/mo. This means you are generating an additional $3000/mo from other revenue streams. Raising prices on your SaaS is a risk to your lifestyle.

While your SaaS income might rise, it could also drop significantly. Maybe even below $1000/mo. If that happens, your total income is only $4000/mo and well below the minimum you need it to be. Is that a risk you are willing to take? Probably not.

Before making any type of price increase, you’ll want to be well above your minimum monthly revenue. If revenue for your SaaS is $2000/mo, letting it go up to $3000 or $4000 should provide a good amount of margin in case things don’t go the way you are wanting.

I’d also say it is important that your SaaS is growing. A SaaS that is flat month over month or decreasing is not likely to handle a price increase well at all.

Your personal lifestyle is a huge factor in whether or not to increase your SaaS pricing. Simply leaving your SaaS alone and doing nothing will maintain your lifestyle.

Additional Considerations In Making a Decision

When deciding to increase your SaaS prices, you’ll want to consider “a” worst case scenario. No one knows what “the” worst case scenario is. So we’re going to be very conservative.

One thing we can probably all agree on – your subscribers aren’t likely to drop to zero. Especially if you are net positive with subscribers each month. Meaning, month over month, you’re netting new subscribers.

Let’s say we consider our worse case scenario to be a 50% drop in subscribers for a $10 price increase. This means 50 subscribers paying $30 for a total of $1500. That’s a 25% drop in revenue and 50% drop in subscribers for a 50% increase in the price. Ultimately a lose situation unless we get back to $2000.

We have to consider that the more prices are increased, the more subscribers will drop off. We don’t have any type of linear rate for that. For example, if the price goes from $20 to $35, can can’t really use the above formula to back into what the subscriber and overall revenue drop might be?

But we can say it will probably be a further decrease in subscribers and overall revenue. Again, this is worst case scenario, which we very much want to plan for. If the opposite happens, that will simply be a pleasant surprise.

So then, what is the right step – $30, $35, $40, etc? With no historical data or expectations to go off of, a smaller increase should result is less impact. This means going with $30 or $35. Then sit back and wait for the results. But again, we’d only want to do this if we have enough margin. Meaning, monthly revenue is at $3000 to $4000 for a $2000/mo minimum.

Conclusion

Before you decide to raise your SaaS prices based on a simple calculation of $X/mo increase with X subscribers dropping out, also consider the following:

  • Your minimum in monthly revenue to maintain your lifestyle
  • Worst case scenario and does it impact your minimum monthly number
  • Are your SaaS subscribers month over month growing

Raising your SaaS prices successfully is an involved experiment, as it should be. Armed with more than some simple calculations, you’re definitely on the right rode to making a decision and that should have a better chance at succeeding.

 

Want to learn more great tips about business finance? Check these related articles:

When Should You Increase Your SaaS Prices? (What The Gurus Always Leave Out)

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