Monday Price Point:​

The price you charge for your product is also the money you have to pay for everything:
1) Customer Acquisition (CAC)
2) Building a better product
3) Overhead
4) Profits
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The thing is that for most categories (e.g. CRM for the SMB segment) the CAC is very similar for almost all vendors in the space. Hubspot pays about as much for a customer as Pipedrive.
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The same for overhead: this just seems to creep up linearly with total revenue. In theory it *should* scale, but it rarely does. Even the +$1B ARR giants have overhead around 15-20% of revenue.
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This leaves Product and Profit which - unlike CAC and Overhead - seems to be very flexible.
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Here is the pattern I see again and again:
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If you charge $100 in a market where CAC is $50 and you pay $20 in Overhead...
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... you have $30 left for Product and Profit.
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If your Sales team then goes and discounts down to $90.. then you only have $20 left.
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This creates a vicious cycle: low prices leads to underinvestment in Product - which in turn forces low prices, as the value just isn't there.
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But if you raise prices to $200..
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And just double the CAC to $100 to win the same volume of business.
The overhead tends to stay at $20 (at least for a while).
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Now you can invest $70 in the product (and keep $10 in Profit).
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Soon Product value will catch up. CAC can drop back down to $50. Overhead will have crept to $40.
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But you now have $110 left for Product and Profit.
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You have now started your Virtuous Pricing Cycle.
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The price is the budget you have to pay for the business - including delivery value to customers.​

How to do it:

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Look in the mirror and answer these two questions:
1) Do you feel squeezed by competition and price in the market?
2) Have you invested less than you should in Product in the last 2 years?
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If you answer 'Yes' to both questions you now have two options:
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A) Raise list prices 10% and reduce all discounts significantly. Invest in Product and sell customers the roadmap. Raise prices 15-20% every year the next 3 years. You can grandfather original customers (for now), but all new business comes in at new higher prices. It will be tough in the beginning. Then it will remain tough in the middle... but after about 2-3 years your business will be transformed completely.
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B) If you have a sticky product with churn below 5% consider raising prices 50-100% immediately for all new and existing customers. Combine it with a repackaging and some more structural changes (e.g. give unlimited users away for free, redesign your premium support etc) to argue that this is a New Deal.
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This will take about 1.5 years and the first 6-8mths are going to be tough, but from there it's smooth sailing.
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Every Monday: a point about pricing that could change your business

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