How To Increase Prices (Without Leaving Money On The Table)

At Volpi Capital, we are privileged to work with technology leaders and meet with hundreds of B2B technology companies every year, positioning us well to assess emerging trends, best practices and strategies ahead of the curve.

Since we started investing in 2016, we have partnered with +30 businesses across Europe and the US. As we sit on the boards of these companies, we have both the opportunity and responsibility to champion best practices with our C-level teams. This article aims to share our reflections on an area which has come to the fore: How to increase prices in an inflationary environment.

The inflationary environment that we are all living in (6.9% at in Q1 2023 slightly down from 7.4% a year earlier ) has led our portfolio companies to shift “Price” to the top of the board agenda.

Given the challenging macroeconomic backdrop, we at Volpi have supported and pushed through significant price increases across our portfolio. There is no “one size fits all” approach, and we have listed a couple of factors below to consider in order to mitigate against customer churn and / or reductions in new customer wins:

1. Assess pricing power by customer segment:

Pushing the same price increase across all customers typically backfires, as not all customers have the same propensity to accept price increases. Therefore, we encourage our portfolio companies to assess their bargaining power by customer segment. Segments can be defined by geography, customer size, vertical, or underlying product scope. The idea is to group customers into segments with similar constraints and objectives and consider factors such as:

• Customer satisfaction level (measured through NPS surveys)
• Historical churn
• Usage intensity and number of active users (measured with telemetry tools such as Hotjar)
• Level of embeddedness in mission critical processes
• Market share of the relevant solution
• High switching costs

Once the analysis is complete, the leadership team can make an informed decision on which segments will be receptive to price increases, and those where it makes sense to delay or offer a degree of flexibility.

2. Benchmark prices against the competition:

Periodically, we compare each portfolio company’s prices to their competitors. Alongside this, it is important to bear in mind what the industry giants are doing. In mid-2022 many large software platforms were pushing historically high price increases, for example:

• Oracle increased maintenance by 8% in the US
• Sage increased subscriptions by 10%
• Microsoft increased O365 subscriptions by 15%

These catchy industry headlines paved the way for our portfolio companies to push through price increases, regardless of their positioning within their peer group. Consequently, one of our top tips is to drive pricing changes alongside the large platform players.

3. The most lucrative pricing strategies sometimes do not increase prices at all

Pricing changes can achieve more than just revenue increases. They can also improve profitability, win market share, and / or improve quality of revenue. Most of our portfolio companies have been around for more than a decade, so they carry on-premise and cloud-based products with varying levels of profitability and strategic value. With this in mind, incentives are typically implemented to encourage customers to upgrade to the latest products which command a higher margin and are generally more embedded in customer processes– accelerating growth and allowing us to secure a higher valuation multiple at exit.

Taking one portfolio example, the price of new perpetual licenses was increased at double the rate of subscription licences. This pivoted new customers towards SaaS contracts, improving the quality of revenue and customer lock-in thus creating value as we move towards exit.

4.Prepare the sales force:

It is understandable that many customers will complain, or at least question, the rationale for price increases. Therefore, it is critical to prepare the sales force, and ensure they are enabled to justify the rationale for these increases. For instance, straightforward explanations include personnel costs growing due to inflation, or cloud hosting costs being increased by the hosting provider.

5. Offer alternatives if price increases are unacceptable:

For end-customers who cannot meet higher prices, a more flexible approach may work as a solution. For example, they might sign up to a longer contract term, spread their payments over a longer time period, or switch to a recurring contract. Taking another example, one of our IT services portfolio companies allowed customers to keep their prices fixed conditional on converting their variable spend into recurring managed support contracts. This created a win-win dynamic, as these customers acted like recurring profiles in practice, therefore the contractual lock-in was more acceptable than price increases.

6. Experiment with different segments and price changes:

In an ideal scenario, the CFO and CRO have a proactive approach to pricing, with the ability to pilot different pricing models by market. It is noted that this approach is typically feasible in companies which sell to a high-volume of SMEs diversified across markets and / or products. Drawbacks include the longer time horizons required to see results, more upfront investment in IT systems, and a large degree of attention from the management team.

7. Schedule the price change in stages to minimise pushback:

In order to avoid sudden or significant price changes for customers, a number of our portfolio companies implemented gradual price increases over time. Conversely, if the goal is to drive short-term behaviour, it often makes sense to announce a large price increase on a future date, which typically drives sales or renewals in the short-term.

8. Implement the right reporting systems:

Without the reporting processes to track churn, customer margin, or discounts by customer segment, it is nearly impossible to optimise pricing. We have recruited PowerBI specialists across our portfolio to develop granular BI dashboards with a focus on customer pricing metrics. ERP solutions are also effective and may be the better fit depending on the business model e.g. FinancialForce for services companies.

Ultimately, the approach to price increases will depend on the specific product, customer base, and business goals of the vendor. We hope that our summary has conveyed the importance of a well-thought-out price increase strategy. Please reach out to the Volpi team should you wish to continue the discussion.