Grandfathering in SaaS Pricing

Many SaaS startups set low prices when they launch to avoid scaring away potential customers.

At some point, they will (hopefully!) realize that they need to make adjustments. This is where Grandfathering becomes relevant.

From my experience, pricing is a sensitive issue for many founders. Admittedly, I'm not an expert on the subject either, but I try to inform myself as best I can.

What I can say for sure is that you are leaving money on the table if you don't rethink your pricing regularly.

This applies to pricing for both new and existing customers. Focus of today’s article will be on the latter.

What is Grandfathering?

It means that existing customers remain at the same price point at which they first signed up, while you only change pricing for new customers.

Depending on how often you adjust prices and how big the increases are, this can lead to a large gap between what your first customers and new customers pay.

In addition, your whole pricing becomes a mess because you'll end up with dozens of groups paying different prices.

Why is this a problem?

1. You are undermining the value you are providing.
   
   Providing customers with a better product / additional features without charging them diminishes the value of your product in their eyes.
   

2. It can result in higher churn.
   
   It may sound contradictory, but the more you charge, the more likely customers will stay engaged with your product. Most valuable customers are willing to pay for added value vs. those at a legacy price that see no benefit in feature updates.
   

3. It limits your ability to generate expansion revenue.
   
   Allowing existing customers to maintain their original pricing / features hinders adoption of new, higher-priced offerings and prevents upsell opportunities.

Ultimately, there is a much bigger, overarching issue:

It can limit the growth of your whole business!

To quote Patrick Campbell from Profitwell who is known to be an expert in SaaS pricing:

“It’s a really cute idea when you are early on - and everyone is like “Yeah..early customers forever..this is gonna be awesome”. All of a sudden you get to $10M – and it’s really hard to go from $10M to $100M without raising prices in some way on your existing customer base.”

If you ask me, you should be looking at this well before you reach the $10M ARR mark.

Maintaining growth becomes more difficult as you scale, and you constantly need to exploit opportunities to generate additional revenue.

It may feel awkward at first to attract customers, get them used to your product and then ask for more money.

You may even have a special relationship with your early adopters you don’t want to jeopardize.

Still, you should try to upgrade all customers to the new pricing sooner or later.

A few customers will certainly be upset. But in the end, you and the customers who actually value your product will win.

How can you tackle a “De-Grandfathering”?

1. Upgrade legacy customers to a new offer.
   

   Instead of asking customers to pay more for the same, present the transition as an upgrade. Be sure you’re offering something they’ll consider worth paying more.
   
   Remember when Zendesk messed this up? 🤦
   

2. Leverage packaging to establish a distinction in value.
   
   Offer customers a compelling upgrade path that aligns with their needs. Categorize your customer base into groups or "classes" that share similar software usage and value.
   

3. Run experiments with small groups of customers.
   
   Use collected data to forecast revenue impact before rolling it out to everyone. This allows you to assess potential outcomes of alterations to your pricing / packaging.
   

4. Train your team to discuss the shift with customers.
   
   Make sure your new pricing model is easy to understand. Prepare customer-facing colleagues to explain the rationale for it, illustrate the benefits, and defend its integrity when confronted with inquiries.
   

5. Allow for a gradual implementation process.
   
   Customers may need different amounts of time to transition. You should think about developing customized strategies to facilitate the switch effectively.

If you have not yet considered “De-Grandfathering”, you should get to it asap!

By the way, there is an old article by Christoph Janz that contains a useful spreadsheet to check the impact of your assumptions. ✌️