Questions
Should you raise prices, or change the packaging?
Raise prices when two things are true: good customers receive clearly more value than they pay for, and the margin you gain on those who stay exceeds the margin you lose on those who leave. The second test is simple arithmetic, and kinder than most owners expect. The first needs evidence, and that is where most price decisions go wrong.
The sum that settles most of it
Every price rise has a break-even point: the share of customers you can lose and still earn the same gross profit. Divide the size of the increase by your gross margin plus that increase. At a 70 percent margin, a 10 percent rise leaves you ahead as long as you lose fewer than one customer in eight.
The higher your margin, the fewer departures a raise can absorb, because each customer who leaves takes more profit with them. A business at 85 percent margin raising 10 percent breaks even at about 10.5 percent lost. A distributor working on 20 percent margins, by contrast, can lose a fifth of its volume on a 5 percent raise and still come out even.
A worked example
A subscription product charges $40 a month to 1,000 customers. Serving each one costs $12, so the margin is 70 percent and monthly gross profit is $28,000. The owner proposes $48, a rise of 20 percent.
At $48, each customer contributes $36. Gross profit holds at $28,000 with 778 customers, so the business can lose up to 222 customers, about 22 percent, before it is worse off. If past price changes and lost-deal notes point to losses nearer 8 percent, the raise adds roughly $5,100 a month.
The average hides the real risk. Customers who leave after a raise are rarely a random sample: light users with little invested tend to go first, while heavy users stay and keep costing what they cost. Run the sum separately for each group, with the margin each group actually earns, before trusting the total.
Evidence worth more than a survey
Asking customers whether they would pay more produces polite and unreliable answers. Behavior is better evidence: how often price came up in deals you lost, how deeply your sales team discounts, how many customers chose the top plan unprompted, and what customers pay for the alternative they would really switch to.
Discounting deserves a hard look. If the average deal closes 25 percent below list, raising list by 20 percent may change nothing except the size of the discount, so fix the discount habit first.
The cleanest test raises the price for new customers first, keeps existing customers on their current price for a stated period, and compares conversion before and after. Give existing customers clear notice and a reason tied to what has improved, and check your contracts, which may set the notice period for you.
When packaging beats a higher number
A flat raise asks every customer to pay more for the same thing. Often a better move is a new top plan with features heavy users already want, a minimum charge for very small accounts, or a discount for paying yearly that brings cash forward. Each lifts average revenue while leaving the entry price where it wins deals.
Weigh these as real options rather than treating the raise as the plan and packaging as an afterthought. The right answer is frequently a smaller raise paired with one change of packaging.
Running the raise in a Decision Room
Bring the current price, the proposed one, your margins by customer group, and what you know about churn and lost deals. A raise for everyone, a raise for new customers only, and a new top plan each get their own Champion, and the break-even sums are worked exactly from your figures.
The Challenger presses on the churn estimate, because the whole case rests on it. Scout checks the public prices of the substitutes your customers name, Inspector treats survey answers about willingness to pay as unverified until purchases confirm them, and Red Teamer runs the quarter in which your largest accounts leave first. The Verdict names the churn level that would reverse it, and the Human Decision on price is yours alone.
Questions
- How much can I raise prices without losing money?
- Some loss of customers is normal and often acceptable. The number to know is your break-even loss, the increase divided by your margin plus the increase; if the evidence suggests fewer departures than that, the raise pays.
- Should existing customers get the new price at once?
- Usually later than new customers, and with notice and a reason. Moving new customers first gives you clean evidence on conversion without putting the base you already have at risk.
- What if a competitor charges less than we do?
- A rival's public price rarely shows its discounts, its margins, or which customers it would rather not serve. Compare what your own customers would actually switch to, and what switching would cost them in time and effort.
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