It’s common practice in SaaS to increase prices for existing customers every year.
Modest inter- and intra-renewal term increases are standard fare, and B2B buyers have come to expect them.
But why do we do this?
Well, for one thing, it pads top-line ARR and revenue growth.
It’s also easy to justify.
If I had a nickel for each time I’ve uttered the words, “We invest millions of dollars in R&D every year to bring innovations to our customers,” I’d be living full-time on Seabrook Island sipping Mai Tais all day.
But what if, instead of raising prices each year, we lowered them?
Not drastically, but by a little.
Look at this sentence in Jeff Bezos’s 2012 letter to Amazon shareholders:
We’ve reduced [Amazon Web Services] prices twenty-seven times since launching seven years ago…
AWS proactively reduced their prices twenty-seven times between 2005 and 2012.
What!?
Why would they do this when they could maintain flat pricing or even raise prices?
In many of Bezos’s letters, he repeats the following strategic principle:
When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.
In other words, Amazon prioritizes long-term value over short-term gains.
So they proactively optimize value for their customers.
At first, this seems counterintuitive. After all, lower prices mean lower revenues and cash flows over time. But that’s “short-game” thinking.
Bezos’s long-term mindset depends on a flywheel effect—that virtuous cycle of increasing loyalty as a result of the consistent, proactive, and almost-irrational expansion of customer value.
Bezos was far from the first in history to adopt such as strategy. He’s a student of Jim Sinegal, founder of Costco. Sam Walton, founder of Walmart. And Henry Ford, founder of the Ford Motor Company who reduced the price of the Model T over time so more Americans could afford them (Elon Musk and Tesla are now following suit in the EV market).
All of these entrepreneurs were obsessed with creating outsized value for customers with the products they pedaled and the price points at which they sold them (and their operations reflected this low-cost mindset).
Talk about delighting your customers… AWS customers receive more bang for the buck each year in two ways: 1) the product improves, and 2) it becomes less costly on a per-unit basis.
This goes against the traditional private equity playbooks, and most VCs would question it, too.
Maximizing all the value we can value from existing customers seems obvious, especially in 2023 when new bookings are more challenging to come by than they have been in recent years.
But if we see our customers as our partners in success and if we want to build a durable, long-term business serving them, then why not leave a little slack in the rope?
Give a little more than we take.
I’m not saying don’t ever raise prices.
And I’m certainly not implying that we shouldn’t sell customers additional products that increase our share of their wallets. To this end, Amazon has added dozens of services to AWS since 2005 which have expanded customer spending.
But just like a good marriage, business relationships thrive when we give our partners a little slack.
It’s a long-term mindset.
As my mom used to say, just because everyone else is doing it doesn’t mean it’s right. Or as my partner in crime, Jeff, says… When everyone else is zigging, we should zag.
Watch what everyone else does – do the opposite. The majority is always wrong.
– Earl Nightingale (prolific radio personality from the 1950s to 80s)
How could reducing prices drive goodwill and lifetime value in your business?
What else could you be doing differently for your customers?
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