Last night, when I went to open Spotify, I was greeted with the below screen. Spotify just increased its prices in the US from $9.99 per month to $10.99 per month. Netflix also ​raised prices​ multiple times, but most recently in 2022. ​raised prices​ Price is one of the most powerful levers that you have in your business, so how should most companies think about pricing? There Are Only 2 Ways of Increasing LTV There Are Only 2 Ways of Increasing LTV Despite ​all of the complications​ that a subscription model brings to calculating LTV, it's still one of the most important metrics that you have as a company. ​all of the complications​ If you want to increase the value of your company in a sustainable way, you need to increase revenue. To increase revenue, you should focus on getting LTV as high as possible. There are really only 2 ways of doing this: Get users to stay around longer  Get the user to pay you more per month/cycle Get users to stay around longer Get the user to pay you more per month/cycle As I've mentioned in ​previous posts​, getting users to stay around longer can be tricky for mature products, as a lot of products sit in a use case that has a certain "natural" end to them that is only a few months long. ​previous posts​ If your product focuses on diet, fitness, meditation, finding a job, dating, etc., then you're probably looking at average user lifecycles that are under 6 months. Short of selling annual plans or lifetime plans, as a lot of companies in this space have done, this isn't a lot that you can do to scale up LTV that isn't a price rise. There is no definitive measure that will tell you if you are charging too much or not enough. You have to research your competitive set and test this change for yourself. The thing that you should be trying to do is to charge the maximum price for your users, your strategy, and the growth rates that you want. The Good and the Bad of Price Raises The Good and the Bad of Price Raises Some of these will show up within the measurement window of an A/B test, others won't :) You can't say exactly what is going to happen, but assuming that you run a successful pricing test (more on that below), you should be able to anticipate a range of impact: ‍Potential Positive impacts: ‍Potential Positive impacts: Increase the LTV of your user base, which will allow you to spend more to acquire users.  This opens up new acquisition channels, which can then fuel additional user growth.  Likely attracting a higher "quality" of users, who are more committed to your product, this might lower associated support costs as these users, if they are material.  Raise the enterprise value of your company, which allows you to raise more money if you need it and/or attract a higher talent level of employees. Increase the LTV of your user base, which will allow you to spend more to acquire users. This opens up new acquisition channels, which can then fuel additional user growth. Likely attracting a higher "quality" of users, who are more committed to your product, this might lower associated support costs as these users, if they are material. might Raise the enterprise value of your company, which allows you to raise more money if you need it and/or attract a higher talent level of employees. ‍Potential Negative Impacts: ‍Potential Negative Impacts: Throw off your existing LTV calculations as mentioned in the post above.  By definition, you'll have to see users at this new price point reach the end of their lifecycle; this, in turn, might throw off your CAC to LTV spending ratio in paid media.  Changes in where your brand sits in the mind of a consumer might need to initiate more branding work. This is only likely to happen if you go from the lowest price to the medium or from the medium to the highest.  Unlikely to matter if you are adding a dollar to your price as Spotify did.  Potentially slows down word of mouth and brand growth. If you raise your prices successfully, you are likely going to have a smaller group of users who are paying you more.  This slightly smaller user base means that there are fewer people to tell other people about your product, which slows down word of mouth.  Users are also way more likely to talk about a product that they see as a great tradeoff between what they pay and the value they receive. Throw off your existing LTV calculations as mentioned in the post above. By definition, you'll have to see users at this new price point reach the end of their lifecycle; this, in turn, might throw off your CAC to LTV spending ratio in paid media. Changes in where your brand sits in the mind of a consumer might need to initiate more branding work. This is only likely to happen if you go from the lowest price to the medium or from the medium to the highest. Unlikely to matter if you are adding a dollar to your price as Spotify did. Potentially slows down word of mouth and brand growth. If you raise your prices successfully, you are likely going to have a smaller group of users who are paying you more. This slightly smaller user base means that there are fewer people to tell other people about your product, which slows down word of mouth. Users are also way more likely to talk about a product that they see as a great tradeoff between what they pay and the value they receive. So What Should You Do With This Information? So What Should You Do With This Information? Despite all of the complexity and uncertainty on this topic, I am still a big believer in testing your pricing several times per year. There is no faster way of raising revenue than just charging more for the product. Patrick Campbell has mentioned testing a price rise once a quarter, which I agree with, especially for more mature companies (on ​this podcast​ , which is great btw). ​this podcast​ I have never met a company that wasn't emotional about their prices and didn't have an internal bias against raising prices, mostly based on fear of failure. It's just human nature. Price is where you have to put a number on all the hard work that you have done and see if the market accepts it. That alone produces anxiety. Assuming that you want to test this (and you should), I would do the following. Decide Who You're Raising Prices For Decide Who You're Raising Prices For There are a lot of ways of raising prices; the least risky one is just raising them for new users who have never tried the product before. They don't have a concept of the "existing" pricing, so there is not a lot of risk of blowback. The most risky version is raising prices for the existing users. This is where companies typically experience the most blowback. Other, more subtle tactics include raising the prices of one of your plans, such as the monthly plan only. Alternatively, if your paywall structure has any concept of metering (such as​ Zapier does with the number of tasks​), you can lower the amount of credits in a tier, which effectively increases the price. ​ Zapier does with the number of tasks​ This is one of the many reasons that I like metered paywalls, as it gives you a lot of flexibility. Run a Pricing Test Run a Pricing Test There are a lot of ​methodologies​ to do pricing research, all of which sound very fancy and impressive, but none of them will tell you what your users will actually pay for the product with the same degree of confidence as a pricing test. ​methodologies​ When we did this at Codecademy, we did the following: 1. Scrub any mention of pricing from as many pages as you can. 1. Scrub any mention of pricing from as many pages as you can. It will obviously stay on the pricing page, but limit places like blog posts, forums, and drip email sequences where users might not see the same price package they see on the product. This makes the test setup a lot easier. You might have to exclude any users coming in through paid channels who may or may not have been exposed to pricing. 2. Set up an A/B test 2. Set up an A/B test Design the test to both control for risk and make sure you're measuring to a high level of confidence. Our primary KPI was revenue per allocated user, meaning we wanted to increase the overall revenue of the user base. We only tested on new users. We measured through the end of the first month of churn and our trial period. We also monitored plan ratios (between monthly and annual) as well as on the platform actively. 3. Communicate results widely in the company 3. Communicate results widely in the company Make sure everyone understands the value that is created, and you have full exec level buy in on the results. You need a very high level of buy-in to get these tests approved, so allocate time to chase down all the edge cases and lingering questions. Announce Your Price Raise to Users Announce Your Price Raise to Users Be clear on who is and who is not going to be paying more and have a reason why. This is the post that ​we ran at Codecademy​, ​here is Spotify's​ from this year, and ​here is Dropbox's​ from 2022. ​we ran at Codecademy​ ​here is Spotify's​ ​here is Dropbox's​ The most common argument that a company makes in these posts is that they have added a lot more value to the product. Whether this is true is up for debate, but it seems to be the standard line. I'd suggest being clean on the mechanics of: Who this impacts and doesn't impact  How/when it happens  What happens in the main edge cases (like annual plans, geo-based prices, team packages, etc.) Who this impacts and doesn't impact How/when it happens What happens in the main edge cases (like annual plans, geo-based prices, team packages, etc.) Maximize Secondary Opportunities Maximize Secondary Opportunities At Codecademy, we actually did 2 other things that gained us some additional revenue from a price rise. 1. Run a mini marketing campaign to sell annual plans 1. Run a mini marketing campaign to sell annual plans We were raising prices across the board, so we took the chance sell a few more annual plans with the message of "lock in a lower price" before this happens.‍ ‍ 2. Tell users who are grandfathered at lower prices this during cancellation 2. Tell users who are grandfathered at lower prices this during cancellation ‍Because we were only raising prices for new users, we dropped a quick message in the cancellation flow for users telling them that: ‍ They were paying a lower price than is currently offered  If they cancel, they'll have to pay the higher price  Give them an option to "pause" billing for a few months if they need a break They were paying a lower price than is currently offered If they cancel, they'll have to pay the higher price Give them an option to "pause" billing for a few months if they need a break This wasn't a major needle mover, but every little bit helps when it comes to lowering churn.

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Should You Raise Your Prices? When to Do So and How

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