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Estd 4.22.2023
In the dynamic world of SaaS, price changes are inevitable as companies evolve, costs fluctuate, and market conditions shift. However, one of the most challenging decisions executives face isn't just determining the new pricing structure, but how to transition existing customers to it. Should you grandfather them in at their original rates, potentially sacrificing revenue? Or should you implement a forced migration, risking customer dissatisfaction and churn?
This critical decision impacts not just your bottom line, but your customer relationships, brand reputation, and long-term growth trajectory. Let's explore both approaches and provide a strategic framework for making this decision.
Understanding the Two Approaches
Grandfathering
Grandfathering allows existing customers to maintain their current pricing structure while new customers are subjected to the new pricing model. This approach prioritizes customer loyalty and minimizes disruption.
Pros:
- Preserves customer goodwill and trust
- Reduces immediate churn risk
- Honors the original agreement established with customers
- Simplifies communication ("Nothing changes for you!")
Cons:
- Creates revenue disparity among similar customers
- Complicates your billing systems and reporting
- Delays the full financial impact of your pricing strategy
- May create challenging customer conversations when contracts eventually renew
Forced Migration
Forced migration transitions all customers to the new pricing structure, typically with some notice period. This approach prioritizes business model consistency and revenue optimization.
Pros:
- Creates pricing consistency across your customer base
- Accelerates revenue impact of price changes
- Simplifies billing and financial operations
- Aligns customer value with pricing more quickly
Cons:
- May trigger immediate churn from price-sensitive customers
- Can damage customer relationships and trust
- Requires careful communication and change management
- Might generate negative market feedback or reviews
Key Considerations for Your Decision
When deciding between grandfathering and forced migration, several factors should influence your approach:
1. Customer Acquisition Cost vs. Lifetime Value
According to research from Price Intelligently, SaaS companies spend between 6-12 months of a customer's revenue on acquisition costs. If your forced migration might trigger churn, calculate whether the increased revenue justifies potentially losing customers before you've recouped their acquisition costs.
For example, if your average CAC is $5,000 and monthly revenue per customer would increase by $100 with new pricing, but you project 15% churn from the change, you need to determine if the math works in your favor long-term.
2. Competitive Landscape
Your industry's competitive dynamics play a crucial role in this decision. According to OpenView Partners' 2022 SaaS Benchmarks Report, 72% of SaaS companies experienced increased competitive pressure last year. In highly competitive markets with low switching costs, grandfathering may be the safer approach to prevent competitors from capitalizing on your price change.
3. Magnitude of the Price Change
The size of your price adjustment significantly impacts your strategy. Research from Simon-Kucher & Partners indicates that customers typically accept price increases of 3-5% without significant resistance, but larger increases face exponentially higher pushback.
If your price change exceeds 15-20%, grandfathering or a phased migration approach may be necessary to prevent shock and sudden churn.
4. Contract Terms and Legal Considerations
Review your existing contracts carefully. Many SaaS agreements include clauses about price changes. If your contracts specify pricing for specific periods or require notice for changes, these legal considerations must guide your approach.
Strategic Approaches to Implementation
Rather than viewing this as a binary choice, consider these nuanced approaches:
The Hybrid Approach: Segmented Strategy
Many successful SaaS companies implement segmented strategies based on customer characteristics:
- Strategic accounts: Grandfather your highest-value customers or those with strategic partnership potential
- Mid-tier customers: Implement a phased migration with incremental price increases
- Long-term customers: Create loyalty tiers where tenure affects migration terms
- Low-value or high-maintenance customers: Consider a direct migration that either increases their value or accelerates natural churn
Salesforce has masterfully executed segmented pricing strategies during numerous price changes throughout its history, maintaining remarkable 92%+ retention rates even through significant pricing evolutions.
The Value-Added Migration
Instead of simply raising prices, consider coupling your price change with added value. According to a study by Gartner, 80% of customers are more accepting of price increases when they perceive added value.
Slack demonstrated this approach effectively by adding new features and integrations concurrent with pricing adjustments, making the conversation less about paying more and more about getting more.
The Phased Timeline Approach
Rather than immediate implementation, consider a phased approach with clear timelines:
- Announcement phase: Communicate the upcoming change (3-6 months before implementation)
- Education phase: Demonstrate value and prepare customers for change
- Implementation phase: Roll out the new pricing
- Feedback and adjustment phase: Monitor impacts and make necessary modifications
This approach, used successfully by companies like Adobe in their transition to subscription pricing, gives customers time to adjust budgets and expectations while preserving relationships.
Communication Best Practices
Regardless of your chosen approach, communication is critical. Here are best practices based on successful price changes:
- Be transparent about reasoning: Explain what's driving the change (increased costs, added value, market alignment)
- Provide ample notice: 3-6 months is typical for significant changes
- Offer clear options: Explain precisely what customers can do and what choices they have
- Train your customer-facing teams: Ensure everyone can articulate the change consistently
- Create anticipation buffers: Prepare for support volume increases around announcement and implementation dates
HubSpot exemplified excellent communication during their 2018 pricing restructure by creating dedicated migration specialists, personalized impact assessments for each customer, and multiple communication touchpoints throughout the process.
Measuring Success
How do you know if you've made the right choice? Track these key metrics:
- Churn rate delta: Measure churn before and after the pricing change
- Net Revenue Retention: Monitor how your revenue from existing customers evolves
- Customer Satisfaction Scores: Track NPS or CSAT changes through the transition
- Sales cycle impact: Observe whether new pricing affects sales velocity
- Support ticket volume: Monitor customer confusion or frustration
Conclusion: Finding Your Balance
The grandfathering vs. forced migration decision doesn't have to be all-or-nothing. The most successful SaaS companies create nuanced approaches that balance business needs with customer relationships.
Remember that pricing changes provide the opportunity not just to adjust revenue, but to reset customer expectations, clarify your value proposition, and potentially improve customer relationships through transparent, value-focused communication.
The companies that emerge strongest from pricing transitions are those that view the process as not merely a financial necessity but an opportunity to demonstrate their commitment to both business sustainability and customer success.
Before making your decision, ask yourself: Five years from now, how do you want customers to remember this change? The answer to that question might be your best guide in choosing between grandfathering and migration—or finding the right balance between the two.