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Estd 4.22.2023
Introduction: The New Reality of Supply Chain Economics
In today's volatile business environment, supply chain disruptions have evolved from occasional inconveniences to persistent operational challenges. From the global pandemic to geopolitical tensions, extreme weather events to labor shortages, SaaS executives are facing unprecedented pressure on their supply chains and, consequently, their cost structures. According to McKinsey, 93% of supply chain executives reported they are planning to increase resilience across their supply chains, recognizing that these disruptions aren't merely temporary setbacks but fundamental shifts in the operational landscape.
As input costs rise, SaaS companies face a critical strategic question: How can increased costs be passed to customers without eroding market position or customer loyalty? This article explores strategic approaches to this complex pricing challenge.
Understanding the Current Supply Chain Crisis
The current supply chain environment represents a perfect storm of disruptions. The semiconductor shortage alone has caused an estimated $210 billion in lost revenue for the automotive industry in 2021, according to AlixPartners. For SaaS companies, hardware constraints have extended deployment timelines, while talent shortages have increased development costs substantially.
Even purely digital SaaS operations haven't been immune. Infrastructure costs have risen as demand for cloud services has skyrocketed. According to Gartner, end-user spending on public cloud services grew 23.1% in 2021 to total $332.3 billion, increasing competition for these resources and driving up costs.
These disruptions have created a multilayered pricing challenge: costs are rising across multiple dimensions simultaneously, making traditional incremental pricing adjustments insufficient.
The Strategic Importance of Pricing in Disruption
When confronting supply chain-driven cost increases, companies typically consider three approaches:
- Absorb the costs - Maintaining current pricing and accepting margin compression
- Pass through costs - Transferring increased costs directly to customers
- Strategic transformation - Restructuring offerings, operations, or business models to adapt
According to a PwC survey, 60% of executives reported increasing prices in response to supply chain pressures, while 52% reported absorbing at least some costs. The most successful companies, however, pursue a more nuanced strategy.
Best Practices for Passing Costs to Customers
1. Segment Based on Price Sensitivity
Not all customers respond equally to price increases. Research from Simon-Kucher & Partners indicates that strategic segmentation can increase the effectiveness of price changes by up to 50%.
Implementation Strategy:
- Analyze historical purchasing data to identify price-sensitive segments
- Consider contract size, industry vertical, and customer tenure when segmenting
- Apply different pricing approaches to different segments
For SaaS executives, this might mean preserving pricing for strategic growth segments while implementing higher increases for established enterprise customers with greater switching costs.
2. Enhance Value Communication
When prices must increase, reinforcing value becomes critical. According to Salesforce research, 67% of customers say their standard for good experiences is higher than ever.
Implementation Strategy:
- Clearly communicate the drivers behind price increases
- Emphasize the ongoing and enhanced value of your offering
- Quantify the ROI your solution continues to provide
ServiceNow provides an exemplary case study. When implementing a price adjustment in 2021, they accompanied it with enhanced implementation support and expanded platform capabilities, effectively communicating improved value alongside the price change.
3. Restructure Pricing Models
Supply chain disruptions provide an opportunity to rethink fundamental pricing structures. According to OpenView Partners' SaaS Benchmark Report, 38% of SaaS companies adjusted their pricing structure in response to shifting market conditions.
Implementation Strategy:
- Consider shifting from perpetual to subscription models
- Evaluate usage-based components that align costs with customer value
- Develop tiered offerings that protect entry-level customers while capturing more value from premium segments
Atlassian successfully navigated this approach by transitioning from server-based to cloud-based subscription pricing, ultimately creating a more resilient revenue model while passing along some increased infrastructure costs.
4. Time and Phase Implementation
The timing and pacing of price changes significantly impact customer acceptance. A Harvard Business Review study found that phased price increases typically result in 50% less customer churn than single large increases.
Implementation Strategy:
- Provide advance notice of coming changes
- Consider phasing in increases over multiple billing cycles
- Align price changes with product enhancements or natural renewal cycles
Slack effectively implemented this approach by announcing pricing changes well in advance and providing legacy pricing for existing customers for a defined period, reducing immediate churn.
5. Create Strategic Bundling Opportunities
Bundling can effectively mask price increases while delivering genuine additional value. According to Bain & Company, effective bundling can increase customer lifetime value by up to 30%.
Implementation Strategy:
- Combine high-margin services with products facing cost pressures
- Create good-better-best tiering to allow customer choice while encouraging upgrades
- Use bundles to introduce new offerings that may have more favorable cost structures
Microsoft's bundling of standalone products into the Microsoft 365 suite exemplifies this approach, effectively passing along infrastructure costs while providing customers with expanded capabilities.
The Role of Transparency in Price Change Communication
When implementing price increases, transparency emerges as a critical factor in customer retention. A study by Deloitte found that 94% of customers are more likely to be loyal to brands that offer complete transparency.
Successful communication strategies include:
- Proactive outreach - Contact customers before they receive increased invoices
- Context provision - Explain the market forces driving the increases
- Value reinforcement - Remind customers of the ongoing benefits they receive
- Empathy demonstration - Acknowledge the impact on customers and explain efforts to minimize it
Salesforce has effectively implemented this approach by providing regular communications about infrastructure investments and their impact on pricing, maintaining strong customer relationships despite necessary adjustments.
Conclusion: Strategic Transformation Beyond Simple Price Increases
The current supply chain environment requires more than tactical price adjustments. Forward-thinking SaaS executives are using this moment to fundamentally rethink their value propositions, pricing structures, and customer relationships.
The most successful companies view pricing not merely as a mechanism for preserving margins but as a strategic lever that can drive business transformation. By segmenting customers strategically, enhancing value communication, restructuring pricing models, carefully timing implementation, and creating thoughtful bundles, SaaS companies can navigate supply chain disruptions while strengthening their market positions.
As we move forward in this era of persistent supply chain challenges, the companies that will thrive won't simply be passing costs along—they'll be transforming their businesses to create new sources of value that justify evolved pricing structures.
Next Steps for SaaS Executives
- Conduct a price sensitivity audit across your customer base to identify opportunities for segmentation
- Review your value communication materials to ensure they effectively articulate your differentiated benefits
- Evaluate alternative pricing models that might better align with both your cost structure and customer value delivery
- Develop a phased implementation strategy for any necessary pricing changes
- Consider forming a cross-functional pricing committee with representation from product, marketing, sales, and finance to ensure holistic decision-making
By approaching supply chain-driven pricing challenges strategically rather than reactively, SaaS executives can transform a potential crisis into an opportunity for business evolution and strengthened customer relationships.