A few months ago, we nearly doubled the price of one of our SaaS companies.
We were charging $5/month/user. We increased it to $9/month/user.
Ask me if it decreased customer acquisition.
Ask me if it decreased LTV.
You don’t have to ask.
You already know the answer.
It didn’t.
This article is about increasing price.
Tim Ferriss once asked investor, Marc Andreessen, what he would put on a billboard. Marc’s response:
Right in the heart of San Francisco would be a billboard with just two words on it:
“Raise Prices.”
The number one theme with our portfolio companies that are struggling is they’re not charging enough.
It has become absolutely conventional wisdom in Silicon Valley that the way to succeed is to price your product as low as possible under the theory that if it’s low-priced everybody can buy it and that’s how you get the volume.
And we just see over and over and over again people failing with that because they get into the problem we call “Too hungry to eat.”
They don’t charge enough for their product to be able to afford the sales and marketing required to get people to buy it.
They can’t afford to hire the sales rep to go sell the product.
They don’t have enough ad spend, whatever it is.
They cannot afford to go acquire the customers.
People will pay more.
Here’s one more quote.
This is something I used to share a ton with friends when I discovered it back while living in Rome.
It was crazy.
I was on a train to Florence with a good friend. We were going for a day trip.
I listened to this episode of the Indie Hackers podcast on the way there.
The guest was Patrick McKenzie, who’s now an advisor to Stripe.
He gave an eye-opening story:
It would have been great if someone had told me to charge more.
When I was working at a Japanese day job, I worked at a company that was essentially a consultancy.
It’s called a systems integrator in Japan, but whatever. Modeled like an engineering consultancy.
And I’m just an engineer, I have no connection to the business side, but I knew what my charge-out rate was.
It was approximately $100 an hour.
I didn’t make anything close to $100 an hour, but I thought, if I start a consultancy, then I can make 100% of my charge-out rate: 100 bucks an hour. Awesome.
Then I spoke to – by the way, this is the importance of having friends who are a few steps down the road from you – I made a buddy on Hacker News, Thomas Ptacek, and he told me, “You shouldn’t charge hourly for consulting, you should charge weekly for consulting. So, whatever your rate is right now, multiply it by 40. That’s your new week rate. And people can’t buy hourly blocks. They have to commit to a week.”
And so I started doing that, started selling $4,000/week engagements, and after one of those, I decided that four grand was way too low relative to the value I was creating for larger software companies.
I said, “Okay, my new rate is $8,000/week.”
And people still bought it.
Then, for the next engagement I was pitching to a company, they sent me a one-sentence email: “Quote me your rate for two weeks.”
I said, “Well, my rate for one week is $8,000, so two weeks is $16,000.” And I had my finger over the send button, and I said, “Wait. What’s the worst thing that happens if I type in $12,000? They say it’s too high? You’ll have another of these emails coming from somebody else in another week or two.” So backspace, backspace, backspace.
“$12,000, $24,000 respectively.”
Hit Send.
And then I had a panic attack because I thought, “Who could charge $12,000 for a week? I don’t even know what I’m doing. How are they going to react to that? Am I going to lose a friendship over this? Blah blah blah.”
I got a reply back five minutes later: “Wow, that’s a healthy rate. Okay.”
And that’s the last time that consulting client ever even mentioned rate as a discussion.
So six months later, new engagement, my stock rate is $20,000/week. New client goes, “Okay.”
And then a year or two after that, my stock rate is $30,000. New client goes, “Pricey, okay.”
I did put $125,000 a week for 10 weeks on a proposal once, and got very far away down the line on that proposal, but that didn’t happen.
I remember sitting on the train looking at the rolling Italian hillside in disbelief at that story.
Patrick didn’t 2x his prices.
He didn’t 4x his prices.
He more than 7x’d his prices! And almost 31x’d his prices.
So wild.
“Raise prices”
