There should be no courage required to raise rates. It’s done all the time around us. Everyone raises rates, and most often we accept it without question. The real question is why do we have anxiety over raising our own rates for others? The number one reason is fear of losing a customer. Therefore, what we really need is to not fear that loss. Churn happens. You will lose customers occasionally for one reason or another. How often and how many your business can handle depends on how many new ones you get and how much you grow the value of the ones that stay. If you can balance the equation in your favor, you will lose the fear of churning customers due to pricing.
First, you have to realize—and I mean really internalize—the fact that every year you are not raising rates your profit margin is shrinking. Inflation alone can take a serious bite out of your margins, and left unchecked too long it will kill a small business. In addition, some of your vendors are most likely raising prices on a regular basis as well. If you don’t keep up, you can find yourself losing money on the same top-line revenue that was netting you a healthy profit only a few short years ago.
Second, like most relationships, setting expectations with your customers in the beginning goes a long way. It prevents a lot of misunderstandings before they even have a chance to emerge. If your managed services agreement spells out price increases, your clients will be agreeing to them up front. You don’t need to raise prices every year, but if it’s in your agreement you have permission. I know that many managed services providers (MSPs) have month-to-month recurring revenue services they sell on an a-la-carte basis. Many times, these services don’t have a contract or agreement. This is a mistake. One of the most important purposes of an agreement is to set expectations, with price being just one of the items you should spell out.
What do you do if you have not set expectations ahead of time? Simple—give plenty of notice. The first thing to do is make sure every customer consuming a recurring service has an agreement in place. Then you can give three to six months’ notice of your price increase and reference the agreement you put in place previously.
Now that we have set our frame of mind and expectations, let’s do some math. If it is a fact that you will lose customers, we can quantify that number. We can call it L. The only way to counteract L is by adding new customers. Let’s quantify new customers with N. There are two ways to count customers: one is by logo, meaning one customer equals one logo; the other is by revenue. Each customer has a revenue value in monthly recurring revenue (MRR) or annual recurring revenue (ARR).
Logo growth is simple; it’s just N - L. If the number is positive that represents growth; if it’s negative the business is declining. Logo count is not a good representation, though, because we could gain five small customers and lose one large one. Revenue is a better measure because it gives value to each logo. Therefore, $N - $L is a much better indicator of how the business is growing or declining. In addition to $N and $L there is another revenue factor that can help. We’ll call it $E. This represents the revenue growth of an existing customer. If we include $E in our equation, we get $N + $E - $L. This is our real growth number.
Why am I telling you all of this? Growth of existing customers is a powerful way to overcome losing some. This means you can afford to lose a certain number of customers if you raise prices because the ones that stay can make up for the $L. In my experience it’s usually the smaller customers that leave over price, so that helps as well. As an exercise, look at last year and classify each customer as existing (E), new (N), or lost (L). For the existing customers, subtract their 2017 invoices from their 2018 invoices to get their $E number for 2018. Add that to the $N or total invoices from all your new customers from last year. Finally, subtract the $L, or total invoices from the customers you lost last year. How did you do?
Approach raising prices with logic and make sure you prepare customers for it in advance. Raising prices is a part of being in business. It must be done periodically to protect your profit margins.
Eric Anthony is principal of customer experience at SolarWinds MSP. Before joining SolarWinds, Eric ran his own managed services provider business for over six years.
You can follow Eric on Twitter at @EricAnthonyMSP