All things being equal — or “ceteris paribus,” as Professor Swanson, my phenomenally awesome yet brutally, infamously hard UCLA economics professor corrected us in our first Econ 1 lecture — if prices go up, demand goes down; if prices go down, demand goes up. This “first rule of economics” is pretty intuitive stuff, and I certainly didn’t need my BA in Econ to teach me that. Weird exceptions aside — like so-called “snobbery goods,” such as fancy cars and jewelry, for which inflated prices likewise inflate demand — this general rules tends to hold true fairly universally.
So you can imagine our dilemma then, when we discovered that we needed to increase our prices by a whopping 50%, to $15 per month from $10 per month. Not a small increase, then. And if indeed Prof. Swanson’s lectures held true, then surely increasing prices by 50% would result in a reciprocal decrease by 50% in subscribed customers, and we’d be exactly where we started. All was not looking well then.
And that wasn’t the half of it: this wasn’t just a problem of increasing prices for future customers; we needed to increase prices for current users, too, users who should otherwise have fairly expected to be grandfathered in at their original $10 per month price point.
Thing is though, we didn’t have a choice. The finances just wouldn’t have it any other way.
And so we did it. We increased our prices by 50% not only for future customers, but for our existing customers as well. And remarkably, inexplicably, and against all odds — never mind the beautiful laws of economics — we saw nary a dip in demand; in fact, if anything, we’ve seen a slight up-tick in demand.
This then is the unlikely story of how we increased prices, and demand, and broke economics.
A few weeks ago we discussed the five best ways to actually engage your startup’s customers, at a really micro, super-detailed level. Most relevant to this delicate act of raising prices was the tip about being personal, transparent, and honest.
And while we discussed the notion of how your startup can raise prices without totally pissing off your customers, the discussion was largely theoretical, and lacking any real-life examples.
As promised, however, our suggestions weren’t in fact “just foolish theory and philosophical nonsense,” because we just executed the very strategy we suggested.
Three weeks ago, in early March 2016, I emailed all of our existing Twibble PRO customers to see whether they would support our proposed price increase instead of being grandfathered in at their original $10 per month price point. I emailed them personally. Like, from my very own email account. And in that email, I started by just laying everything out on the table:
- I admitted that the email body was obviously copy/pasted, but that I promised to reply to each and every response immediately (I only missed one or two)
- I thanked them for their support so far
- I acknowledged our technical challenges while remindeding them of our proactive refund policy (see #2)
- I optimistically described our forward progress and improvements
- I gave a teaser of future features and services
- I explained our decision to henceforth charge all future Twibble PRO users at $15 per month in order to accomplish all of the above
So far so good. And relatively easy. But then began the real challenge: I had to ask our existing customers if they would also be willing to accept this price change:
- I admitted that our original intent to increase prices for only new customers simply wasn’t going to work and that we needed their help too: would they be ok with the new price point?
- I made clear that maintaining and open, transparent line of dialogue with our customers was one of the fundamental tenets upon which Twibble was built
- I made clear that this was not going to be a unilateral decision, and that we wanted their input first
And, just for good form, I included a PS at the bottom for any customers who had just signed up within the past few days, acknowledging that this must really suck, and that we are sorry.
So what happened?
Almost immediately, email replies started pouring in. And almost immediately, my eyes started to glisten with joy: unbelievably, and against all odds, one email after another in support of our proposed price change increase — not to mention Twibble itself — kept rolling in, some customers even proclaiming how they would have happily paid even more.
Now obviously, everyone did not agree. But not only was this just fine, this was of course expected. So you can imagine our surprise when a whopping 65% of all respondents agreed to the price change. Sixty-five per cent! We couldn’t believe it.
And so I sent a second email two days later:
- I started with a reminder about the first email (in case it was missed)
- I reiterated our intent not to make this a unilateral decision
- I made clear that if for some reason they missed the first email or they otherwise are not okay with the price change, then they should let me know and we will take care of them
- I shared the results of our survey
- I announced our decision, because of these results, to implement our new price point, effective immediately
- I concluded with an impossibly transparent admission: that Twibble would have likely be gone in just 6 months without their support
- I thanked them profoundly and sincerely
Not only did responses to the first email keep coming in, but the second email captured even more customers’ responses. One customer in particular even wrote to say that they would happily have paid $99 per month as Twibble apparently fills the job of two employees at their company!
And then this happened. Our heads just exploded. We had really done it. We couldn’t believe it.
So what did we do with the customers who responded against this price change? I emailed them back immediately and said no problem, and that we’re happy to keep them on their original $10 price point as promised, and thank you for their loyalty.
Obviously, many customers did not respond at all. And to be sure, a few did indeed cancel their Twibble memberships. Again, this was expected. But incredibly, the results of our survey really did scale, and the net result is that even more customers have stayed with us than we had anticipated; and inexplicably, our new customer acquisition is even slightly above what it was before the price change.
So yes, not only did we increase prices without netting a loss due to customer attrition — i.e., our 50% price increase wasn’t cancelled out by a 50% customer loss — we have actually increased demand and have seen slightly more customers sign up than on the old $10 plan. Granted, we cannot explain this increased demand, and to be fair, it probably won’t scale perfectly, but so far, things are looking great.
So this has been an absolutely incredible change for us. Sure, in the big picture, it’s still just a small but crucially important step for us, but without this change, we would have been in very dire straits indeed; and to be sure, we will still have tremendous challenges ahead. But more than being a practical financial help to us, this price change is also a phenomenal vote of confidence in what we’re doing with Twibble. People really love and support us. And that’s an incredible feeling for which we are immensely grateful.
But the big takeaway for us — and, I hope, for you — is the recognition that customers are just other people, like you and me. Likewise, companies are really just other people like you and me, too. And the big challenge with any company — especially a young startup — is to enable your customers to interact with the people of your company, and not just your faceless company itself.
Companies come and companies go, and startups most of all; but the lesson learned here is to project the concept of customer engagement to the nth degree, to be as open and transparent as possible, and, yes, to ask your customers’ permission if you need to increase prices, while openly acknowledging that you have no problem keeping them at their current price if they request it.
To any Twibble customers reading this story, a huge thank you once again for your generous and loyal support. And to any future customers, I look forward to making your acquaintance.