How to price expansion and growth

The value metric is the thing the customer pays for that grows when their success grows. For software it might be seats, contacts or projects. For a service it might be hours, locations or deliverables. Pick one.

Test it with a simple question: "When this number doubles, is the customer clearly better off?" If yes, they will accept paying more. If no, such as charging per page of a report nobody counts, they will resent it and look for ways around it. For a deeper look at building this into your product, see Pricing for expansion: building NRR into the product architecture.

The most common error is pricing the next step from what the customer already pays. "They pay 500, so 600 should be fine" has nothing to do with what the extra capacity is worth to them.

Work it out from their side. If the next tier saves their team 20 hours a month and an hour of that team's time costs them 40, the tier is worth 800 a month. Pricing it at 150 to 250 leaves them with most of the gain, which makes the decision easy. Write the calculation on one line for each tier, so your team can say it out loud.

A jump from a small plan to a plan three times the size feels like a different product, so many customers stay put. Aim for steps of roughly 30 to 60 per cent. That is an opinion, not a law, so test it against your own acceptance rate.

Each tier should add a clearly named limit or feature that the lower one lacks. How to design upsell paths covers how to lay these out. Here the point is that the price must match the size of the step.

An add-on is for something that some customers need and many do not: extra support hours, a specific integration, advanced reporting. Use this rule. If most customers who upgrade would want it, it belongs in the tier. If one in five would, it is an add-on.

Do not hide core features behind add-ons to squeeze more money out. Customers see through it, and it makes your base plan look unfinished. Be careful that an add-on does not cost more than the next tier up, or you will push people to buy it and skip the tier.

Changing prices for customers who already pay is where churn can start. Settle three rules before you announce anything:

• Give 60 to 90 days of notice, in writing.
• Tie any increase to something new they receive.
• Offer to hold the current price for a set period for the longest-standing customers.

Introduce a new structure to new customers first. Watch for a month or two, then roll it out to the base with the lessons you have learned.

Once the price is right, the buying step should be a single action. A customer who says "yes, let's upgrade" should not have to wait for a quote. Offer prorated billing so that they pay for what they use from today, and offer an annual option if it suits your business. Your billing tool, such as Stripe Billing, Chargebee or Paddle, should handle plan changes by itself.

Then time the offer using How to time expansion offers and frame the conversation using How to handle expansion conversations.

Use Test new bundle configurations to compare two versions on a small group. Look at the share who accept, the share who downgrade within 90 days and the change in revenue per account. A change that raises revenue and also raises downgrades is moving the problem, not solving it.

• Basing the new price on the old one.
• Choosing a metric the customer cannot see or control.
• Jumping prices so far between tiers that nobody moves up.
• Putting core features in add-ons.
• Announcing an increase with two weeks of notice and no new value.
• Making customers wait for a quote to buy something small.

Net revenue retention goes above 100 per cent, which means the existing customer base grows without a single new logo. Upgrade acceptance rises, downgrades in the first 90 days stay flat and your sales team stops discounting expansion deals to close them. If customers tell you the next tier is "obviously worth it", the pricing is doing its job.