Common wisdom in B2B SaaS these days is that you should review and iterate over your pricing every 6 months (shoutout to
Bessemer for this advice). But founders oftentimes don't realize that a good SaaS pricing strategy is not just about setting the right price points; it's also about making sure you're keeping your loyal, early customers happy.
This leads us to the tricky topic of "grandfathering." Finding a way to iterate and evolve your pricing without alienating your OG users (and watching your customer retention metrics tank in the process).
In this post, we explore what grandfathering is, why it can be both beneficial and detrimental for SaaS startups, and how it fits within the broader context of SaaS pricing strategies, and most importantly, whether or not you should grandfather your customers when updating your pricing next time.
Read also:
Why is ACV more important than ARR?What Is Grandfathering?
Grandfathering in the SaaS industry refers to the practice of allowing existing customers to continue using an old pricing plan even after new pricing has been introduced.
When a SaaS company decides to change its pricing model, it faces a choice: migrate all customers to the new pricing or let existing customers stick with the pricing they signed up for, often under a "grandfather clause."
This exemption means that while new customers are subject to the new pricing, legacy customers retain their original terms.
3 Benefits to Grandfathering
Customer Loyalty and RetentionGrandfathering can be a powerful tool for customer satisfaction and retention. By honoring the old price for early customers, you're showing appreciation for their loyalty and support from the early days. This can lead to your customers feeling a stronger sense of loyalty, as they feel valued and fairly treated. The lifetime value of these customers may increase as a result of this positive sentiment.
Related:
Should you offer discounts for annual plans? Avoids Alienating the Customer Base
Abruptly increasing prices for all customers, including those who have been with the company since the beginning, can lead to customer dissatisfaction and churn. Grandfathering helps avoid the potential backlash that can come with price increases, ensuring that the customer base remains stable and content with their service.
Provides a Competitive Edge
In a market where new SaaS companies and pricing models are constantly emerging, grandfathering can provide a competitive edge. It's a nice humanizing gesture that can set a company apart, demonstrating that it values its customer base and is committed to fair practices. This can be a compelling selling point for new customers and a way to differentiate from competitors.
When Grandfathering Can Be a Bad Idea
Revenue Loss
One of the most significant downsides of grandfathering is the potential revenue loss. If the old pricing model is significantly cheaper than the new pricing, the company may be missing out on increased revenue from customers who would be willing to pay more. This is especially true if the cost of serving those customers has increased over time.
Pro Tip: Balance out the missed revenue here with the overall business you'd lose if this customer decides to cancel.
What's the LTV of this customer? Is it worth keeping them happy albeit at a lower revenue rate, to retain their business long term?
Complexity and Confusion
Maintaining multiple pricing models can lead to complexity in both your billing systems (if you're using an antiquated vendor) and customer support. It can be confusing for both new and existing customers to understand why there are different pricing plans and who is eligible for which, and when they go to contact for clarification, this can be super time-consuming and resource intensive to hunt down the answers. This confusion can detract from the customer experience and lead to increased customer support costs.
Hindered Growth and Scalability
For SaaS businesses looking to scale, grandfathering can be a hindrance. It can prevent the full realization of a new pricing strategy designed to support growth. If a significant portion of the customer base is on old pricing, it may be challenging to achieve the revenue targets needed to invest in growth.
The Case for Automation and UpgradesMaintaining different pricing tiers for grandfathered customers can be administratively burdensome and costly, particularly if managed through outdated systems like Excel spreadsheets.
These manual billing processes are prone to errors and often require substantial human resources to manage effectively. As a SaaS business evolves, these legacy systems can become a liability, hindering scalability and flexibility.
Incentivizing Customers to New Plans
Whether or not you decide to grandfather, you will have to make sure that customers are migrating to your new plans at some point.
To mitigate the high costs of maintaining multiple pricing plans, you might want to offer incentives to encourage customers to transition to new, more most often more expensive pricing plans. This can take the form of giving them additional features, enhanced support, or even price reductions for a limited time. The goal is to make the new plan more attractive than the old, easing customers into a transition that ultimately benefits both parties.
Solve for your billing first
As we mentioned above - a lot of the decision whether you need to push your customers onto the new pricing or if you can support multiple plans at once depends if your billing system is able to handle it.
One of the worst customer experiences you can provide is by attempting to grandfather some users, but not fully being able to support it, and leaving them in limbo.
Look for a
billing solution that offers:
- Flexible grandfathering options
- Configurable pricing adjustments
- Intuitive customer-facing billing system so they can track their own plans over time
- Detailed portal where sales can view detailed customer feature, plan & pricing history
Final Thoughts
Grandfathering is a more complex issue than it appears at first glance. While it can be a good idea for fostering customer loyalty, avoiding customer dissatisfaction, and providing a competitive edge, it can also lead to revenue loss, complexity, and scalability challenges. SaaS companies must weigh these pros and cons carefully.
If you're getting ready to undergo a pricing overall and considering whether or not to grandfather your old customers or move them to the new pricing, focus on maintaining a balance between honoring your commitments to your most loyal, early customers and progressing towards a pricing model that supports the company's future.
