In my epic tome, the Pricing Strategy Framework for SaaS Startups, I mentioned that the price testing I recommend will result in some customers paying a different price from what you have now; and that this is okay.
Sometimes this “grandfathering” of customers happens because you’re explicit with those customers; “if you sign-up today you can lock this price in for as long as you’re a customer.”
Sometimes you’re less overt and this comes from testing prices, getting your pricing wrong and having to change it later, or going Freemium and deciding that’s a bad idea and having a large cohort of free customers.
No matter how you end up there, having a cohort of customers that are “grandfathered” into their price – that is, they are allowed to continue to use your product at the price they originally signed-up regardless of how that may differ from what they’d pay if they signed-up today – is certainly not uncommon.
Though, while not uncommon, grandfathered customers are often a source of frustration and management overhead and I want to explore a few ways we can upgrade those grandfathered customers in a way that’s a win for all parties.
First, we have to remember that…
Early Customers are a Gift
When doing price testing like I mentioned in my Pricing Strategy Framework for SaaS Startups post, you will at some point in the near future end up having a cohort of customers that have pricing that’s inconsistent with your current (at that point) pricing.
The reality is, as a quid pro quo in helping you learn, you gave them a low price, unlimited use, or otherwise gave them terms that, frankly, you now regret.
My suggestion is, instead of looking at these customers as if they’re taking from you, consider those early customers a gift.
They helped you accelerate your learning and got you to a point where you could mature your pricing strategy faster than you would have been able to do without them. Don’t forget that.
Also don’t forget that you most likely completely mismanaged expectations with them, making them think – very likely because you told them this – that as an early customer they’ll always have unlimited access to everything, all the support they’d ever need, and other things that are now coming back to bite you because now they feel entitled.
But that entitlement is your fault, and it was given (even if, in hindsight, it shouldn’t have been) in exchange for accelerated learning. Early customers are a gift.
Now, as long as we’re going into this with that mindset, let’s figure out how to…
Upgrade those Grandfathered Customers
“Let me, let me, let me, upgrade ya, grade ya” – Beyonce
Understanding the value our early customers brought – beyond the actual revenue they generated for you – is critical, but it’s also critical that we figure out how to get those customers off of grandfathered plans as quickly as possible.
When it comes to grandfathered accounts, the big frustration isn’t usually that you’re leaving money on the table – that revenue is a small sacrifice to the learning gods; rather, it will eventually become a pain to support and manage them at some point. In fact, it probably already has.
The best way to move a customer off of a grandfathered plan – whether due to the implementation of the type of strategy framework I’ve outlined here or the natural course of price changes – is to make them a compelling offer to move off that plan.
First, be clear on…
The Wrong Way to Upgrade Grandfathered Early Customers
The goal here isn’t to strong-arm these super-valuable early customers into paying us more or kicking them out if they don’t, it’s about finding a way to make it a no-brainer to move off the grandfathered plan in a way that’s mutually beneficial.
A quick anecdote you may be able to relate to. Many years ago I signed up with at&t for my mobile service and got the unlimited data plan. Perhaps they offered a plan like that to observe usage patterns and more intelligently segment customers and create a pricing model based on that segmentation; I don’t know.
But what I do know is that I started getting notifications from at&t that said something to the effect of “you have unlimited data – awesome – but you’re using too much data so, while we won’t turn off your service, we’ll reduce the speed of your service so you can maybe just check your email. No more streaming WWE Network for you. Thanks for being an at&t customer!”
That scared me because I didn’t know when they’d throttle me and since I was technically – and legally – on “unlimited data” there was no way to simply have them charge me an overage fee for data so I could get back to the fast 4G speed.
So I changed my plan to one that includes a bunch of data, but isn’t unlimited, so when I hit my limit they charge me an extra $10 per GB (or whatever) and I keep going at 4G speed. That’s better for me so I don’t get throttled, but man… that was not fun.
All of that felt very punitive because, well, it was; I was using the service the way they originally sold it to me and now I was being punished for using too much of my unlimited data, only they were doing it in a really sneaky way (throttling).
That sucks… and it was a terrible experience.
Raising prices, reducing features/capacity/support, or otherwise creating a negative reason to move off of the plan you gave them is just not a wise decision long-term.
So, unless you’re part of an Oligopoly and have contractual lock-in and high switching costs like a phone company, that’s the absolute WRONG way to get me to move off of the plan they gave me many years ago.
And when I say that’s the wrong way, I mean the actions at&t used resulted in a class action lawsuit that got them to stop that garbage.
So avoid the nasty pitfalls of punishing your early customers by trying one of these…
3 Good Ways to Upgrade Grandfathered Early Customers
There are probably other ways to entice a customer off of a grandfathered plan, but these three are a good place to start.
1. Offer them a Discount
You could make them an offer for one of your retail plans that best fits their current and near-future situation – based on usage patterns and where they are on the trajectory toward their Desired Outcome – at a discount.
“Get our Pro plan for 50% off for the first year.” That way they’re off the grandfathered plan and on course to eventually paying retail prices. If you wanted – though this may end up resulting in another grandfathered cohort – you could continue the discount in perpetuity (unless they cancel and come back), but at least, they’d be on a modern, retail plan.
2. Pile on the Value-Add
You could make them an offer for one of your retail plans that best fits their current and near-future situation – based on usage patterns and where they are on the trajectory toward their Desired Outcome – at the regular retail price, but by adding other value-added services or products (yours, your partners’, etc.) that dramatically increase the value prop for the customer.
3. Use a Strategic Discount
You could make them an offer not for the plan that best fits their current and near-future situation – based on usage patterns and where they are on the trajectory toward their Desired Outcome – but the next plan up that they can really grow into. Offer the next “biggest” plan at the same price as the plan that would fit them best today.
This also adds an “aspirational” element to the mix by giving them a plan they can grow into (and then, of course, encouraging them to do the things to grow into it).
And if none of those feel right for your situation, cool, use your imagination. But do it from the starting point of “Early Customers are a Gift.”
Regardless, the idea is to entice the “grandfathered” customers into moving off the plan in a positive, win-win way. Don’t punish them for helping you out… reward them for being an early customer with this new offer.
Ensuring Success for All
I originally titled this section “Firing Unprofitable Customers” but I realized that might send the wrong message.
This isn’t only about profitable customers; this is about ensuring that everyone – the customer and us – are successful in this relationship. If the customer is costing us more money to serve them then they pay us, that ultimately takes away from our ability to serve our other customers.
It hurts our ability to keep our promises to internal stakeholders, too, which then hurts their ability to serve the customers.
So sometimes you have to actively jettison customers that are hurting the ability of all parties to be successful.
So, what if you try all of the ideas I mentioned in the previous section and some people are stubborn and don’t budge? What are you supposed to do with these customers if they’re costing more to support than they bring in?
First, I’d make sure that’s true; sometimes we just think this is the case because we feel like they’re taking from us. See the section titled “Early Customers are a Gift” if you need a refresher.
Now, if it is true and they won’t take you up on any of the offers you made – including the one you make during a frank phone conversation – it might be wise to cut ties with them (make sure you can do that legally, contractually, etc.).
If you do this, I would suggest you do at least the following:
- Be transparent about why (the cost to serve is just too high)
- Give them some time to move to a different solution and provide export/transfer support if possible
- Provide some alternative solutions for them to move to (including setting up a discount or bonus with the new vendor)
Things happen and if you really can’t afford to support them, that’s reality; but have a bit of empathy and give them a clear way forward (doing for them what you can to ease the transition); don’t leave ’em hanging.
And setting them up with a discount (or even paying for the first month) with your competitor is a win-win for everyone; a place to go for your customer… and a new customer for your competitor. 😉
Again, regardless of how they got there, you should look for ways to move as many people off of grandfathered plans in a way that isn’t punishment for the customers that helped you in the early days.