Grandfathering: An Essential Piece of Your Pricing Puzzle

Grandfathering

v. Retaining your old pricing plan for existing customers, while new plans are applied to all new customers

Verizon and AT&T are once again in the news for their notorious grandfathered unlimited data plans. To cut a long story short, these carriers have been unable to sustain their cheaper legacy plans for early customers and are now revising those prices to general ire.

Pricing strategy changes are inevitable as businesses grow and scale. But it’s not the price revision itself that rubs customers the wrong way.

It’s the fact that they feel that these mobile carriers are dishonoring their grandfather clauses with bait-and-switch* tactics. So how can you introduce pricing changes for your customers without alarming or inconveniencing them?

*Announcing forever free/lower prices for early customers but soon forcing them to change over to plans that are more expensive than advertised

Keep Your Existing Customers to Upgrade Them

When it comes to SaaS pricing, a grandfather clause is one which lets your existing customers remain at the same price point at which they first signed up for your product, while you change your pricing plan for new customers.

It’s all too common for businesses to price themselves lower than they should when they start out.

And it’s not uncommon to see SaaS pricing plans start from $0 either. Having an inexpensive or free plan is a great way to give people an opportunity to use your product with no strings attached. (We have one ourselves). But problems start creeping up when you tell customers that your free plan is free forever.

Ultimately, you want to convert your most valuable customers on a free plan to a higher pricing tier. However, your own ‘lifetime free’ label can block you from the possibility of ever upgrading them. And you’ll soon find that it was an impractical promise that may be impossible to keep.

The customers who sign on during the nascent stages of your growth help you, as Lincoln Murphy says, ‘accelerate your learning and [get] you to a point where you could mature your pricing strategy faster than you would have been able to do without them’.

As such, grandfathered plans strike a balance between treating your early customers with good faith (ensuring that you retain them), and giving them sufficient time to evaluate if your pricing change matches their perception of your product’s value. If it doesn’t measure up, it’s unlikely they will upgrade.

What happens if you’ve made no provision for grandfathered plans?

  • Customers have no idea a pricing change is coming

    A sudden pricing change potentially shifts the ground under their feet. This could irrevocably damage trust in your B2B product.

  • Short notice on hiked-up prices will back them into a corner

    If you give them two weeks to change over to the new pricing plan (bait-and-switch), they may face a painful choice between moving to a cheaper competitor or making on-the-fly decisions to adjust budgeting.

Grandfathering, therefore, helps ease them into the transition with clear communication and easy options that help them feel in charge of the situation.

Business Benefits of the Grandfather Clause

Often, mismanaged expectations are responsible for pricing changes gone awry with customers. Simply considering the necessity of grandfathering as you build out your first pricing plans will put you on the track of thinking ahead to the point when you will eventually change them.

But once you’re on the brink of change, what benefits do grandfathered-in plans provide? On the surface, it may look like you’re forgoing revenue. But dive deeper and you’ll see that grandfathering lets you:

  • Run pricing experiments with higher retention rates

    Customer acquisition costs are a big part of any company’s expenditure. So it makes sense to understand all the aspects of a trade-off between losing customers on a free or low-paying plan and the cost of acquiring an equal number of new, engaged customers. Mostly, it’s better to retain rather than to acquire.
  • Maintain long-term customer satisfaction

    The relationships you build with your early customers are often more personal than the ones you make as you scale. And they will likely be your strongest supporters in the long run. Grandfathered-in plans respect your early relationships.

Of course, grandfathering is only one of several ways to shift customers gradually from the old to the new. While it works in most cases, there are other variations and methods you can adopt depending on your pricing model and SaaS product. Some of them are explained in Patrick Campbell’s guide to changing SaaS pricing linked below.

The important thing to remember is that pricing plan changes shouldn’t come as a sudden shock to the people using your product or services, but as a chance for them to reassess your product or service’s value in a positive way.

Pro Tip

How long in advance do you need to announce a pricing change for grandfathered plans?

Ideally, the price should be grandfathered-in forever with incentives for upgrading. At the very least, however, it’s best practice to allow your existing customers to stay on the same plan without an upgrade for a minimum of 2 years from the time you change your pricing plan.

The Billing Intelligencer

Ready to ring in the new and grandfather your old plan? Here’s a quick list of must-reads before you embark on your pricing journey:

Sounds interesting? Check out how you can easily grandfather your existing customers when you introduce a new plan with Chargebee.