Ever heard of the term “Grandfathering”? This “warmth-inducing” term is often used in the business world, especially concerning pricing.
Picture this situation: Your existing customers continue to enjoy your offerings at the old subscription price even after you have updated the products or services with new features and revised pricing. Sounds familiar?
Yes. In business, it is a common practice to increase the pricing after adding new features to an existing product or service. However, many businesses leverage the “grandfathering” pricing strategy. to retain customers and protect the customer relationship to a greater extent.
Grandfathering refers to a pricing strategy where you charge existing customers the same price that they initially signed up for but charge new customers the updated price.
What Does the Grandfather Clause in SaaS Mean?
The grandfather clause means pretty much the same thing in SaaS pricing. You let your existing customers enjoy the offerings for the price they originally signed up for while charging the revised prices for new customers.
Grandfathered customers also have the privilege of accessing a new version of the software and additional features without paying extra.
Customers who are satisfied with their current plan's pricing and services can continue with it, while others can switch to a different plan.
In SaaS pricing, grandfathering is used as a strategy to entice new customers with a low barrier of entry before raising the cost later. The most obvious benefit of grandfathering is retaining existing customers.
It is important to take into account the need for grandfathering while creating your initial pricing plans, as it will help you plan for future changes. However, when you eventually decide to make changes, what advantages do grandfathered-in plans offer? Let’s find out.
2 Important Benefits of Grandfathering
1. It allows you to test pricing with high retention rates.
In any business, retaining existing customers costs less than acquiring new ones. Hence, spending money to retain existing customers is the more sensible decision, which is exactly what grandfathering helps achieve.
This strategy allows you to experiment with new pricing models and repeat services innovatively. You can also explore new revenue avenues and markets without risking your existing customers. In short, grandfathering gives you a competitive advantage in today’s fast-paced business landscape.
2. It gives extended customer satisfaction.
Always remember that your early customers are your loyal supporters in the long run. The relationships established with early customers are often more personal than those formed later.
In this scenario, grandfathering is the perfect strategy to keep your existing customer base happy by allowing them to enjoy your offerings at the same price. It also makes them feel exclusive and motivates them to remain loyal to your brand.
Are there any drawbacks to grandfathering? Yes, there are.
Challenges You May Face With Grandfathering
1. Loss of revenue.
The obvious drawback is that you are leaving money on the table that could fuel growth and help meet other expenses. The larger the existing customer base, the more money you will lose.
2. Poor perception of your product.
If you enhance your product or add more features without raising the price, your customers might perceive it as a lower value. This can lead to a higher churn rate, further destabilizing your business financially.
3. Loss of transactional revenue.
Grandfathering for the long term is simply not sustainable for any business. Lack of consistent cash flow can badly hit your daily operations and hamper your ability to scale.
4. Poor operational efficiency.
Grandfathering often makes you focus more on customer acquisition to compensate for the financial loss. This approach may not work as planned because acquisition-based strategies are less effective than monetization-based pricing. They also do not compensate for the financial losses you incur because of grandfathering.
Businesses often face the dilemma of encouraging or scraping grandfathering altogether. It is sometimes a boon and a bane because you need your existing customer base, yet you cannot reap the revenue you want after revising the price.
So, how do you handle this delicate situation? As your business grows, it's important to adjust pricing. However, you can be more flexible when informing existing customers. Let’s explore how to get it done.
Techniques to Implement Grandfathering Without Hurting Your Business
1. Upgrade customers with enticing offers.
To encourage your customers to upgrade, it's important to present the transition as an opportunity for improvement. Make sure you offer something they will see as valuable enough to pay a little extra without asking them to pay more for the same service. One effective way to do this is by offering a grandfathered discount that is time-boxed. This means that your existing customers can continue to pay the same rate they signed up for for a specific period of time.
2. Make your value appealing.
Packaging your products with an innovative, creative twist may urge your customers to embrace upgrades. You can put together an effective
packaging by considering your business size, location, and data regarding usage, transaction, and invoicing.
3. Predicting revenue data.
By utilizing pricing models and packaging, you can predict and assess the most likely outcomes of modifying your pricing structure. They allow you to experiment with hypothetical scenarios and present simulations to stakeholders and executive teams. You can employ these tools to devise and execute complex deployment plans that minimize risk and adapt pricing plans and packaging to diverse needs during full-scale rollouts.
4. Give customers time to transit.
Instead of allowing your customers to enjoy the old price point indefinitely, set a fixed transition time to upgrade to your current plans. A notice period of 12-18 months will give them enough time to change their mindset to adopt the new price changes. It's important to show an equivalent increase in value to encourage a faster transition and offer discounts to appreciate early adopters.
