We increased our revenue by lowering prices
There's a common rallying cry amongst Silicon Valley investors and tech Twitter pundits: raise prices! Marc Andreesen, the famous tech founder turned VC, went as far as to say he would hire a skywriter just to write it across San Francisco:
It's not just Andreesen, however, who subscribes to this advice. Kevin Hale, a current partner at the famous startup incubator YC, had this to say when it came to pricing a startup product:
Once you have any kind of price, and this is particularly important for people who are doing B2B or enterprise sale, you should start practicing raising prices. And I like to just start by raising prices by 5%. If you feel really confident, jump it up by bigger numbers if you want, but this is a pretty safe way to do it so that you can feel comfortable with it. And you wanna keep raising prices until you're losing 20% of your customers.
Wherever you look in startup land these days, whether it's in popular online blogs or from advice-based threads on Twitter, entrepreneurs seem to strongly encourage startups to raise prices.
Taking "raise prices" at face value, however, avoids much of the nuance, research, and experimentation that goes into getting pricing right. Pricing is different for every type of product, and raising prices without any justification or reason is not going to magically turn a struggling startup into a unicorn. In this blog post, I'd like to share some real-world learnings from our team at Kapwing, an online video editor. In fact, we recently lowered our prices and increased our overall revenue. Surprised? Seem impossible? Read on!
How Kapwing Pro pricing works
Kapwing monetizes our product in a single, straightforward way: we sell a subscription to our premium offering known as Kapwing Pro. While it's free to use Kapwing, upgrading to Pro offers users additional features while editing video on our website, including things like additional storage, longer exports, and more. There is only one tier of premium features available, but it is priced differently based on whether a customer is billed monthly or annually.
Lowering the price of Kapwing Pro
For the last two years, the pricing for Kapwing Pro was static at $20 billed monthly, or $204 billed annually (for a rate of 17 dollars a month). A few weeks ago, we lowered the annual price from $204 to $192, or from a rate of $17/month to $16/month. The thinking behind this change was that by lowering the price, we could persuade more potential customers to choose annual billing, which would result in a higher gross revenue as well as lower churn for our company overall. Users are also happy to see a company actually lower prices, and we hoped that this would generate goodwill and more excitement around upgrading. We also added a "limited time discount" label to our pricing page to promote the new rate, and waited to see how it would affect our conversion rates.
Results of lowering our price
If we look at three weeks of data both before and after this change, which rolled out on October 15, we see that overall conversion to the annual plan has bumped up 20% (almost exactly - our calculation resulted in a 19.9957% change).
By decreasing the plan cost from $17/month to $16/month - a 5.9% decrease in price - we were able to increase conversions 20%! For us, converting 20% more users to an annual billing plan was worth the slightly lowered LTV of these customers. We were also able to do this without a corresponding decrease in monthly billing subscriptions, so the overall revenue has increased significantly over the past few weeks.
A major learning lesson through this process is simply that annual billing is helpful in reducing user churn as well as increasing overall revenue, and that lowering the price of an annual billing option relative to the monthly option can be helpful to many startups who are looking to increase the LTV of their customers. An annual billing option that offers a significant discount over a monthly billing option can encourage more users to select it during checkout.
Another interesting finding was looking through industry benchmarks for annual billing discounts. Some examples that we found were:
- Airtable: $20/month billed annually vs $24/month billed monthly (20% increase in price)
- Notion: $8/month billed annually vs. $10/month billed monthly (20% increase in price)
- Figma: $12 month billed annually, $15/month billed monthly (25% increase in price)
- Slack: $12.50/month billed annually, $15/month billed monthly (20% increase in price)
So when it comes to popular online software, a 20-25% price increase from the monthly to annual billing option seems to be what is offered in major industry players. However, not every company prices their product accordingly to this.
For example, Down Dog, a popular yoga and fitness company, charges $7.99 a month, or $49.99 a year for a premium subscription, which breaks down to $4.17 a month when billed annually. That means that the monthly plan is a 91% increase in price from annual billing over 1 year.
Our research shows that there really isn't an optimal price point where the annual and monthly plans make the most sense. While popular SaaS seem to benchmark their annual billing markups around 20-25%, technology companies of all sorts have different pricing strategies based on their product and customer segment.
"Raise prices" is a good rallying cry if you have a business where customers are highly retentive and are happy to pay at higher price points. However, applying it as a general statement to all startups can be misleading for many founders. "Raise prices without decreasing conversion or churn" is perhaps a better general statement. But if your product is already priced competitively, experimenting with more options around pricing will likely be more effective than simply continuing to raise prices across the board.
Entrepreneurs and growth teams need to be mindful of their pricing and experiment to create the best strategy that works for their customer segment. Sometimes, like in our case, designing a pricing strategy where prices are lowered for a particular segment will encourage higher conversions and drive more revenue overall.
For us at Kapwing, we'll be continuing to experiment with our pricing strategy over time to find the best price points that work well for our customers while also setting up our company for long term sustainability. Beyond experimenting with annual vs monthly pricing, we're also planning to explore more conversion strategies like payment methods, free trials, and referrals. And of course, we'll be excited to share our learning lessons with you here!
Like this article? Interested in working on growth and monetization problems? Kapwing is hiring! Learn more about our open roles at kapwing.com/careers.Create content faster with Kapwing's online video editor →