PRICING POWER: HOW SMALL CHANGES CAN HAVE BIG IMPACTS
Over the past 5+ years, acquisitions of software companies have become increasingly common in the Search Fund ecosystem. As somebody who spent almost 10 years searching for, acquiring, operating, and ultimately selling a software business, I learned a few lessons along the way.
One such lesson is that pricing software is notoriously difficult, and tends to include aspects of both art and science. In my experience, I’ve noticed that after software companies establish their prices, they often don’t revisit them, or at least don’t revisit them regularly enough (this often tends to be true of more mature companies, though not exclusively so). Even when they do revisit prices, many companies remain deeply fearful of changing (specifically, increasing) the prices charged to existing customers, usually for fear of impacting customer attrition rates.
However, as I argue in the blog below, in certain circumstances raising the prices charged to existing customers is one of the fastest, most effective, and “lowest friction” ways to unlock a nascent revenue and profitability opportunity that may lie within the base of customers that you already possess.
It isn’t the right strategy for all software companies, but it almost certainly is for some. If you haven’t revisited your pricing in 1-2+ years, then there’s at least a possibility that incremental revenue and profitability are being left on the table.
If you're currently evaluating a software business for acquisition, one of the first places you should look into is the degree of pricing power that the company possesses relative to the customer base that it serves.
You can read the blog post here (URL hyperlinked): https://inthetrenches.net[redacted]pricing-power-how-small-changes-can-have-big-impacts/