When we think of inflation, we usually think of the cost of groceries and gas. Some of us might think about the cost of rent, college, or housing. Economists will focus on wage increases.
The US and global economy is currently going through a period of abrupt inflation. As seen in the chart below, the annual CPI rate as calculated by the U.S. Bureau of Labor Statistics hit 6.2%. The typical range for the CPI is around 2%.
Less official sources will cite inflation rates even higher than that. I won’t try to figure out what the real rate of inflation is or how transitory our current round of inflation will be. If you want to nerd out on economics, hit me up on Twitter or my blog at InvestorGeeks.
In this post, I want to focus on how inflation is affecting our customers. While the focus may be on gas and groceries, there is inflation in software and membership dues as well.
Software Price Inflation
Matthew Guay does a great write up about Software Inflation Rates every year. He calculated an inflation rate of 1.4% for software last year. But software companies don’t just raise their prices by 1-2% every year. They will only raise prices every few years. The price of some software goes down. Over the course of a decade though, software prices are up around 62% or so on average.
If you haven’t raised your prices in the past 3, 5, or 10 years, you are due for an increase. Just to keep pace with an average annual inflation rate of 2% or so, you should be raising your prices about 10% every 4-5 years… at a minimum.
A few years back, I joined the board of a non-profit. At the time, membership in the association cost $6 per year, a price I think set in 2000. Tickets to the annual banquet had always been $25 per person. The association used to make a profit on ticket sales, which covered the non-dinner costs of the banquet, including newsletter mailings and allowing honorees and family to attend for free. Recently, the cost of the room and dinner had gone up to the point where $25 barely covered the cost of an individual attendee.
The discussion to raise the banquet tickets from $25 to $35 took way too long. And after all that discussion, across several months, we’re probably going to need to raise ticket prices again this year.
With regards to membership dues, in this case, the board actually decided to offer lifetime membership for $35 and focus on donations and sponsorships for revenue instead of membership dues.
So I’ve been there. I’ve been in meetings that go on too long just to make the seemingly obvious decision to charge people the cost of the dinner we are giving them.
Raising prices is often complicated
There is friction to raising prices. It’s not always an easy thing to do. I’m also on the record recommending folks don’t run too many sales or change their prices too often. If you are allowing existing customers to keep their older rate (a good idea), each price change introduces a new cohort of customers you need to account for in your decisions going forward.
Once you’ve made the decision to raise prices, how do you go about doing that? That is a topic that deserves its own post. A resource I’ve shared before is Amy Hoy’s writing on price increases over at Stacking the Bricks. The posts are targeted toward SAAS companies, but applicable to any business that is charging customers or members on a recurring basis.
Why is this on my mind?
We’re raising our prices next year. The current PMPro Plus plan will be priced about 30% higher than it is now. This means that the 30%ish BFCM deal going on right now is more like a 50% off deal vs next year’s pricing.
By far the largest expense we have as a business is employee and contractor pay. Like other companies, we give raises to cover inflation in addition to performance-based raises. As our costs increase, we need to increase our pricing to adjust for that.
At the same time, our software and service continue to evolve and get better. When we first launched PMPro Plus, we had only a handful of add ons. We now have 78 that we manage ourselves. The core plugin, and many of those add ons, are getting more powerful over time. We’ve found ways to improve the efficiency and effectiveness of our support. Our tutorials and documentation get better every year. Customers get a lot more value for their purchase than they did a few years ago.
The average price of our offerings is going up, but the real opportunity we have with this coming update is to better align our products and services with the real value we are providing to the types of customers we tend to have. That all changes over time, and we’re due for a bit of a shake up. A little bit.
As a reminder, existing customers, have little to worry about. If you stay current with your subscription, you will be charged the amount you agreed to at checkout.
Pricing decisions are complicated. Pricing updates can be even more complicated. Every couple of years, remind yourself to check in on your pricing and take inflation into account specifically.