Episode 646 | Building a Recurring, Annual Price Increase Into Your SaaS

Rob Walling:
Welcome back to Startups For the Rest of Us. I’m your host, Rob Walling. This week I sit down with James Kennedy and we talk through this interesting approach he takes with his business, ProcurementExpress, where they have a recurring annual price increase every year. And they’re very upfront about this. They communicate this to the clients when they sign up. We run through the pros and cons of this strategy, as well as catch up with James Kennedy. He has spoken at several MicroConfs. You may have seen him if you’ve attended.
But before we dive into that, TinySeed applications for our next batch are open from February 6th to February 19th. If you’re a bootstrapped SaaS founder doing at least $500 in monthly recurring revenue up into the many tens of thousands in MRR, I’d love it if you would apply. Head to tinyseed.com/apply to find out more. You can drop your email there to get notified when applications open or just head to tinyseed.com/apply if you are interested in participating in a year-long accelerator program that is focused on bootstrap and mostly bootstrap SaaS founders like yourself. We offer mentorship, guidance, the batch itself, we have an amazing Slack channel, and we offer a community. And we match you with masterminds within your cohort of founders as well as the right amount of funding for a company like yours. Tinyseed.com if you’re interested. And with that, let’s dive into my conversation with James.
James Kennedy, welcome to the show.

James Kennedy:
Hi, Rob. How are you?

Rob Walling:
I’m doing good. People might recognize your name and voice from the many questions you’ve sent in, voicemail questions. You tried, we call it Video Ask, I guess, that’s at the top of the website.

James Kennedy:
I feel like I’m the biggest sponsor of that thing. I feel like, “This is an awesome idea. Why isn’t everyone doing this?” And then I’m the only one who does it.

Rob Walling:
Yeah, there’s some good audio, video questions that come through.
So yeah, want to welcome you on the show. You are the founder of ProcurementExpress at procurementexpress.com. Your H1 is take the hassle out of company purchasing finally. So as people can tell by your name, when we talk about doing enterprise sales and if you have to go through procurement, then you need to 10x your pricing, right? This is the thing. Well, your software helps companies handle their own procurement. Is that right? You want to describe it a little more?

James Kennedy:
Yeah, sure. We’re a little less enterprise, more like 50 to 500 employees. So the original use case was Richard, my business partner. He had an IT support business in Dublin. And he had two customers come to him in the same week looking for kind of the same thing. One was UNICEF and the other one was Clarins cosmetics. And they both wanted to… If you think about it, when you’re buying stuff and your own business is great, you take out your credit card, you do it, but then as soon as you get a bit bigger, if you need to spend money to do your job, it gets a bit more complicated.
In UNICEF’s case, they need to get approval. Obviously, it’s public money or donation money. They need to be very careful. There’s a lot of reputational risk if you don’t handle that money correctly. And in Clarins case, they actually had their old MD embezzle 150,000 euros worth of stock from them. So there were two very different reasons for wanting something. They didn’t know what to call it. We need controls. They didn’t want to be buy an ERP, but their accounting system wasn’t doing it for them.
So Rich Googled, not very well, couldn’t find anything because there are competitors. But he came to me, we hacked together the first version, and now we have about 300 customers all around the world, half in the States, half everywhere else. And we handle about $3 billion in spend for those customers each year. And that’s what we do. It’s normally like a CFO new in the business, he comes in, he’s like, “Oh, let me get control of the spend in this place. I’ll make it easier for people, an easy win.” And that’s what we do.

Rob Walling:
And how long have you been in business?

James Kennedy:
Incorporated in 2016. But the easy one is it’s the same age as my son, Max, nine. So we got pregnant with Max and I was like, Oh my God.” I had a crappy online business. It’s bad enough I’m ruining my own life with this marginal business. But now, suddenly I’m dragging my kids into it.
So that was a big motivation. And it was definitely the famous Jason Cohen speech from 2013 in MicroConf. That was the aha moment for me. And when Rich came with this opportunity, it almost matched up exactly. I’m sure the audience has already seen that. But if you haven’t, go Google MicroConf 2013, Jason Cohen. It’s the OG talk I would say. Maybe one of the best talks ever when it comes to bootstrapping a SaaS business.

Rob Walling:
That’s what I call it.

James Kennedy:
Yeah. We tried to ape some of that.

Rob Walling:
Yep. And how big is your team now? You’re bootstrapped fully, right?

James Kennedy:
Yeah. We did take an angel round, actually. So we have five angel investors in 2016, but we have about 25 people and we’re in around two million ARR in revenue mark. So it’s been very much the slow, what do you call that thing? The slow, steady for death. It’s not been an overnight success, but it’s great. It’s definitely all I ever would’ve hoped for and it’s a great team. I know people don’t think purchasing procurement is fun, but it’s a lot of fun to make something that delivers value and you couldn’t help for hope for more with our product.
We really save people a lot of hassle. And that’s what I get my kicks from is hearing the stories about, “Hey, I used to spend three hours a day doing this and now it’s gone Away. magically it’s gone away.” And despite the money, it’s the value. I think as engineers we like that idea of delivering value. So we’ve all maybe had jobs in the past where we’re horribly overpaid and you deliver no value and you feel empty and dead inside. And then of course we’ve gone the other way. We’ve built products that no one uses. Neither of those is good. So the crossover there is to build something that delivers value and is rewarding. So more or less, that’s what Procurement Express is.

Rob Walling:
And to build a pretty great business. It sounds at two million ARR, it’s just a SaaS company like this, the stability, and as you said it’s done everything you wanted it to do. And I love businesses like this. I often say boring businesses and I mean that as a compliment. It’s like you said, procurement doesn’t sound that amazing, but it’s like, no, that’s cool, ESP sending emails for people.
It’s like, “Ugh, this is boring.” But those can be fun businesses if you’re into them. It just depends on what brings you the joy. If you have to be working on a social network or the next hot thing, VR, that’s your personality, that’s cool. You’re playing a certain game. And that’s not the game that we tend to play in the MicroConf crowd. It’s more like I get my joy either from building businesses and providing value to people, like you said, in exchange for money or from the idea of wanting to be independent financially and whether that’s 10k a month MRR, whether that’s selling for 10 million, whatever. I think these things are all wrapped up in the ethos.

James Kennedy:
Yeah, and you say it’s boring, but it’s boring, if it’s not your job. If your job is to administer all the payments in a private school and you have a string of teachers waiting for you outside your office every Friday looking for their money and you’re terrified you’re going to make a mistake and then you make some sulfur to make that go away, to them, that’s not boring, you just give them another Friday afternoon back. So that’s third of stories I think of there are humans at the end of the day still. We’ll see what happens with AI now, but there’s still humans writing software for, so that’s the fun part for me.

Rob Walling:
And so we’re going to talk about your annual price changes for customers where every September you emailed me and said every September we increase our price by 8%. And it’s an incredible story frankly that I haven’t heard another SaaS company do. But before we do that, I want to ask about the name of your company, ProcurementExpress. Am I remembering correctly that when you started it was called Rubber Stamp? Rubberstamp.io?

James Kennedy:
Yeah, absolutely. There’s only two problems in computer science. One of them is naming things and I am terrible at naming things and my partner Rich came up with Rubber Stamp. I absolutely hated it, but I’m like, “Okay, whatever. Let’s just do this thing. We’re probably not going to be around in six months.” And who knew it took off. So I pushed to say this and we got to be grown up and be more professional now. And the Rubber Stamp idea was just get your expenses approved with a rubber stamp. But then we became paranoid because in the US some of our customers were saying, Well, rubber stamping isn’t necessarily a good thing. It means you’re just waving it through.” And then we got insecure about that and then we, let’s get a proper grownup name. Now there are great stories out there, like teamwork.com that went from some obscure domain to Teamwork and it exploded their business. It probably had the inverse effect for us. I think we may have been better off at Rubber Stamp, but that’s what happened. So c’est la vie, we can’t win them all.

Rob Walling:
Yeah, that’s the hard part, right? Naming’s hard. Rubber Stamp, I always liked it because it was so memorable. I remember hearing it be like, “Oh, I wonder what that does?” That’s an interesting clever name. And ProcurementExpress describes what it does, but it is less interesting I’d say. So naming’s hard as you said.

James Kennedy:
Yeah, I would say if I to do it again, I would not let myself be part of the naming. And attention is worth more than being super descriptive. And even a big problem with ProcurementExpress is that it’s very similar to our competitors, like from purify, pre choral, all these consensus kind of similar. Sometimes we get emails from people saying, “Oh fantastic, we’ve decided to work with you. This is great. We’re going to get started next month and we can’t wait to start working with whatever no friction or purify one of our competitors.” And I’m like, “No.” They can’t even tell us apart. So differentiating in hindsight, I think it probably was a mistake if I was to do it again, I would maybe have not been branded.

Rob Walling:
So let’s talk about this annual price increase. I want to preface this by saying that with companies that I advise that are selling into the enterprise that are actually doing annual contracts, it’s standard recommendation at this point to say if you’re signing an annual contract with a customer, build in an annual price increase, five to 10% is the rule of thumb that I think we throw around. But a lot of these companies are doing some annual, minority annual, let’s say 20% and then everything else is monthly and a lot of them aren’t custom contracts and they’re just signing up paying with a credit card a year in advance and they’re no custom TOS or whatever. So talk me through how you are handling this. I guess start with, are all your customers annual? And are they all more custom contracts you’re signing or is it terms of service? And then we’re going to dive into the 8% every September. I just want to know how that’s communicated and how that pans out.

James Kennedy:
So to answer your question, yes, for mostly month-to-month contract terms of service, we do have some contracts for some customers and in fact they often preclude us from price increases in those contracts or it’s certainly a point of negotiation, so for bigger customers. But let’s say for our mid-market customers, it’s three to a thousand dollars a month in MRR fees. That’s all just signing up on the website with a credit card. And we started doing this a few years ago because it’s been a mantra as long as I’ve been listening to this podcast about just increase your prices patio 11 I think. And definitely Patrick Campbell talks a lot about this, but I’ve never really, the reason I reached out to you because I never really talked about, well why don’t we just annualize this? And we annualized it just three years ago now and it’s been the best thing ever.
And I don’t want to say everyone should rush out and do this, but there’s definitely, I’ve identified five key benefits and there’s one reason not to do it in true content marketing style. So we started doing this three years ago and the first thing is that we actually did a price increase three years ago and it had to be bigger because we hadn’t done the price increase for three years or maybe three or four years. And then suddenly we were faced with new customers were paying $300 a month, whereas some customers were paying $50 a month from way back in the day. The longer it went on, the worse it became because if they were grandfathered then you just had this desperate group of payments and it also made the physically very difficult to manage all the payments. So your stripe becomes a mess.
Some people are on one type of plan and some people are on a different type of plan and it became very, very difficult to manage. So after having to go through the pay and also when you do a big increase, I think we did like 20% or so, we definitely hit churn on that. That’s not good news story for anyone. So we were like, okay, subsequent years we’re just going to warn our customers and in fact new customers that come on September, we do our price increase.
We normally say exactly that, it’s like between five and 10%. Last year it was 8%. And then the biggest benefit there, first one is it avoids this shock. So A, customers expect it. So it’s not so much because if you’re a hundred bucks a month, paying 110, it’s a rounding error. It really doesn’t matter to anyone except you as running a SaaS business because multiply that across all your customers, it’s actually a really significant bump to your MRR and it becomes a little early gift Christmas present, which you can plan for and you can decide, okay, you want to hire a new resource or whatever, you know it’s coming in September and it’s a two-way win.
You know you’re going to get the bump in ARR and your customers know it’s coming, you train them for it. So I’d say the first big reason is, or big benefit is it avoids a bigger shock every two or three years just forgetting to do it. You hear about lots of people who buy SaaS businesses and they haven’t done a price increase in 10 years or something nuts and then suddenly you’re faced with trying to bring them up to 2023 levels and it’s just too much and then you really annoy people. Yeah, so I’d say that’s the first benefit. It avoids larger bumps. The second thing is that I think really it’s a rule of thumb that no one really cares as long as less than 20% except for one group of people. And that’s the group of people that weren’t getting value from your product in the first place.
So it’s not universally great. So especially I think it’s maybe a little secret of SaaS is that there’s inactive users, it can be anything from five to 15% of your customer base may be paying you and are not getting value from the product. That’s a group of people that will consider things and you have to think about before you go ahead with your price increase, well how are you going to handle that?
Of course the best way to handle that is to identify them and try and get them active. But as we all know, no matter what you do, no matter how many cartwheels you do to try and get people activated, a hundred percent, I don’t know if it’s possible, I’ve never heard of it, but it’s just really hard to get people on board. So I think the fact that it’s 8% means that your risk of churn is very low. We do have a bump in churn after we do this, for sure it does exist, but it’s always the people who were just never onboarded in the first place. And personally I would prefer we could get them active, but I’d rather also be honest about my ARR and there’s an argument for just churning people who aren’t active anyway and just focusing on the people who are, because it keeps the business real and honest.

Rob Walling:
I’m curious how you communicate this to new customers. Obviously existing customers who’ve been with you through a September, they probably got an email and they know that it’s happening. But if I signed up, it’s December, if I signed up now, how would I find out that there’s going to be a price increase next September?

James Kennedy:
So it’s not part of our sales process, but if people ask, we always tell them. So we normally actually have a bit of a grace period. So if it’s September for anyone from July, they’ll get that year’s pricing for the following year. But anyone previous to that then will just be put onto the new pricing. And I know a lot of people go to a lot of effort with their emails, with fancy emails. My email is quite straightforward, the subject line is my favorite subject line is our smallest ever price increase and 10 new features we made for you this year. And then in there I’ll describe it as we’re going from $30 to $31 per user per month. And then I will go down through what we did for them that year, which I think is another benefit because I know this email is coming up in September and if you’ve got to explain your price increase, you know you got to do it.
It’s actually interesting. It’s a psychological thing. So how am I going to justify this price increase? And there’s a very good argument for inflation, yada yada, everything gets more expensive. Restaurant prices go up, food goes up, everything goes up. So why shouldn’t SaaS? There’s an argument to that which I’d like to talk a bit about which people think, “Well if it’s SaaS, you’ve made the product once and sure why should you ever have to put up the price because you just stamp out more software.” Which would be true if there wasn’t a thing called churn.
But there’s a roof, so there is actually a roof to what you can possibly get in terms of revenue. So it means that you do have to increase your prices. Yeah, so that’s how I describe it. I say this year for example was we went from 33 to $35 per user per month. The email goes out, we got one churn straight back on the email and then in the subsequent month we had a higher than normal churn. We have fairly low churn as the general rule, but it was really, I could see it was the people who hadn’t been onboarded and it was still a big win in terms of net MRR for us for sure.

Rob Walling:
And you mentioned to me that this also helps you close some deals. You’re in the middle of a procurement process yourself trying to bring someone on there in a decision process and you say if you get in by this date, you get the old pricing for a year in essence. And you actually mean it, it’s not just a sales tactic?

James Kennedy:
Sure, yeah. Well it is a hundred percent and I tell the sales team and they know it and they’re trying to get their people in, yeah, helps them with their quota, an extra thing to bring in for the end of the quarter, helps them bring in with their quota and everything. So it’s an overall good reason to move to take action. But there’s one definitely one big reason I think you should consider not doing this or you should be careful, and this is something actually I mentioned again Jason Cohen came up with on Twitter, I was talking about this and he was saying, “Well if you’re not careful you can inadvertently drift up market.”
So if you’re just increasing your prices and you’re not thinking about it at a certain point you change the nature of your customers. So you might go from proof prosumer to mid-market, you suddenly might go from mid-market to enterprise and then that changes how your product is positioned and so on. So normally at an 8% rate it’s not going to be about that. You just have to be aware of that as it’s going on. We definitely have some customers that only came on because we were 50 bucks a month. That’s long gone. We just are happy with that, not having those customers anymore. But yeah, still have to be cognizant of that, that you could damage your business if you just went too high without considering what your use case is.

Rob Walling:
Yeah, that’s what I was going to ask or I was going to ask an intentional question to that. If you raise every year five to 10%, do you find that you are now more expensive than any of your competitors and they’re not raising because a lot of people don’t and so not exactly up market, but to the point where you’re enough above a couple competitors that it’s causing you grief?

James Kennedy:
Yes, that is true and it means your product has to be better. And some people will say, “Well, if you built a business which is about undercurrent, undercutting a big incumbent like a Mail Chimp or a Constant Contact or something, then yeah, maybe you don’t want to do that.” But for our product we’re happy to go along with that because I personally believe because we sit on top of $3 billion worth of spend data every year, I see how people buy and I’m firmly convinced that the actual dollar value has very little to do with the buying decision, definitely in mid-market. So really the price is just someone has to justify to someone else why this product is worth something. You have to give them a good justification, but really what you’re doing in mid-market most of the time is saving people’s time and saving staff time, et cetera, so they can be let opened up to be more strategic, et cetera.
It’s saying you’ve got to be careful not to say the quiet bit out loud. So you got to be careful to say, “Listen, it’s all about price.” Especially our tool. We’re all about price and helping people get the right price. There’s trillions of dollars worth of mar tech solutions out there to help salespeople to sell, but there’s hardly any software help from us and our competitors to help people buy. So I am definitely aware of what the buying cycle is like for people. So you got to be aware of that. But having said that, I just believe that another thing is when people decide to buy, let’s say at a hundred dollars a month or whatever it is, they have not experienced the value in your product. They’ve heard a bunch of claims, they’ve maybe done a sales demo, they maybe got a testimonial, but they don’t actually know if it’s going to work. One year later after having experienced the product, if it’s working, then the money isn’t a problem.
If it’s not working, that’s a different situation. That’s why I’m not a big fan of discounting either, because it’s really a weak source argument for why someone should buy your product because you’re the cheapest. And where does that go? If you’re the cheapest, does that mean it’s okay to let yourself off and having the best performance or the best experience or whatever else you decided to compete on, and then where does that go? Well, someone else comes along who’s cheaper and they are even nastier or whatever. It lets you off the hook in terms of quality in your product. So maybe that’s the strategy here in Ireland. We have Ryanair, it’s like a low cost airline and they do very well doing that, but it’s not the strategy we cater for, especially in the face of increasing cost of acquisition across the board.
This has been an argument for decades, which is ad spend is going up, cost of acquiring customers going up and what’s going to happen there? To now, if I was to start our product today, there’s no way we would have enough money to compete with the other people like ourselves in the market because the ACVs have become high enough to support more expensive marketing channels. They’ve pushed up Capterra, pushed up AdWords, pushed up everything else. Even SEO becomes expensive when you’re competing against incumbents. So where does that go? If you’re not going up market, where’s your strategy? Because eventually someone else is going to come along with more. It could be a funded competitor who burns all their cash and goes into the ground or whatever, but then in the meantime they destroyed your business. So that doesn’t help you.
So that’s my view on increasing the prices also pushes your team say, “Hey listen, I’ve got to write this email next year a better price increase, so let’s think about that.” What’s going to be a no-brainer when I write the email about, hey, they’ve charging us extra two bucks a user and meanwhile they’ve added OCR and they’ve added whatever features we got planned for the year. And it focuses the mind a little bit like how Amazon did the press release before they do a product. You got to imagine, okay, well how are we going to justify our price increase this year, guys?

Rob Walling:
Yeah, I really like that aspect of it. There have been multiple times where I will sit down and write a landing page for something before I then go build it. So TinySeed started as a landing page, an AR and I actually maybe we had started building a deck, we had a part of a deck, but I remember being like, “I want to write down what this thing should be like. How do I explain it to people? How do I sell it to people?” And in essence, and I’ve done that with books and such before that, but that’s what you’re talking about is thinking about starting from the end and then using it as motivation to get things done. I want to circle back on one thing you said because I’m super curious. You said we’re sitting on $3 billion in procurement data and so I have a sense of how people buy. Any other insight that you want to share just off the cuff of a pattern or patterns you see that you feel like other SaaS folks could benefit from?

James Kennedy:
I will say that price has become more of an issue. I think we’ve all seen that anecdotally and also in terms of purchasing volumes has gone down and average dollar sale in the system has gone down. Now all on aggregated data is BS. So maybe I could, I don’t want to give you off the top answer there, but I can say in a very high level I could probably come back and give some segmented data there. But on a very high level for sure, price purchasing has changed in the last quarter and having a value prop, definitely it has tightened up. So it’s a lot more focus on getting the right value. So I’m not going to be as a more detailed answer. Maybe I should go and do some research and tell you about that.

Rob Walling:
And that’s fine because I asked you that off the cuff without any preparation.

James Kennedy:
Yeah.

Rob Walling:
I want to wrap up with this email subject line. When you emailed me, you said, “I’d like to throw in the best subject line I’ve ever written.” And of course that was a great teaser. I’d love to hear what it was.

James Kennedy:
Sure. When we do a price increase, it’s always some variation of this, which is what we’re going to do for you in 2023 and our lowest price increase ever. So I’m not hiding the fact that we’re doing a price increase. I personally love that line because it’s kind of humorous. I think you’re giving you a price increase, but at least it’s the smallest we’ve ever done. And the way we achieve that is on a percentage basis, we keep it within smaller than last year normally.

Rob Walling:
Awesome. Well, if folks haven’t seen your MicroConf talks, you have two of them. How we reduced churn by 25%, how you could do it too. That was MicroConf year of 2019, an attendee talk. And then you had a full talk about sales, how to stop giving demos and build a sales factory instead at MicroConf growth in 2017. And if folks want to keep up with you, procurementexpress.com to see what you’re working on. Are you still on Twitter these days?

James Kennedy:
Yeah, yeah. James Kennedy. I’m back. I think I’m the only one left on Twitter apparently.

Rob Walling:
Yeah, I was on it this weekend. I was like, “Hey, anybody out there?” It’s a trip. This’ll go live in a month. And so I am curious by the time that happens, is this where that all will have wound up?

James Kennedy:
We’ll all be on Mastodon. Yeah.

Rob Walling:
Apparently. Yeah.

James Kennedy:
Rob, it’s so, if it’s okay, I’m very keen to hear from other SaaS founders who are marketing to CFOs, hit me up on Twitter. I’d love to talk to you, looking for co-marketing opportunities. So it’s okay to say that I’d love to talk to anyone out there who’s selling to CFOs and mid-market, 50 to 500 employees, have a chat to see if we can do some brainstorming.

Rob Walling:
Absolutely. It would be amazing opportunity if folks are able to pull it together. So James, thanks for coming on the show.

James Kennedy:
Cool, thanks Rob.

Rob Walling:
Thanks for joining me this week. Hope you enjoyed a different episode where certainly it was an interview with James, but we weren’t telling his story per se, we were getting a tactic or a strategy from an experienced founder who’s built pretty incredible business. This is Rob Walling, signing off from episode 646.