By this point in the cycle, every founder has heard the message that cash-efficient growth is the most important thing to be focused on (as it always should have been). As a starting point, most founders have either frozen hiring or have executed RIFs to right size their fixed overhead.
That is a great starting point, especially given most companies have overhired during the past few years, but cutting fixed overhead only gets you so far.
What most companies should focus on most is improving gross margin. Gross margin improvements not only immediately improve cac, ltv and payback, but as you grow each dollar of growth now provides incremental dollars to support your fixed costs.
While improving margins is always an exercise in both cost reduction and price improvement, the easiest and best lever to pull is simply test increasing price. It hits immediately and requires you to sell less of whatever you were selling to generate the same revenue growth.
So given this and the fact that prices startups charge are often little more than a guess, why are founders so hesitant to increase pricing? If you’ve never raised prices, you could be holding a magic wand that could solve all (or at least a lot) of your problems – “Accio Better Margins!”
My belief is that founders are afraid to raise price for two main reasons. One, great founders are customer-obsessed, and the idea of potentially getting a negative backlash and churn from customers is difficult to stomach. In addition, if the price increase goes poorly, it means that the founder has to wrestle with the really painful idea that maybe their current business isn’t actually good enough to succeed.
If you increase price to the level that gives you attractive margin and unit economics and fail, this might be a proactive step to recognizing failure, but also it gives you the ability to address and fix whats wrong it before it’s too late.
Alternatively, founders who don’t attempt to raise price won’t get this immediate feedback and instead will fail slowly while their cash runs out over the next 12 to 24 months.
But failing slowly is psychologically safer – you can blame the market or investors or a host of other problems, but what you avoid is blaming your product and by extension yourself.
So given the huge impact raising prices can have on growth and burn, in addition to giving you immediate feedback on if your product is good enough – my question is – what type of founder are you and how brave are you going to be?
Are you a founder that addresses the hard thing and recognizes what might be failure and gives yourself and your company a chance to really thrive?
Or will you avoid the hard thing, keep your head down, fail slowly, and blame factors outside of your control?