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What is the grandfather clause?

When you’re implementing a pricing model for your SaaS business, you’ll probably encounter the term “grandfather clause” at some point. So, what is the grandfather clause and is it right for your business? Read our comprehensive guide for a little more information.  

Grandfather clause definition

On the most general level, a grandfather clause is a legal provision that enables people/organizations to continue with activities that had been approved prior to the introduction of new laws or regulations. Those organizations that are exempt from the new laws are referred to as having “grandfather rights” or having been “grandfathered in.” A grandfather clause example could be a “grandfathered power plant” that’s exempt from new energy laws and regulations. In most cases, grandfather clauses are time-limited, which means that they only apply for a specific period or with certain limitations.

In the SaaS space, the meaning behind the grandfather clause is slightly different. Essentially, it’s a clause that ensures your existing customers are able to stay at the same price-point they agreed to when they first signed up, while new pricing plans are applied to new customers, who are charged more. Grandfather clauses are commonly used throughout the subscription economy and by companies in the SaaS space – but is it always a good idea to grandfather your subscribers into lower price plans?

Benefits of the grandfather clause

Grandfathering can have a significant impact on your business. It’s relatively common for SaaS pricing strategies to start off with an inexpensive price to entice new customers, before raising the cost over time. This is sometimes referred to as “penetration pricing.” Furthermore, freemium models can mean that your subscribers start out by paying $0 for your product or service.

Although it might appear that by grandfathering these early subscribers, you’re needlessly forgoing revenue, there are benefits to consider. Firstly, it’s a great way to reward those customers who stuck with you from the early days, and perhaps provided you with invaluable feedback that enables you to improve the product. In short, it’s a good tool for customer retention.

Furthermore, not applying the grandfather clause to your early customers could reduce the number of referrals your business receives in the early days of growth, while diluting the level of goodwill your target customers feel for your product. By contrast, grandfathering could encourage these customers to engage even more deeply with your product.

However, there are a few drawbacks that should be considered before you make a decision regarding the grandfather clause.

Drawbacks of the grandfather clause

First up, there’s the economic side. If you’re grandfathering, you’re leaving money on the table that could be used to fuel growth and enhance your products and services. Grandfathering is an implicit barrier to growth and a self-inflicted wound to your bank balance. By charging all your customers a fair price for the product, regardless of when they signed up, you can strengthen the financial base of your business and ensure that you’re driving growth all the time.

Then, there’s the customer retention side. Although many people claim that a grandfather clause is a great way to deepen the bond between you and your customers, there’s a good chance that by providing additional features for free, you’re essentially devaluing the product in their eyes. This could make your customers more likely to churn, introducing even more financial instability to your business. The more you charge, the more likely your customers are to really engage with your product or service.

Transitioning out of grandfather clauses

Overall, the grandfather clause may not always be the most effective addition to your business’s pricing plans. While it’s a great way to show your appreciation for loyal customers, there’s no need to devalue your product. Other customer retention strategies, such as customer loyalty plans or forming a customer advisory board, are likely to be more beneficial.

So, if you budgeted for a grandfather clause in your old pricing plan, are you stuck with it? No, rather than allowing your customers to stay at their old price-point indefinitely, you can gradually transition them to your current pricing plan. Give them around 12-18 months’ notice of the price rise so that they aren’t blindsided, and as a gesture of good will, you could offer them a discounted annual plan.

It may also be a good idea to draw up some kind of “Customer Bill of Rights” which explains to your customers how price increases will be dealt with in the future. Generally, customers are willing to go with a price increase if they’re confident that they’re receiving an equivalent increase in value as well.

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