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Price Realization
Hi, it's CJ Gustafson and welcome to Looking for Leverage.
Today's term: price realization, meaning the share of an announced price increase that actually turns into revenue.
Let's say you announce a 5% increase. What you collect depends on contracts, renewal timing, procurement teams, sales incentives, and how badly your biggest customers want to stay. So you don't actually get to print 5% across your entire customer base and let it drop to the bottom line (that would be juicy).
But first… Spotify.
Spotify's half-billion dollar email
In January, Spotify sent its US Premium subscribers an email saying the Individual plan was going from $11.99 to $12.99 a month, starting with their February bill (Duo and Family went up $2).
I remember seeing it and thinking, wow, they just printed half a billion dollars.
Seriously!
And it's not like anyone negotiated. The price is what it is. There is no B2B renewal period where both parties come to the table and say their piece about features that have been added and CPI trends. A few people probably grumbled and cancelled, while the rest of us kept paying because we weren't going to rebuild ten years of playlists over a buck (well, $12 annually).
Each account is tiny relative to the whole, pricing is standardized, and there is no procurement team negotiating on behalf of the Gustafson household. Spotify simply sends the email, changes the number on the recurring bill, and for most customers the increase sticks.
That's about as clean as price realization gets.
I learned this one the hard way
I've been on the other side of modeling this wrong as an FP&A professional.
We put through a 7% price increase, and I worked essentially all of it into the plan. I assumed we'd capture the increase across the install base and also land net-new customers at the higher pricing.
We were growing more than 50% y/y at the time, so a lot of the revenue in the plan was going to come from customers we hadn't landed yet. That meant a meaningful portion of the pricing upside in my model depended on us both winning the new logo and winning it at the higher price.
On the install base, what I quickly found was the customers who pushed back hardest were the largest ones, which were also the accounts where the price increase would have helped us the most. They had more dollars at stake and more negotiating leverage, so naturally they cared more about the increase than a smaller customer would.
We also got pushback from our own sales reps, because they were trying to upsell many of those same customers into new products, and hitting the buyer with a price increase before asking them to spend more on something else made that next conversation harder.
We came in at roughly half of what I'd modeled from the price increase on the install base, and missed by more than 75% of what I thought we'd gain on net new.
What I didn't fully appreciate when I built the model was how different those two revenue pools were. The install base already had contracts, relationships, renewal dates and account-level dynamics attached to it, while net new still had to be won in a competitive market where the customer had no obligation to care what we'd done to list price.
And yet, I had put 7% on both.
Where it starts leaking
Pricing shows up in value creation plans for good reason, and you'd be silly not to consider that lever. Where I think the modeling gets harder is what happens after the increase is announced, because in reality, the 5% is just the starting point.
Contract caps: Enterprise customers may have negotiated a CPI or 3% cap on renewal increases when they originally signed, which means the 5% increase you want to push through was never actually an option for that account in the first place.
Multi-year locks: A customer halfway through a three-year fixed-price deal is out of the pool until the contract comes up for renewal. And best believe they will mentally be anchored to a flat rate.
Your biggest customers: The accounts where the increase would generate the most dollars also have the most room to push back. That doesn't mean they won't take price, but I wouldn't expect a $3M account and a $30K account to behave the same way.
Sales incentives: Reps are trying to renew the customer and upsell them at the same time, and if pushing hard on price makes the next product harder to sell, finance may care about that mix differently than sales does.
Concessions: You can also get some or all of the increase and end up giving part of it back somewhere else through seats, services, payment terms or additional functionality.
New logos don't care what you did to list price
You can raise list price by 5%, but the customer is still comparing your quote against alternatives, while your rep is still trying to get the deal done. If discounting expands at the same time, very little of the list price increase actually shows up in the net price.
AI has made that conversation stranger because customers can now threaten to build certain things internally, whether or not they actually could. Every CFO I know will threaten to build something (and it's usually a bluff) just to try to keep prices flat y/y.
The math
Say you're planning a year with $75M of revenue and $63M of costs, so you're starting with $12M of EBITDA before any price increase.
You've got:
Install base: $60M of revenue
New logos: $15M of revenue
If the full 5% sticks across both, that's $3.0M from the install base and $0.75M from new logos, or $3.75M of uplift, taking EBITDA from $12M to $15.75M.
So EBITDA is up 31% off a 5% price increase!!!
Now say the install base realizes half of what you modeled and new logos realize 20%, which is about where I landed:
That's 44% price realization, and a $2.1M gap from what you thought you'd eke out. On revenue it's about a 3% miss to the total plan. On EBITDA it's a 13% miss, because the cost base didn't change.
And if you're in a year where you're looking to fundraise or exit, at a 12x EBITDA multiple, $2.1M of EBITDA is about $25M of enterprise value.
What I'd do differently now
The first thing I'd do is separate the different places the increase is supposed to come from instead of carrying one assumption across everything.
Build the eligible pool: Pull the renewal dates, escalators, caps and multi-year terms so you know which portion of the install base can actually take an increase during the year.
Split the install base into buckets: Large accounts, small accounts, customers coming off multi-year contracts and customers that were recently repriced probably deserve different assumptions.
Model new logos separately: Look at the net price you're actually closing new business at before and after a list price increase. If the list price moved and the average discount moved with it, the realized increase may be much smaller than what you announced.
Work through price versus upsell with sales: There are going to be accounts where pushing harder on the base renewal hurts the odds of selling something else. I'd rather make that tradeoff explicitly than have it happen one deal at a time and find out later.
Track the other givebacks: Seats, services, payment terms and other concessions all matter when you're trying to understand how much of the announced increase you actually kept.
I'd also put price realization, announced vs. realized by bucket, into the monthly sponsor package, especially if price is carrying a lot of the improvement in your EBITDA plan.
Wishing you a price increase that sticks like Spotify's,
CJ
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