“The single most important decision in evaluating a business is pricing power.” So sayeth, the greatest investor of all time, Warren Buffett. He added in his typical style:
“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
I’ve spent most of my career in enterprise software, where there has historically been substantial pricing power. I focus mainly on this part of the market. However, my experience with my own one-person company has shown me how much pricing power there is in SMB software.
Quickbooks Online Pricing Power
According to Intuit, QuickBooks Online has approximately 6.6 million subscribers, of whom I am one. I have the plain, simple Simple Start package with no exceptional functionality and have had it for about ten years. Below is a chart of my pricing for this package over the past decade relative to inflation over the same time.
Inflation has increased overall prices by about 30% since 2015. In the same period, the price for QuickBooks online has grown 100%. That’s about a 7% annual price increase. The product has improved over that time, but I have not added any users or additional modules not bundled into the base product. This is a pure price increase.
Is Intuit likely to lose me as a customer? Nope. First, while Intuit sends me a letter about the price change every year, it gets lost in the flood of emails. Pulling this price history from my credit card bills took a lot of work. So, the price is pretty opaque to me. Second, the time I perceive I would need to convert to Xero or something else makes me highly tolerant of price increases. The price has doubled but is a small amount in absolute dollars. No business would waste time changing its core accounting software to save this few bucks.
Mailchimp Pricing Power
Another application I have used for a long time is Mailchimp, an email marketing tool with 1 million customers. Intuit bought Mailchimp for $12 billion in 2021. The pricing story here is pretty comparable, though slightly more complicated.
I have a very plain vanilla version of Mailchimp. The price of Mailchimp’s monthly subscription scales with the number of subscribers to my blog. The base package includes up to 500 subscribers, though I now pay for up to 1500 subscribers. As you will see below, the price of Mailchimp is 4x the price I originally paid in 2016. That’s impressive upselling and price increases.
As you can also see, it also appears that Mailchimp has become more aggressive in its pricing since its acquisition by Intuit. Quelle surprise.
Once again, the absolute dollars are small, and I’m not even remotely thinking of switching, as who the heck wants to learn a new email marketing program?
Small businesses, like my silly little one, restaurants, dentist offices, or contractors, don’t have much time or people to deal with switching out applications core to their business. And if the cost is small relative to revenue, there’s likely to be price inelasticity. Many vertical (and horizontal) SMB SaaS businesses are being built that are likely to have excellent pricing power over the long haul.
I bought Intuit’s stock in 2010 (at the suggestion of Peter Goldmacher, then an analyst at Cowan). At the time, it seemed clear that Intuit was figuring out how to navigate the transition to the cloud. And navigate it they have. In 2010, about 20% of Quickbooks customers were online versus desktop users; now it is 88%! While the price of my Intuit software has doubled or quadrupled, the price of my Intuit stock is up almost 10x since I bought it. It’s, by far, the best stock purchase I have ever made. Now, like Warren Buffett, whenever I evaluate a software company, I try to figure out what their pricing power is likely to be.