We believe we are entering a period in which leading companies, with mission critical products and services, can finally flex pricing power. There are multiple reasons for this newfound power. First, we believe the shift from the Easy Money era to rational money is making a number of industries less competitive (as startups die off), allowing the industry leaders to emerge stronger and, in some cases, with improved pricing power. Second, investors are demanding that management teams focus on profits and expanding margins, and increasing pricing is a powerful lever to drive profit growth. All that said, we believe an even stronger and sustainable foundation for increasing prices occurs when companies create a series of innovations and features, fundamentally increasing the value of their offerings—and justifying higher prices over time.
We illustrate this dynamic in the graphic below, which shows how new features can drive a stairstep increase in the value of an offering to end users/consumers over time. Think of each step as corresponding to each new feature added to a platform. The interesting part is that many technology and innovation leaders have not increased prices that much in the past five years, and as a result a growing “value-price gap” has opened up that allows companies to raise prices. We are seeing this dynamic across a growing number of companies we own.
On average, many of our platform companies have raised prices by 5-10% year over year in recent quarters and appear to be instituting a regular cadence of modest price increases to the future. If this is based on innovations that users truly value, then we believe this can be sustainable. These price increases also add another growth driver, one that is highly profitable given that incremental margins for price increases can approach 90%+ and push up company-wide margins. The bottom-line is that sustainable pricing power is a signal of innovation and competitive advantage, and another driver of the efficient growth profile that the market may reward over time.
With its rapid pace of innovation, HubSpot, is one of the strongest examples of the value-price gap dynamic. At its most recent user conference, INBOUND, in Boston, HubSpot announced over 200 new features across its marketing, sales, service, and content management hubs or platform. Based on these and past new features, the company raised prices by 25% for its Sales Hub Enterprise product last year, and raised prices by 5-8% for its Marketing and Service Hubs this year. It is important to note that many of the company’s new GenAI features, such as blog content assistants (ChatSpot), customer service bots, and other automation, add substantial new value to its broad platform and may position HubSpot to continually increase prices if these features provide important value and productivity enhancements for users and companies, as anticipated.
Another great example of this pricing power dynamic is GitLab, a holding in the portfolio and leader in the software development tools space. GitLab utilizes a “premium” model where its basic product can be used for free, with users converting to higher-priced tiers as they need more advanced features. The first of these tiers, branded as the Premium Tier, had no price increase for the five years prior to the recent 50% increase GitLab instituted. Reflecting the “stairstep” increase in features, GitLab has packed its software development suite/platform with many new features across the Development, Security, and Operations segments of the software lifecycle (known collectively as DevSecOps). The company also roughly doubled the price of its new GitLab Duo Pro GenAI product, which enables higher productivity for programmers through its code suggestions and automated software vulnerability testing.
Monday.com is another standout example of a company that has added a significant number of new innovations, features, and capabilities into its work management platform over the past few years without increasing prices—until now. Monday.com is a cloud-based project and task management platform for planning new projects and managing day-to-day activities and tasks, often in a team-based environment. This is a rich area for adding new features to improve productivity and add value for teams. Newly added features include workflow automations and integrations, product localization across 13 languages (important for multinational companies and in-country customers), an expanded apps marketplace, custom role-based account permissions for enterprises, and important features like Monday Workforms, Monday Workflows, and Monday AI. A key new capability for improving the scalability of its platform has been MondayDB, which improves the scalability of boards/dashboards and increases load time by 5x. After keeping prices flat for five years, Monday.com increased prices on its core work management product by 10-20% in 2024.
Klaviyo, a leader in marketing automation platforms for managing personalized marketing campaigns across multiple channels such as email, SMS, and push notifications, is also flexing pricing power. After not increasing prices for eight years, the company began raising prices in 2022 and 2023 by mid-teens percentages. Klaviyo has a unique architecture that combines the data and application layer, enabling full-stack integration of the data store and the application layer that manages and powers the marketing campaigns. This unique architecture allows Klaviyo to utilize first-party data on customer engagements (interactions and clicks, for example) to improve future campaigns. Given its strong data-based architecture, the company is able to add a number of new features including real-time customer segmentation and analytics. As Klaviyo adds these new features it can steadily increase prices and go up-market after more mid-market and enterprise customers.
Spotify also has a long record of not raising prices—12 years—while it has continually built out its market-leading audio streaming platform. Spotify is the global leader in audio streaming apps with over 600 million users and over 235 million premium subscribers (no ads). In its push to drive sustainable profitability, the company has begun raising prices in multiple geographies, including the US. Starting in 2023, the company raised the price on its premium tier by 10% (by $1, from $9.99 to $10.99 a month). As it has added even more features, such as a leading podcast network and 15 free hours of audiobook streaming, the company has boosted prices in 2024 by $1-2, depending on the geography.
We believe we are entering a unique period in which leading innovators are in a position to flex (long overdue) pricing power. This is of profound importance as the ability to implement price increases adds another growth driver for businesses. The primary drivers of growth for most innovators are launching new products and services (unit growth), taking market share, and expanding margins. However, innovators that continually add new value to their offerings—by adding important new features with a uniquely differentiated and dominant position (such as platform leaders)—pricing becomes an additive growth driver.
