What was the purpose of grandfather clauses?

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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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When trying to understand legal documents it is important to know the different types of clauses they can contain. Legal documents can often have complex clauses which may severely impact you without your knowledge. One clause which business owners should be aware of is called a ‘grandfather clause’. Grandfather clauses have the ability change how businesses or even individuals are allowed to operate on daily basis. This article will explain what grandfather clauses are, how they can be applied and what it can mean for your business.

Definition

A grandfather clause is a portion of a statute, contract or regulation which provides that the legal document does not apply in certain circumstances. This is usually due to specific pre-existing facts. It means that whatever the old rules were prior to the implementation of new rules will continue to apply. The group of people or businesses exempt from new laws or contracts have acquired ‘grandfather rights’. This means businesses can continue to operate as if the laws did not exist. This can be a huge benefit to those businesses. It may even shape competition within industries.

Due to reasons of compromise and practicality provisions such as grandfather clauses exist. Grandfather clauses ensure that new laws put in place do not disrupt existing logistical situations. This also means that businesses are not liable retroactively for certain practices or decisions they made prior. The principle of not being retroactively punished is a recurring legal concept.

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Application

Grandfather clauses can be relevant to business owners in a number of contexts. When dealing with employees, contractors or suppliers contracts can contain grandfather clauses which imbue certain rights even if circumstances change or new laws are put into place. Another potential example relates to regulations put in place by governments. There are regular changes to environmental, building, or workplace standards. This has a big impact on businesses and how they operate. However, within the new legislation there may be provisions which allow some businesses to be exempt from newer standards. However, new standards usually do not mean that businesses which are exempt can expand without having to comply to those new standards.

Importantly, just because new regulations or contracts put in place contradict older clauses, it does not mean grandfather clauses apply. For a grandfather clause to exist, there must be a specific provision within the new legal document which allows for an exemption. If there is no provision included grandfather rights cannot be invoked by businesses or individuals.

Sometimes, grandfather clauses have be temporary. This means that businesses are only exempt from new laws for a certain period time. This is because businesses are given time to adjust to new standards and practices. Otherwise it is unfair to implement new laws. In other instances, they are permanent or instituted with limits. The nature of a grandfather clause drastically changes its impact on your business.

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Conclusion

Understanding contracts and new laws is critical to ensuring the continued success of your business. Failing to understand the implications of grandfather clauses can have negative consequences. Errors such as this can be common when running a business which must deal with lots of laws, regulations and contracts. In order to avoid such errors when dealing with grandfather clauses, or any other complex legal matters we recommend that you consult one of the lawyers that Lawpath can help you get in contact with.