Could this help boost the Xero share price in 2022?

Xero is lifting prices for subscribers. Will this help the share price?

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Key points

  • The Xero share price has suffered a heavy sell-off this month
  • It’s putting up prices for subscribers in some of its key markets
  • Xero said it would help improve the service for subscribers

The Xero Limited (ASX: XRO) share price fell 2.6% to $79.72 yesterday, taking its losses this month to almost 11%.

However, it will be interesting to see what happens next after the ASX tech share announced that it would be implementing price increases.

There are two key ways that Xero can grow its total operating revenue. It can grow its number of subscribers, and it can also increase the average revenue per user (ARPU).

Xero could soon see a bump in (annualised) revenue after announcing that it was going to be increasing the prices in some of its key markets.

Price increases

Xero is a major accounting software player in Australia, the UK, and New Zealand, with more than two million subscribers across those three countries.

Now it has announced it’s going to be increasing prices for these regions in mid-September 2022.

In Australia, many of its plans are going up by more than 8%. For example, the ‘standard’ Xero subscription in Australia is going up from $54 per month to $59 per month. The ‘premium 100’ package is rising by $14 to $177 per month, while the ‘starter’ package is seeing a $2 per month rise to $29 per month.

Why is Xero raising prices for Australian subscribers? It said:

This price change will help us continue to respond quickly with the tools and services businesses need to operate efficiently in changing environments, and improve Xero for our customers now and in the future.

Xero is also increasing prices in other regions such as the UK and New Zealand. Higher prices could help the Xero share price over time if it leads to more revenue and earnings.

The UK ‘starter’ subscribers will see a £2 per month rise to £14 per month – a 16.7% rise. ‘Standard’ UK subscribers will see a 7.7% rise to £28 per month. ‘Premium’ subscribers will experience a 9% rise per month to £36 per month.

New Zealand subscribers are also going to see a price increase. ‘Starter’ subscribers will get a 6.9% increase to NZ$31 per month, ‘standard’ subscribers will get a 6.4% rise to NZ$66 per month, and ‘premium’ subscribers will see a 7.7% rise to NZ$84 per month.

How will this affect Xero’s financial metrics?

It will be interesting to see how this affects the ARPU, annualised monthly recurring revenue (AMRR), and retention rate statistics over the next 12 months.

Xero has already been reporting growth in its ARPU. In FY22, ARPU rose by 7% to NZ$31.36, total subscribers increased by 19% to 3.27 million, and AMRR increased 28% to NZ$1.23 billion.

These price increases could also help Xero’s profit margins. In FY22, the gross profit margin was 87.3%, up from 86% in FY21. However, Xero is currently investing a lot of its revenue in growth expenditure, such as marketing and product development, so it isn’t generating much free cash flow or net profit after tax (NPAT) yet.

At the end of FY22, Xero had a net cash position of $51.2 million. It had cash and short-term deposits of $936 million, with $884.8 million of convertible notes as a term debt liability.

Foolish takeaway

The price increase is a few months away, but it should come just in time to boost some of the FY23 half-year numbers as that result will be for the six months to 30 September 2022. For example, the annualised monthly recurring revenue should get a boost.

Since the beginning of 2022, the Xero share price has fallen 45% amid the heavy market focus on inflation and interest rates. Time will tell what happens next.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Xero. The Motley Fool Australia has positions in and has recommended Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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