The Xero Limited (ASX: XRO) share price closed more than 2% higher on Thursday amid the company announcing further price increases for its subscribers.
Xero shares finished the day at $113.79 apiece, a gain of 2.2%.
The ASX tech share provides cloud accounting services to subscribers around the world.
Two of the company's most important markets are Australia and New Zealand. As at 31 March 2023, Xero had 1.57 million subscribers in Australia and 567,000 subscribers in New Zealand. It had a total of 3.74 million total subscribers globally at the end of FY23.
Image source: Getty Images
Price increases for Australia and New Zealand
From 13 September 2023, Xero will be increasing its prices for both Australian and New Zealand subscribers.
I'm not going to mention every single price change but in New Zealand, starter subscribers will see a 6.4% increase, standard users will get a 7.6% price rise, and premium users will see a price rise of 11.9%.
In Australia, starter users will be hit with a 10.3% increase, standard users will get a 10.2% increase, and 'premium 5' subscribers will see an 11.8% rise.
Xero referenced its investing in its platform when disclosing the price increases, saying:
We continue to invest in our platform to deliver more efficient tools, powerful insights and access to faster payments, so you can save time, improve your cash flow, and operate your business with greater confidence and control.
What will this mean for the Xero share price?
Clearly, investors think it's a good thing, given the positive reaction on the ASX today.
In the company's FY23 result, Xero reported its average revenue per user (ARPU) increased by 10%, which helped operating revenue grow by 28% to NZ$1.4 billion, while annualised monthly recurring revenue (AMRR) increased by 26%.
The last price increase didn't seem to have a negative impact on the company's subscriber churn. Its retention rate was above 99% in FY23, which was better than in FY21.
If Xero's revenue grows faster than its costs, then its profit margins should improve, including the gross profit margin which was around 87.3% in FY23.
Xero is expecting its operating expense-to-operating revenue ratio in FY24 to be around 75%, which would be an improvement from 80.7% in FY23.
Investors often like to judge a business based on its profitability capabilities, so a better profit margin and stronger revenue (thanks to higher subscription prices) could be a winning formula over the next 12 months.
Xero share price snapshot
As we can see on the chart above, Xero shares have risen by more than 60% since the start of 2023.
