We are currently building an application which will be licensed to customers. Customers then pay $x a year to for updates, maintenance and reviews each year.
Would it be practical to adjust the price they pay each year to inflation? Do customers react well to such increases? How should one communicate such a change (should be just tell them that we are adjusting to reflect inflation)?
I would argue that if you must increase your fees year by year to be able to maintain your margin, you are likely not pricing your product correctly, or have grossly underestimated how much it costs to deliver the product to your customers. As a company you have a learning curve, so theoretically regardless of inflation, the cost to produce a service or good should go down the longer / more you produce. So this idea of increasing costs to match inflation should really only apply on VERY low margin products or services (commodities) which software generally isn't/
I would advise you to seek a qualified cost accountant, and based on the data he delivers to you, adjust your pricing structure to more accurately address market realities.
You should put a clause in your maintenance agreement that there will be a consistant say 5% increase per year by default to adjust for inflation and the wages of technical staff which are rising quicker than the average. (ask your lawyer for the best wording)
Changing the rules "after the fact" can cause you issues depending on the size of the contact. If its a $10 increase then they probably won't worry, if its $10,000 you may need to treat with more care so you don't sour relations.
The approach we take is to write a letter or email a few months ahead of time to remind them of the renewal and stating the new rates with a note as to why they are increasing. If it is < 5% and people are warned in advance you should have minimal push back.
For new clients you should get it on the contract upfront that it should always be expected, either a fixed amount or make sure in the contract you can send the letter from the paragraph above with your "increase for this year" assessed per time.
I work for a large government organisation in the UK and it is common and accepted practice to write in a RPI increase into the contract.
If your contract is fixed term, you can probably build in a reasonable estimate for RPI increases and play it that way. Not so good if it is perpetual.
So, I would say the answer is yes, as long as you have agreed this up front. They may not like it, and might ask you to remove it from the agreement, but there is no harm in trying and it probably depends on the type of organisation you are selling to.
However, laying it on your poor customer where it's not part of the original T & Cs they signed up for is not good form (although I understand you are not suggesting this).
Yes. Here are a list of few things you SHOULD do. It will allow you to make SIGNIFICANT changes to your revenue/sales. You can increase your price by 71%!