One right price is better than three wrong prices: SurveyGizmo Simplifies Pricing

This post is my interview with CEO of SurveyGizmo, Christian Vanek on their pricing strategy.

A few weeks back I wrote about the continuing changes to SurveyGizmo pricing. It turned out they have been A/B testing their pricing for a while and I had slipped through the crack, finding both the offers. Last week I sat down (over phone) with SurveyGizmo CEO, Christian Vanek and their web marketing lead Kipp Chambers for a conversation on their new pricing.  Christian happily shared with me  the genesis and details of this simplified pricing.

The details are sure to add new dimension to the thinking of most startups that see pricing as simple freemium model or do it as tactical afterthought. Their analytical process, understanding of customer mix and their willingness to go against the conventional wisdom are exceptional traits that need to be commended.

Pricing is lot more than an eye-candy pricing page!

What was their pricing before the change?

Take a look at their previous pricing page. Their pricing options and the pricing page design look not much different from numerous other webapps out there. In fact there are wordpress templates available to show this classic three column design with the “suggested version” highlighted.

One glaring difference is, while most webapps include their free version as one of the three presented, SurveyGizmo showed their free version as a footnote.
Otherwise this is nothing more than a  instance of what Hal Varian described as Goldilocks pricing.

What is the change?

Gone are the multiple editions and the pricing page eye candy to nudge customers to a specific edition. There is just one edition with all the features including the advanced features that used to be available only in the higher priced versions. Most importantly, they used to limit the number of responses per month and now they eliminated that limit as well.

In the past they had a cheaper $19 plan even though it was not prominently featured in the pricing page. Now that is gone along with the $159 Enterprise Plan that was prominently featured and highlighted in the middle of the pricing page.

After this pruning, all is left is just one version – no name  for it (like the new iPad)- offered at $50 for the first user and a flat fee of $20 per additional user.
Another point to note is there is no non-linear pricing built into the price list. Whether it is 100 additional user of 1 additional user, the price is the same, $20 per additional user.

To discuss this change, the drivers behind it and how they arrived at it, I talked to SurveyGizmo’s Christian Vanek, their CEO, and Kipp Chambers. Here is what they had to say.

Why are you open to sharing this information? Isn’t pricing strategy meant to add to your competitive advantage?

“We have a company policy of no secrets”, said Vanek. He stayed true to this policy even when I later asked him about SurveyGizmo’s future product roadmap.  “Regarding SurveyGizmo’s pricing there is nothing really to be protective about. As soon as  the pricing page went up our competitors likely saw it. Or they will know when your article goes up. Even before this, people were copying the pricing plans and the pricing page down to the name of our plans and their feature set. Once they had comparable plans they were competing on price”. Vanek adds he could either spend all his energy protecting ideas or spend his energy on better execution and coming up with newer ideas. The choice is clear to him.

What are the drivers for this major pricing change?

We had our $19 plan, the $49 plan and the $159 plan. We found several key things from our analysis of our customers.

  1. Very people were opting for the $19 plan. Some of those who chose it for price realized they did not have all the features they needed and were calling us about that. In most cases we ended up enabling the additional features for them. We are not going to tell our customer, ‘you need to pay additional just for that feature’. Some upgraded to higher priced plan just for a brief period to use the advanced features and downgraded right away when their job was done.
  2. Those who picked the $159 plan were using only 10% of all possible features they get with it. We were taking lot more money from our customers who were not taking full advantage of what they were paying for.
  3. What if a customer wants only one of the feature offered in higher priced version and that is the only one they want? Why should they pay more just for that? We tried for a time some kind of a la carte pricing but it was not the best of experience for our customers.
  4. Surprisingly, customer satisfaction was low among those who chose the lowest priced plan and high among those who chose the higher priced plans. You could argue this is because their purchasing decision itself may have something to do with satisfaction rating.

Considering all these we thought, there is really only plan that served customer needs and presenting three options is likely aggravating customer choice by adding to their cognitive costs. So we decided to test this hypothesis.

This is so different from what every other webapp startup is doing.

Presenting  three plans, any three plans, at different price points and hoping customer will pick the one they want is shotgun approach to customer segmentation. It came apparent to us to retire the shotgun and get sniper”. (Vanek calls this his Call of Duty metaphor, “almost any business lesson can be learned from Call of Duty”, and adds The Lord of The Rings after my prompting*. )

“I think we are seeing now the end of the freemium model, signing up for free and then trying to up-sell. Our value is in providing both a great product and great service to go with it to customers who need and value our product”.

So you are giving up those customers who are willing to pay $20?

These customers were never ours to begin with. Customers who want free survey or want to pay $10 or $20 a month have always been SurveyMonkey’s customers. We are okay with that. If a customer is happy with a competitor we are okay with that. These were the customers who anyway ended up getting the features from higher priced plan because we did not want to say to them, that is extra.

What about profits lost by eliminating $159 plan?

“This was our fear as well and we discussed this internally. It would seem silly to give up on the higher priced plan. In essence you have to bring in 3 new customers at $50 level for every $159 customer we are giving up by eliminating this plan. We asked internally, can we do this? Happy to say we are doing very well after we moved to single price plan.”

“When we discuss our features with customers showing them how we compare feature for feature with competitors and then show them the price, they ask, ‘okay, why such a low price? What is the catch?’. There is no catch. We don’t have to overcharge for the product.”

About the change process?

“We did lots of A/B testing. We found that customer decision was easier with just one pricing option. In fact when we presented the simplified plan in split testing  that charged $50 for first user and  $20 for each additional user we found customers were signing up more than one user than they did with three pricing options.  We are serving marketing research field, we should be doing our homework before such change. Only after a lengthy testing process and data analysis we decided to go with this change.”

It is acceptable for a pricing geek like myself to say cognitive cost, how is that you are thinking about it?

For this Vanek seems to believe this is common sense. A customer who has to weigh multiple plans, the features it has and the price points suffers significant cognitive cost. “We work with lots of researchers who work on cognitive research and we understand the cost to customer from choice.”

Final words?

By eliminating the three plans and going to a single plan we have narrowed the field. We are targeting only those customers who want and value the advanced features.


*Talking of The Lord of The Rings, Vanek says his super power is he has the voice of Saruman.

On Customer Segmentation

Are you a devoted fan of Greek style Yogurt?  You know, the one with tangy taste and texture of sour cream? If you answered no, think back on the TV ads for the unusual brand, “Chobani”.
If you answered yes, then some industry analysts believe they can answer the following questions about you

  1. Your education level
  2. Your income level
  3. The  part of the country you live
  4. Whether or not you frequent Starbucks
  5. Your gender

What do these data points have to do with segmentation? David Palmer, an analyst with UBS, has this to say about those rabid fans of Greek yogurt:

You know, sort of what I would envision to be the Starbucks crowd. It’s a higher-educated, higher-income user that resides in the Northeast. More often than not, the Greek yogurt consumer is a female.

As you can see from Palmer’s quote, he very succinctly captures the five attributes  listed above  in his description. What he is describing is a a type of segmentation  based on fixed and observable characteristics of the customers. Due to the fixed (or fixed over longer periods) nature of the attributes (gender, geo, education) this is also known as Static Segmentation.

You can see the fallacy in Palmer’s argument. He is basing his segmentation by observing the current customers and listing out their common traits he can easily distinguish. This does not mean anyone with these traits are the target segment  or vice versa.

Marketers practice Static Segmentation because it is easy. You see this in consumer products and in B2B as well. In B2B, it is even worse, most Product Managers really have no clue what their segments are and simply opt for the industry classification.

It is easy and observable but  it is not correct. Before I explain what is wrong, let us see what a Greek  yogurt fan has to say about Palmer’s segment description,

I love Greek yogurt. I’m highly educated, and I live in the Deep South. Can that be right? In case Mr. Palmer forgot, Starbucks began in Seattle, about as far from the Northeast as you can get, not to mention that there are higher-educated, higher-income users all across this country. I could have done without the jab about the education and income level of consumers across America.

Static segmentation, while easy for anyone to practice, does not answer the product strategy questions (and if you state your segmentation in public your customers won’t like it either).

What are the product strategy questions? Here is a list of Top-10 product strategy questions for starters:

  1. What is our competition? There may not be another product from a competing brand but there are many alternatives.
  2. How much do these alternatives pull down the reference price?
  3. What are the obstacles for product adoption? Are there reasons for customers not to buy the product?
  4. What is the opportunity size? Most usually answer this question by answering a different easy question. For example, there are 40 million customers in certain income bracket that spend a total of $50 billion. If we capture just 2% of this spend, that is a $1 billion business.
  5. Which segment should we go after first and with what version?
  6. What are the different product versions we should offer and at what prices?
  7. From what budget (real or mental account) will the customers be paying for the product?
  8. How will we reach these customers?
  9. What is our messaging?
  10. Should we be investing in this product line over other competing opportunities?
Knowing the education level or that the customer lives in North-East does not help and are non-starters.
Answering the product strategy questions require a different type of segmentation called – Needs Based Segmentation which starts with the compelling needs of the customers vs. observable traits of the customers. It cuts across the Static Segmentation boundaries.  For instance, there are purchasing occasions where  considerable number of people from low-income bracket may buy your product.  (see Tiffany Sterling silver case study in my Groupon book)
Needs based segmentation is not easy, it is expensive (time and cost it would take you to hire me), and non-reusable (from one product to another).  But the value it deliver is the difference between a successful product strategy and a spectacular failure.
Greek yogurt or a webapp, if you are not practicing needs based segmentation you are swimming in shark infested waters with anchor chained to your legs.

The Pricing Story You Likely Did Not Read About

You likely read the many opinions about Netflix pricing. This isn’t about that. This is about something boring, something you do not think about much (even though your safety depends on it) and something you buy only every five years or so.  It is highly utilitarian consumption but does have hedonistic and conspicuous aspects to it.

Tires!

Specifically Goodyear’s tire pricing case study. I am not breaking news for you, it was in the news. Most of you likely missed it. It is not about Goodyear using Customer engagement, Co-creation, Business Model Innovation, Social Media, Gamification, Product Innovation, Superior Design,Decoy pricing, Viral campaign etc. So none of the Gurus wrote their opinion on it.

The story has none of the popular components to it. It is very dull. It is just a story about how Goodyear  relied on first principles of strategic marketing to increase revenue and most importantly increase profit.

Here is the link, if you do not have access you should find a way to get it.

The headline is,  Goodyear increased revenue by 25% with just 2% increase in number of tires sold. Most strikingly its turned a profit of $143 million from a previous year loss of $19 million (I did not check income statement to see if there were any one time charges).

How did they do it? None of the quick fix recipes. It simply started with their segmentation. Until an year ago, Goodyear sold more tires to auto makers than they did to customers. The problem with auto makers is tire is yet another component that adds to their cost. They want the cheapest possible tire both in terms of quality and the price they are willing to pay.

Goodyear stated,

the key to its turnaround has been concentrating on fewer but higher priced products targeted more toward consumers than auto makers.

The impact on its pricing?

Four years ago, almost 40% of the tires it produced were low-end tires retailing for about $60 apiece.

The average likely pulled down by even lower wholesale prices to car manufacturers.

With their new strategy to focus on consumer segment (rather than auto makers)

Almost 75% of its tires now sell for $130 and up.

Note that the price change started with their customer segments. The product mix did not change until they made the strategic choice about customer segment to serve.

Knowing the current customer mix and making a strategic decision to change it to drive revenue and profit is not innovative. But given that most have forgotten the first principles of business in favor of the fads of the time, following first principles would soon be called innovative.

That is is a pricing story worth telling many times.


Note: Not all the profit increase can be attributed to segmentation strategy change alone. They did some operational efficiency changes (another boring act) and negotiated deal with union.

Losing Control of Customer Mix Through Group Discounting

From the Book:  To Group Coupon Or Not

In one of the small business success stories featured in GroupOn website, Director of Melt Spa and Salon in Boston tells us about her success from running GroupOn promotion.

Her original expectation was 200 people but the promotion brought in 1400.

If you skip ahead in the video, at one point she answers the question,

“What were GroupOn customers like?”

The Spa Director says,

“We have seen a big range of customers come in, from students to business people to grandmas”

When you open a premium Spa and Salon or any similar business that offers premium product at premium prices, your strategy should be to target specific segment of customers who are similar in their profiles. Most importantly you want a customer mix that hires your product for the same set of reasons.

A customer buying  $125 haircut is hiring the product not just for what the product is but for a basket of reasons. There are utilitarian reasons and then there are other (hedonistic) reasons like brand, experience, ambience, social status and most importantly other customers.

Perception of profiles of other customers is a key decision factor because it tells them about their own profile. We all tend to look for social conformity in our choices.

If a  GroupOn promotion brings in 1400 new customers, from students to business people to grandmas who came in only because of the steep discount, what message will it send to your core customers?

Will the big change in customer mix negate a key reason your pre-GroupOn customers hired your product for?

I have nothing against grandmas; the point is your loyal customers may take away a different message about the product when they see a sudden change in customer mix.

Acquiring 1400 new customers who paid $50 for $125 services is not all bad  but you lose control of your customer mix.

Instead of targeting all its 25 million email subscribers, can a Group Coupon site enable you to specify the exact customer profile that you want to reach?

Do you know your customer mix?

You run a cupcake business or a web startup, you have customers – do you know

  1. Profiles of those you give you their money?
  2. Types of customers that generate your sales?
  3. Types of customers that generate your profits?
  4. The touch points – how you can reach the different customers?
  5. Those you are relational and those who are transactional?

If you know these about your customers, you know your customer mix.

If you do not know your customer mix you are flying without a dashboard, not knowing which customers to keep and develop and which to fire.

I listened to last weekend’s This American Life’s story featuring a Chik-fil-a franchise owner from a Tennessee mall. Take a listen to this small business owner’s grasp of this key concept (start at 15 minute mark)

“50% of my business comes from people who work in the mall”

For a franchise owner with no control over the product or the messaging, she is focused on one aspect she can and must control for her business – customer mix.

Do you know your customer mix?