How to offer free version – Google Fiber Pricing

 

Google is getting into ISP business with its Google fiber offering. There are several relevant questions about this attempt by a business whose core competence is in organizing world’s information.  There are questions about the pricing strategy, cost structure and whether they have the operational wherewithal to pull this off against others whose core competence is in running a network.

Here let us look at one specific topic – their Free version. Some will see this as significant evidence supporting freemium model. It is anything but a case for freemium. Let us take a closer look at this free version.

The service is available in one city that is likely not the one with hunger for high-speed internet. This in essence is a test market and what they offer here has nothing to do with what they will eventually offer in other markets.

The Free internet is technically not free. Customers either pay $300 upfront or pay $25 a month.

The $300 price is labeled as construction fee which is waived for other premium versions. That is a clever presentation for two reasons. First, the $300 is a high upfront cost for any customer and even more so for someone attracted to free. Right there it limits the most price sensitive customers from opting for this. Second, by explicitly waiving this cost for other two versions, those who choose Free are made to think they are losing out on this value.  Pain from this foregone value will push most to opt for the higher priced versions.

Free is also not free forever, customers who pay the upfront fee will get free service for 7 years. This limits the liability for Google and sets clear expectation among customers. It is likely that most customers who would choose this option do not stay in the same house for 7 years.  If they did stay, they are less likely to switch to another ISP because of sunk cost bias. In essence Google captured upfront value and locked away these customers for up to 7 years, making them unavailable to others.

There is indeed an option to pay-off the $300 fee over twelve months which will help reduce the barrier for some. Prospect theory suggests that paying $25 a month for twelve months will cause more pain than single payment of $300. So even fewer customers are likely to chose the installment option.

Netting it out, this free is not the run of the mill Chris Anderson school of free. There is a well defined segmentation strategy with  carefully crafted free used as a tactic to support it.

Essential Companion Guide to Freemium Article

In my recent article in Gigaom I make a case for returning to the first principles of marketing.I could cover only limited number of points there. Here is an essential companion guide to that article, a list of articles on pricing strategy and freemium that I have been writing over the past three years. Or you can read my entire blog filled with articles on Evidence Based Management and Pricing Strategy.

1. Approximate Guide to Pricing Webapps - It starts with segmentation
2. Freemium Customer Lifecycle – 5 questions to ask before you launch your venture
3. Variations of the World Famous Hershey’s Experiment – Are you betting your venture on one experiment?
4. What do you charge for a service you just made up? Product may be new but what job is the customer hiring it for?
5. Pricing Always Comes First – That is your fair share of value you create for your customers
6. Opportunity Cost of $0 Price - What are you giving up by not charging for your value-add?
7. Pricing Digital Goods – Hint: Not Free
8. Three components of Effective Price Management
9. Can you answer the “why” questions with your segmentation strategy?
10. Last but not the least - Cloudy with a chance of Free business model

Can you afford to set your pricing wrong?

“My only regret was how we introduced pricing in the beginning, because how did we introduce pricing? Thirty dollars and you get all you can eat,”

This is what ATT wireless CEO Mr. Randall Stephenson said about their iPhone history.

It is likely that the price and the unlimited data plan made sense in 2007 when 95% of the people consumed far less mobile content. ATT was fighting for subscribers in a market that was close to saturation. Only way to show growth was by causing churn away from competitors. They chose a price such that it brought in large number of customers with only a small percentage of them being outliers in consumption.

All you can eat was not all bad when there was not much to eat, everyone eats differently, and the amount one can eat had an upper-bound. But all that changed when the very device (iPhone) they were after resulted in explosion of content to consume and rate of consumption.

ATT was forced to rethink pricing to better align price with value delivered. But the initial low price and offering set a strong reference price that was hard to overcome.

Hats off to Mr. Stephenson for seeing their initial folly and admitting it. He sees the importance of getting initial pricing right.

What about your free webapp? How difficult is it going to be to move from free to fee?
ATT has the resources to recover from its pricing mistakes. Can you afford to make mistakes?

 

If you are selling Enterprise Apps you don’t start with freemium

I thought the word freemium went the way of singing fish and MySpace and hoped I never have to write yet another article with this portmanteau in the title. Unfortunately wrong ideas  and false beliefs don’t die easily. They are not replaced by some profound truth because the believers suddenly achieve self-realization. As Kathryn Schulz wrote in her book, Being Wrong, bad ideas die hard because they can only be replaced by another equally bad idea. Until another such bad idea comes around we are stuck with freemium.

This time we are presented with some profound advice on go to market strategy for Enterprise Apps by Scott Irwin from Rembrandt Venture Partners. In his article for GigaOm , Mr. Irwin recommends freemium as the first option for go to market strategy for Enterprise apps before inside sales and before enterprise sales.

Those who are already sold on the idea of freemium will see this as further evidence supporting their case.  Those who are new to the idea will likely see the popularity of the post as evidence for its veracity. Those like me are not going to be convinced as usual. The problem this time is the flagrant errors in the case Mr. Irwin makes by recommending freemium for enterprise apps.

If you stopped reading here, think about it – Enterprises have a budget and have wherewithal to pay. Why shouldn’t you charge for your value-add?

Now to the flaws in Mr. Irwin’s argument.

1. Ignoring Customer Needs: There is absolutely no mention of the customer segmentation and their needs. Why are customers hiring the Enterprise 2.0 Apps for? If you do not understand your target segment and their needs you cannot deliver them an effective product. And if there is an urgent your product fulfills why should you not charge for it? These are enterprise customers and they have a budget to pay for these apps that add value.
2. Ignoring Customer-Channel Alignment: Mr.Irwin starts out by making a case with Salesforce.com, a company I admire for its disruption of the enterprise software landscape and its marketing. But it should be noted that they very carefully chose their initial go to market strategy that aligned with how enterprises buy software – building an highly effective enterprise sales team backed by phenomenal marketing. It was not freemium that helped Salesforce.com grow to $3 billion a year company. Sure their product was easy to setup and use but they were not just fighting against customer apathy, they were competing against strong players with significant sales prowess. Do not for a second think freemium would help compete against entrenched players or serve as free marketing.
3. Choosing Irrelevant Examples: If the topic is about go to marketing for Enterprise Apps the examples used should at the very least use such companies. Not Evernote, a consumer based webapp. When it comes to freemium examples, for the past two years, there have been no other examples than Dropbox and Evernote. Such a model of try the free version and upgrade to premium may work in consumer segment (barely, only 3% upgrade to paid version) but the competition is not going to let that happen for enterprise segment.  In addition any such popular example also suffers from biases.
4. Choosing Selective Evidence:  Mr. Irwin makes a case using SurveyMonkey, specifically goading us to make app fun so users will use it. First, why should making the app fun be mutually exclusive to charging for it? What about many other applications that are fun to use and but not free. If we want to stick with the same application family as SurveyMonkey, we have SurveyGizmo which you know decided against freemium model to target enterprise customers. There are many other examples of applications that are fun to use and not free. By using selective evidence Mr. Irwin not only succumbs to biases but leads his readers down the wrong path.
5. Anything but Charging For Value: Rest of his article is presented as a recipe for freemium. If you did not have your segmentation right, you do not have your product strategy or go to marketing strategy right. Any other revenue model, however innovative it is, is not effective. Yes Atlassian and others adopted pay to charity, pay what you want, pay with WOM etc models. Likely these models were relevant for them because they started with right customer segmentation. But all those do not apply to your business.

Why are management gurus, entrepreneurs, startup gurus and now venture capitalists  dead set against getting fair share of the value they create for their customers?

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.

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

Pricing Multiple Editions – SurveyGizmo Takes a New Approach

My favorite survey platform is SurveyGizmo. In the past I have written about its pricing and how it effectively used multiple versions and visual nudges in its pricing page. SurveyGizmo has been experimenting with their editions and pricing page since then. From presenting five options, to four options and now there are only three options when you visit their pricing page.

Before I point out the most critical change in their pricing, let us look at some of the secondary changes

1. What is missing in the three options? What is one version you see in any pricing page you visit but is missing here? The free version. It is not prominently featured in SurveGizmo page. It is still there but as a footnote. It is an indication that their customer mix has changed as they move into next phase of the product adoption.
   Their current customer mix is more likely made of Enterprise customers with willingness to pay for a survey platform and a budget to match it. The focus has likely shifted from attracting freeloaders who may never convert to those who think differently about the product and have different buying process.
2. What do you see about the prices? The highest priced option is listed first and the middle option is prominently featured (in the middle too). This points more to the size of organizations or groups within organizations they are targeting. While you may notice the two options as different you will later see this difference essentially going away.
3. What do you think about unlimited number of responses in all three? Most webapps differentiate based on number of responses or equivalent – like number of Giga Bytes of storage in case of Dropbox or number of events per months in case of Kissmetrics). SurveyGizmo has done away with number of surveys or number responses as pricing meter. It is a very good approach as most likely customers are not seeing as many responses and it does not make sense as a meter to attach pricing to.

Now all these points are for naught when you try to upgrade your free account to a paid account. Despite what the pricing page says they have done away with any feature differences between the different editions. In essence there is just one version of the product with all the features.

Well the free edition comes with limitations, otherwise you would be happy with free.  Beyond that are no difference in the power of the tool, types of questions, reports, number of emails you can send, etc.

If they have done away with differences what is the pricing meter then? They rely on number of users. Want access to all these features? You can get it for $50 and after that it is $20 each additional user on the account.

Why have they done away with multiple editions? If one price is good, aren’t two better?

When you have  multiple versions (editions) these should differ in at least two dimensions. The mandatory dimension is price and you choose the second based on what the customer values and willing to pay the price difference.

For example, take MacBook Air. Its multiple versions differ in three choice dimensions. Price, screen size and capacity. Clearly the customers see value difference between 11″ and 13″ screens and are willing to pay for it.

But if the customers do not see value difference between versions, they serve no purpose. In fact they add to cognitive cost to customers in making their purchasing decision. When SurveyGizmo had Personal, Professional and Enterprise editions they tried to limit the advanced features like custom scripts to the certain versions. It is likely that only a small percentage cared about these and for the rest the most essential features of the survey platform were more than enough.

Hence their decision to get rid of multiple versions/plans/editions and charge only based on number of users.

How do you decide on offering multiple versions of your product?

Related Articles:

1. Why there is only one version of Apple TV but three versions of Roku?
2. Why are raspberry and strawberry yogurts priced the same?
3. Should your Versioning differ in quantity or benefits?

Note: I have used words Plans,Editions and Versions interchangeably in this article.