Innovative Pricing & Packaging Strategies

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Learn strategies for accelerating your marketing levers to drive business growth and hear best practices first-hand from our panelists at Subscribed 2015: Chris Luo,VP of Marketing at Fivestars, Madhavan Ramanujam, Partner at Simon-Kucher, Nick von der Wense,‎ Vice President, Marketing at Neopost, and Josh Gold, Head of Global Pricing Strategy at LinkedIn.

Listen to the session or read the highlights below!

Growth and Acquisition Levers

Joe Andrews: Our first topic is about growth and acquisition levers. Curious to know, and you as an emerging high-growth company have a huge focus on new customer acquisition, what are your priorities there? What marketing and pricing levers have been effective for you?

Chris Luo: In terms of our priorities of growth, I think it’s easy to place it in a context of our funding. We’re a Series B funded company, we just raised our Series B of $26 million in September. As you guys know, in a Series B, ultimately you’re trying to scale a model that has been proven through the Series A. We’re trying to just go into hyper growth mode. That means for us it’s a model that’s driven by sales. Local sales, whether it’s in the field, or inside sales, they’re pretty much evangelizing our product platform to local businesses everywhere. Our measurement is pretty much new MRR added every month by our sales team, trying to scale the sales team aggressively, and also maintain their MRR per rep, their sales velocity. All the while keeping our churn numbers low so our LTV to CAC ratios look really positive

Joe Andrews: As a follow up, what are the levers that you’re focusing on within price? Do you have freemium model to get people in the door?

Chris Luo: Yeah. Our pricing model is pretty simple. We want to have something that’s simple and transparent to local business owners. They don’t want unpredictability. We’ve actually shied away from some of the more common database-size pricing and we just go with a simple fixed price per month. We have three packages, but it’s actually 90% of people pick the middle package and I think that’s a very common pricing packaging strategy. We’ve been very successful with that it’s served us well so far and we’re probably going to continue with that.

Joe Andrews: Great. Thanks, Chris. Let me turn it over to Josh. You have different businesses, different target segments that you’ve laid out. Tell us a little bit about your growth and acquisition strategies.

Josh Gold: It starts with how do we get every professional on the platform. We’re up to 364 million professionals now. How do we get every job that exists in the world, every professional job, on the platform? We’ve increased tenfold in the last year or so. Then how do we get digital representation of every company? How do we get all the relevant professional knowledge on the platform? That’s really driving our overall company and what we’re investing in and how we measure success towards that over goal, towards building this what we call the economic graph. That powers things like the acquisition of Lynda.com where we can now start to identify and deliver skills to folks in order to meet that skills gap. That powers a lot of the member side.

On the customer side it’s really again around identifying work to deliver and match the unmet needs. How do we make sure these customers who want to hire, who want to market, who want to sell, are getting the right products? We’re focused on things like really understanding value delivery, actual delivery relative to the outcomes they want, things like NPS and customer satisfaction, of course overall acquisition and customer growth, and then of course lifetime value and looking at churn and things both by product and overall relationship.

Joe Andrews:Thanks, Josh. Nick, you’re in a different business situation. You’re, as you mentioned before, a contact against the backdrop of declining mail. You’re not trying to necessarily acquire a whole bunch of new customers, you’re trying to keep the customers you have and add new services that they use and become loyal. Tell us a little bit about your levers there. What’s working for you?

Nick V.: Most of our customers have a fixed payment per month with us. They’re either on a rental or a lease with the hardware. What we’ve discovered is, as I mentioned to you previously, that customers are not communicating less to one another just because they’re not using the mail. Certainly we’re emailing and there’s a thousand different ways to communicate now.

Joe Andrews: They’re shipping more.

Nick V.: They’re shipping more. That’s probably our biggest lever. What we’ve done is we’ve taken a strategy where we’re trying to offer add-on services to the hardware and also get them to have some relationship that’s really sticky. All our customers mail and ship, and now we’re offering a simple subscription to the hardware, five to 15 dollars a month is the average. We’re having a really, really successful year selling subscriptions on shipping. To give you an idea, our metrics of measurement are probably similar to everyone else’s. We have subscribers, how much revenue per month, per year usage, we have all that stuff. But what’s most interesting, or most relevant to us, is dollar per customer. That’s how we’re measuring these new subscriptions.

Joe Andrews: Madhavan, any closing thoughts around growth and acquisition levers? You see this across a number of businesses.

Madhavan R.: Yeah, totally. The number one thing that we work with most of the C-level executives is to align them on what goals to go after. Because when you talk about subscriptions you have revenue, profit, you have you have churn, you have acquisition, you have growth, you have brand. Put all those things together, not all of them actually point in the same direction. It’s about forcing tradeoffs and picking what you actually want.

If you ask someone which of these goals do you actually want to increase on, the typical answer is everything. But then what we actually do with the executives is put them through situations and say, “Would you rather take 10% revenue, 5% margin, or would you rather take this outcome?” It’s going back to what Josh was saying. Show them outcomes and ask them to pick. Once they actually do that, you’re systematically tapping into their mental models and rules as to what the priorities are. Then we get people on the same page.

Price to Win

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Key KPIs

Joe Andrews: What are the key KPIs that you use to run the business, the different business lines? Ultimately, how do you know when your pricing is successful?

Josh Gold: I would say on the numbers side it’s really around member growth, member engagement, customer satisfaction. On the customer side, for our enterprise customers, it’s really around win rate, if it’s our field sales, average deal size, year over year growth and increasing spend, retention rate. Those are the types of things we look at to check the health of our business. Also value delivery and NPS, things like that. On our online subscriptions, similar metrics but now it’s more around number of people signing up for free trials, conversion from free trials, lifetime value. Those are the things we’re looking at. Overall, we’re primarily focused on maximizing lifetime value because it’s both an idea … It gauges profitability and also customer satisfaction if they’re staying longer.

In terms of pricing, whether or not pricing is right or whether it’s too high or too low, some of the things we’ll look at there will be similar metrics. What does our win rate look like in terms of when we’re quoting deals? What does our churn rate look like? How has that changed? How much value … What has been the value change of our product over time? If it’s increasing, is there still the right ratio between value delivery and how much we’re capturing? If we’ve changed price levels in the past, what have we seen in terms of reactions? How price sensitive are our customers by segment, by business line? To the extent we’re running pilots, both either in-field and online, what have we learned from there? Those are the types of lenses we look at when deciding can we increase price, if so by what product, by what region, for which segments.

Joe Andrews:,Great. Chris, you were talking about MRR in terms of pure growth metric and also sales velocity.

Chris Luo:Yeah. Whenever we launch a new price point, most recently in January we went from 199 to 249, the things that we’ll look at to get a read … Obviously we’re trying to maximize LTV to CAC, but how do you actually look at whether the KPIs in the near term are … Are they healthy? We look at things like close rate in the sense that our sales team, they meet a certain number of businesses per week or per day, and what is their close rate? Close rate we think is an indication of how velocity will evolve. That’s one.

I think we also look at things like merchant NPS. As price goes up, we regularly actually ask them would they recommend us. It’s great to see that our NPS is actually at all-time high and actually the higher price point people have a higher NPS, which is great. We also do a lot of regression analysis trying to tease out how does price impact things like churn. There’s a lot of different moving factors in there. It’s not always easy to get a good read.

Joe Andrews: You’re establishing correlation between price.

Chris Luo: Yeah. We’re throwing in all kinds of factors like product adoption, different things like that, and price is one of them. We want to see if that’s a significant factor.

Joe Andrews: Great. Madhavan, how do you measure if your pricing is successful?

Madhavan R.: I think that’s always a million dollar question. It really depends also if you’re in B2C, B2B, whether you’re selling to consumers or businesses, in terms of subscription. In B2C pricing, more often than not, it also depends on what stage in the life cycle you are. For instance if you’re an early stage startup your goals are completely different compared if you’re a post-IPO company. The typical metrics that we see, I think Josh mentioned customer lifetime value, ARPU, those are the ones that people actually go for. If it’s more B2B, you also need to have a bit more of the sales-oriented KPIs.

One of the KPIs that I would say for subscriptions that at least we immediately know whether there’s an opportunity to improve is the mixed distribution if you have a good, better, best. Ideally, from our best practices having done this across hundreds of projects, you have 30% … 20 to 30% in the entry level package, and about 70% or so in the better and best, with about at least 30% in the best package

Madhavan R.: I would say in general, looking for going beyond just financial KPIs, because most companies look at only financial KPIs, but looking also at sales KPIs, operational KPIs, customer KPIs, and having a balance scorecard approach is more close to best practice.

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Segmentation

Joe Andrews: One of the promises of a subscription model is that there’s a better opportunity to align price to value. I want to get some thoughts from you guys in terms of how you think about this and usually as we see, it starts with really a deep understanding of your target segments and developing a segmentation approach to do that. Josh, let me start with you as you have a clear distinction in terms of the segments you target with the offerings.

Josh Gold: Yeah, I can think of a couple examples. The segmentation … One interesting example from our subscription business, the things you would see on LinkedIn.com, historically if you had visited our pricing and packaging page a year ago you would have likely landed a pre-defined use case. We think you’re sales person, we think you’re a talent professional, of we think you’re somebody who wants to build your network, or you’re a job seeker. You would be presented with three plans. If you do the math, there are four different use cases, three plans, we basically had 12 SKUs. That worked pretty well, it got there over time.

More recently, if you go there now, you’ll see you actually land on a page and it says, “Hey Steve, what do you want to get out of your premium LinkedIn membership?” Now it’s gone from we selecting for you, which what is your use case, to actually self-selecting your use case. You can decide you might be a salesperson, but your use case for LinkedIn might actually be you want to find your next dream job. You might be a talent professional, but you don’t necessarily want to use LinkedIn for recruiting right now, you want to find your next dream job. We’ve actually shifted a model that’s much simpler, but it also helps ensure that the members, when they subscribe, are going to get into the plan that fits their use case.

In terms of the pricing models, innovative pricing models, question, we’re currently and constantly looking at bringing new products to market. Some of the lenses we put on those, in terms of how do we monetize and how much do we charge, is we think about will this model help accelerate customer adoption, will they think it’s fair, will it help communicate the value, is it something they’ll accept, and then is it something that will scale with customers’ value over time. As we deliver more value, is it something that we can then capture more of that value over time.

Finally we’re finding, particularly in our enterprise businesses, is it needs to be something that’s predictable. Most of our large enterprise budget minimally annually and with the exception of maybe programmatic buying through marketing, they want some sort of budget predictability. We have to try to balance those different dimensions when coming up with new and innovative pricing models.

Joe Andrews: Got it. That makes sense. Chris, let me turn it over you. You’re clearly in a land grab mode but you say you’ve already gotten some insights in terms of segments and also willingness to pay. Tell us about that.

Chris Luo: Yeah. I guess the way we think about it is there’s two million small business in America, they’re not all the same, but none of them really have a customer retention platform. What we’ve tried to do is just keep it really simple and we try to take just an average understanding of a small business and what their annual revenues are and what their database size would be with FiveStars, and what the impact would be on average based on just basic usage of our product. We use that and think about if we were in the position of the small business owner, would that drive ROI for them?

That’s how we’ve come up with our pricing but it’s obviously not very segmented. We realize that it’s not going to work across all segments in the sense that there are some low-end businesses, just starting out, that it’s probably not going to be appropriate for. Even high-end businesses where we deliver a lot more value. We’re going to have to evolve to that. But at least at this point the 80/20 approach is fine for us because we’re just trying to simplify everything for the salesperson and for the customer and just keep it really basic.

Joe Andrews: Great. Nick, on to you. In the face of disruption you’re having to reinvent your plans here and understanding your segments. Tell us about that.

Nick V.: I mentioned one of our biggest challenges is that we’re essentially having a huge cross-selling strategy. We’re not introducing an out there service to our customers. Mostly we’re looking for compatibility with the price that we already offer them. Some of it is just gut and experience. We know what customers have paid for other nominal add-ons to our existing services.

The unique thing about Neopost is although I’ve spent a lot of time talking about really the SMB space, we do sell enterprise solutions as well, subscription basis. Typically the way that we do that is … Probably be slightly inappropriate, but nonetheless we establish what we think the customer is willing to pay, we don’t go off of a price sheet. We get pretty wide variations in what a company is willing to pay.

Joe Andrews: It’s like real-time field testing.

Nick V.: Yeah. We train our salespeople on how to sell the value and maximize it and also assess what that payment is likely to be a month.

Joe Andrews: Okay. Got it. Madhavan, this is hard stuff clearly. Really doing segmentation right and translating that into your pricing strategy. Tell us some of your thoughts around best practices.

Madhavan R.: Segmentation is one of those things that everyone understands but is really hard to do, to Joe’s point. Our number one thing that we help clients with is to have a unified segmentation strategy that drives product, marketing, sales, campaigns, et cetera, with one segmentation strategy. If you know who your segments are you can build the right products, the right solutions, and do it.

An example like what Josh Gold was saying that’s pretty close to best in class. Not many companies do it but what we’ve seen of late is a lot of companies wanting to head in that direction and we are helping on those. The closing thought on segmentation from my side is segmentation that is based on needs, value, and, more importantly, willingness to pay, all three of those are by far the most actionable segmentation strategy because you know what to build, what people are willing to pay for, and why do they actually value your solutions. Then a salesperson can also take that and know how to pitch which product to which segments, et cetera. Using those three principles is probably what I would say.

Joe Andrews: I think that’s a great takeaway for everyone here. Thanks, Madhavan. Let’s shift to a different topic. This is a popular one that we talk about a lot with our customers which is testing and iteration. You know that in a subscription model you’re going to rapidly evolve over time, much more frequently than in a product-based pricing scenario. Let’s start with Chris. You talked about raising prices in subsequent rounds, tell us how you went through that process. Was it gut feel? Was there data involved? How did you actually go through that process?

Chris Luo: I’ll tell the story as a critical time in the company’s history where we’re selling the product at 129 a month but we felt as we got together with finance and we talked to our CEO that we needed to raise the price to about 199 to have a really compelling story for investors. Product came up with a bunch of ideas and we had two competing ones. We were like okay, we’re going to bet the company on one of these two ideas. We split the company into two and they went off and we had first just people going out and just talking about the product concepts with people, trying to pre-sell it almost. Then pretty much what we figured out was one of the projects was going in a little bit of a dead end, then we modified the positioning and modified the way we sold it and it started coming back.

We had this other project that I was leading that was a little bit of dark horse, no one ever thought it was going to actually work. But we had two, we had two horses. Then we went out there and we had two small teams pitching, selling, and then product was simultaneously developing. Pretty much we realized pretty quickly that this one product that was pretty much a marketing automation solution for local businesses really was something that resonated with local businesses. We didn’t really realize it was going to but they loved it, it was magical, they would just bring people in automatically.

Ultimately we had the product team build it, then we had five salespeople go try to sell it. They had great success and then we pretty much got everyone in the company pumped up about it and rolled it out to the whole sales team and transformed our business from selling at 129 and 199 and pretty much dramatically changed our story to investors.

Joe Andrews: That’s a great story. I’m sure everyone here would like to see that sort of success. Nick, tell us about in your world, you’re still in this transformation early, how are you going through that testing iteration process?

Nick V.: Yeah, I think I mentioned to you on the phone we certainly don’t do it as much as Chris probably does and it’s not as vital to our business. Probably should be. But one of the things that we see is we see a downward pressure on our monthly payments based on usage of the mailing machines. This has caused us to constantly iterate not only the price value that you purchase but what comes with it. A lot of times we add extra features into what comes with it in order to battle the lowering value that we’re getting per month.

But I think the big that we learned with our shipping subscriptions is we’re in a unique position because we actually see the usage of everything our customers use. We’re … 75% of our machines are connected to our servers, marketing is running the analytics on the data. We’re able to go back and match the usage with the pricing. I think the big thing we see is if we see a class of shipping or mail get exploited by our customers then we come back and opportunistically offer a higher price on that service. That’s been a lot of fun for us because you feel like you know … You have some knowledge of what they’re doing.

I think everybody knows that people are just shipping a lot more than they were three years ago. People are distributing their products. Companies, retailers, everybody, colleges … It’s just amazing how much is going on. We undercharge to start with, we charge $5 a month, and we were doubling in shipments every month that we launched a product. The chart and the bar just went off the page. We’re now at $15 a month, we’ve tripled our price.

Joe Andrews: Okay. Thanks, Nick. Josh, you mentioned earlier you do a lot of controlled experiments on different business lines. How do you approach this?

Josh Gold: One of the mantras within the company is we’re a billion dollar startup. What that entails is really we want to keep iterating, we want to keep testing, we want to keep shipping stuff and learn by doing. There’s an ingrained bias towards action. What that means is both within our large enterprise businesses we do a lot of field pilots, this is around different packages, new offers, different pricing, different pricing models. We might pick specific sales folks, we might pick specific geographies, where we’ll go out and we’ll try stuff and we’ll do controlled experiments both with our sales teams and online.

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