The Spreadable Story: Why We Shut Down a Business That Was Making Money & Getting New Customers Every Day (Part III)

June 17, 2011

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This is the third part in our four-part Spreadable post mortem. In the third part, we will explore some of our marketing tactics & pricing initiatives. See Part I & Part II.

Time to Hold a Marketing Launch?

When you’re working on something new, it’s hard to resist the urge to go out into the world and tell anyone who’ll listen.  We made that mistake by focusing on a premature launch event and PR instead of continuing to learn from our customers. Everyone thought, “We need to build buzz.”

Planning and executing a marketing launch takes a ton of time and effort from people across your entire organization. If done at the wrong time in a product’s life, it ends up being more of a distraction than anything else.

Parties are a great way to get out there and meet people, but are they the right people? Are they your target customers? If you haven’t found product/market fit yet – how can you be sure? We were there pushing a demo, not learning from customers. Launching loudly had other negative side effects:

It created looming artificial deadlines for our development team.  Saying “We need this feature for the launch party!” caused our development team a lot of unwarranted stress. It didn’t have to be that way. We could have just shown people mockups or screenshots. We didn’t need the entire feature to be done. We’ll think about ways to demo cheaply next time.

We also missed a significant opportunity to get a bunch of paying customers.  When we threw the party, we weren’t even ready to accept credit cards. It sounds so crazy looking back on it.

If you’ve done your job building a small group of visionary customers, launch your product with those people first.  They are the ones who will help you hone your product and your message.

Takeaways

• Our Marketing Launch Party ended up being more of a distraction and it caused unnecessary stress for our team
• Marketing launches are for when you’re ready to scale the business – not before then.

Should We Charge?

The advent of freemium has given many of us the idea that offering our products for free will build user numbers faster and result in more feedback.  More sign ups = more feedback = better future iterations of your product, right? In my experience, that hasn’t been true.

When we initially launched Spreadable in “Beta”, we didn’t charge anything.  Though it felt good to have a whole bunch of users, we were missing the opportunity to find out if what we had built could actually generate real revenue.  Customers saying they will pay you money is very different then a customer writing you a check.  There is no better form of validation than revenue.  If you’ve got bugs, don’t worry about it. Customers who’ve paid you will be very prompt about letting you know.

When customers aren’t paying anything – they don’t feel as compelled to invest themselves in what you’re building.  If a customer has paid you, feedback becomes pointed and immediate. It’s not always pleasant feedback – but it’s feedback you need to hear.

When you don’t charge something from day one, you don’t learn how much a new customer is worth to you.  More importantly, you don’t learn if your free customers will ever feel compelled to pay you for your service.  Ours didn’t.

Takeaways

• Charge something from Day 1 and take payment information at minimum.  It validates that you’re solving a real problem and whether or not your business will be sustainable.
• Charging from Day 1 also helps you understand three key metrics:
  • CPA (How much it costs you to acquire a new customer)
  • LTV (How much a customer is worth to you over their entire lifetime)
  • Payback (How long it takes to recover the cost of acquiring that customer)

Conversion Lessons

When we started charging real dollars at the beginning of 2011, we launched with a fairly straightforward pricing model: Two plans, monthly and annual, $49 & $489, respectively. Conversion was unacceptable using this model, so began a barrage of experimentation to improve it.

From January 1-March 1, we churned through multiple marketing site mini-redesigns, a full redesign, a copywriting overhaul, seven different iterations of our sign up flow, five price changes, introduced a free trial, and produced a three minute video about the product.

We were making these changes in a relatively un-scientific way, opting for quicker iterations instead of incrementally rolling out changes in calculated tests. We chose speed over quantitative confidence and it was chaotic to say the least. The following is my best effort to highlight the key learning:

Anchor Pricing

Launching with two plans seemed like a simple way to present our product. We learned a lot about pricing strategy as our market invalidated that assumption. There were two big takeaways:

First, prominently displaying the annual plan at $489 on the first iteration of our pricing page deterred many new customers from signing up. $489 is a scary number for most folks and it wasn’t immediately clear that this was for a yearly subscription. The visual emphasis was in the wrong place.

Second, when we launched a pricing page with multiple plans, we saw a notable increase in conversion. In fact, the increase can be attributed to a theory called anchor pricing. The high level idea behind anchor pricing involves setting a potential customer’s “anchor” at a higher price point than what you actually want to charge them. In our case, we set our anchor at $199 for a monthly plan with some additional features. In reality, we didn’t expect anyone to sign up for it.

Not only did overall conversion increase, but we saw about half of customers signing up on the middle and top tier plans. Had we scaled the business and kept the same sign up mix, it would have meant a substantial increase in revenue over the old pricing model.

Throttling

Observing the change in sign up mix from the pricing model shift, I wanted to dig deeper into the thought process of people signing up on our more expensive plans. There were a couple of differentiators between each plan, but I wanted to find out what was motivating the people who signed up on the Grow or Max plans.

It turns out that the absence of certain features on the lower tier plans really wasn’t it. Instead, it was the fact that we were throttling the right key activity across the plan mix: Referrals.

By capping the number of referrals you could theoretically receive, people instinctively chose the plan where they believed they would never have to worry about missing out on receiving a referral. Since in most cases a referral was worth more than the $25 difference between Start and Grow, people felt more comfortable paying for that security.

The Power of Video (or lack thereof)

As we struggled to get conversion up to an acceptable place on the marketing site, we learned from many potential customers that it just wasn’t clear what Spreadable actually was. To remedy this, we made some significant copy changes to the site and hypothesized that a short video would go a long way in explaining our product. We looked into working with a couple of the well-known studios in the space, but quickly realized that price was going to be an issue.  So, we started hacking a solution instead.

We used Mechanical Turk to transcribe the audio of four product videos we really liked and then dissected each script to find out what made them so good. We discovered that there was a pretty consistent framework used throughout all of them and set out to develop a script of our own.

When the script was done, we worked with an extremely talented motion graphics designer to bring the video to life.  When it was done, the reaction we got from people was that they finally got Spreadable and the value it could create for their business.

Despite the reaction, the video didn’t have the effect on conversion that we expected. In fact, it had the opposite effect. After adding the video to our primary landing page, conversion went down.  There are too many potential reasons to guess at why this occurred, but the key learning here is that people had a better understanding of our product and still didn’t sign up. This served as another red flag as to why this market may not have been right for us.

Fake It

Earlier I wrote about how impactful moving to a three plan mix was on conversion. Well, guess what? We didn’t actually have any of the features advertised on the more expensive plans. We were faking it.

While we were actively working on those features, putting the new pricing page out there was really a big experiment. As I explained earlier, we had hypotheses around the effectiveness of throttling and the plan mix itself.  If we had launched the three plan pricing page and continued to see dismal conversion, we would have had a very different problem to solve in terms of our product offering. Instead, when we launched the new page conversion doubled.

I get some funny looks from people when I tell this story. In some ways, it feels a little bit dishonest to be selling something you don’t actually have. But imagine the alternative. You spend all of this time and money on a product that no one wants, when you could have simply created a pricing page to tell you if anyone would have bought it.

We didn’t actually take anyone’s money either. If a new customer signed up on either Grow or Max, I personally reached out to them and refunded their first month. I thanked for them choosing us and explained that I needed their help to shape our future offering. I enlisted them as an advisor and used their expertise to help us build a better product. I didn’t get one negative reaction from a customer.

In your experiments, you may not have such a forgiving customer base. In those cases, just apologize and make it right.  There is only one thing a customer likes better than signing up for your product and having a great experience, and that’s being apologized to and having a situation rectified.

Guarantee vs. Trial

Our first pricing model launched with a 30 Day Money Back Guarantee for customers who weren’t happy with the product. If it was within 30 days of signup, we would refund people’s initial sign up fees with no questions asked.  We heard inklings from potential customers that they would have liked to have had a free trial, but it wasn’t until we tested the change that we realized how impactful it could be.

Moving to the 30 Day Trial was our last big effort to increase conversion. It nearly tripled conversion rate on our marketing site. It’s important to note that these aren’t real conversions yet – but the number of people we were moving through the app increased significantly.  We didn’t make it long enough to see how many of those leads became real paying customers, but my guess is that it would have been a significant improvement over conversion with the 30 Day Guarantee.

Takeaways

• Anchor pricing strategy, where we set an anchor at a much higher price point than our target RPC, was a very effective means to increase conversion
• Throttling plans by the right key activity (in our case referrals) drove more new sign ups to the more expensive plans
• By faking our pricing page with features that weren’t finished yet, we were able to learn what the real demand for our product was much sooner than if we had waited until the features were done
• In our case, a 30 Day Free Trial was drastically more effective at converting site visitors than a 30 Day Money Back Guarantee. (I know. You’re not technically charging on Day 1 anymore but you are taking the customer’s payment information and authorizing the card.)

The last and final Part IV will be available Wednesday, June 22nd.

• The Spreadable Story
• Part I: Our Vision & Team
• Part II: Developing the App
• Part III: Marketing & Pricing
• Part IV: Final Decisions

Download the entire case study here.

• Comments 6
• Date June 17, 2011
• CategoriesEntrepreneurship, Marketing & Brands