How to Read this Report
First, the learnings in this report are not scientific nor statistically backed. Please take it all as hypotheses and cues for testing on your products if you wish. It is almost impossible to make meaningful conclusions early-on in a product’s life.
Many of the conclusions here are based on hunches, opinions, educated guesses, recalls of observations during product development, and some statistically non significant data.
Also, if you have had similar experiences, please help me and the rest of the community by sharing your views in the comments.
Background
First an introduction to Gather, the subject of this case study:
This is an excerpt from an article I wrote on the Shopify’s app developer publication about the beginnings of Gather:
I was sitting in my friend’s office and received one of my favourite email newsletters in my inbox.
In the newsletter, the author asked if I would be so kind to forward the newsletter to a friend as a referral.
This triggered the idea of email newsletter growth through referrals, and what we can use to augment the effect of newsletter referrals. At the time, my friend Seb (who is now an advisor to Gather), indicated to me that newsletters were one of the most fundamental channels for his wife’s Shopify ecommerce store.
He was keen to help her grow her list. So we started exploring this idea of newsletter growth through referrals.
I built an MVP for him, slowly testing it out and refining it. This was a very minimal solution. If I recall correctly, it lacked the ability to support more than one account!
We kept refining Gather for a few months until it was ready for launch on the Shopify store as a Beta app.
Fast forward to about a year later (September-ish 2016) and I have a SaaS product dilemma: Pricing.
Why is Pricing Tricky?
In our experience, it is tricky to get it right because it is a vehicle for getting to the truth about your product, which is:
The perception of your product’s value in your prospect’s mind.
Customer’s perception of the value of your product usually isn’t the same as your perception of it.
Having ‘done’ products for close to 10 years now, pricing is where clarity unfolds. It’s when you get that reality check, that causes much cognitive dissonance.
It is when the market wakes you up to reality.
Initially, when Gather was in Beta, it was free to use. When it came out of Beta, I decided to find out what the pricing limits were (more on designing to the limits in a future post).
Essentially I asked myself: Given the conversations I had with early users and the market research I had done, when would pricing feel like a ‘failure point’?
What were the plans or pricing tiers for which I thought customers would unlikely pay?
I didn’t want to play safe and ensure successful transactions, I wanted to find out where the boundaries were.
Before I continue, can I tell you a little bit about what Gather is, the story behind it, the pivot we had, and what it now does?
This is to put things into context, and so that you can get a feel for Gather’s worth.
About Gather
Gather started as a tool to automate referral programs in order to grow your email list (e.g. newsletter list). It started as simple tool, on which we refined and built.
The tool was focused on the ecommerce vertical to start with, since the dynamics of ecommerce funnels were simple. Stores follow simple patterns to incentivise customers to take action: e.g. coupon codes, loyalty programs, upsells, etc.
Newsletters (or generally the ability to send customers emails) is pivotal to ecommerce stores. This is especially for stores that rely on repeat purchases, and customer retention.
In fact, my test case (a friend), would get a spike in sales on a Thursday every time he sent his customers an email on a Wednesday evening.
Ecommerce newsletter content usually revolves around time limited offers, new products, promotions, etc.
So newsletter growth is super important for ecommerce businesses, and growth through referrals seemed incredibly attractive; much cheaper than advertising.
Who wouldn’t want to set up an automated system that incentivises current subscribers to refer their contacts…
To name drop, Uber, Dropbox, all grew with the aid of referrals.
In most cases referrals have to be incentivised to work well, hence the: give $20 get $20 campaigns, that I am sure you have encountered.
Back to triggering customers…
Gather gives ecommerce merchants a link they could add to their communications with their customers. When customers click on the link, it takes them to a referral page where the process starts.
There, they can share the offer on Facebook or directly send it to their friends via email. Gather then manages the whole process where it tracks who referred who, and sends out rewards accordingly.
From memory, this referral system usually yielded Beautifulbecause.com.au ( the test subject) anywhere between 4–10 new subscribers a week. Not bad since these are fresh leads, my client did not pay to acquire them in the way of advertising.
But we knew we had to do better.
The Pivot
This is where the idea of overlays came to play.
We implemented a new interface that triggered customers to refer friends.
After a customer made a purchase on the store, and they were on the order confirmation page, they would see an overlay (aka popup) triggering them to refer a friend for a discount on their next purchase.
This helped with email acquisition.
Nevertheless, the effort that went into building the overlay; the Javascript, the Exit Intent code, etc. gave premise to a mini, dare I say, pivot.
Do you recall the Business Model Canvas, and the book Business Model Generation by Alexander Osterwalder?
Many businesses pivot through unbundling, or creating new value through the an existing asset they created to deliver their original value prop.
Amazon is a prime example. Amazon created AWS (the hosting services) as it was an asset they built to cater for Amazon retail. Though not necessarily a pivot, they unbundled their business model and provided hosting as a separate offering.
Over the years, this resulted in AWS hosting a ginourmious chunk of the web!
The Results we Had with the Unbundled Product
We turned the tech we built behind overlays and popups into a separate offering. The new offering was essentially an email opt-in overlay, with Exit Intent tracking.
From influencers to ecommerce stores, anyone who understands the value of email marketing, as just about the only online channel to the market you have good control of, will probably prompt their visitors to opt in.
Popups and overlays are used on mobile apps, on the software you run on your Mac or PC, everywhere. They are used to trigger the user to take the desired action. If there is one desired action a website owner wants, it is for visitors to convert to subscribers.
In ecommerce (the market segment I focus on), the act of signing up to a newsletter through an overlay form, has different dynamics to other markets: again, it is simpler.
If you are prompted to sign up on a well known blog, you will either dismiss the form, or you will signup on the basis of receiving timely information from your trusted, influential, source.
With ecommerce, on the other hand, it turns out that you opt in, mainly to receive exclusive deals. You know you will buy from that shop in the future, and you are probably interested to get your products at a lower price.
With the exception of crafted items, luxury items, and the like, many of the physical items you buy are commodities. Given two retailers selling the same thing, you will tend to buy from the cheapest option, given most other variables you care about are equal.
I like this about ecommerce. It constrains and simplifies the process of ideating possible solutions for maximising opt-in rates.
One of which was a no brainer:
Offering a discount code for an opt-in email, instantly.
This explainer video demonstrated how it works, excuse the production quality :)
As demonstrated in the video, you can see the that form returns a discount after a signup instantly in the same page; there is no redirecting to another page.
This was valuable because:
a. My test shop asked for it outright. To their words, nothing in the Shopify app store at the time provided a solution where a discount code is returned to the customer, after signup, on the same page.
b. The theory behind this is: When a customer receives their discount code on the same page instantly, they are more likely to make a purchase. If they have to wait to receive it in an email, or are redirected to a page on which they receive the code, they are instantly taken away from their flow. Remember, seconds count when it comes to interacting with customers through an interface.
Remember this video?
As this video demonstrates, we are all customers, and we are all ‘drunk’ when we use websites and make purchasing decisions.
Also, when the form returned a coupon, it fetched a unique discount code, which was unique to the customer, from the server first. A discount code could only be used once by one person only.
The requirement for a unique code was given to me by my, again, test shop. They wanted to minimise the chances of multi-use discount codes being shared on the internet.
The results were nothing short of amazing.
Instead of receiving up to 10 new emails per week from referrals, BeautifulBecause was getting 10–20+ new email opt-ins a day!
But there lies a very big difference between opt-ins and referrals.
In the case of popup email opt-ins, advertising brings in visitors and some convert to subscribers. This is unlike referrals, where the advertising comes from current customers (also known as ambassadors, advocates or promoter).
This difference between opt-ins and referrals, was difficult to explain to a customers. We feared that most of our customers would see 20 emails a day as far superior solution to 10 emails a week.
Side note BeautifulBecause is a small business. For a mid size of larger ecommerce operation, we are probably talking 100’s of emails a day, not 20 or so.
With that, we hid Gather’s Referrals module to the rest of our customers.
We hid it for over a year. I’ll let you know, later, why we eventually brought it back (perhaps in a new post).
Today, Gather, is positioned as the ultimate tool to build your email list and increase conversions.
Our current tag line, if you like, is:
Convert visitors to subscribers, to customers, to ambassadors.
With some context into Gather’s history over the past 2 years, let’s now get back to the pricing talk, the premise of this post.
Back to Pricing
As mentioned above, when Gather was in Beta in the app store, it was free. It received a significant number of users back then. This is when it was simply an app that delivered email opt-ins and returned coupon codes to ecommerce customers (the referrals module was hidden).
Out of Beta, we were under the assumption that we would, then, qualify to charge for the app.
Gather is a bootstrapped company, there was really no means to subsidise free accounts with funding, you know, for the benefit of growth.
To date, I have tested many alternative plans and pricing points.
Fresh out of Beta, I tested a $29/ month pricing point for all features.
I knew that email acquisition was incredibly valuable. Marketing research has suggested that 1 acquired email offers a return of $44.
Who would not want to invest $29/month ($348 a year) to grow their email list to thousands of new opt-ins, worth potentially, tens of thousands of dollars?
It turned out, from this pricing experiment, that hardly anyone did!
Coming out of beta, with a few 5 star reviews, hardly anyone installed the app, and this ran for weeks. Gather’s acquisition was effectively non existent.
Oh how naive I was!
It wasn’t until I found during a call I had with one of my beta customers, that according to him, Shopify customers were likely to filter the app store listings for Free apps as means to identify apps that offer a free trial.
The app store did no provide a filter for apps with free trials, only apps that provided a free tier.
Aha!
Because Gather did not have a free tier, it was not discoverable for a big chunk of the market.
Depending on your channel to the market, pricing can affect discoverability.
We added a free tier, and signups picked up again. If I recall correctly, we began getting upgrades too, or even customers signing up to our premium level tiers from the get go. We were not invisible anymore!
From then, I tested: Free tiers, $9/month, $15/month, $29/month, $49 /month, $99/month, and many permutations of the above.
Lesson Highlight:
We found that our pricing strategy totally depended on the type of product and the environment in which it existed:
Does pricing affect the discoverability of the product?
Is it a marketing product that aids with growth?
Is it a product that helps high growth businesses manage growth?
Is it easy to explain how it can save customers time?
How the Free Tiers Increased Strain on Resources
In Gather’s case, this is what we had to build to cater for free tiers:
- A feature availability management system that provided premium features to premium customers only.
- A usage tracking system. Since free only allows for X number of page views, and X number of email leads, we eventually had to build code to track usage.
- Supporting free users. The happiness of users, even non paying customers, is our responsibility.
- Giving free users the information they need to make an informed decision about upgrading.
We wouldn’t have needed any of the above had we not provided a free tier. There was no choice though, Free was required for discoverability, especially in the limited scope and attention span we had in a marketplace or ecosystem.
The Addon System
We went on to build an add-on system in the app. I guess you can call it an in-app purchase system.
This was based on a number of behavioural theories. My Behavioural Designer friend and mentor, Ash Donaldson also suggested this as a way to nudge users to upgrade should they need premium features.
With the addon system, the free tier provided a limited number of features, premium features were still included in the UI. When a user clicked to activate a premium feature, an upgrade modal prompted the user to upgrade.
After much testing, this eventually worked quite well for upgrades, but only in certain situations:
- When the lowest paid tier was $29, upgrades from Free to $29/month seemed to be rare.
- When we introduced the $9 tier, an upgrade from Free to $9/month seemed much more likely.
When it comes to what works best in terms of revenue, there are approx 3.2 x $9 tiers to every $29 tier, so it is difficult to gauge what makes more sense in terms of revenue: more low tier customers or fewer high tiered customers.
Again without 100’s of data points, it is difficult to make a conclusion.
Lesson Highlight
The customer’s progression from one tier to the next, may depend on the limitations of the customer’s existing tier, how much in effort they have already invested in your product, switching costs to alternative products and how the next tier anchors to the existing tier.
Notable Comments from Customers
The following notes from customers, have shaped my decision making with regards to pricing, though some of them are conflicting:
The $9 tier gave customers credit to activate 3 additional premium features, of their choice.
A customer indicated to me that she did not see the value in the $9 / month tier as it allowed for 3 free feature add-ons, and she was only after 1 premium feature.
She felt that the other 2 add-ons were a waste for her investment! This led me to test a $9 dollar pricing point, just for ‘that one additional feature a customer wanted’.
When I tested $9 / month for 1 addon, it did not get a good reception. From conversations with customers, it seemed that the $9/ month for 1 premium feature was asking too much. So I returned to the original plan.
See how this begins to get messy? It’s the nature of startup products right? There is an information disadvantage when it comes to startups, and much confirmation bias.
Lesson Highlight
Pricing does not necessarily only reflect the actual, calculated, value a product delivers.
We needed to be able to communicate the value effectively.
Pricing needs to be positioned in a way that demonstrates that customers are getting value for their money, and they are not wasting it. It simply isn’t enough to rely on the customer’s own conclusions of understandings they make on their own about a product’s value.
You really only have a tiny window of opportunity with your customer’s attention to communicate your value.
Bloom’s blog included this great quote by Lawrence Steinmetz:
The first thing you have to understand is the selling price is a function of your ability to sell and nothing else.
What’s the difference between an $8,000 Rolex and a $40 Seiko watch?
The Seiko is a better time piece. It’s far more accurate.
The difference is your ability to sell.
Lawrence Steinmetz,
How to Sell at Margins Higher Than Your Competitors
The Things we Did to Demonstrate Gather’s Value
Though many marketers understand the value of email acquisition, which enables what is normally referred to as Permission Marketing, most ecommerce merchants aren’t marketers, they are entrepreneurs, they undertake a heap of activities, from customer acquisition to inventory management.
I wanted a quick and easy way for our users and customers to understand Gather’s value.
Here’s a few things we implemented, some required engineering efforts, some were delivered through simple copy:
- We wrote code that calculated how much, in orders, an email lead, that came through Gather made. We presented it in a dollar value in the dashboard.
- We wrote code to calculate how much, in dollar value, an ecommerce store made in discounted orders; from discount codes provided by Gather.
- In the copy, we demonstrated the value of email acquisition: It provides a return of $44.
- We sent automated encouraging emails to customers when they received their first email opt-in to congratulate them.
- We sent automated emails at intervals showcasing how many new leads an ecommerce store has ‘gathered’ with Gather!
These initiatives were essentially behavioural initiatives, aimed to help motivate our customers.
Though it was difficult to gauge if any of these behavioural initiatives had any significant effect, due to low statistical significance of our data points, it is something worth measuring as and when enough data is present.
Having said that, I have used tools like Inspectlet to help me obtain a qualitative feel of what users looked at in their dashboards.
What Plans Gather Offers Now
Now we are sitting on the following:
- Free limited tier
- $9/month for 3 premium addons
- $39/month for unlimited addons
- $99/month for unlimited addons and unlimited page views.
- $500/month for a Concierge service (essentially micro-consulting layer)
These tiers are not perfect, and we plan to continue testing more options.
I test them with the following methodology, something I refer to as: Limit State Design, a term I borrowed from my background in Structural Engineering:
- From market research and educational guessing, start with a pricing point that is on the edge of failing.
- Test it in the market.
- If results are satisfactory to your conditions, consider upping the price point, till you reach ‘failure’. Or if results are unsatisfactory, reduce pricing ever so slightly.
This is so much easier said than done. Reliable test results, will depend on:
- If you can afford to test and fail.
- The statistical relevance of the data you have.
- The time it takes to make meaningful conclusions. E.g. allowing time to test churn rates on various pricing, etc.
- The size of your company and product.
My tests were by no means reliable. With continual testing, continual improvement, better designed pricing would eventually be reached.
Lessons from Cloud Marketplaces and Ecosystems when it Comes to Pricing
Many SaaS companies avoid listing on cloud ecosystems or marketplaces, which are essentially ecosystems of third party apps or plugins (e.g. Shopify App Store or Salesforce App Exchange)
This is warranted since, marketplaces often make products easily comparable. Your product will always be subject to anchoring effects; how does it compare to other products in the market.
After speaking to app developers, and from my experience, it seems like churn rates may be higher on apps that live in closed market places. Prospects are shopping around, trying your app, then trying others.
We have had installs, uninstalls and then reinstalls.
Avoiding closed ecosystems and market places is warranted, but you may already be in a closed ecosystem without it necessarily appearing so.
If you are relying on SEO, Google is essentially an ecosystem, albeit a big, more open one.
Unless most searchers spend time on page 2, 3, and 5 on Google; which most don’t, your offering on Google’s results only has a limited opportunity.
Because of advancement in Search filtration systems and PPC, you are also likely to be one click away from your competitor.
The competition is on, and channels to the market are getting easier and easier for any and everyone to access.
The Long Tail by Chris Anderson is a great (classic) resource in Long Tail theory, and how aggregation works (search aggregation).
I have had customers who compared Gather to other equivalent solutions on the Shopify app store, sometimes I was priced down. It worked both ways, too, a huge chunk of customers switched to Gather from other similar products.
That is all great and it is part of a healthy market place.
But where the challenge lies, is being able to provide the customer with the information they need, to make a well informed decision about their purchase.
I thought we could easily differentiate ourselves by offering the high-end of our premium tiers at a lower price than competitors, and that this would spare us the need to offer a free entry tier, but we were mistaken.
For our type of product, in its environment at the time; we still needed a free entry tier. The ecosystem dictated that.
Another example as to how I learned this the hard way, is illustrated as follows:
The Pricing Mistake we Made on the Shopify Ecosystem
I was shocked and excited.
Shopify had selected Gather for featuring on the app store’s front page.
Prior to this point, we had never planned an official app launch.
I took Shopify’s front page featuring proposition, as an opportunity to officially launch the app to the world. Also, the featuring of Gather on the front page of the apps store facilitated a great launch story:
A launch story that could be summarised as follows:
‘We are good enough to be selected for featuring on the front page’.
I prepared and prepared, lined up partners, planned a launch on Product Hunt, etc. etc, which you can find here.
It was a great experience.
Remember when I mentioned above that we decided to add a Free Tier to enhance discoverability of the app? Well with being featured on the app store, we were under the impression that we wouldn’t have the discoverability problem, after all we would be on the front page.
Remember also when I mentioned that as much as we love helping customers, supporting free tiered users is a strain on resources especially in the early stages of a bootstrapped product?
I thought being featured on the Shopify app store would open the flood gates to many free tiered users, which would make it difficult to support them.
So we took the free tiers off.
Side note: All this switching on and off features, building experimental features, etc. requires very responsive, rapid software development. It is great to use tools like efficient testing protocols and Automated Testing to aid with rapid changes.
Also, I engineered into Gather, a feature that made it easy for an admin to create new plans and switch between plans easily, without the need for extra code.
We made a mistake. Tonnes of customers signed up to the paid tiers when the app was featured, but tonnes of customers also churned.
Again I forgot the fact that in an ecosystem or market place, you are probably anchored to other available solutions. Given all else equal, pricing will be compared to alternatives and competitors in the market.
The problem is that: all else is never equal, you are never like-for-like with a competitor.
In software (or generally knowledge based products), comparing products like for like, before using the product itself, is almost impossible.
This is unlike water supply, gas or electricity. An electric current is an electric current, from whomever you get it. It’s a true commodity. Not software.
Things like marketplace reviews, are currently the ideal heuristic for customers, like you and I, to help make a quick decisions about a product before purchasing or joining.
But even with ratings alone, you can never get an accurate picture of an app unless you use it first hand.
Why the Shopify Ecosystem was Invaluable to us
‘Launch with a customer’ is great advise for startup products.
When I started Gather, we had no scope for marketing, nor sales. I wanted to focus on product development only.
To develop a product effectively, the product had to be in the market; a product developed without customers is laden with guess work.
At the same time, developing with customers (and you need more than one customer) isn’t easy, because lack of trust problem gets in the way.
The Shopify app store solved this problem for us. Partnering with Shopify gave us a channel to the market, where Gather was associated with one of the most exciting ecommerce tech companies in the world.
The beta release of the app, gave us access to early, forgiving, adopters, that allowed us to continually refine the product till it was ready for wider adoption.
This was all done with effectively, zero marketing, where marketing was just not something we could afford to focus on.
Thank you Shopify!
TL;DR — Summary of Pricing Lessons Learned
Here they are:
- The source of truth
Pricing is the source of truth of how much perceived value you have created, it forces clarity about the viability of your product.
2. Your product’s environment
We found that our pricing strategy totally depended on the type of product and the environment in which it existed. These questions help identify a pricing strategy:
Is it a marketing product that aids with growth?
Is it a product that helps high growth businesses manage growth?
Which pain point does it fall under?
Does pricing effect the discoverability of the product and the value it provides?
Is it easy to explain how it can save customers time?
3. Anchor
We found that anchoring the desired price point in comparison to other price points in the app; as well as other price points in the marketplace, helped communicate, effectively, the value of the app.
This brings us to the next lesson.
4. Communicate well
Pricing does not necessarily reflect the actual, calculated, value a product delivers.
You need to be able to communicate that value effectively.
5. Consider the effects of search
Search allows for highly targeted prospects, looking for something specific.
With very limited scope and attention to demonstrate value to a new prospect, we found that it is best to focus on one specific offering.
Even if a product offers more than one thing, there will simply be no scope to effectively communicate everything.
6. Asses the customer’s progression up the tiers
The customer’s progression from one tier to the next, may depend on the limitations of the customer’s existing tier, how much in effort they have already invested in the product, switching costs to alternative products and how the next tier anchors to the existing tier.
7. Test
Getting the pricing right, requires much testing.
Why?
Because every product is unique, what works for one product may not work for the other.
8. Test to the Limit
We found clarity from devising tests that took us to the limit (the limit state of pricing).
You can get a lot more sophisticated with this than I did, which is to conduct A/B testing, and if you have enough data points, that is when you can become confident about your results.
9. Keep testing
Especially in the early stages, your tests will be more qualitative than quantitative, and will not tend to be scientific.
Therefore, you cannot settle when you find something that works well, for it probably won’t be the optimal solution.
10. Observe and talk to customers
We found that the perception of the customer’s value of the product, and the pricing, differed to ours on many occasions.
Insights from customers gave us cues for further testing. Tools like Intercom made it easy for us to interact with customers.
Use caution when receiving insights from customers. The validity of tips from customers, will depend on if they, firstly, fall in the ideal customer segment for your business model.
Do you want carefully curated product related news and content, like this article, and from other product authors?
Further Pricing Resources to Read
Bloom’s Ultimate Guide to Pricing
SaaS Startup Strategy | Three SaaS Sales Models
What other guides would you suggest, help us in the comments below :)
Over to You
These were the lessons learned and the non-scientific experiments I ran.
What are your thoughts about these learnings?
Do any of them resonate with your findings?
Do any of them differ to your findings?
Please help us and the community in the comments :)
