Latest posts by Madhavan Ramanujam and Georg Tacke
The following is adapted with permission of the publisher, Wiley, from “Monetizing Innovation: How Smart Companies Design the Product Around the Price” by Madhavan Ramanujam and Georg Tacke. Copyright (c) 2016 by Simon-Kucher & Partners. All rights reserved. This book is available at all bookstores and online booksellers.
Seventy-five percent of venture capital-based startups fail in the United States, according to a 2012 Harvard Business School study. What could be the reason behind this? One issue is a lack of pricing strategy. Even in its earliest stages, a startup should be considering how it will monetize its offerings. The story of Optimizely, a San Francisco-based startup that has achieved incredible triple-digit annual revenue growth, proves the power of considering pricing from the inception of a venture.
Optimizely is the world’s most popular software for optimizing websites, creating and delivering more than 30 billion optimized visitor experiences. Founded by two former Google product managers, Dan Siroker and Pete Koomen, the idea for Optimizely emerged during Siroker’s stint as director of analytics for the 2008 Obama presidential campaign. Siroker and his team compared the effectiveness of web pages, email messages and other communications, helping the Obama campaign raise more than $100 million in additional donations online. Their analytics found, for example, that a button reading “learn more” – rather than “sign up” or “join us now” – was more likely to get visitors to provide an email address.
From this experience, Siroker saw an opportunity to commercialize A/B and multivariate testing and launch Optimizely as a full-fledged software product. The software could help companies improve their website experiences for customers, which is especially important to e-commerce companies. With his idea in place, Siroker set out to develop his product.
First up: determining whether customers would pay
In contrast to the course taken by many other Silicon Valley companies, Siroker included pricing in the strategy from the very beginning. Instead of diving head first into development, he and his business partner Koomen began their process by first having the “Willingness to Pay” (WTP) talk with potential customers to understand what features they valued and how much they’d be willing to pay for them.
At the time, A/B testing was in its infancy, and Optimizely had no products to sell. But when Siroker presented his idea to e-commerce companies, they instantly recognized its value. They also expressed a clear WTP, which was no surprise. If more customers engaged with their website, they were more likely to spend more time on the site, and therefore they would make more purchases more often.
Optimizely also created a monetization task force dedicated to discovering the best way to price the platform. The task force’s job was to determine the importance of each feature, as well as the best monetization model for the software. Taking this into account, the team attempted to determine the optimal pricing strategy and how much the company could charge. In other words, Siroker and Koomen put resources behind developing the most effective pricing strategy for both client needs and company growth.
The monetization task force was able to segment the market of potential customers and use this information to create packages (i.e., pricing configurations) that varied by value (features offered) and price. These packages were designed to satisfy companies of all sizes, including a “freemium” product in an attempt to convert free users to paid users over time.
Understanding how to charge
The next step was creating a monetization model that would generate revenue, both for the company and its customers.
To the Optimizely monetization team, the question of how to charge was, in many ways, more important than how much to charge. The more a customer uses the product, the more benefits the customer derives. Consequently, the team wanted to base the monetization model on usage: use it more, pay more for it.
The monetization team weighed its options, taking into account how to increase revenue over time, as well as the impact the pay structure would have on the sales process. Ultimately, Optimizely decided to charge according to the number of monthly unique visitors (MUVs) bucketed into an experiment. This metric was more in line with the value of Optimizely’s product. This also enabled both smaller companies and larger companies to afford the product and potentially become customers.
Expanding the product portfolio
Optimizely began expanding its product offerings in 2014 with Personalization, a product used to help companies tailor their web experiences for customers in real time. Essentially this means the website will be unique to each visitor based on his or her demographic and behavioral data.
As Optimizely had done with its original Testing product, the company first asked consumers and prospects if they were interested and willing to pay for a product such as this one. The answer was an overwhelming yes. Following this realization, a new pricing model came into consideration.
Optimizely chose this route: Customers who wanted both Testing and Personalization products could choose from good/better/best options of each (that is, mix and match between the products). Unlike pricing for the Testing product, Optimizely chose to charge for Personalization based on total site traffic. By measuring the value of each product differently, Optimizely could better defend the value of each. This, again, was a win-win for Optimizely and its customers.
What does this mean for my small business?
The moral of the Optimizely story is that there is no one right answer for monetizing a suite of products.
By designing each product separately around the value and the price, Optimizely and its products have been a huge market success. Regardless of the size of your company or amount of product you are selling, pricing strategy is essential to solving a challenge all innovators face: determining whether a product can sell, and at what price, before asking investors to pony up their money.
Optimizely has positioned its products as a website customer experience optimization platform, on which the company will add future Optimizely products. But before it launches those new products, the firm won’t have to guess how many customers will want them and how much they’ll pay. You can bet it will know.
For more information, visit www.monetizinginnovation.com.